A brief on mncs _

Shri. Kedar Nijasure
Vidya Prasarak Mandal's Dr. V.N. Bedekar Institute of Management Studies, Thane INDIA - FROM LICENSE RAJ TO LIBERALISATION
Dr. Guruprasad Murthy, Director Research, Dr. V.N. BRIMS
Mr. Kedar Nijasure, Lecturer, Dr. V.N. BRIMS
First Edition : April 2007
Published by :Vidya Prasarak Mandal'sDr. V.N. Bedekar Institute of Management Studies‘Jnanadweepa', Chandani Bunder Road, Thane (MS), IndiaTel. No. : (91-22) 2536 44 92, 2536 98 68Email : vnbrims@vpmthane.org • Website : www.vpmthane.org Printed byPerfect Prints22/23, Jyoti Industrial EstateNooribaba Darga Road,Thane - 400 601, INDIATel. : 2534 1291 / 2541 3546Email : perfectprints@gmail.com India - From License Raj to Liberalisation
I am happy to note that Dr. V. N. BRIMS Research Centre has brought out its monograph - License Raj to Liberalisation. The title speaks for itself. The sea change
in our business environment since 1991 is perhaps unprecedented in Indian economic
history since independence. There has been a paradigm shift, in approach to economic
policies, which has touched the lives of one and all in our country. It has also affected the
World at large since 1991. The country faced, in the words of Dr. Manmohan Singh, the
then Finance Minister, an ‘acute and deep' crisis. India's balance of payments was literally
in the doldrums. Serious remedial measures were required. Following devaluation of the
Indian rupee, several measures of a radical nature had to be initiated immediately. These
measures presented, as mentioned earlier, a paradigm shift from a centrally planned economic
system to a market driven environment which has changed mindsets all over the country. It
is gratifying to note that Mr. Buddhadeb Bhattacharjee, Chief Minister of West Bengal has
gone on record to say that "People of our states do not want bandhs and strikes. Still, the
opposition parties are calling bandhs frequently. Bandh culture is bad and will send wrong
signals about West Bengal to the World. The people of our state will not tolerate any
bandhs and strikes." (Economic Times, 8th Jan, 2007).
This work by Dr. Guruprasad Murthy and Shri. Kedar Nijasure tries to capture several measures of reforms initiated since 1991 into a neat format for analysis. They haveidentified the economic dimension of business as a convenient point of departure. Afterpresenting a corporate financial model in terms of total management excellence along withits component parts namely operating excellence (management of revenue, costs and capital)and financial excellence (managing interest, taxes and the proportion of different sourcesof finance), they have addressed several issues at the macro and micro levels. Theperspective of this work is global and they have brought out various aspects of liberalisation,globalisation and privatisation and its impact on the economy. The monograph also presentsfinancial statistics based on CMIE data which makes interesting reading and corroboratesthe happenings in and around business. Further they have provided excellent examples ofparadigm shifts, in the Indian economy, which explore the entire gamut of factors thataffected the landscape of the Indian economy inter-face all its global partners. Incisivecase studies have been presented based on the annual reports of concerned companieslike Infosys, Nicholas Piramal and others. In their chapter on Vision 2050 they haveattempted a quantification of the nature, extent, direction and pace of change required toachieve the long desired objective of regaining our lost position as a super economicpower of the World. History bears evidence that India is the cradle of civilisation. FurtherIndia was a major economic power in the past. History bears evidence to this too.
According to an economic historian Angus Maddison ( The World Economy : A millennialPerspective) India had the World's largest economy in the 1st century and 11th century,with a 32.9% share of World GDP in the 1st century and 28.9% in 1000 CE. In 1700, Research Department - Dr V.N. BRIMS
when most of India was ruled by the Mughal Empire, it had a 24.4% share of WorldGDP, the largest at the time, which fell drastically to 3.8% by 1952. Another estimate ofIndia's pre-colonial economy puts the revenue of Akbar's Mughal empire in Circa 1600at 17.5 million GBP, in contrast to the entire treasury of Great Britain in 1800, whichtotalled 16 million GBP.
India is once again awakening and the elephant is learning to dance. If it continues to dance, vision 2050 which is every Indian's dream, will become true. India will be a supereconomic power!!! I hope this work receives due attention by all concerned with the Indian economy.
Every citizen is concerned with it. I hope society at large will benefit from this publication.
I wish the publication every success.
Dr. V. V. Bedekar
Chairman, Vidya Prasarak Mandal, Thane
India - From License Raj to Liberalisation
"If we command our wealth we will be rich."
"If the wealth command us we are poor indeed"

Edmund Burke
This monograph is an effort to trace the process of economic change that has occurredand continues to take place in India since June 1991. Dr Manmohan Singh the thenFinance Minister had said "The crises in the economy is both acute and deep. We havenot experienced anything similar in the history of independent India" (Finance Minister,Dr. Manmohan Singh on the floor of the House, presenting the Budget on July 24, 1991.) In accordance with the rescue package, proposed by IMF/World Bank, a series of reforms
were initiated viz monetary, fiscal, trade, exchange rate, licensing regulations, capital issues,
entry to new players-local and foreign et.al. The journey since 1991 has had its own
impact on every stakeholder all over the World. India Inc has been, particularly, on its
tenterhooks ever since 1991. Over the said period of sixteen years there have been great
strides and equally great shocks too. However India has emerged to be a World force to
reckon with-from a country on the verge of total bankruptcy on the external account
(May 1991) to a situation where we need to take account of our foreign currency assets
in billions and not meagre millions. Today the issue is how to put our surfeit foreign currency
assets to productive use. It is not without reason that in 2005 the Prime Minister
Dr. Manmohan Singh said "Today, when I look back, I am even more convinced that I
was correct to observe in my first Budget speech in 1991 that the idea of the emergence
of India as a front-ranking economic power house of the world economy was an idea
whose time has indeed come" (Prime Minister Dr. Manmohan Singh's speech at the
World Economic Forum, November 2005. )
The change in tone and content of the words of Dr. Manmohan Singh and the different roles, (Finance Minister then and Prime Minister now), bear eloquent testimony to thearduous journey of India Inc and the country at large. This monograph is a small effort totrack and trace the events, episodes and experiences of the Indian economy and responsesof INDIA INC to the challenges of liberalisation, privatisation and globalisation. Neverbefore has economic history of India been as dynamic, turbulent and volatile as it is today.
Again, perhaps, never before has the revolution of rising expectations been as poised andprovoked for a take off into the process of self sustained growth, to be the World'seconomic superpower, (2050) only to regain the lost prestige, power and position ofIndia's – past — almost on all fronts including economic. This work is dedicated to allthose who have played an important role in India's economic development since 1991 Research Department - Dr V.N. BRIMS
Measures Towards
Globalisation, Liberalisation and Privatisation
Dismantling of Licensing Policies and Monopolies andRestrictive Trade Practices Act.
Direct Investment by Foreigners (FDI) Direct Investment by NRIS De-reservation of Industries Reserved forPublic Sector Undertakings to Private Enterprises Divestment of Quantitative Restrictions Decrease in Customs Tariffs coupled with liberalised imports Decrease in Income Tax Rates.
Drastic Financial Reforms Declining Interest rates.
Disclosures towards transparency, accountability, ethicalpractices, objectivity and information security to improvecorporate governance.
De-reservation of items reserved forsmall scale industries and risen to the occasion and responded proactively and positively, by and large, to theexigencies of the ‘acute and deep' situation that emerged in May 1991.
Dr. Guruprasad Murthy
Director Research,Dr. V. N. BRIMS Shri. Kedar Nijasure, Chartered Accountant
Lecturer, Dr. V.N. BRIMS
India - From License Raj to Liberalisation
Vidya Prasarak Mandal, Thane
Dr. V. V. Bedekar Shri H. T. Thanawala Shri S. V. Vengurlekar Dr. V. V. Bedekar Shri M. Y. Gokhale Jt. Secretary Shri S. V. Karandikar Shri Aniruddha Joshi Dr. Mahesh Bedekar Research Department - Dr V.N. BRIMS
Governing Board of Dr. VN BRIMS
Dr. V. V. Bedekar Chairman, Vidya Prasarak Mandal Prof. A. S. Chaubal Director, Dr. V. N. BRIMS Shri. Sandeep Gokhale Sr. Vice President, Sterlite Industries Sr. Vice President, Eureka Forbes Shri. Nadirshaw Dhondy Advocate, Supreme Court Sr. Vice President, Clariant Consultant - Research, Quality and Compliance Shri. G. B. Patkar Vice President, Cox and Kings Dr. Vishnu Kanhere Practising Chartered Accountant Shri. V. Krishnan Vice President, Tata Aig Dr. P. S. Deodhar Executive Chairman, Aplab Ltd. Thane Prof. V. S. Bhakre Management Consultant India - From License Raj to Liberalisation
Vidya Prasarak Mandal, Thane Dr. Bedekar Vidya Mandir [Marathi Medium] Sau. A. K. Joshi English Medium School B. N. Bandodkar College of Science K. G. Joshi College of Arts N. G. Bedekar College of Commerce V.P.M's TMC Law College V.P.M's Polytechnic V.P.M's Polytechnic IT Centre Advanced Study Centre Dr. V. N. Bedekar Institute of Management Studies Research Department - Dr V.N. BRIMS
Vidya Prasarak Mandal, Thane A BRIMS Publications • Dr. V. N. Bedekar Memorial Research Volume - I ( 2006) • Dr. V. N. Bedekar Memorial Research Volume - II ( 2007) • Challenges for Indian Multinational • India - From License Raj to Liberalisation India - From License Raj to Liberalisation
To So Many
To the management, particularly Dr. Vijay V. Bedekar for having agreed to the ideaof this work and publishing the same.
Mr. Sandeep Bhavsar for his excellent knowledge support services throughout theprogress of this publication.
Ms. Ajita Atre Gupta for her patient and continuous involvement as a researchunderstudy in management of archives and identifying the relevant required inputsfor use and bringing it to a state of use for publication.
To Ms. Ketki Mistry for her patient and quiet, secretarial and other supportthroughout the progress of this publication.
To Ms. Swati Bhatia, Ms. Sheetal Bendre, Mr. Abhishek Parmar, Mr. GaurangDeshmukh and Mr. Lalit Mahajan for their continued involvement in helping us ingenerating all the relevant statistical tables from the CMIE Corporate DatabaseProwess for the Section on India Inc Financials.
Research Department - Dr V.N. BRIMS
FROM HERE TO WHERE: VISION 2050 India - From License Raj to Liberalisation
"If the rich had spent their new wealth on their own
enjoyments, the world would long ago have found such a
regime intolerable. But like bees they saved and
accumulated, not less to the advantage of the whole
community. (they) were allowed to call the best part of
the cake theirs and were theoretically free to consume it,
on the tacit underlying condition that they consumed very
little of it in practice. The duty of ‘saving' became nine-
tenths of virtue and the growth of the cake the object of
true religion."

This Section addresses the following : Economic Dimension of Businesses Corporate Financial Objectives New Measures of Corporate Financial Performance Towards a Corporate Financial Model Measuring : Operating Excellence Financial Excellence Total Management Excellence Research Department - Dr V.N. BRIMS
Every business has its first dimension an economic dimension. Enterprise, assesses its performance through a result – resource ratio or ratio of output – input. In economicterms, output refers to profit after interest and tax and input refers to the contributionmade by the owners viz equity shareholders ( equity share capital plus reserves andsurplus also known as net worth ) This ratio is known, all over the World, as return onequity ( ROE ) or return on net worth ( RONW) which is a specific version of return oninvestment (ROI).
ROE is the returns from the owners perspective and is expressed either as a percentage or as a ratio commonly known as earnings per share ( eps ). The said ratio ( ROE )indicates the productivity of every rupee invested by the equity shareholder or the financialworth of every equity share held by a shareholder. ROE or earnings per share is anuniversally accepted indicator of economic performance of enterprise from the view pointof owners welfare. Top management are hired primarily to protect the investments madeby shareholders and they ( top management ) are accountable to the board of directors.
Ultimately the board of directors is accountable to the shareholders. Eventually, all actionstaken by the business should maximize the owners wealth. In the ultimate analysis, themarket value of the business has to be maximized on a continuous basis.
R.O.I in General Motors
Its Bearing on Organization
· It increase the morale of the organization by placing each operation on its own foundation, making it feel that it is a part of the corporation, assuming its own responsibilityand contributing its share to the final result.
Its Bearing on Financial Control
Develop statistics correctly reflecting the relation between the net return and the investedcapital of each operating division-the true measure of efficiency-irrespective of thenumber of other divisions contributing thereto and the capital employed within suchdivisions.
Its Bearing on Strategic Investment
It enable the corporation to direct the placing of additional capital where it will resultin the greatest benefit to the corporation as a whole.
Source : Alfred P. Sloan, My Years with General Motors P 50.Co. Eds. J Mcdonald and C Stevens Doubleday Publications,2006, USA Over the years, alternative yardsticks of performance have emerged like economic India - From License Raj to Liberalisation
value added, productivity per employee, ecologically sustainable return on investment,unit cost productivity, cash driven returns on investment – may be equity investment oreven investment understood as total assets or capital employed. In fact research has shownthat cash driven returns are more reliable than returns based on book profits. Hence thefuture measures of financial performance may hover around cash related measures ratherthan mere statistics based on accounting or book profits. Further, in future, multiplemeasures may emerge in lieu of the single measure concept.
Objectives of Financial Management
We may define the objective of financial management as : * continuous improvement in the result-resource ratio; * continuous maximization of the owners' wealth; * continuous maximization of the present value of owners' wealth; * continuous maximization of present value of return on owners' capital.
Objectives of Financial Management
"What specific assets should an enterprise acquire ?" "What total volume of funds should an enterprise commit ?" and "How should the funds required be financed" "An alternative way of stating the content of these three related questions is as follows ; How large should an enterprise be ? How fast should it grow ? In what form should it hold its assets ? What should be the composition of its liabilities ?" Source : Ezra Solomon, The Theory of Financial Management,pp 8 – 9 Oxford University Press 1961 Research Department - Dr V.N. BRIMS
Net Present Value
The concept of ‘present value of future benefits' will have to take into account the following facts : *The owner is making a sacrifice of resources ( C ) today.
*The owner expects a benefit ( B ), per year, over future years (n years say) The present value of future benefits can be given by the following expression : where Bi = prospective yields expected over the economic life of a proposal at the end of each year ; and K= discount rate used as the cut off point.
The final value to shareholders is given by the difference between the present value of future benefits and the initial commitment of capital ( C ). This difference is known, infinancial parlance, as Net Present Value (NPV), which is expressed in financial terms asan absolute amount. NPV is a measure of performance used to evaluate the worthinessof investment proposals. Thus the explicit goal towards which financial management mustbe directed is continuous maximization of the present value of future benefits of shareholders'investment. Through this process the market value of the business can be maximized.
Shareholders Versus Stakeholders
Though the interests of shareholders and other stakeholders have to
complement their mutual roles and positions, the interests of stakeholders
inter-se tend to be at loggerheads. A reconciliation of the mutual interests of
stakeholders is a challenge to management Hence, ‘shareholders versus

The Saturn Story
In the mid-eighties, General Motors, the world's largest vehicle manufacturer,faced strong competition from foreign producers of small, efficient, reliable,and inexpensive cars. In response to this challenge, GM set up a separatecompany to build an entirely new car, the Saturn. The car was designed,produced, and sold according to the best practices available at the time. Workerswere highly motivated, car dealers could not keep up with demand, andcustomers were extremely satisfied with their cars. According to these criteria,Saturn was an undeniable success story.
India - From License Raj to Liberalisation
However, at the time of this writing, the project had not delivered the rise in
value of GM's shares that management had hoped would occur. Why? The
Saturn project has not created value because most observers think that it is
unlikely ever to become profitable. From the project's inception until the mid-
nineties, GM invested more than $6 billion to develop, manufacture and launch
the Saturn. According to knowledgeable consultants, this amount is so large
that, in order for GM to earn an acceptable return for its shareholders, "it
would have to operate existing facilities at full capacity forever, earn more than
double standard profit margins, and keep 40 percent of the dealers' sticker
price as net cash flow."1 How long should a firm fund a project that delights its
customers, pleases its distributors, and satisfies its employees but fails to deliver
value to its shareholders?
1J.M.McTaggert, P.W.Kontes, and M.C.Mankins, The Value Imperative (The Free Press:
1994), 16.

The important message from the Saturn Story is that projects, which continue to be a toll on shareholders wealth, will have to be examined for their continuation. Such projectswill be abandoned sooner or later – preferably sooner to protect further erosion ofshareholders wealth.
Depreciation, a non – cash expense, which is deducted from revenue to arrive at book profit is an enigmatic amount influenced by multiple factors viz tax and corporatelaws as also other laws, method of depreciation, intentions of corporate financial policy ,dividend policies, technological obsolescence et al.
An item which is the result of so many factors and could possibly be changed eventually, many times even post facto, is not a reliable and durable input. Hence the exclusion ofdepreciation stabilizes the statistic and also provides the cash flow picture of the enterprise.
Many annual reports show depreciation adjustments and present slogans like "excessdepreciation charged in the earlier years, no longer required and credited to reserves". Itis an unwritten policy but known fact that such excess depreciation contributes to thecreation of hidden or secret reserves.
Cash is King
There is a paradigm shift in thinking – cash flow measures are relatively morereliable than book profit measures and stock market prices of shares are alsobetter correlated with the former rather than the latter. The view taken is thatthe firm's shareholders and debt holders have invested cash in the firm and thustheir expectations are also in terms of cash returns.
Research Department - Dr V.N. BRIMS
Thus, as a convenient point of departure ROE, book profit basis and cash profit basis, can be a financial goal.
Financial Performance is not the ultimate or the only goal. At the outset is should be clear that while economic performance is a key factor which influences survival andprosperity of business, there are other aspects to the development of any enterprise. Anenterprise is a social entity too and has to contribute to the organic growth of societythrough a variety of methods. Since, 1991, which is a watershed in India's socio-economichistory, many paradigm shifts have taken place as shown in Table One. Enterprise has toposition itself to capture the new paradigms in its fold and yet show results that satisfy allstakeholders. The interests of many stakeholders may be at loggerheads yet a right, neatand delicate balance has to be struck to achieve the end objective of maximizing theproductivity of every rupee invested by the business.


The corporate financial and other objectives are conditioned and constrained by the ‘ push ‘ and ‘ pull ‘ factors.
India - From License Raj to Liberalisation
On October 1, 1974, The Wall Street Journal published an editorial lamentingthe prevalent focus on earnings per share as an indicator of value : A lot of executives apparently believe that if they can figure out a way to boostreported earnings, their stock prices will go up even if the higher earnings donot represent any underlying economic change. In other words, the executivesthink they are smart and the market is dumb.
The market is smart. Apparently the dumb one is the corporate executive caughtup in the earnings per share mystique.
Source : T Copeland, T.Koller and J Murrin, Valuation-Measuring and Managing the Value of Companies, John Wiley and Sons, INC, P 69 As the Wall Street Journal asserts, the market is not fooled by cosmetic earningsincreases; only earnings increases that are associated with improved long-termcash flow will increase share prices. Substantial evidence supports the viewthat the markets take a sophisticated approach to assessing accounting earnings.
This evidence can be grouped into three classes : Evidence that accounting earnings are not very well corrected with shareprices.
Evidence that earnings window dressing does not improve share prices.
Evidence that the market evaluates management decisions based on theirexpected long-term cash flow impact, not their short-term earnings impact.
Source : T Copeland, T.Koller and J Murrin, Valuation-Measuring and Managing the Value of Companies, John Wiley and Sons, INC, ‘ P 77 ‘ Measures of Performance
Post liberalization,the measures of performance, used to define corporate financial objective, have undergone sea changes. The first paradigm shift is from book-profit oraccounting profit to cash flow measures. External forces particularly the market acceptcash as a much more transparent, reliable and acceptable measure of performance.
Similarly, other measures which are impartial, market driven, arbiter of performance haveemerged.
Research Department - Dr V.N. BRIMS
Maximizing ROE ( % ) or EPS or Cash Flow per share is a fine proposition.
However, the ratios' numerator and denominator are both driven by internalrecords. While the credibility of these records may not always be doubted, yetmeasures based on internal records alone may suffer from limitations on accountof bias, predetermined intent and natural limitations of computational processes.
Hence, the emergence of a new set of measures, amongst others, viz Economic Value Added ( EVA) Market Value added ( MVA) EVA Defined
Excess profits of a firm after charging cost of capital. The quest for value where valueis defined as the excess of operating excellence after adjusting for opportunity cost ofresources employed to produce those results.
EVA is a Quantified Measure and it attends to as many stakeholders as possible viz :Lenders, Government,Share holders and Employees.
"Until a business returns a profit that is greater than its cost of capital, it operatesat a loss. Never mind that it pays taxes as if it had a genuine profit. The enterprisestill returns less to the economy than it devours in resources. Until then itdoes not create wealth; it destroys it." PETER DRUCKER As defined by Alfred Marshall : "EVA is a measure of economic profit andrepresents the wealth created by a firm after accounting for the cost of capitalemployed in business." India - From License Raj to Liberalisation
Drivers of EVA – 4 M's.
EVA is driven by 4 MS viz Measurement, Management System,
Motivation and
EVA is a measure of total factor productivity EVA is a holistic measure encompassing all segments of business and thedrivers of those segments including planning, organizing and control EVA is an important driver of incentives, rewards, bonuses, compensationet al.
It brings about a change in corporate culture and facilitates a system ofinternal corporate governance which motivates individuals and groups todevelop a proactive mindset.
EVA, a name trademarked by Stern Stewart & Company.
capital i.e. (k x c ), k = Cost of Capital c = Capital Invested in Business i.e.
Long Term Debt.
EVA Formula
WeightedAverage Cost of EVA = [ (A) MINUS (B X C) ] Research Department - Dr V.N. BRIMS
Search for Excellence – Some Inspiration
Peters and Waterman, the management gurus of the 1980s, identified basic practices which were characteristics of the superior performance companies they examined in theirbook ‘ Search for Excellence; Lesson's from America's Best Run Companies ( Harper &Raw, 1982). They concluded : " We find among the excellent companies a few common attributes that unify them despite their different values. First. these values are almost always stated in qualitative,rather than quantitative terms. When financial objectives are mentioned, they are almostalways ambitious but never precise. Furthermore, financial and strategic objectives arenever stated alone. They are always discussed in the context of other things the companyexpects to do well. The idea that profit is a natural by-product of doing something well,not an end in itself, is also almost universal". With an even more telling observation Petersand Waterman condemned the obsession that some companies have with detailed financialobjectives. In less well – performing companies they were familiar with: " the only (objectives) that ( management) got animated about were the ones that could be quantified– the financial objectives such as earnings per share and growth measures. Ironically, thecompanies that seemed the most focussed – those with the most quantified statements ofmission, with the most financial targets – had done less well financially than those withbroader, less precise, more qualitative statements of corporate purpose." Measurement of profitability – another thought
"It has been argued that profitability is the primary aim and the best measure of
efficiency in competitive business. However, profits as such are meaningless unless
related to the equity ( ordinary) shareholder's investment in the business. The
relationship between the capital invested in a business and the profits earned is the
rate of return on capital employed. The ability to earn satisfactory rate of return on
equity shareholder's investment is the most important characteristic of the successful
"Increased sales volume is at best a short term indication of successful growth, and,
without additional information, must be viewed as such."
"In the long run, increased sales volume may prove a deceptive guide post if there
is not a proper return on the capital necessary to support these sales. Real growth
comes from the ability of management to employ successfully additional capital at a
satisfactory rate of return. This is the final criterion of the soundness and strength of
a companies growth, for in a competitive economy capital gravitates towards the
more profitable enterprises. The company that is merely expanding sales at a declining
rate of return on capital employed will eventually be unable to attract expansion
capital. Thus any measurement of a company's effectiveness must be based on the
successful employment of capital."
Source: J.Sizer, An Insight into management accounting, Pelican ( 1975)
India - From License Raj to Liberalisation
Paradigm Shifts Since 1991
Progressive resort to market Planning by direction Planning by inducement High interest rate regime Lower and lower interest rates Labour driven environment Management driven Labour driven operations Information Technology driven Self sufficiency within enterprise Net working and outsourcing Controlled prices Market driven prices Information and knowledge society Highest tax nation Moderately taxed nation Profit = Revenue – Cost Cost = Revenue – Profit (Sellers market) Small scale concept Size driven by economies of scale Balance of payments deficit Balance of payments surplus Middle aged nation Business Process Re-engineering Ecologically sustainable ROI Male driven society Women empowerment Quantitative indices for economic Qualitative indices for economic Politics of single party rule Coalition Governments Poor productivity Improved productivity Closed skies policy Open skies policy Research Department - Dr V.N. BRIMS
" Perfection is the Objective
Excellence will be Tolerated "
Lufthansa Cargo – Mission Statement
Operating Excellence - Return on Capital Employed (ROCE)
This section addresses the following : • Revenue Management – Managing Price, Volume and Mix • Appreciating INR • Towards Perfect Competition • Liberalization and New Players • Cost Management • Paradigm Shifts in Cost Management From amongst the different measures an operational corporate financial
objective is return on equity ( ROE) also known as return on shareholders equity
( ROSE) or return on net worth ( RONW). A corporate financial model shown as
Exhibit Two, in the glossary, is used throughout this monograph.

India - From License Raj to Liberalisation
ROE Again
ROE – result of overall organizational efforts — operating excellence andexcellence with respect to financial management equals total excellence inmanagement ROE is a result of the efforts put in by all segments and employees of a business. It includes marketing staff for revenue, line management across the global network of abusiness for inputs ( costs ) and of course the resources, as well as mix of resources,investedby the business as part of asset formation.
Given that there are three inputs in the ratio of ( profits divided by investment ), there are then only three ways of improving financial performance viz. improved revenue,reduced costs ( input costs and cost of capital ) and effective and efficient management ofinvestments. Mathematically, the options can be expressed as reduction in investment ordisinvestment .However, while disinvestment (divestment ) is an useful management strategy,managing investments profitably helps to sustain ROI. Nevertheless, divestment is partand parcel of business strategy to improve economic performance of any business.
Ways of Improving Enterprise Performance Best possible currency mix Cost per unit or Unit Cost Productivity Investments
Manage Investments Effectivelyand Efficiently Research Department - Dr V.N. BRIMS
This version of three ways of improving financial performance, truism as it sounds, is universally valid – at macro and micro levels of business. Paradigm shifts in economicmanagement may alter the statistic used to assay performance. However, universally theoptions to improve financial productivity, to reiterate, hover around the three factors justcited.
Revenue is an important stream of inflows. It is a product of volume of sales ( units) and the selling price per unit. Revenues earned may also come from different countriesand hence a currency mix emerges – revenues as a basket of currency. In India, in thepast foreign currencies in the revenue mix was a great relief because it supported theexternal account which was in bad shape – continuous balance of payments problemsyear on year basis. Table Two alongside showing RBI's foreign currency assets from1991 to March 2006 speaks for itself about the surfeit of foreign exchange balances ofIndia, in the post 1991 period.
RBI's Foreign Currency Assets
Year Ending
Foreign Currency
Assets (USD Mn)
over previous Index 1991 = 100
2006 (Dec.)
N.B. In March 2007, the RBI's foreign currency assets was199.2 billion USD.
India - From License Raj to Liberalisation
Today India enjoys an appreciating rupee. Our external account is swelling with reserves and is surging ahead . While a strong currency is a healthy sign, it has its ownwoes. Corporates which are into exports would be earning revenues in a currency whichis not as strong as the INR and hence the adverse economic impact on the bottom line.
However, these export oriented businesses spend in rupees which is appreciating. Thusearning in a relatively weak currency ( USD ) and spending in a relatively strong currency( INR) means that the bottom line of the business is adversely affected.
There is a paradigm shift in the approach to revenue management from a searchfor avenues to improve the hard currency content to protecting the bottom lineagainst the loss of revenue due to falling value of other currencies – say USD inthe immediate context. In June 1991 1 USD = Rs.17.94. Today ( 2.2.07)‘ 1 ‘ USD = Rs. 44.1 The highest rate in recent times was 1 $ = Rs.48.80( March 2002) Companies in the Information Technology (I.T.) Sector and many other sectors having a high export content need to protect their bottom lines through various forexmanagement tools and techniques. They are trying to insulate themselves against the adverseand volatile fluctuations in currency movements – particularly the USD against which theINR is gaining ground continuously. Continuous appreciation of the INR since 2001 hasresulted in lower export realisations thus making it necessary for more sales dollars tomeet original targets.
While the I.T. Sector is relatively fortunate because of a high profit margin on account of better yield and relatively less outgo on account of imports ( expense), the manufacturingsector is not so fortunate. The manufacturing sector's import content is relatively higher.
Hence, and otherwise, profit margins are once again, relatively low. The appreciatingINR is helpful because less payment need to be made for imports. The distortion to thebottom line is relatively less. India Inc. is enjoying the virtuous circle of an appreciatingINR, because IT sector is export prone and manufacturing sector is import prone (rawmaterials).
Earlier the exporters delayed the remittance of USD earnings. This was motivated on account of a depreciating INR and a potential gain on account of exchange rate. Thus,dollars delayed created short supply which enhanced the value of the USD till March2002. Subsequently and even today since INR is appreciating enterprise is hasteningdollar inflows, which has increased the supply of USD and pushed up, this time, the valueof INR. It was then a vicious circle (prior to 2002).
Research Department - Dr V.N. BRIMS
This is a paradigm shift, again in revenue management driven by a progressivemovement from balance of payments deficit to a robust swelling externalaccount, since 1991.In fact continuous appreciation of a country's currencycreates complications concerning corporate's revenue targets.
The continuous appreciation of the Indian rupee vis-a-vis the U.S. Dollar hasput substantial strains on the revenue budget of export oriented companies.
Information Technology (IT) Companies and companies like TCS encounterthis problem. Thus, even excellent performance in sales does not dazzle. It justlooks good. For instance, though the total sales of Infosys for the quarter ended31 st December 2006 looked very good,the final impact was not as good. Forthe full year, Infosys has also revised, marginally upwards, its projected toplinegrowth to over 46% (about Rs. 13,919 crore). EPS growth for the full year isexpected to be 48 % at Rs. 66.63. According to Company's CFO "Despitethe rupee appreciation by 200 basis points, we maintain our margins. For theoutlook, we have taken the value of the rupee at 1 USD = Rs. 44.11 and wecontinue to hedge proactively." Most IT companies are affected by the falling U.S. Dollar vis-a-vis INR. To
offset the same they look for better revenue productivity, increased license
revenues and reduced overheads. Export oriented companies in the services
sector like Satyam, Wipro, TCS all suffer on account of the appreciating INR.
A substantial amount of revenue of TCS comes from export earnings and quite
a bit of the same comes from U.S.A. and Canada. The thumb rule here is that
a 1 per cent increase in the value of the rupee against the dollar has a 50 basis
point impact on the operating margins of software companies.
" Exporters generally want the rupee to remain above 45. The problem will beif the rupee keeps on appreciating". Federation of Indian Export OrganisationsDirector General Ajay Sahai.
" Unlike India, China has controlled its currency and is not allowing it to go up.
As an exporter it is always difficult if the value of the domestic currencyappreciates. If it is not checked it will impact economic growth". VardhmanGroup, Chairman SP Oswal.
Source : Economic Times, 22nd March, 2007, New Item : "Rupee Surge to hurt more in the future" India - From License Raj to Liberalisation
Revenue Management – Pricing and Volume
India is a country with a huge population – a mass middle-class market. However, these markets have to be nurtured and cultivated. Markets can emerge only when there isan effective demand i.e. want backed up by purchasing power . Prior to 1991, the Indianeconomy was essentially a controlled market with the license raj in action. Enterpriseenjoyed a local market, which was fully sheltered from outside through tariffs and quotasand controlled from inside through regulations which monitored the selling price, salesvolume and production mixes. Controls existed in all markets – factor, output as well asfinancial – capital and money, markets. Entrepreneurs got used to profit levels and quantumsunder inefficient conditions of business operations. There was one and only one theme :given the farrago of laws and controls and all other rules of the game how to maximizeprofits. People developed a special skill to manage and even manipulate their moves to bewithin the four walls of law and yet make the most by flouting as many laws as possible.
The Industrial Development and Regulation Act laid down restrictions on the maximumunits to be produced through licensed capacities. Yet companies sold more than theproduction capacities Corporates used their legal acumen to identify that the law onlyrestricted production volumes – not sales volumes. This was a fine distinction betweenbeing within the law ( produce only what is permitted ) and selling beyond production —outside the law if home production exceed limits and within the law if, through outsourcing,sales exceeded production. Yet the spirit of controls was to prevent a monopoly, duopolyor oligopoly in factor market as well as output market. In fact, controls were distorted byviolating the letter of the law and truncating the spirit of the law. The license raj encourageddevelopment of talent in a perverted direction and professionals developed skills in avoidingthe rigours of law that is to say the art of dodging the spirit and letter of law withoutbreaking the law.
The theme of managing revenue was therefore driven by revenue maximization objective in a controlled, regimented, regulated, license driven environment. There has been atraumatic change now – decontrols, dismantling of the monopolies and restrictive tradepractices, industrial development and regulation act, foreign exchange regulation act, andmany other business related legislations.
The field was suddenly open to local players, who had to compete with each other, and also open to foreign players. Suddenly the rules of business underwent a radicalchange to the chagrin of local entrepreneurs at that stage ( 1991). Enterprise literally weretaken by surprise and also grouped themselves to seek level playing fields as mentioned inBox 15.
Research Department - Dr V.N. BRIMS
Removing the regulatory fetters wasn't easy. The government's liberalizationpolicies faced stiff resistance from the domestic industry, which got used to thelicense permit-raj. The famed ‘ Bombay Club' which represented the old guard,was led by none less than the fiercely vocal Rahul Bajaj, whose two-wheelercompany sold scooters that had a 10-year waiting period. While Bajajvehemently refutes any dealings with the Bombay Club, he does not shy awayfrom his argument. "What were the liberalizers doing till 1991? Although thePrime Minister is at heart a liberalizer, surely, there was no sign of this till1991".
Source : Business Today, 15th Anniversary Issue, January, 2007 , p:64 Towards Perfect Competition - Survive or Perish
The year 1991 saw the launch of change in nature, content and direction of approaches to economic management. The list of reforms, by no means exhaustive, is presented inBox 16. The reforms covered, as can be seen, changes in fiscal, monetary, trade policiesand also exchange rate management.
The theme was compete successfully or perish in the course of business because of the invasive nature of market forces and the muscle power of new alien entrants. Fromsmall number of producers suddenly the el dorado of competition , nay perfect competition,became a potential reality. The grouse that assymetry of information creates marketdiscrimination does not hold water any more. The electronic media revolution has madeperfect competition a reality. Thus, an almost equilitarian culture emerged in the marketplace which is no longer spread at different locations. On the contrary there is a paradigmshift because the virtual market place has emerged for the buyer and seller with virtualbanking acting as the modern day funding intermediary.
There was a paradigm shift from a sheltered protected market to a market driven by competition and market forces allowing only the fittest to survive. The theory ofcontinuous entry and exodus of firms – inefficient firms withdrawing and efficient firmsentering and surviving became a way of life.Several examples can be cited as shown inBox 20.
Thus, revenue management was suddenly a function of costs , competitiveness, effective product differentiation, appropriate choice and use of technology and timelymoves — preferably pre-emptive moves. From managing laws and licensing limitsgoverning business, enterprise had to shift abruptly, and rather sharply, to businessmanagement in the real sense.
India - From License Raj to Liberalisation
List of Reforms - 1991
Capital Licensing of Industries was discontinued.
Legislative restrictions on expansion were removed.
Reservation of Industries for public sector was discontinued.
Import restrictions on import of foreign technology was withdrawn.
Industries reserved for small scale sector were opened up.
The numbers of reserve industries scale down from 836 to 326 in 1991.
SEBI was formed as the regulator of activities in the capital market.
The financial sector opened up the Insurance sector to limited foreignownership. The monopoly of the public sector was dismantled in favour ofoligopoly. This was to give way to competition.
The Telecom and Insurance regulatory authority of India were formed.
Custom duties were brought down an average of more than 100% in 91too substantially lower levels.
State level taxes were replaced or transformed to VAT-Value Added Tax.
This has facilitated the collection process in the state tax system and alsocontributed to simplification, rationalization and reasonable uniformity.
Tariff rates have been reduced from peaks of 400% to 12.5% Since 1991 the personal income tax and corporate tax rates have graduallybeen brought down to 30 per cent, along with considerable simplification.
A great change since the times when India was labelled as the highesttaxed nation with maximum marginal tax rates being abnormally andatrociously high.
Fiscal Responsibility and Budget Management Act (FRBM) of 2004,enjoined the government to eliminate its revenue deficit. Fiscal deficit is tobe contained to 3% of GDP.
Introduction of service tax in 1993-1994.
As a result of the reforms initiated in 1991 erstwhile legislation suddenlyassumed a historical status viz. Industrial Development and RegulationAct and Foreign Exchange Regulation Act. While FERA became ForeignExchange Management Act. The Monopolies and Restrictive TradePractices Act was re-christened as Restrictive and Unfair TradePractices Act. Further the capital issue control order was rendered defunct.
Research Department - Dr V.N. BRIMS
"The obsolete system of capacity licensing of industries was discontinued; theexisting legislative restrictions on the expansion of large companies wereremoved; phased manufacturing programmes were terminated; and thereservation of many basic industries for investment only by the public sectorwas removed. Restrictions that existed on the import of foreign technologywere withdrawn and a new regime welcoming foreign direct investment,hitherto discouraged with limits on foreign ownership, was introduced." Source : Address by Dr. Rakesh Mohan, Deputy Governor, Reserve Bank of India at a Public Seminar by Institute of South Asia Studies in Singapore on November 10, 2006. New Legislations Since 1991
The Public Liability Insurance Act, 1991 The Securitisation and Reconstruction of financial assets and FinancialAssets and Enforcement of Security Interest Act, 2002.
Special Economic Zones Act, 2005 The Right to Information Act, 2005 National Rural Employment Guarantee Act, 2006 Liberalisation and New Players
1991 and LATER
Branded Shirts market was dominated by Kapitan of Bombay Dyeing,Stanrose of Mafatlals, Double Bull and Christian Dior. Thereafter foreignbrands like Indigo Nation, Louis Phillip, Peter England, Scullers(T-Shirts),Benetton and others have captured the market especially amongst theaffluent class.
Shaving Blades market was divided between Topaz , 7 O'clock, Gillette,Wilkinson, Erasmic and others. After liberalisation improved productslike Twin-Blades of Gillette and Electric shaver of Phillips replaced ordinaryshaving blades market. Erasmic and Wilkinson have become almost extinct.
Box 20 cont. India - From License Raj to Liberalisation
Two wheelers market was confined to Vespa of Bajaj and Lambretta ofAutomobile Products of India. Motor bike market was restricted to Bulletof Royal Enfield and Rajdoot of Escorts. Bajaj Auto lost its top position toHero-Honda in Scooters and Bikes market(in 2005) and products arenow available off the shelf. Number of models made available every yearhas also increased due to competition.
In 1993, the refrigerator market belonged to three brands-Godrej,Kelvinator, and Voltas-which among them held more than 90 percent ofthe market share. By the end of 1994 and early 1995 their combinedmarket share had eroded to less than 70 per cent with the advent of thenewcomers- Videocon, Whirpool and BPL.
In the 1980's the colour TV market was dominated by brands such asWeston, Nelco, (Blue Diamond), Uptron, and Bush. By 1994 and 1995,most of these had been replaced by new brands like Videocon, BPL,Onida, and Philips. Other global brands like Sony, Akai, and Goldstar hadalready started making inroads.
In the civil aviation sector the open-sky policy announced in 1991 createdroutes for eroding the monopoly of Indian Airlines and Vayudoot. By March1994, the big five private air-taxi operators (East West, Jet, Damania,Modiluft and Sahara) had captured 27 per cent of the market. On trunkroutes, their share accounted for 44 per cent of the traffic. Today there arenewer airlines like Kingfisher, Go Air, Spice Jet, Deccan Air. Some of theairlines mentioned earlier like East-West, Damania and Modiluft are out ofthe airline business.
Enterprise had to evolve new ways and means to manage the top
line ( revenue )and bottom line ( profits after tax) with the middle
line ( costs) acting as the key link.

There was a paradigm shift in the equations governing business from profit
equals revenue minus cost to cost equals revenue minus profit.
Role of
management accounting underwent a major shift in providing inputs that helped
and guided timely and prudent management decision making, in the context of
the new equation in which cost became the key factor.
Research Department - Dr V.N. BRIMS
Target Costing : HLL Paradigm
Source: Dr.Guruprasad Murthy and S.R.Kale, Role of Management Accounting, pp30, Himalaya Publishers, 2002 ( Presentation made by Shri.D.Sundaram in2001 p 30 ) COST management acquired utmost importance to sustain the new wave of competition . Indian producers were used to high cost production, sellers market marginsand resultant super normal profits. Now, there were new signposts viz buyers market,variety of products , number of producers and sellers, cost conscious new entrants andmarket as the arbiter of economic activity. The electronic global village became the rendezvous for one and all. Again and again enterprise efforts to seek level playing fields andcrutches from the Government failed and Indian business had to accept the new order ofthe day i.e. a paradigm shift from conditions of closed market to an open market with freeflow of trade and commerce through competition. Thus revenue management dependedupon a competitive price and profit per unit was driven by unit cost productivity. Hence,a paradigm shift took place in the algebraic relations with the three factors amongstthemselves viz revenue, cost and profit, as shown in Box 22.And quantum of profits wasdependent on mass volume of sales. All the three parameters had to be built in afresh intoIndian business, And business itself was moving in a totally new direction with changesfrom all quarters being announced and initiated by players from different parts of theWorld at an unprecedented pace, perhaps unprecedented in the business history of ourcountry.
The options open to business in the normal course are ‘ high margin – low volume' or ‘ low margin – high volume. Competition literally destroyed the sellers market syndromeand the protected margins as well as amount of profits. Consumer goods, consumerdurables and other products experienced the heat of competition. Of course, within thecompetitive market there are exclusive products positioned to skim the cream i.e. highmargin and rather restricted volume.
India - From License Raj to Liberalisation
Louis Vuitton (LV) which is in the business of making expensive watches pricedat Rs. 1 crore per piece and other products like travel accessories and ready-to-wear line has a policy regarding pricing. According to the authorities of thecompany "Our prices remain constant as we want our customers to feel they'vepaid the right price for the product. To put the same product on sale would beshortchanging them." When there are unsold products (travel accessories andready-to-wear line)the company prefers to burn them rather than offering themat a discounted price. However, in niche market for watches which cost Rs. 1crore a piece the company is very careful about quality. Taking about eightmonths to manufacture, it comes with a five-year guarantee. But the moreastonishing aspect is – whether you want it in gold or platinum, studded withdiamond or rubies, with your initials engraved or your family crest – the priceremains the same!. Since 2004 the company has sold only 40 watches.
Source : The Bombay Times, 23rd Feb. News Item ‘ We burn our unsold products!'
The new rules of business, display a great learning experience to operate withstrange multi-cultural and multi-racial bedfellows with symbiotic alliances in thefactor market, bitter business battles in the output market and hectic competitionin financial markets. The rules of the game have changed so much and so fastthat there is turbulence and chaos arising out of the actions and interactions offriends and foes who are all the same. It's as if that in a football match while thegame is on, the size of ground could change, players could exchange sides,umpires could change rules, goal posts could be shifted, duration of the matchcan be altered after the game has started and the ground itself could be inmotion while the game is being played.
SOURCE :Dr.Guruprasad Murthy Dr . V.N.Bedekar Memorial Research Volume p 70, 2006. The new rules of business was resisted by many. However, there were enterprises which did adapt, adjust and adopt learning and venturing as a key management tool.
Mahindra and Mahindra (M & M) once known for tractors and jeeps had to venture intobusinesses functionally unrelated to their core competence. Today M & M are in hotelsand real estate too. Similarly, Reliance a textile giant, once upon a time, diversified intotelecom and oil exploration. Many other players like MESCO, Atul Products, KediaGroup, Shakti Group not to say about Tatas, Birlas, RPG, ITC, WIPRO and Larsen andToubro, ventured into new vistas heralded by the post 1991 liberalization measures.
Research Department - Dr V.N. BRIMS
Zero Based Budgeting — Modus operandi
Budget Requesting Unit with RelevantResponsibility and Commensurate Authority.
Status Quo Requests Status quo plus Higher, New Budget Request De Novo Budget Requests TO SCREEN
Budget Requests' Screening and Processing (Cost- Benefit Analysis and related tech- niques to evolve yardsticks for assessing economic worthiness of budget requests) Budget Requests ranking Process N.B. : ZBB had to be applied vehemently to accommodate and absorb the impact of paradigm shifts. Every event – new rules, products, ideas, meant a shift to a zero base.
Business had to begin ab initio.
Cost became the key factor to influence the survival, growth and prosperity of business.
Unit cost productivity acquired great importance and all the hitherto neglected costmanagement approaches had to be brought to the fore. Yet, our history on cost managementis unique, perhaps unparalled in the World. India was the first country in the World tomake cost audit compulsory through the provisions inserted in the Companies Act, in1965.
COST AUDIT – COMPULSORY SINCE 1965, A supporting, instrumentwas necessary "to strengthen the provisions relating to investigation into affairsof companies and to provide for more effective audit in dealing with cases ofdishonesty and fraud in the corporate sector". ( Daftry Shastry Committee) India - From License Raj to Liberalisation
As per Companies Act Section 233B : "where in the opinion of the CentralGovernment it is necessary so to do in relation to any company required underclause (d) of sub-section (1) of section 209 to include in its books of accountthe particulars referred to therein, the Central Government may, by order, directthat an audit of cost accounts of the company shall be conducted in such manneras may be specified in the order by an auditor".
Thus, cost audit was very much available as a mandatory tool. However, its presence was rather perfunctory to be used only to meet prescribed regulations. The spiritunderlying legislation governing cost audit was grossly obliterated. However, some companiesdid practice cost control and cost reduction. Even the Government of Maharashtra initiated,under the stewardship of late Dr.S.Jichkar, the concept of zero base budgeting.( ZBB)The idea was to bring about a change in mindset – greater and better mindsets for greaterand better productivity and therefore greater economic performance. ZBB was used bycorporates too.
However, the efforts were sporadic in a few islands of excellence which were dedicated to the cause of professional management. By and large the customer had no choice but tobear the brunt of cost escalations of business There was no motivation to either employprofessional management methods or seek specific gains through improved cost productivityor pass on value added features to the customer either through product or price. It wasseller is king in lieu of the current thought that customer is king.
The paradigm shift from seller to customer as the focal point is a powerful change transmitting many compulsory lessons to business – India in particular and the World atlarge in general Research Department - Dr V.N. BRIMS
The implications of the shift in this regard is presented in Chart 1.
Over the past 25 years or so, management accounting has undergone substantialchanges in concepts, application methodologies and various other paradigms.
With market boundaries no more existing business going global, management.
The latter part of the 20th century witnessed the emergence of number of costmanagement techniques that enabled cost management to be perceived froma totally different perspective i.e. how to manage costs strategically to sustaincompetition. The chart below tries to look into some major shifts in this vitalmanagement function.
Paradigm shift in cost management
Cost + profit = price Cost = price - profit Industry specific COURTESY : Shri. R.S. Verma, Lecturer, Dr. V. N. BRIMS India - From License Raj to Liberalisation
Chaparral Steel company (USA), founded in 1973, has become a globalproductivity leader in the intensely competitive steel industry. Employingover thousand people, company manufactures steel products for, amongothers, the construction, automobile and defense industry.
As an example of the benchmark position, Chaparral uses 1.3 hours oflabour to make one tonne of rolled steel whilst best comparable plants inthe US, Europe and Japan average well over five hours. And, accordingto a case study in the Work in America, the company is an integratedlearning organisation, one of the world's lowest cost steel producers anda best practice benchmark for employee participation in Human Resourcesub-systems viz employee involvement and team-based activities, labourmanagement partnership, integration of technology and social systems,communication and information sharing.
Cost Specifics – Variable and FixedCosts
Costs encountered by business are of two types - variable and fixed. The former are driven by volume unlike the latter which are independent of volume for a given timeperiod. In the sellers market environment, huge levels of fixed costs could be justifiedbecause, as mentioned earlier, customer bore the brunt of internal inefficiencies of thefirm. Further because, of labor legislation and judicial decisions being pro-labour, wagesbecame sticky in the download direction. The philosophy of socialism and egalitarianismsupported the revolution of rising expectations, which included improved conditions ofwork and monetary quid pro quo sans productivity improvements. Today, courts are ofthe view that any kind of misconduct or indiscipline is to be viewed seriously. This waspreposterous but true. The result was a high cost private sector which looked efficientonly vis-a-vis the white elephants in the public sector. ‘UNIT COST' was high both inthe public and private sectors. The efficiency ( rather inefficiency) was only a question ofdegree. Production volumes of Indian companies were and are rather pygmy by globalstandards. In the late eighties the so called giants at home were grossly incomparable toforeign production volume scenario.
The post 1991 scenario has seen changes. Box 30 shows global capacities of a few Indian Companies.
Research Department - Dr V.N. BRIMS
Global Capacities of some Indian Companies
KEC International, an RPG Group company, is the world's second largestproducer of transmission towers.
The Aditya Birla Group is the world's largest producer of rayon fibre, andthe second largest producer of palm oil Bajaj auto is the third largest two-wheeler producer in the world Arvind Mills is the fifth largest producer of denim in the world Lupin Laboratories is the world leader in the anti-TB drug, ethambutol,with 70 percent share in the world market Hero Cycles is the world's largest producer of bicycle Raymond Mills is the fifth largest manufacturer of worsted suiting Nirma is the world's largest producer of detergents Nicholas Piramal is the World's largest producer of bottles used to storefinished pharmaceuticol.
Source : Madhukar Shukla Competing through Knowledge-Building a Learning Organisation, 1997, pp 43 Mahindra and Mahindra increased its production levels by 50 % to 60,000 tractors per annum. Mukand Iron and Steel increased its production from 450 to 2500 tonnes perannum that is to say by a whopping five and half times. Now, with Laxmi Mittal's Arcelorand Tata's Corus deal the situation in the steel industry is different.
However such increases in production are required across the entire network of business and that too on a continuous basis. Box 31 presents the profile of automobileproduction on a global basis. The unit cost productivity of General Motors vis-a-vis SuzukiMaruti is a question of imagination. Even if we concede that in mega enterprises of the USlike Walmart, General Motors, IBM and General Electric dis-economies of scale creepin. Suzuki Maruti at 21 Lakhs units per annum (world producation) is rather low to reapeconomics of scale that can provide a competitive edge in global markets. Indian businesseshave to improve the ‘size factor' to approach optimal levels and gain the edge on accountof unit cost productivity, as soon as possible.
India - From License Raj to Liberalisation
Country wise Global Car Production Report Volume-2005
2005 (Figures in Lakhs)
Company wise Car Production : Top 15 in the World
2005 (Figures in Lakhs)
PSA Peugeot Citroen Research Department - Dr V.N. BRIMS
The asset base of the country increased in size but not in terms of utilization towards improved output. Liberal banking facilities both commercial and development added fuelto the fire. Cheap loans from the ‘parallel purse' of the exchequer viz. the IDBI, IFCI andState Financial Corporations resulted in acquisition of assets. However, monies weresunk in projects with long gestation period, whose importance was neutralized as theimmediacy of the project was nullified and end results which fructified came in rather lateand lost their value addition potential. Technological advancements also created hurdlesfor projects completed after a long gestation period. Obsolescence invaded the projectswhich were commissioned after several years of gestation. Time was and is of essence inthe developmental process – macro as well as micro levels.
The time and cost overruns of projects in the public and private sectors,stemming from managerial inefficiencies and administrative delays,was a bigtoll on the Indian economy and acted as a drag on the country's then exiguousresources.
Our inefficiencies within the system due to sellers market conditions affected our propensity to make a dent into export markets – notwithstanding several export incentivesincluding those specified in the provisions of the Income Tax Act 1961, from time totime.
In the post 1991 scenario the motivation to manage costs effectively and efficiently has emerged out of literal helplessness – compete and survive or perish. Thus, todayIndian industry, as mentioned earlier is walking the talk on budgets, benchmarking,standards, standard costs, productivity measures particularly unit cost productivity, quality,kaizen, business process re-engineering, E commerce, technology driven systems andprocedures, cost- benefit analysis, appropriate cost classification schemes, humanresources productivity and a variety of other tools, techniques and tested methods limitedonly by the genius of business.
The paradigm shift in approaches to cost management (pre 1991 versus post 1991) bear eloquent testimony to the pull and push effects of competition as well as marketdriven and imposed compulsions. The appropriate levels of manpower became animportant matter and painful experiences of downsizing went into action. However, publicsector units have, by and large, refrained from downsizing as a policy measure to containcosts. Yet, the writing is on the wall. For the first time recruitment drives were geared tomeet productivity norms and human resource levels were flexible in either direction. Agreat achievement indeed. Similarly, through value analysis in different segments of business,productivity was monitored to yield the best possible result-resource ration. The top linewas driven by ambitions of market share. However, competition dictated the ultimate India - From License Raj to Liberalisation
volume accruing to enterprise. The bottom line represents the ambition of managementmanifest in the form of periodic targets. Hence, it was the middle line, that is to say thecosts, which had to be closely watched and managed to deliver results. India Incexperienced, perhaps for the first time, that costs can be reduced to levels which cancontribute to profits substantially and yet leave customers happy through competitivepricing and value additions – goods or services.
Electronic media has made possible the transmission of messages to educatethe customer on an on line basis. The average citizen is taking informed decisionsregarding pricing, now that people are aware that the maximum retail price is aceiling which cannot be exceeded and further that the maximum retail price( MRP) can be flexible, unlike in the past, in the downward direction.
Cost management also had to do with proportioning of fixed costs and variable costs. While in most cases the ratio of fixed costs to variable costs is 1:1 fixed costsusually tend to be a little higher – say 55 % of the total costs. However, enterprises indifferent industries adopt different approaches. Organizations which want to be lean andmean do have a cost policy which keeps fixed costs as low as possible just 20 percent.
Outsourcing is the key factor which permits a low fixed costs. The risk of business issubstantially reduced. Many companies, especially multinationals, have adopted the practiseof mass outsourcing, liquidated real estates and used the cash inflows for repatriationand reduced cash outflows, on account of limited outlay on fixed assest as well as loanamortisation, to improve return on investment . Since the assets were diluted, through realestate divestment, suddenly these multinationals became lean and mean and ROI wasreally catapult.
The general theme is that higher the fixed costs greater the self sufficiency of resource requirements. However, viewed from another perspective higher the fixed costs greaterare the risks. Hence managing the proportioning between the fixed and variable costsbecame an important issue in risk management with respect to costs. Appropriatemanagement strategies had to be evolved- to choose between a ‘low variable and highfixed cost level' vis-a-vis the reverse scenario of high variable and rather low level offixed costs.
The former scenario meant a lot of facilities within the system yet a high risk. High fixed costs means a high break even sales. The gap between actual sales and break evensales is rather narrow. Further the operating leverages will bring about violent fluctuationsin bottom lines for small changes in the top line ( sales) of business. The risk also meantthat if for some reasons business is not forthcoming in adequate volumes, either enterprisehas to resign itself to losses, may be continuously, or quit. Both options are painful, makingchoice difficult – devil versus the deep-sea. With high fixed costs, risk is high and bail out Research Department - Dr V.N. BRIMS
is difficult and comes only with painful decisions and damage to the financial health ofbusiness. The extent of non-performing assets bears ample testimony to the damagescaused to India INC on this score.
The alternate strategy of high variable costs and relatively low level of fixed costs meant a lean and mean organization. Many organizations adopt this approach to keepthemselves fit to match different volumes of business without increasing their permanentcommitments with respect to inputs ( costs). If volume materializes the organizing machineryto cater to the needs of customers through the outsourcing outlets is actioned. If not, theorganization continues in business with limited commitments.
In the middle nineties, El Air, the flag carrier of Israel had a variable : fixedcost ratio of 80: 20. As soon as the customers emerged at the airport, anaircraft could be hired from the tarmac,. Similarly other inputs required couldalso be hired. This used to be known in airline lingo as ‘ Power by theHour'.
The Toyota Car production environment is characterized by a similarapproach. Through, the just-in-time approach inventories get delivered twicea day straight into the assembly line. Working capital is managed through alean and mean current assets portfolio.
Hero Honda vis-a-vis Bajaj Auto is another case in point. Hero Honda isrelatively speaking lean and mean, and hence the economic performance ofHero Honda stands out. Hero Honda has only 30 percent of the total assetsof Bajaj Auto( Rs.12804 crores for 2006). However, Hero Honda enjoys a107 per cent of sales of Bajaj Auto of Rs. 8162 crores for 2006) and90% of Bajaj Auto's profit after tax of Rs.1082 crores Again in business the knowhow as to how manufacturing products are built accounts for 60-70 percent of their development costs,. In service industries and consulting firmsknowledge component of development costs account for 90 percent. For example, inairlines business knowledge regarding air craft maintenance or reservation systemsrepresent massive investments. Such investments are recouped through massive costsavings, on account of internal operations and revenue generated through services offeredto third party work. Nike and Reebok are global leaders in the sportswear business.
Nike, owns only one production outlet. Reebok does not own a plant. The key assets arethe knowledge of designing and marketing high technology driven state of the art productsviz footware and sports goods. The production centres are in Asia. Thus, what is to bemanaged in the assets portfolio is not physical assets but knowledge manifest in the formof patents, copyrights and technical knowhow.
India - From License Raj to Liberalisation
A choice is made between make or buy decision in favour of buying from the outside and networking with outlets capable of catering to business needs as and when necessary.
It is not without reason that business process outsourcing has emerged as a powerfulnetwork of activities and is handling large scale volume of activities on behalf of principalsacross the global network. Developed countries like US, UK and other European countrieshave constantly used the cheap labour and intellectual capital of countries like India, Chinaand also few others in the Afro - Asian continents. India has a competitive edge over therest of the World as on date because of the reservoir of trained intellectual capital andcommunications skill in English. China is making big strides in improving its competitivenessin English. When the dragon awakens and unleashes its potential in English, China may bethe rendez vous for global business and emerge as a World Trade Centre, unless Indiacan offer cost effective, competitive, value added goods or services. India may be achoice at best second to China. Thus, there are many paradigm shifts that have takenplace and are worthy of listing separately as shown in Box 36.
Paradigm Shifts in Cost Management
a movement from cost as a fait accompli to cost as a key factor to bemanaged to influence survival, growth and prosperity of business; a shift from high fixed costs, high risk business to low fixed costs, lowrisk, lean and mean portfolios, as far as possible; a shift from on loading everything within a business to offloading tooutside business process outsourcing agencies; and a shift from seeking rendezvous outside to establish Indian business tooffering India as the best rendezvous for business with the caveat thatIndia's competitiveness can last only so long as English language is ahandicap for Chinese; unless Indian productivity improves by leaps andbound and surpasses global benchmarks.
Asset utilization provides signals regarding the wisdom of investment decisions of the past. If enterprise has to protect the overall productivity of assets, the options areclear - increased revenues, reduced costs and effective and efficient management ofinvestments. So long as revenues and costs are moving in proper alignment vis-a-visassets, business is safe with respect to asset utilization. Otherwise, investment managementwill also include prudent and timely divestments to release cash, reduce asset obesity andallow capacities installed to relate themselves to effective demand. Continuous poorperformance on asset utilization means faulty choice of projects and capacity installation.
Research Department - Dr V.N. BRIMS
Enterprise World over face this problem – lean business activity resulting in underutilizationof capacity and under trading. On the other hand brisk business activity results in overutilization of assets and over trading.
Sellers market conditions providing for protected profit margins under license raj resulted in underutilization of assets, under trading, limited volume of select goods, highprices ( depending on the discretion towards price fixation) and also a parallel market forgoods in short supply either through internal leakages or smuggling and may be occasionallylegitimate imports ( since foreign exchange was a constraint) There is a paradigm shiftagain - opportunities for mass markets under conditions of stiff competition and alsocompetitive cost-price structure. Mass markets refer to global markets and the size to becaptured is left to the desire, dare and ambition of the entrepreneur. To reiterate, theIndian middle class market itself is a big mass market - 350 million plus.
The analysis so far has tackled revenue ( sales volume x sales price), costs ( fixed and variable) and capital employed i.e. assets. The indicators used to measure performanceleading to productive use of capital employed is Return on Capital Employed ( ROCE) Factors Influencing Operating Excellence
Return on Capital Employed = PV Ratio X Margin of Safety X Turnover of Capital Employed Thus, the risks of the firm with respect to proportion of revenues between different revenue patterns - currency, markets, product lines, customer networks, price bandsand proportions of costs between those driven by volume and those that are fixed alongwith the aggregate capital employed decides the operating performance or excellence ofenterprise viz ROCE.
Return on Capital Employed ( ROCE)
ROCE accounts for operating excellence of business – managing sales,
variable and fixed costs and capital employed. Before exploring the other
dimension of business – management of interest and taxes, an exposure to the
financials of India INC is in order.

India - From License Raj to Liberalisation
"A Picture is Worth a Thousand Word"
- Anonymous
India inc. - Manufacturing Sector -Financials
List of Tables
Profitability Ratios – Book Profit Basis Profitability Ratios – Cash Profit Basis Revenue – Cost - Profit Break even Analysis Debt- Equity Ratio Aggregates – Sales, PAT(NNRT), Net Worth,Total Assets & Capital Employed List of Graphs
Return on Total Assets – Book Profit Basis Return on Total Assets – Cash Profit Basis Return on Net Worth – Book Profit Basis Return on Net Worth – Cash Profit Basis 2 ROI's - Book Profit Basis 2 ROI's - Cash Profit Basis Research Department - Dr V.N. BRIMS
India - From License Raj to Liberalisation
Research Department - Dr V.N. BRIMS
India Inc – Manufacturing Sector
(Rs. Crores)
N.B: 1) Fixed costs are assumed at 55% of Cost of Sales 2) Variable costs are a balancing figure placed at 45% of Cost of Sales India Inc – Manufacturing Sector
Profit Indicators (Break Even Analysis)
Margin of
Break Even
P/V Ratio
Sales (%)
India - From License Raj to Liberalisation
Comment on Table C 1
The P/V Ratio which shows the rate at which surplus is generated to recoup fixed costs and then earn profit is in the range of 55% to 57% for the study period of 1989-2005. The Margin of safety which is indicative of the cushion which business enjoys vis-a-vis breakeven sales is in the range of 7% to 12%. Apparently this is not very high. In factless than 10% means that break even sales (BES) is 90% of sales. This is a high riskscenario. However in recent times (2003 to 2005) the Margin of safety has improvedfrom 5.7% to 12.2%. The risk levels have been well managed causing reduction in fixedcosts - thanks to outsourcing, divestments (hiving off), planned reductions in levels ofinvestments (lean and mean asset portfolios), downsizing and overall productivityimprovement in India Inc Manufacturing Sector. The corresponding complementary impactis visible in the higher total assets turnover ratio which has increased from 0.82 times in1998-99 to 1.13 in 2005. Hence, the return on total assets has shown improvement ofnearly three times that is to say from 2.95 per cent in 2001 to 7.9 per cent in 2005. Thus,entrepreneurs have launched a multi pronged attack on various inefficiencies that plaguedIndia Inc. during the license raj. Liberalisatioin has enabled and empowered enterprise toenact themselves by taking bold, daring and imaginative steps to improve the result-resource ratio.
India Inc. - Manufacturing Sector
Debt – Equity Ratio
Research Department - Dr V.N. BRIMS
Comment on Table D
Debt-Equity Ratio-After 1993 number of companies showed substantial increase upto 2004. In 1993, 85% of the companies were having a maximum debt-equity ratio of3:1. Till 2004, the said per cent (85) increased to 88% indicating that more and morecompanies preferred reasonable and manageable debt-equity ratios not exceeding 3:1. Infact after 2005 better managed companies have shown preference for equity rather thandebt inspite of tax advantage in debt finance.
Comment on Table E
India Inc. - Manufacturing Sector
Rs. Crores
Net worth Total assets
Till 2000 India Inc.'s Total Assets were more than India Inc.'s Sales. But after the year 2000 India Inc reduced fixed assets as well as current assets by hiving off divisionsor by sale of business or of landed property. Outsourcing has facilitated this change.
Again, interest rates and taxes both were reduced from 1999 onwards. Thus there is ajump of almost 3 times in profit after tax (PAT) in 2005 compared to 2003 and 9 times inprofit after tax compared to 2001. The number of companies reduced by 18% from2001 to 2005.Obviously, sales of India Inc grew by 29% only while total assets grew by16%. Whereas PAT increased by 300% during 2003-05, India Inc.'s networth increasedby 45% only for the same period. Apparently, the PAT was distributed rather liberallythrough unreasonably high dividend payouts. The PAT increased, to reiterate, due toreduction in interest and taxes. Thus, though top line did not show much of an increase, thebottom line responded very positively. Excellence in financial management of India Inccame to the fore to contribute to its bottom line.
India - From License Raj to Liberalisation
Graph 1: Return on Total Assets - Book Profit Basis PAT / TOTAL ASSETS Graph 2: Return on Total Assets - Cash Profit Basis CASH PROFIT / SALES CASH PROFIT / TOTAL Graph 3: Return on Net Worth - Book Profit Basis SALES / NETWORTH PAT / NETWORTH ( % ) Research Department - Dr V.N. BRIMS
Graph 4: Return on Net Worth - Cash Profit Basis SALES / NETWORTH Graph 5: 2 ROI's - Book Profit Basis PAT / TOTAL ASSETS PAT / NETWORTH ( % ) Graph 6: 2 ROI's - Cash Profit Basis CASH PROFIT / TOTAL India - From License Raj to Liberalisation
Comment on Graphs – Based on Tables A & B
Based on the Graphs the following inferences can be made : Graphs 1 & 2
1. Return on Total Asset (ROTA)-Book Profit vis-a-vis Cash Profit Basis ROTA (book profit basis) is a physical product of Profit Margin (%) and Total Asset turnover ratio (times). The turnover ratio is more or less stable and is within anarrow range of .82 to 1.13. Thus, ROTA is a direct function of the profit margin (%) .
Hence as per Graph 1 the profit margin graph is almost in total alignment with the ROTAwhich ranges between .19% to 5.06%. Thus,the financial productivity of INDIA Inc(ROTA – book profit basis) is linked with the profit margin (%) ratio. The ratios of Graph2, which are computed on cash basis, are pitched at levels higher than those depicted inGraph 1.
Graphs 3 & 4
Return on Networth (RONW) : Book Profit vis-a-vis Cash Profit Basis RONW (%) (book profit basis) is a function of Profit Margin (%) and Turnover of Net Worth(Times). RONW (%) (book profit basis) ranges from .80% (2002) to 17.85%(2005). The relatively high RONW (%) in certain years is due to improved ratio of Sales/ Net worth, profit margin (%) ratio being the same as compared to Graph 1. RONW(%) cash profit basis (Graph 4) is pitched at levels higher than their counterpart in Graph3 as well as Graph 2.
Graphs 5-6
shows the profitability ratios comparison for ROTA and RONWon book and cash profit basis respectively. Since depreciation is added back to profit after tax all cash based profitability ratios are placed at much higherlevel than their counter parts expressed as book profit profitability ratios.
India Inc's financials presented in tables, graphs and prose reveal certain changes in the structure of corporate finance. These changes are well corroborated by the episodes,events and experiences of India Inc in particular and the Indian economy in general. Thesaid changes are well discussed in the course of the foregoing and following Sections.
Research Department - Dr V.N. BRIMS
" To speak of the abolishing of usury is idle. All states
have ever had it, in one kind, or rate or other. So as that
opinion must be sent to Utopia."

( Francis Bacon, Essay ‘of Usury' 1618, England)
Financial Excellence: Managing interest
Interest as an Input Cost
Negative Interest Rates
Nominal and Real Interest Rates
Short Term and Long Term Interest Rates
Cheap Money Policy and Funding Strategies
Four Case Studies
India - From License Raj to Liberalisation
Operating Excellence Link to Total Management Excellence
ROCE is only one side of the story. Operating excellence captures within its fold revenues and costs and that too only operating costs. Operating excellence is almost apre - condition for overall excellence though there may be exceptions to the rule. Andthere are many. Given certain assets employed to operate a business it is necessary thatthose assets are gainfully employed in business. If not, the portfolio of non-performingassets emerge and this is a toll on business and a bane on society at large. Hence thetheme that operating excellence is a necessary condition for overall excellence isrecommended with the caveat that there are exceptions to the rule.
There are many situations in business when operating losses emerge. However,the final bottom line ( profit after tax) may be positive. Thanks, to income otherthan sales which emerges by design or default. Planned sale of fixed assets orhiving off of Strategic business units are Strategic decisions. These events emergeout of design. Bonanza gains arising out of favourable developments in markets– say foreign exchange can bring about improvements in bottomline by default– unplanned and unthought of, yet tangible and real.
Financial Excellence – Managing Capital, Structure, Interest Costs and Taxes.
ROCE as seen earlier, is a measure of operating excellence. However, the end objective is to measure performance of shareholders investment i.e. Return on Equity(ROE). The link between ROCE and ROE is the obligations towards creditors and theexchequer. Interest payments and income taxes intercept the ‘operating profit' and netprofit ( profit after interest and tax) Operating x Financial Leverage x Tax Impact ROE =ROCE X Profit before tax x Capital Employe x Profit after interest and tax ( % ) Operating Profit Owners fund ) Profit before tax Research Department - Dr V.N. BRIMS
Financial Operations Ratio
The ratios relating to interest and tax management and the mix of debt and equity are known as financial operations ratios. The ratio of profit before tax to operating profitindicates the extent to which operating excellence is depressed on account of obligationsto the creditors . A high ratio indicates that treasury has been able to shield operatingexcellence in favor of equity shareholders, pro tanto, and vice-versa Thus, treasury skillsand motivation come to the fore – interest costs and also management of debt and equity.
Interest as an Input Cost
Interest depends on the borrowing policy of the business. The amount of debt depends on the policy governing leverage and its role in business. It also depends on the need forborrowings. There may be an intent to lever but no need to lever. There may be a needalright but availability and affordability are considerations which cannot be overlooked.
Since leverage helps to boost ROE and an aggressive leverage helps to catapult ROE,enterprise should be interested in using their equity base to raise as much debt as possible.
It is like speeding a car at a high or highest gear. In fact leverage alternatively expressed isknown as gearing of capital. Yet, borrowings do not take place as a routine perfunctoryexercise. There are extra – commercial considerations influencing capital structure decisionslike, the attitude of borrowers, creditworthiness in the market, nature of industry, taxconsiderations, cash flow needs and ability, nature of industry, reinvestment plans as wellas opportunities and government regulations ( if any) and last but not the least autonomydesired by the enterpreneur.
A high ratio of capital employed divided by funds is indicative of high gearing of capital, and vice versa. Increasing role of debt helps to lever the capital structure to improveROE. A low leverage restricts opportunities to boost ROE. The presence of debt alsomeans creditors are always observing and the autonomy of the business could be limitedto the mind-set of the lenders. Leverage per se helps to boost ROE and so long as themarginal efficiency of capital is greater than the marginal cost of capital the benefits ofleverage can continue rather indefinitely- ad infinitum. However, the non-quantitative factorslike controls exercised by lenders, covenants imposed by lending financial institutions andthe fear of exposure to banks punitive action are factors which inhibit unfettered use ofleverage. In addition to these qualitative considerations, business environment may seechanges in fiscal, monetary and trade policies which require enterprise to revisit, periodically,the choice between debt and equity. Hence, the choice between debt and equity is one ofevaluating, like all other decision choices, the quantitative and qualitative dimensions andassessing the combined impact of the same on corporate financial objectives in particularand corporate objectives in general. The choice finally boils down to risk-return matchingand evaluation of the best option available and arrive at a possible solution given a set ofcircumstances in today's dynamic ever dis-equilibrated business situation. Financial leveragerequires decision making with respect to interest management nature, form, source, cost , India - From License Raj to Liberalisation
currency, country from where debt is sourced, tax rates and the proportions betweendebt and equity subject to constraints ( if any) imposed by laws of the land in whichbusiness is transacted. Yet, borrowings need not necessarily happen.
Companies which are not interested in expansion or diversification may not need funds and hence the question of borrowings does not arise. Companies which are notinterested in using debt for expansion or diversification tend to restrict expansion anddiversification plans to funds available from within through internal generations.
Companies do tend to be conservative with respect to borrowings as a policy and also because they would not like to loose control – the presence of creditors, individualsor institutions, means loss of control to the extent of the restrictive covenants agreed upon.
Invariably bankers impose covenants that tend to be harsh on borrowers. Moreover,bankers have a notorious reputation - " offering an umbrella when there is sunshine andwithdrawing it when it starts raining".
Hence the urge of enterprise, for this and other valid reasons, to be out of the clutches of the banking system.
Underutilization/ over utilization, under trading/ over trading and under capitalization and over capitalization of enterprise were all driven by the motivation of entrepreneurswhich was influenced in the main by licensing laws and controls prevailing during thepermit raj.
Corporates, as a policy, do not wish to entertain a fair weather cock. While conservative policies may result in low leverage, cash rich companies also need not borrow.
Hence the leverage is rather low or may be nil. On the contrary cash rich situations demandcash deployment policies to identify re-investment opportunities which can absorb surplusfunds. A fundamental financial tenet is in operation – cash rich companies suffer fromsurfeit cash – high liquidity. However, liquidity and profitability are at loggerheads. Cashrich businesses have to find ways and means of literally disposing off cash, into productiveventures, as soon as possible. Otherwise, cash surpluses can posit a severe problem toenterprise. Several examples can be cited. What is true at the corporate level is true, withgreater force, at the country level. For instance Switzerland enjoys or suffers the inflow ofcash of all stripes, black, white and grey, from different parts of the World.
The cash excess reaches a point where the country can no longer afford to allow further inflows. If further cash comes in bankers have problems of identifying reinvestmentopportunities to invest the surplus funds. The returns on these investments have to meetthe modicum expectations, which is just not possible.
Research Department - Dr V.N. BRIMS
Keep the money in the bank pay interest, Withdraw money from the bank earn interest.
Though negative interest rate is a theoretical concept, it occurs in the real World. It takes place in Switzerland and Japan from time to time due to the strong currencies viz the Swiss franc and the Japanese yen respectively.The moral of the story – excess of anything is an unmitigated nuisance.
The interest rates in Switzerland have been very low over the last several years.
Between 1975-2005, the highest rate per cent per annum, of short term interestrates, has been 10.47 % and that too only once ( 1974).
The concept of negative interest rates works in commodities markets too. Excess agricultural or dairy production tends to create serious problems for Governments andfarmers. Farm prices become unremunerative and Governments have to bear the burden.
To overcome this problem, World over, farmers behaviour is uniform and this emergesfrom the fundamental tenets governing capitalism – mass production, mass consumptionand mass destruction if necessary. Thus, agricultural produce – wheat in USA, potatoes inCanada, apples in Australia, coffee in Brazil, sugar in Cuba, onions in Maharashtra (India) dairy products in Scandinavian Countries and excess production of cars in Europeall get dumped literally as scrap because cost of holding the production is greater than thebenefits of the same. Production that is just not of any use, on the contrary an obstructionto profit motivation, is dumped in the sea, or just left on the roads.
India - From License Raj to Liberalisation
Switzerland : Profile of Short TermInterest Rates-1974-2006
Interest Rate
1% but less than 2% 2% but less than 3% 3% but less than 4% 4% but less than 5% 5% but less than 6% 6% but less than 7% 7% but less than 8% 8% but less than 9% 9% but less than 10% 10% but less than 11% Table Three is self-explanatory and shows the levels of interest rates in Switzerland.
Switzerland had a variety of capital controls in effect since 1971. The controlswhich were strengthened between 1973 and 1975, included negative interestrates on Swiss Franc Deposits of non-residents (1970's). Again, Japan hadintroduced various controls because of the strength of the Japanese yen. Interestrates in Japan tend to be negative from time to time since1998. Recently, onJanuary 24, 2003 domestic interest rates went negative in Japan.
Research Department - Dr V.N. BRIMS
Table Four
World Interest Rates
Major Central Banks – An Overview
Central Bank
Date of Change
European Central Bank Swiss National Bank Reserve Bank of Australia Relationship between nominal and real rates is as follows :
(1 + Nominal) = (1 + Real) x ( 1 + Inflation) where N, R and I represents rates A zero nominal interest rate occurs when the interest rate is the same as the inflation rate. If inflation rate is 4 per cent and interest rates are also 4 per cent, investing for a yearat a zero real interest would result in a status quo position at the end of the year vis-a-visthe starting point. A loan of Rs. 100, at 4 per cent per annum would fetch Rs 104 at theend of the year. However, Rs 104 is required to command a purchasing power of Rs.100.
Hence the status quo prevails. Thus: If the nominal rate is greater than the inflation rate, the investor's real payoff isdiluted but positively; If the nominal rate equals the inflation rate the investor is indifferent; and If the nominal rate is lower than the inflation rate the investor is adverselyaffected ab initio.
India - From License Raj to Liberalisation
According to some economists a zero nominal interest rate can be caused by a liquidity trap: The Liquidity trap is a Keynesian idea. When expected returns from investmentsin securities or real plant and equipment are low, investment falls, a recessionbegins, and cash holdings in banks rise. People and businesses then continue tohold cash because they expect spending and investment to be low. This is a selfcreated trap.
Wikipedia explains the relationship between the liquidity trap and zero nominalinterest rates: In monetary economics, a liquidity trap occurs when the economy is stagnant,the nominal interest rate is close or equal to zero and the monetary authority isunable to stimulate the economy with traditional monetary policy tools. In thiskind of situation, people do not expect high returns on physical or financialinvestments, so they keep assets in short-term cash bank accounts or hoardsrather than making long-term investments. This makes recession even moresevere.
New Dimensions of Interest Management - Inverted Interest Rate in India
At one stage, prior to 1991, India was practising a dear money policy with high interest . Inflation used to be rather high, usually, near about, double digit. Interest rateswere kept high to prevent profligacy and encourage parsimony, with respect to the enduse of loanable funds. Further, short term interest rates were higher than long term interestrates. In other words " interest rates were inverted." The IMF World Bank rescue packageof 1991 made special mention of inverted interest rates and its inconsistency with normalcy.
The need to correct the inversion in interest rates, and that too quickly, was emphasized.
Post 1991 India had to fall in line with the rest of the World. The RBI did initiate policymeasures to drive interest rates southwards. Between 1991 and 2004 short term interestrates moved from 16.5 % to 10.25 %.
Research Department - Dr V.N. BRIMS
Short Term and Long Term Interest Rates - THE INDIAN SCENE
The relationship between short and long term interest rates has also undergonea change, albeit the structure of interest rates has not been corrected, in toto,from inverted to a regular relationship where interest rates are driven by tenureof lending. However the following points emerge: Between 1970 and 1990 the short term interest rates continued to behigher than long term rates.
Between 1991 and 1996 the respective interest rates were either atpar or driven by the tenure of lending except in 1993 when short termrates were again higher than long term rates.
The years 1997 and 1998 again encountered inverted interest rateswith a correction in the years 1999 and 2000 and a reversion to the oldorder in 2002 and 2003.
For a long time in India, the long term interest rates were lower, in factmuch lower, than short term interest rates. This runs contrary to theinterest rate theory that the level of interest rates should be functionallyrelated to the tenure of the loan.
India - From License Raj to Liberalisation
Table Five
Profile of Iinterest Rates in India- 1970 to 2004
NB : SBI rates refer to benchmark rates for short term.
IDBI rates refer to benchmark rates for long term.
Companies do not borrow because they do not want to or they need not. What about companies which use leverage ? Reliance is a very good example of successful leveraging year on year basis. Perhaps this is the only example of its kind where leverage has been proactively employed to raisefunds, pre-empt outflows on account of repayment and boost returns on equity through aseries of conversions of debt into equity.
Research Department - Dr V.N. BRIMS
Similarly, certain types of businesses which are capital intensive tend towards borrowings as a necessity. Aviation, shipping, cement, machinery manufacturing are goodexamples. No entrepreneur would like to risk his own money into such ventures. Hence,borrowing is an inevitable complement.
In airline business it is said that to enter the aviation industry one has to be abillionaire. He should be lucky to get out as a millionaire." However, venture capitalists and now private equity volunteer to offer riskcapital as a policy with the intent of encashing their role at a later date throughdivestment of controlling interest and that too at a bonanza price. Such adivestment follows only after the initial contribution of the venture capitalist isconverted into equity. e.g: Citigroup, Progeon, and Infosys. (case study 1, pp69-70) Cheap Money Policy and Funding Strategies of Enterprise
In India inflation control is a predominant desiderata of monetary policy.
Hence, short term interest rates were and may continue to be used as a leverto balance the demand for and supply of loanable funds. Infact, in monetaryparlance, high powered money was a critical parameter to be watched andcontrolled. Therefore, even between 1991 to date interest rates have beeninverted from time to time. In fact, unfettered expansion of credit throughoverdraft, cash credit and pledge resulted in flow of funds into hoarding ofstocks giving vent to the profit motive, nay profiteering. By default or otherwisethis fanned the fumes of inflation. Hence from time to time interest rates wereraised to make hoarding less attractive. High interest rates increased the costof hoarding and therefore hoarding became expensive making it uneconomicalto practice profit motivation via hoarding. This was the Singapore experiencetoo. As a strategy, interest rates were placed at levels twice the inflation rateto make hoarding an unattractive proposition. Hence inverted interest ratesemerged and had to be accommodated and sometimes inducted as a part ofplanned policy. This seemed to be a ‘fait accompli' at least till 1998.
However, since 1999 the inversion of interest rates stands corrected due tofall in inflation rates to levels below even the floor rate of four percent. Though,generally short term interest rates have to be lower than long term interestrates, this relationship is deliberately distorted from time to time, because inIndia inflation management is the key consideration.
Box 47 contd. India - From License Raj to Liberalisation
Between 1991-1998, this was the main reason for which distortions betweenshort term and long term interest rates were tolerated even though it defiedthe financial fundamentals. After 1998, the Government started using interestrate as an instrument relevant for enterprise investment decisions and cost ofcapital. Hence, short term interest rates continuously lowered themselves from1997 to 2004 as part of the new paradigm shift from dear money policy tocheap money policy and from inflation management to investment decisions.
Now, the main objective was to encourage investment with a view to offerattractive returns to enterprise. The side-effects of this effort was that shortterm debt became cheaper than before. However, low tax rates and lowinterest rates made post- tax debt cost not very attractive. Thus, the impact oftax breaks demotivated use of debt. Further, low interest rates improved thebottom line and increased the dividend. The equity investors were happybecause profit levels improved and dividends were tax free. They respondedpositively to new issues of equity through Initial Public Offers (IPO's). Henceequity became attractive and cheaper than debt. However, cheap money policydid not really interest many enterprises. Since banks were keeping industryon their tenterhooks,industry wanted to be as unfettered as possible by beingoutside the scope, ambit and purview of the stranglehold of banks. Enterprisewanted total freedom from the control of banks. Banks were putting a conditionthat the end purpose of term loans given should be strictly complied with.
Moreover, using cash credit facilities from a particular bank was madecompulsory, if the borrower had availed of term loans facility from thatparticular bank.
Entrepreneurs – Changing Mindset
Industry wanted autonomy with respect to investment decisions because daringentrepreneurial decision like acquisitions, mergers and demergers were in theoffing. Hence, as a strategy many enterprises hived off certain strategic businessunits to augment cash flows and enjoy unfettered use of the same. Simultaneouslythey were outside the banking system. This upset the apple cart of the bankingsector. In the anxiety of the banking system to retain their customers, the bankswanted to ensure that customers completed their tenure as borrowers. Hencethe concept of penalty clause for premature amortisation of loan was introduced.
Companies like Imperial Chemical Industries ( India) Ltd.( ICI), Nestle, Glaxo,Nicholas Piramal hived off their basic strategic businesses from 2001 onwards, Box 48 contd. Research Department - Dr V.N. BRIMS
generated a lot of cash and freed themselves from the yoke of the banks. Thiswas a paradigm shift in the mindset of enterprise notwithstanding the cheapmoney policy.
There was one more paradigm shift and that was relating to the mix of financeused to run business. Companies preferred equity to debt. This served theirpurpose inasmuchas falling interest rates, falling tax rates, improved dividendsand a buoyant capital market, rendered equity cheaper than debt after 2002.
As if this was not enough, entrepreneurs started giving vent to their ambitionby seeking loans at cheaper rate from foreign countries in terms of externalcommercial borrowings, global depository receipts, american depositoryreceipts and foreign currency convertible bonds, after 2002. Since the INRwas continuously appreciating, it became cheaper for entrepreneurs to borrowin foreign currencies now and repay at a later date taking full advantage of anappreciating local currency viz. INR. The paradigm shift that has taken placeis the change in mindset towards the currency mix in the financial structure. Inthe past, there was a fear of foreign currency because of a falling INR andthe adverse impact of devaluation on loan amortisation. Now, enterprise wantedto ride at the crest of the wave of a rising INR.
The appreciating INR had its own problems. Sales targets of export sector, asmentioned in Box was continuously disfigured. The loss in earnings due toreceipt of relatively weak currency particularly the USD was feared by many.
However, this loss was more than offset by the incremental volumes moppedup by a booming IT export sales in particular and other products too viz gemsand jewellery. Incidentally the payments for imports were reduced because ofan appreciating INR and the favourable effects were reduced imports, improvedbalance of trade and a favourable current account balance. The model examplescited above namely Infosys, ICI, Nicholas and Bharat Forge follow.
Four Case Studies: A Synoptic View
Infosys, Progeon and Citigroup : Win Win Business Strategy Imperial Chemical Industries Divestment with a view to be in the core
business and attain and maintain lean and mean operations free of most, longterm encumbrances.
Bharat Forge Funding Strategy to minimise cost of capital and maximise
investment opportunities leading to maximising present value of future benefitsfor the business.
India - From License Raj to Liberalisation
Visioned to develop a hub for state of the art manufacturing and researchand development facilities for end to end servicing.
Established a supply chain management with a trained sales force.
Entered into collaborations to manufacture their products which were totalvalue addition to the total enterprise. Emerged as "World ClassManufacturer". The benefits were: quality production, larger volume,economies of scale, unit cost productivity, range of therapeutic productsunder one umbrella.
Market share improved by leaps and bounds.
Funding strategy used the following instruments : redeemable preference shares Rs 53.37 Cr @ 5% - 6% Dividend rate; equity share capital for acquisitions; external commercial borrowings (to replace costly debt) – Rs. 67 crores; rights equity issue at substantial premium Rs. 173-for Rs. 2 – face value(Issue size Rs.332.7 crores); and sale of real estate and other fixed assets over a period of time.
Case Study -1
Financial Implications of Infosys-Progeon- Citigroup Deal
In April 2002 Infosys formed a 100% subsidiary called Progeon. The main purpose was to capture non-voice business. This was a novel proposition at that point of time in
the BPO market. The initial capital of USD 5 million was put in by Infosys. Infosys
selected Citigroup International Fund as a venture capital investor. There was an agreement
that Citigroup will invest USD20 million in the form of non-voting shares i.e. 0.005%
Cummulative Convertible Preference shares. 25% of Infosys business came from Citigroup
and its associate companies. In June 2005, Citigroup had already exercised its conversion
right at Rs. 75.83 per share as conversion price per share (face value of share being Rs.
10/-). Infosys wanted to retain 100% control over its BPO unit Progeon, which was to
be merged with Infosys later on. This required buying post conversion equity portion held
by Citigroup (approx. 23%) in Progeon's equity capital. This deal was concluded finally
in April 2006 at a price of USD 115 million (This deal was denied by Infosys in March
Research Department - Dr V.N. BRIMS
The important messages are as follows : Infosys did not want to go the debt route because it was flushed with cash.
Question of borrowing was done away from the view point of the goodwill ofthe company.
Infosys paid more than 5 times the amount initially taken by way of issuingpreference shares.These, preference shares were convertible. It may be notedthat in the normal course enterprise would have avoided this approach for fearof loss of control. However, in view of the business partnership Infosys adoptedthe said route.
While Infosys paid an astronomically high amount (USD 115 million ) foracquisition for Citigroup it was a bonanza.
Ultimately it was still a win-win situation because in the said 4 years (2002-2005) Citigroup was Infosys' most valued customer. Infosys benefited throughthe business that it got from Citigroup of the order which exceeded the roleof the above conversion. In ultimate the value of the business from Citigroupexceeded USD 300 million or Rs.1300 crores in the said 4 years. The dealpaid for itself.
Infosys could manage the said deal financially because of healthy financialsituation in terms of profit, profitability and extra-ordinary liquidity. Whereverthese aspects of economic performance do not coincide, by default capitalintensive deals have to be funded through debt.
It is interesting to know that the cash received by Citigroup was, strategically and quickly so, deployed into another business where the entrepreneur was on exitroute.Citigroup acquired the holding of Standard Life plc; U.K., in HDFC. When StandardLife Ins.co.Ltd. decided to get out of non-core housing finance business to raise moneyto overcome the financial crises it faced in the UK., Citigroup captured that opportunityby investing into housing finance business with the eventual intention of getting footage inmortgage backed financing business in Indian Financial Markets.
Case Study -2
Imperial Chemical Industries (India) Ltd.(ICI)
A look into the Annual Report of ICI gives insights into the business strategiesand their financial implications, as reflected through financial statements shownin Table six.
India - From License Raj to Liberalisation
6yrs. ending 2004
(Rs Crores)
Profit before Tax Exceptional Items Profit Provision for Tax Loan Amortisation Cash Surplus even after Loan Amortisation (since 2000) Debt (since 1999) Debt/Equity (since 2000) Working Capital (since 2003) The picture is very clear. The company enjoyed a debt free situation since 1999. The debt-equity was reported negative. Further the working capital defined as current assetsminus current liabilities was also negative and placed at Rs.48 crores for the year 2003.
The negative working capital continued to be negative for the years 2004-2006. As aresult of the above the assets profile of the company underwent change in 2006 as against2003 as shown below: TABLE SEVEN
(Rs. Crores)
In Total Assets
(Rs. Crores)
In Total Assets
Total Assets
It can be seen that investment as a % of Total Assets has gone up to 36% , while that of Net Fixed Assets reduced to 21%. The rate of increase in investment is 27% for acompany which had reasonably high Net Fixed Assets in 1999. The business strategywas to increase investment outside the company per se but within the umbrella of ICIgroup. This strategy helped the company to become lean and mean. VRS was the key tothis and the substantial reduction in staff due to the hiving off of divisions bear testimony Research Department - Dr V.N. BRIMS
to the same. Inspite of the hiving off of divisions, the sales of ICI have shown a 20%increase while reaching to Rs. 993 crores over the 8 years ending 2006. The long termliabilities on account of obligations towards employees were funded through long termone time cash flows made possible through sale of divisions. The extinction of obligationswas Rs. 294 crores and the funding of the same order came, to reiterate, from sale ofdivisions. In the same period though increase in sales was meagre 20%, the extent ofincrease in profit was mindboggling 95% over the said 8 years ending 2006. The surpluswhich emerged on account of sale of divisions was used to extinguish obligations toemployees and repayment of debt. Further cash surpluses were used to pay 325% dividendfor the 3 years ending 2004. This amounted to Rs. 41 crores in 2002 and 2003 each yearand Rs. 51 crores in 2004. The total dividend paid is of the order Rs.133 crores.
ICI situation is interesting - today it has no debt to be paid, minimal staff, initial capital of Rs. 41 crores more than fully recouped- 3 times; infact recouped umpteentimes. The company is totally free of any responsibility whatsoever. The company is meanand lean in the true sense of the term. Thus ICI as a foreign investor can walk away withtheir realizations at market prices as soon as possible. (See Tables Eighteen and Ninteenfor hefty dividend payouts of select companies.) The ICI experience indicates that the company eventually wants to delist itself and go into the background so that disclosures, transparency andaccountability pro tanto gets diluted. Governance gets restricted to the fourwalls, of a neat closely held group, which has its own advantage along withopportunities for quick decision making with respect to a wide variety of issues.
Today corporate management is guided by the compliances requirement ofSEBI, Company law, et al. Hence decision making is circuitous.
It is interesting to note that "Tatas have decided to keep Corus as an unlisted company to be held by one of Tata Steel's subsidiaries". ( Times of Indiadated 5/3/2007) India - From License Raj to Liberalisation
Case Study- 3
Bharat Forge Ltd.
Annual Report 2005-06 shows following changes in financial structure of the

Loans Repaid (Long Term)
9.25 % Redeemable secured N on-Convertible Debentures Foreign Currency Term Loan (secured loan) Rupee Term Loan (secured loan) from Banks Public Deposits (unsecured loans) Foreign Currency/Rupee Demand Loans from Banks Unsecured Loans Raised
0.5% Convertible Foreign Currency bonds (FCCB) Short term finance for import of goods by buyers line of credit Pre shipment Packing Credit from Banks This obviously reduced the cost of finance for the company but more than that it released charge on assets of the company because it repaid "secured loans" whereasForeign Currency Convertible Bonds was an unsecured loan. Taking a step further, itrepaid 0% Interest Sales Tax Package Loan of Rs. 43.86 millions and obtained a discounton early repayment of loan which was a "capital profit" ! Even on the share capital side company used three different instruments to generate huge funds (though not immediately required for business operations, but certainly keepingin mind future business acquisitions) by taking advantage of a booming capital market.
1. Global Depository Receipts (GDR) 2. Right issue at substantial Premium in October 2004 3. Conversion of Detachable Warrants which were issued alongwith right shares at hefty premium i.e. Rs. 266/- per share of Rs. 2/- Research Department - Dr V.N. BRIMS
In this manner company generated Rs. 6946 million extra money by way of share premium for increase in share capital of Rs. 49 million only! No wonder at first it repaid9.5% Redeemable Cumulative Non- Convertible Preference shares of Rs. 100 million.
To top it up the company converted Foreign Currency Convertible Bonds (FCCB) at a premium of Rs. 334/- per share of Rs. 2/- face value into equity capital with almostnegligible cost of finance for ever. This modus operandi of the company clearly indicatesstrategic approach to funding decisions with least constraints.
Case Study - 4
Nicholas Piramal India Limited (NPIL) – consolidation for all round competitive
edge-THE PIRAMAL WAY Mr. Ajay Piramal charted a different route by acquiring Nicholas Labs. from Sara Lee in 1988 and went on taking over more pharmaceutical companies one by one sincethen. Today Piramal Enterprises is Rs. 2500 crores group, with a research centre in Scotland,U.K. He achieved inorganic growth of pharma business by acquiring following well-knownpharma companies or their established brands : Roche Products Ltd.; Boehringer Mannheim India Ltd.; Hoechst Marrion Russel Ltd.'s research centre; Rhone Poulenc Ltd.; ICI's pharma division; Aventis's Research Facility; (in Dec.05) Avecia Pharmaceuticals plc., U.K., Rhodia Organique Fine Chemical Ltd.(w.e.f. 11.1.05) NPIL has entered into 2 strategic agreements with AstraZeneca AB, of Sweden and Pfizer International Inc., USA.
Initially financial strength was created by disposing off landed property of some of the acquired pharma companies and that money was pumped into the flagship CompanyNicholas Piramal India Ltd. But many of the subsequent acquisitions were carried out byissuance of equity shares, without losing control over the business. NPIL has sizableRedeemable Preference Share capital of Rs. 53.37 crores (even more than equity sharecapital of the company) at just 5%-6% rate of dividend.
NPIL used convertible share warrants as well as right shares that it alloted in Sept.'05 at hefty premium of Rs. 173/- for Rs. 2/-face value equity share. NPIL also raised USD15 million (Rupee equivalent 67 crores) as External Commercial Borrowing (ECB) fromtwo foreign banks at cheap rate and repaid unsecured loans, totalling Rs.115 crores,which were costly domestic loans.
Right issue resulted in Rs. 3.8 crores increase in equity share capital and added Rs.
328.9 crores to Reserves. Right shares issued in F.Y. 05-06 at high premium broughtdown Weighted Average Cost of capital (both Debt as well as Equity taken together)substantially. At the same time the company invested a fresh Rs. 460 crore in Fixed Assets India - From License Raj to Liberalisation
that gave an advantage to the company in tax saving through depreciation on assets.
Company also part financed additional requirement of working capital of Rs. 88 crorenecessitated by growth in business.
NPIL has Joint Venture 49:51 with Boots plc. U.K., since April '02 in the name of Boots Piramal Healthcare Private Limited for OTC segment with products like Polycrol,Lacto-Calamine, Saridon, Strepsil and Clearsil to make it a leader in OTC Pharma business.
NPIL has business partnership with Allergan India Limited for Medical Optics business (e.g treatment of blindness) Theme : The company adopted inorganic growth route for faster
development through acquisitions and strategic alliances with foreign pharma
majors and converted its production and research and development facilities
into world class manufacturing and research facility centre for large numbers of
pharma products of other companies. It concentrated on end chain production
processes rather than full chain production of pharmaceuticals. At the same
time it strengthened its All-India distribution network to provide end to end
solutions in marketing pharma products with wide range of over the counter
products in its fold. All this was financed in steps by re-investing profits and
relying on risk-capital rather than costly borrowings.
Corporate growth through Mergers and Acquisitions (M and A)
Ajay Piramal Style
The differences between the stereotypical predator and somebody like Piramal who is akin to an artist in terms of M and A activities is as follows: Compelling persuador Focused on details Hands-on deal-maker Post-takeover integrator Source: Prof. S Shiva Ramu, Corporate Growth through Mergers and Acquisitions pp 246, Sage Publications 1998 Research Department - Dr V.N. BRIMS
Piramal's Tactics in Acquisitions
Take decisions alone: Consultations can obscure the objectives.
Never pay more than you want to: The benefits may not be worth it.
Act as quickly as you think: delays can sour deals and attract competitors.
Be patient if the timing is not right: A good acquisition is worth waiting for.
Accede to unreasonable demands: It allows you to draw on your creditlater.
Do not get snarled in details: The nitty-gritty never needs top-downattention.
Source: Prof. S Shiva Ramu, Corporate Growth through Mergers and Acquisitions pp 246, Sage Publications 1998 Piramal's tactics may not be successful in other industries such as cars, computersand process industries. Piramal started to diversify from his family's MorarjeeMills textile business. He first moved from non-patented medicines and antibioticsto nutritional and biotechnology products. In the pharmaceutical industry, Piramalfirst acquired the Indian associate of the French multinational Nicholas group inJuly 1988. This was followed in 1993 by the acquisition of German multinationalRoche's Indian subsidiary.
Source: S Shiva Ramu, Corporate Growth through Mergers and Acquisitions pp 246, Sage Publications 1998 Low Interest Rates – A New Paradigm – Leading to Newer Paradigms
High Interest rates and high tax rates were complimentary and worked on many occasions to the advantage of enterprise. High tax rates mean an opportunity for leveragingthe benefits of tax deductibility.
Thus, ‘if e = expense and t = tax rate, tax shelter = ‘ t x e ‘ and tax adjusted
expenses = ‘( 1- t) e. In the context of this formula, higher the tax rate, higher was the taxshelter. In the seventies, when the intensity of marginal tax rate was as high 95 percentplus, ( more than 100 % including wealth tax ) an incremental amount of Rs.100 taxdeductible expense meant that the Exchequer bore the burden to that extent namely atleast 95 % of the expense. Only the residual 5 % or less was borne by the business.
Enterprise was also motivated to boost the amount of expenses claimed for tax purposes.
India - From License Raj to Liberalisation
Over the years things have changed and there has been a paradigm shift from the idea andconcept of a " highest tax nation" to a moderately taxed nation. With falling tax rates theimpact of tax shield is reduced. This has further reduced the motivation to use debt as acomponent in the capital structure. The role of leverage is moderated and with a boomingstock market which facilitates raising equity capital at a premium, debt becomes a relativelyexpensive proposition. There is a paradigm shift indeed from the theme that debt is cheaperthan equity to a reverse situation viz equity is cheaper than debt.
When income tax rates were high and interest rates were also high the tax adjustedinterest cost was reduced substantially. In 93-94 Reliance Capital and IDBI couldprice their shares at Rs.130 per share (Rs.10 face value). The post issue priceruled around Rs.55-60. The substantial premium of Rs. 120 per share(1200 %)depressed the effective cost of equity to such an extent that equity was cheaperthan debt even with the combination of double digit interest rate and tax ratesplaced above 50%.The post issue price gave shock waves to many entrepreneurswho wanted to follow the Reliance Capital route. While Reliance Capital managedthe show and so did Larsen and Toubro finance, Mahindra & Mahindra financialservices and the Kotak group, a few others failed miserably viz. Lloyd Finance,Suman Motels and Mafatlal's finance.
In 2006 the corporates raised a lot of money through IPO equity issues along with hefty premium. Sun TV raised Rs. 500 crores with equity shares of facevalue of Rs. 10 at a price of Rs. 730 to Rs. 875 per equity share giving a premiumof at least 630%. Similarly D.S.Kulkarni builders raised Rs. 100 crores with anequity share face value of Rs. 10 and a premium of 230%. Plethico Pharmaceuticalraised Rs. 110 crores with a face value of Rs. 10 and a premium of at least 240%.
In the case of Sun TV the premium itself was substantial and would have helpedthe company to service the capital almost into perpetuity. In all such situationsthere is no such thing as a choice between debt and equity. Equity is bound to beprefered. Till recently since tax rates were low and interest rates were also falling,companies which managed to go to the primary market by issuing shares, at apremium prefered equity to debt. Thus the theme that debt is cheaper than equityis not a dictum applicable universally in vacuo. The cost of debt and equity isdriven by interest rates, tax rates and the ability of the companies to mop upsurpluses by way of share premium at the time of issue of shares.
After tracking and tracing different dimensions of interest management –
macro as well as micro, it is necessary to understand various aspects of India
Inc's issues concerning managing taxes – pre and post 1991.

Research Department - Dr V.N. BRIMS
In the World nothing is certain but Death and Taxes
Letter to J.B. Levoy (13.11.1789)
Tax Planning
India – The Highest Tax nation
Reliance Industries Ltd.
Minimum Alternative Tax
Depreciation as Source of Funds
Tax Avoidance and Tax Evasion
Mc Dowells Case
India - From License Raj to Liberalisation
The Exchequer's role in garnering taxes and mobilizing resources may be at loggerheads with the entrepreneur's objective of maximizing post tax profits. If the incidence of tax ishigh, profit after tax is low to that extent . Tax management is therefore a very importantfunction in business all over the World. Newspaper advertisements inviting applicationsfor positions like tax accountants, tax managers, tax executives bear ample testimony tothe special status for the tax function all over the World. The role of the tax manager is tominimize tax liability of enterprise and yet make sure that no law is flouted – neither theletter nor the spirit of law should be invoked to meet perverted, short run, mala - fideobjectives. The concept of tax management has had a chequered history . In the earlieryears, efforts were made to minimize tax liability by arranging incomes and expense in amanner that profits always tend to zero or negative levels. There are cases where corporateshad not paid taxes since inception – hence the expression ‘ zero tax companies' evolvedin India. A look at the financial statements, of Reliance Industries, shows that provision fortax appears at ‘nil ‘ value year on year basis. This is true for several business houses. Infact at one time in the late sixties and during the seventies, it was accepted that ‘ taxevasion is illegal but tax avoidance is legal ‘. The subtle difference between the twoexpressions provided breathing space to enterprise to use the intellectual capital of theaccounting world to make perversions stemming from intent to evade look as if the idea isto avoid tax liability. To pre-empt the possibilities of zero tax situations, the 1996-97Union Budget introduced the concept of Minimum Alternative Tax ( MAT) on companies.
Today, MAT stands, even today, as part of the Income Tax Act through S115J. (Box 61) The modus operandi of tax planning and its impact on tax liability on corporates is represented in Table Nine regarding Reliance Industries Ltd. What was true of Reliancewas true of other companies too. The introduction of S115J in 1996-97, to reiterate, wasto bring zero tax companies within the fold of tax paying assessees.
India-The Highest Tax Nation-Once Upon a Time
In India, income taxes on individuals, even prior to the Union Budget-1970,was the highest in the world. The gap between the intensity of tax rates inIndia and other countries was substantial. At one point of time, if wealth taxwas included along with the tax on urban properties, tax would exceed100% of income in certain cases. This is preposterous but true ! Thoughsuch progressive taxation helped mopping of resources from the affluent,ithad its own adverse impact. Even the managerial, professional and intellectualclasses had to bear with the incidence of a marginal tax rate of 66% to 77%,depending upon the position in the incomes ranging between Rs. 40,00/- to Box 55 cont. Research Department - Dr V.N. BRIMS
Rs. 80,000/- per month. This substantially destroyed the incentive to workand acted as a disincentive towards intellectual capital formation. Even themoral fibre of the country was adversely affected because high tax rates puta premium on dishonesty. It led to the creation of black money and theemergence of a flourishing parallel economy. In those days tax rates wereunfair and rather expropriatory and adversely affected the economic andtechnical development of the country. Thus the top 10 nations based onhigh taxation and the countries with relatively low tax rates are shownbelow in Table Eight.
Top 10 Nations (High Incidence of Top 10 Nations (Low Incidence
Congo- 55.7%avg. tax rate United States- 38.0% Impact of Tax Planning
Over the last thirty years ending 2006, tax record of Reliance Industries
1. On 15 occasions between 1975-1995 i.e. over 21 years, the provision for 2. From 1996-97 to 2005-06 the provision for tax is positive. The said provision ranges from a minimum of 1.73% to a maximum of 8.41% ofprofit before tax.
3. Over the thirty years ending 2005-06, the total profit before tax is Rs.
2744.15 crores and the provision for tax is a mere 5.53 % of profit
before tax. Even after the introduction of MAT the tax record of Reliance
shows that the provision for tax as a percentage of profit before
tax is rather low, a maximum of 8.41% in the year 2005-06.
Box 56 cont. India - From License Raj to Liberalisation
4. There were several companies like Reliance which have enjoyed the benefits of the bonanza of tax planning using the several benefits and incentivesprovided in the Income Tax Act.
Reliance Industries Ltd.
(Rs. In Crores)
Provision for Tax
Profit before Tax
Col.2 as% of Col.3
Research Department - Dr V.N. BRIMS
India Incs —— Incidence of Tax
1. On the eve of liberalisation, that is to say in the assessment year 1990-91 the
Income Tax rates were as high as 54% including surcharge. For closely held
companies it was higher by at least 10%. The highest incidence of taxation was
on foreign companies. However from assessment year 1991-92, as part of
liberalization process, these rates were scaled down. Today for assessment
year 2006-07 the rates for domestic companies are as low as 36.59% (including
surcharge and education cess). For foreign companies the income tax rates are
2. According to a recent news item the effective tax rate for corporates is a
mere 17%. A panoply of tax breaks have contributed to the low incidence of
taxation and the actual tax rate of 33.66% is only a theoretical rate. The range
is 11.7% (IT sector) to 32.5% ( paint industry ). The effective tax rates according
to the study made by the finance ministry is Oil and gas 22.8% ; Banks 22.0%
; Metals 25.6% ; Capital Goods 28.4% ; Paints 32.5% ; IT 11.7% ; Telecom
14.0% ; Cement 12.0% ; Textiles 15.8% and Power generation 13.9%.
Source : The Economics Times February 2007.
3. According to the Finance Minister Mr.P.Chidambaram, corporate tax rate is
already low and at par with ASEAN levels. To quote Mr.Chidambaram, "
Effective tax rate is not only moderate. The effective tax rate in India is 19.2
per cent. Show me one ASEAN country which has an effective tax of less than
19 percent." he said at a post-budget interaction at FICCI.
( Mumbai Mirror, 6.03.07, p 22) 4. A recent study showed that of the fifty companies paid less than 33 per cent
tax on their profit. A few companies paid more than the applicable corporate
tax rate. However, this was attributable to arrears and appeal decisions dividend
distribution tax, interest tax and other taxes. ( Business World, 26.02.2007,
India - From License Raj to Liberalisation
Minimum Alternative Tax on Companies – 1996-97 Union Budget
In recent times, the number of zero-tax companies and companies paying marginal tax has grown. Studies have shown that inspite of the fact thatcompanies have earned substantial book profits and have paid handsomedividends, no tax has been paid by them to the exchequer.
The new proposal provides for those companies to pay tax on 30% of thebook profits, whose total income as computed under the Income tax Act isless than 30% of the book profits as per the books of account prepared inaccordance with Parts II and III of Schedule VI to the Companies Act, 1956.
"Book Profit" is defined and certain adjustments are also provided in theproposed section.4 The proposed amendment will take effect from 1st April, 1997 and will,accordingly, apply in relation to assessment year 1997-98 and subsequentyears.
TAX PLANNING – How Depreciation became a tangible source of funds?
During the license raj, licenses were obtained. However, capacities werenot installed. This process of preempting production capacities, throughprocurement of licenses for holding, resulted in the legislation then called asMRTP-Monopolies and Restrictive Trade Practices Act. MRTP Act cameinto the scene following the Hazari Committee Report in the late sixties.
Preemption of capacities was the key malaise which then plagued the mindsetof enterprise. Thus even with under utilisation of capacity new licenses wereobtained, once again to retain the monopoly, prevent new entrants andinitiate new activities only at the will of the entrepreneur. In some casesmachinery was obtained from abroad, installed,duly licensed but not put toproduction. Thus, capacity was created and the depreciation on the samewas claimed for 365 days though the machinery was owned only for a fewdays- in some cases owned only for a day because the tax statutes thenallowed claiming of depreciation for 365 days though the asset was ownedand installed only for a day. The high marginal tax rate only added fuel tothe fire by encouraging such motives which were not transaction driven butdriven only by tax benefits accruing to the business. In this sense depreciationbecame a tangible active source of cash (funds).
Research Department - Dr V.N. BRIMS
Tax Planning-Tax Avoidance Versus Tax Evasion -Then and Now
In the past there was a subtle but real difference between avoidance oftax and evasion of tax. Over the years this distinction was accepted. Infact thisdistinction evolved in 70's through the Wanchoo Committee Report on blackmoney. The wide variety of incentives provided under the Income Tax Act(1961) section 32 (depreciation), section 32 (A) (investment allowance earlierknown as development rebate), section 80 J (tax holiday at a prescribedpercentage of capital employed), section 35 (a series of incentives by way ofamortisation of preliminary expenses, patents and copy rights as well as exportpromotion incentives) et al. These incentives were taken full advantage of. Itwas accepted as legitimate to take advantage of these incentives and minimisetax liability, maybe, year on year basis. Hence, the concept of zero- tax companiesevolved. However in a decision in 1985, the Supreme Court in the case ofMcDowell and Company Ltd. (1985) came out with a new version of judicialview on the issue of tax planning, tax avoidance and tax evasion. According tothe court tax avoidance is "the art of dodging tax without breaking the law".
In the English case this principle of Westminster was buried. Said the judge"No one can now get away with a tax avoidance project with the mere statementthat there is nothing illegal about it". The court observed that while tax planningis perfectly legitimate the presence of the following in planning of tax could betermed as "tax avoidance": a) fraudulent motives ; or b) mala fide intentions or ; c) colourable devices ;or d) form of transaction in accordance with the letter of law but absence ofsubstance of transaction defeating the legislative intent.
Tax planning is a perfectly legitimate exercise if it complies with under-mentionedingredients : Tax planning should reflect the basic intention of legislature behind thestatute.
Tax incentives availed of by the assessee is within the ambit of legitimatetax planning.
Planning of financial affairs by a series of transactions (doctrine of form)each having individual legitimacy and composite effect produced as a whole(doctrine of substance) following the true spirit of law is perfectly legitimate.
Tax planning should not involve use of colourable devices for reducing taxliability.
India - From License Raj to Liberalisation
The Government had also a complicated network of sections, which provided for a variety of incentives announced by State Governments through State Financial institutions.
All incentives taken together it appeared, at least prima facie, that enterprise could bestarted with little or no capital, physical incentives made life easy to do business and finallytax planning could keep the Exchequer at a distance for years together. The spirit underlyingbusiness management was not to pay taxes at all through appropriate tax avoidance policies.
Added to all this was the high marginal tax rates which were unduly high – tax rates wererather preposterous. Hence, the motivation of enterprise to aviod taxes.
Managing a business during the license raj and a highly taxed and controlled regime was like developing a mathematical model which would capture all constraints and conditionsimposed by law and yet all businesses to survive happily. The skill and attitudes thatdeveloped were perverted in nature and talent was hired mainly to meet objectives whichcould easily be defended as bona fide yet had a hidden agenda of achieving ulterior maybe mala fide, goals. The environment of high taxes also encouraged conspicuousconsumption, ostentation and prodigal dispensation of wealth.
Post 1991 things underwent a radical change. For the first time in several decades fiscal policy was designed to facilitate active participation of assesees in favour of compliancerather than avoidance or evasion for that matter.
Following Mc.dowell's case the subtle difference between evasion and avoidance was erased in favour of compliance and adoption of ethical coupled with bonafide attitudestowards payment of income taxes, given the relatively low tax rates.
The Income Tax Authorities also started looking at assessees not with suspicion and distrust but with pro-active support for compliance. Over the years the approach to taxmanagement has undergone a reasonable change – from the corporate perspective as wellas from assessee's perspective. Yet if corporate financial objective, of maximizing returnson shareholders equity, has to be met on a continuous basis, tax planning and managementis inevitable and imperative. Minimizing tax liability in accordance with the laws governingtaxes is a bonafide objective for any category of assessees. Any a priori assumption thattax planning designed to minimizing tax liability is unethical and intended to deprive anddefraud the Treasury of revenue is unacceptable. Hence the importance of tax managementin corporate financial management.
Thus, financial management performance is functionally related to management of at least three aspects – interest liability, debt-equity policy and tax management. All thesethree factors, representing financial leverage and tax impact, viewed together will decidethe extent to which operating excellence can be or is transmitted to shareholders. Shouldfinancial management carve out a separate proactive, niche in business, treasurymanagement can not only complement operating excellence but actually, actively, contributeto boosting the bottomline as well as return on equity. To start with treasury management Research Department - Dr V.N. BRIMS
is essentially a cost or expense centre. As activities increase and treasury contributesproactively, it assumes the status of a profit centre at par with such centres like marketing,production (a synthetic profit centre) and other segments of business. Ultimately, treasuryoperations may become so large, important and profitable that it assumes the status of anindependent investment centre and is floated as a full fledged corporate organisation. L&TFinance, Reliance Capital, Mahindra and Mahindra Financial Services and many othergroups have pursued this route. Among other advantages one which stands out is the highleverage permitted to finance companies. The sister companies are legitimate beneficiariesof this bonanza leverage facilities without resort to bankers. Thus, the autonomy of enterprisevis-a-vis the clutches of the banker is fully protected.
Of course the autonomy of the finance company and other sister companies, inter-se, isretained and yet all actions taken by all the inter-related companies will have toconverge towards the overall organisational objective of maximising the wealth ofshareholders.
Finally the measure of performance is Return-on-Equity that is to say total management performance which is a product of operating excellence and excellence withrespect to interest and tax management, as shown in Box 38.
The issues presented and discussed so far have given the components of total
management performance viz operating and financial excellence. It is now
necessary to capture the impact of the changes that have take place since 1991.
Section Six addresses various issues that seem to be pointers towards the changes
that have occurred.

India - From License Raj to Liberalisation
Commerce defies every wind, outrides every tempest and
invades every zone.

George Bancraft
From License Raj to Liberalization
Indian Farmers – From Farming to E Chaupal
India - From Downgraded to Up graded Sovereign

Indian Financial Markets to Foreign Financial

Research Department - Dr V.N. BRIMS
From License Raj to Liberalization
In India, during the license raj capacities were restricted by law. Limited production resulted in monopolies with demand exceeding supply. Prices were high and profit marginswere also high. The quantum of profits was driven by the extent of freedom with respect toprice fixation. However, high tax rates and interest rates reduced the post tax profit. Capitalmobilization was adversely affected partly due to poor profits and mainly due to controlsimposed by the office of the Controller of Capital Issues with respect to quantum of funds,mix of funds, cost of funds, frequency of funds raised through rights issue and or publicissue and pricing of securities raised in the market. This situation continued until the dawnof liberalisation (1991). As part of the liberalisation process there was a series of reformssince 1991 as shown in Box 16.
As a result discretion for decision making emerged on all the three fronts viz. capacity creation (production capacity), imports of raw materials as well as capital goods andinterest rates fixation by banks.
Thus, industry went in for an almost unfettered expansion during the said period 1991-1996. However, demand continued to exceed supply.
Expansion programmes for medium and large-scale unit got a fillip. Further, production activity hitherto the preserve of the reserved sector were opened. This created newopportunities for industry to expand in all directions- main production as well as auxiliaryproduction. Perhaps this kind of expansion was unprecedented in recent business history.
Simultaneous to the above liberalization the opening of the economy to imports added tothe volume of goods and services available in the markets. There was a sudden glut in themarket and supply exceeded demand. Between 1998-2000 there was a slow down inindustrial activity and the stock markets responded sharply- creating a divide known asold economy shares and new economy shares. Monetary policy had to address a mood ofpessimism and revive business activity. This motivated the dawn of cheap money policy.
Moreover, interest rates had to be aligned with the rest of the World. The idea was to givea boost to industry and improve the returns on investment. Wholesale banking anddevelopment banking became a thing of the past and retail banking emerged from 2001onwards. There were other effects supply increases, low interest rates, inflation controland activity revival which was restricted primarily to India. Other countries, particularlythe USA, were experiencing a stagflation. FDI's and FII's increased and the banking andinsurance sector got a new fillip. Mutual funds became an important outlet for investmentbecause of high savings rate, which were driven by the overall per capita income increase.
Thanks to the lead taken by the software sector, this favourable phase continued upto2003. Downward interest rates continued till July 2004. After the change of Governmentin May 2004 the actual inflation rate in the economy, which was more than 6%, wasaddressed by Government. It became imperative for interest rates to rise in order tocontrol inflation. Since stock market had revived, companies including banks encashed India - From License Raj to Liberalisation
on the equity boom from October. 2004 onwards. Changes in taxation of dividend andexemption of long term capital gain from investment in shares quoted on the stock exchangeassured attractive returns on stock market investment which never looked back sinceOctober 2004 . Industry was also comfortable because of cheap foreign currency loansthrough Global Depository Receipts, American Depository Receipts, Foreign CurrencyConvertible Bonds and Euro Bonds route. Without fear of rupee depreciation this wascoupled with heavy inflow of foreign funds in the nature of FII investment, FDI and privateequity.
The paradigm shifts in interest rate, taxation and other policies related to permitting freer flow of funds from foreign countries as well as abolition of the office of Controller ofCapital Issues followed by a regulated, market driven, stock exchange transactions includingdemat and screen trading showed that Indian markets moved from its erstwhile narrowand shallow profile to a new avatar with the required breadth and depth. Above all itportrayed the spirit of entrepreneurship, the dare and ambition to rise to the occasion byunleashing the hidden potential of entrepreneurship, and exhibiting the true spirit of Indiato the World and ourselves.
Indian Farmer: Farming to Bourses
A new development in the field of ‘development of markets' is the emergence ofcommodity markets. Till recently commodity markets were rather inactive except incase of oil seeds, grams, dal and tamarind. Of late commodity markets are emergingin different regions in Maharashtra and other places. Thus, we have a very activeand busy commodity market for grains (dal, gram) and sugar, gur, tamarind (SangliDistrict) in Maharashtra. Similarly there is a wheat commodity market in Harayanaand the Punjab. Andra Pradesh boasts of strong commodity markets for tobacco,cotton, chillies and tamarind. These markets are slowly getting integrated. Throughconnectivity there can be consolidation finally leading to unification with agriculturalproduce market committee. Such an independent market for commodities for futuretrading, on the basis of spot market, has enabled farmers to take advantage ofbusiness motives without necessarily playing on the stock markets. This is animportant development in the overall context of development of markets since1991and helped farmers to feel markets and externalise, to reitrate, their businessmotives without going to the equity market. Moreover the farmers have knowhowof commodity markets and feel very comfortable using their native skills, acumenand confidence in taking decisions on the commodity bourse. This comfort zone offamiliarity, confidence and concomitant motivation does not exist when they looktowards the stock exchanges.
E Chaupal is a place where the farmers got a first feel of commodity markets withoutgoing to the ‘mandi'. Communication links were established through mobile and theprocess got into action. Bullion markets developed, in their initial stages, through Research Department - Dr V.N. BRIMS
this process where traders could get the prices of gold everyday in the morning.
This was happening with a small group of traders, though. now, it is happening tofarmers on a reasonably large scale.
India's Sovereign Rating Upgraded
Standard and Poor (S & P) an international rating agency has recently upgradedIndia's rating as an investment destination. India's sovereign rating has moved upfrom a prevailing speculative grade to an investment grade. According to the agency"The upgrade reflects the country's strong economic prospects, external balancesheet and its deep capital market, which supports a weak, but improving fiscal position." Moody's another global rating agency had upgraded India to investment grade in2004. Fitch also did the same in August 2006.
India's rating was downgraded in May 1991 when the external account was undersevere stress. We had enough foreign exchange only to meet two weeks import bills.
This grading did not change till recently because of fiscal imbalances. The combinedfiscal deficit of the state and central governments was still hovering around 7.5%GDP. This is much below comfort zones. Infact India's total debt equals 85% ofannual output and interest on loan absorbs 35% of revenues. The current situationis bullish because of a buoyant buying spree from the growing affluent middle class-854billion dollars. India is rated as the fourth fastest growing economy in Asia-Pacificthis year. According to Goldman Sachs the country will become the second largesteconomy ahead of the United States and next only to China by 2050. S and P say"Further rating improvements will depend on sustained prudent fiscal policy thatleads to a decline in government debt and interest burden, and further reforms that liftthe growth prospects and income levels," TABLE TEN
India Ahoy 10 Years of Change
GDP Growth Avg for 3 yrs (%) Forex Reserves ($ bn) FII inflows ($ bn) Tax Revenues (Rs cr) Tax Payers (million) Service Tax Collections (Rs. Cr) Peak Customs Duty (%) Total Expenditure (Rs cr) Prime Lending Rate (%) Credit to agriculture (Rs cr) Source : TOI, 26, Feb. 2007, pp 01. News Item "10 years on, will the FM dream again?" India - From License Raj to Liberalisation
From Indian Financial Markets to Foreign Financial Markets
Over a period of time India INC has managed various options, to improve return on investment, such as increase in revenue, reduction in cost, effective and efficient managementof capital and last but not the least management of cost of capital . The corporatefinancial objective of maximisation of present value of future benefits gets fulfilledautomatically as and when cost of capital moves downward .This is because projectswhich are rejected with a tough, rigorous, target or hurdle rate would get accepted if therigour of the said rate is diluted through shrewd and timely management of cost of capital.
is the present value of future benefits where, as mentioned earlier, Bi = prospective yields expected over the economic life of a proposal at the end of each year, in rupees and K = discount rate (%) used as the cut off point.
The final value to shareholders is given by the difference between the present value of future benefits and the initial commitment of capital (say Rs. ‘C'). This difference is known,in financial parlance, as Net Present Value (NPV), which is expressed in financial terms asan absolute amount. NPV is a measure of performance used to evaluate worthiness ofinvestment proposals. Thus the explicit goal towards which financial management must bedirected is continuous maximization of the present value of future benefits of shareholders'investment. Through this process the market value of the business can be maximized.
As the denominator ‘k' becomes lower and lower the value of the above algebraic expression is automatically increased. The degree of change in the amount of wealth andvalue created depends upon the extent to which the cost of capital is lowered, all otherthings being equal.
Managing cost of capital usually denoted by an algebraic expression (k ) is key to wealth maximising strategies of enterprise. In fact,k is an input to establish the minimum acceptable rate of return (R). Thus: R refers to the expectations of management on account of a variety of factors. These expectations tend to push R as away from k , in the upward direction, as possible. The factors influencing the shift of R away from ko Box 65 cont.
Research Department - Dr V.N. BRIMS
include a variety of risks – currency, exchange, sovereign, business andfinancial risks to list a few. Various metrics are used to quantify (R). Howeversome judgmental input is also required and the final imputation of value to Rmay not always originate from pure quantification. R thus represents afundamental standard of financial performance against which investmentproposals are assayed. R may be defined as a target rate or hurdle ratewhich must be surpassed in order to justify the use of capital. The computation‘k ' is quite involved particularly in the context of capital asset pricing model (CAPM) and is presented in the glossary.
In the post liberalisation era, managing cost of capital has been a key challenge and opportunity to improve the competitive edge. There has been a progressive shift from onemethod of funding to alternative methods of funding and from one kind of instrument toanother and further, again, from one country and type of currency to another. Thus in theearly years 1991-1997, debt was cheaper than equity, thanks to high marginal tax ratesand interest rates. However as interest rates moved downwards from-double digit tosingle digit and tax rates also moved from the rigours of a highest tax nation to a moderatelytaxed nation, the benefits of leverage on account of high tax rates got diluted. With abuoyant capital market and high, positive, bullish, optimistic expectations coupled withimproved book profits, increased payout ratios were the order of the day. The entrepreneurfound equity to be better and cheaper than debt for more reasons than one—heftypremiums and simultaneously out of the clutches and fetters of the banker. Enterpriseautonomy was also ensured. In the same way the effort of enterprise to allow cost ofcapital to move further down resulted in adventures of Indian enterprise into foreign financialmarkets which historically have enjoyed or suffered from cheap money policy. Thus,corporates ventured to raise, to start with, debt or debt related instruments like externalcommercial borrowings(ECBs) and euro bonds. Further India INC also raised fundsthrough foreign currency convertible bonds, global depository receipts (GDR) and americandepository receipts (ADR) . These instruments were convertible into equity at a premiumon the basis of the covenants established at the time of issuance in foreign markets. Thuscorporates ventured to raise finance through cheaper instruments in foreign financial markets. To start with two new instruments namely GDR and ADR were launched in 1993. Itmay be noted that GDR/ADR holders were entitled to dividends (subject to tax) as wellas bonus and rights issue during the tenure of the said receipts. This eliminated the exchangerisk, when rupee was depreciating in 2002. The investor had an option to either acceptthe conversion into equity or claim redemption of the instrument. Migration to newinstruments took place at a time when interest rates at home were around 21% per annum.
India Inc. also raised funds through ECBs or Euro bonds and interest rates were verylow. The interest rate payable for the said borrowings were as low as 1% (2001) in the India - From License Raj to Liberalisation
US market. The rates of interest were a little higher in European markets. However inJapan the interest rates were rather low, perhaps the lowest. It is believed that the issuancecost amounted to 1.25% on an average. Of course, the interest cost excludes the issuancecost. It is interesting to know that as late as 2006 Bharat Forge raised funds throughforeign currency convertible bonds at half per cent interest rate as indicated in the ‘AnnualReport' of the company for 2005-06. However these were debt capital raised inforeign currency and in foreign land. In any case debt had to be repaid. In the event ofdefault the difficulties that emerged were rather awkward. The sovereign rating could bedamaged too. The reputation of entrepreneurs and the country may be adversely affected.
Hence convertible bonds were issued to forestall the repayment of principal as and whennecessary, provided all other covenants are met. Thus this was the final act ofentrepreneurial adventure of India Inc to issue equity capital in foreign markets, throughForeign Currency Convertible Bonds keeping cost of capital as low as possible and alsoenabling them to maximise the value creation for the shareholders. Needless to add thatshifting from one level of cost of capital to another, lower level, is a continuous processand will undergo several proactive iterations to push the cost of capital to its lowestpossible so as to maximise the present value of future benefits of shareholders.
Upto 92-93 there was a lot of conservatism regarding the sources of foreign finances for Indian enterprises. Two new instruments were permittedfor launch in 1993. Only very highly rated companies with a lot of credibilityand excellent fundamentals were allowed to launch such instruments. Further,companies which desired to go ahead with these types of instruments whichhad to be listed on New York Stock Exchange and Luxemberg exchange.
Incidentally HDFC to date has tapped several innovative instruments of raising finance in foreign countries like external commercial borrowings,foreign development institutions (Asian Development Bank) and alsodevelopment banks like International Financial Corporation and banks fromGermany. They have also issued floating rate notes and foreign currencyconvertible bonds. The interest rates, for the said instruments were muchlower than the rate prevailing in India at the time of the issuance. SimilarlyHDFC has raised huge amounts by way of local instruments like commercialpaper for funding operational requirements of a short term nature.
Source : Annual Report of HDFC-2005-06 Research Department - Dr V.N. BRIMS
Bharat Forge : Global Depository Receipts ( GDR) :
The company has issued 3, 636, 500 Equity shares of Rs. 10/- each (later sub-divided into 18, 182, 500 Equity shares of Rs. 2/-each) in Apriland May 2005 represented by 3, 636, 500 Global Depository Receipts(GDR) (on sub division 18 182 500 GDRs) evidencing "Master GDRCertificates" at a price of USD 27.50 per GDR (including premium). GDR'soutstanding at the close of the year are 9,75, 950. The said money, afterincurring issue expenses, aggregated Rs. 4, 235 million, have been temporarilydeployed by Investments in Debt oriented Mutual Funds to the extent of Rs.
2, 271 million and the balance amounting to Rs. 1 964 million is held in FixedDeposits with banks.
Source : Annual Report of Bharat Forge-p-60 FCCB (Foreign Currency Convertible Bonds):
On March 17, 2006 1,753,246 Equity Shares of Rs. 2/- each were issued and alloted at a premium of Rs. 334. 105 per share on Conversion ofUSD 13,500,000, 0.50% Foreign Currency Convertible Bonds (FCCB)Tranche-1 in terms of Offering Circular dated 15th April, 2005.
Source : Annual Report of Bharat Forge-p- 60 During the previous year the Company has issued Foreign Currency Convertible Bonds (FCCB) of a face value of US $ 1000 aggregating to US$ 150 million. As per the terms of the issue, the holders have an option toconvert the FCCB's into Ordinary Shares at a conversion rate of Rs. 231,375 per Ordinary Share at a fixed exchange rate conversion of Rs. 43.65 =US $ 1, from 13th March, 2005 to 22nd January, 2010. The conversion priceis subject to certain adjustments of corporate actions and consequently theconversion price has changed to Rs. 230.78 per Ordinary Share. Furtherunder certain conditions the company has an option of early redemption inwhole but not in part. Unless previously converted, redeemed or purchasedand cancelled, the Company will redeem these bonds at 120.89 per cent ofthe principal amount on 1st February, 2010.
Source : Annual Report of TATA Chemicals-p- 68 India - From License Raj to Liberalisation
Cheap, Cheaper and Cheapest Cost of Capital
In the post liberalisation period (Nov. 1992) the government wanted Indian enterprise to tap funds in foreign markets, with a view to encourage inflows of foreign currency intoIndia. To start with government permitted tapping Foreign Currency ConvertibleBonds(FCCB), Global Depository Receipts (GDR) and American Depository Receipts(ADR). The GDR's and ADR's represent ordinary shares. The rupee was then not asstrong as it is today. In fact it was depreciating. A fall in the value of INR would makeforeign borrowings relatively costly. The repayment amount increases. GDR and ADRbecame very handy. This was a route preferred to External Commercial Borrowings(ECB). However in 2001, interest rates were low all over the World. The rupee startedappreciating from-2002 onwards. In the circumstances borrowings became a viableproposition because payment of interest and repayment of loan were in favour of IndiaInc.The exchange risks were low and the rupee, to reiterate, was appreciating. Thuscorporates launched fresh initiatives to improve companies' debt repayment plan. With aview to reduce cost of capital India Inc. went in for another instrument viz. FCCB whichhad many advantages viz. very low interest rates (half per cent), no exchange risk becauseof the conversion facility and hefty premium available on conversions. As a result thepost tax cost of capital became very negligible. Thus India Inc. has moved from cheapsource of finance (GDR and ADR) to cheaper source of finance viz. ECB and finally tothe cheapest source of finance viz. Foreign Currency Convertible Bonds(FCCB). Theimportant message is continuous financial restructuring and innovation, alongwith pre-emptive moves to take full advantage of market conditions, is key to maximisation ofshareholders wealth.
Research Department - Dr V.N. BRIMS
Transition To Foreign Financial Markets
z GDR/ADR are referred z Low interest rates in z Very low interest rate. to as tradeable receipts Overseas Markets.
Due to conversion, no issued overseas in foreign exchange rate risk. currency and are exchangeable at pre-determined ratio with ordinary shares issued and held in India. z GDR/ADR proceeds z Share market was z Low cost of capital were to be used mainly for at low ebb, due to due to hefty premium on acquisition of assets and /or slowdown World- over partly for working capital or after 9/11 event in US. for acquisitions abroad. z Hence debt was preferred despite exchange risk involved.
z ECB reduced cost of borrowed funds.
z Dividends paid were z Interest rates moderate and tax rates stable, in fact appreciated increased for ECB and were high and interest rates during 2003-05 exchange risk also were also high till 1998.
z Lower crude prices z Inflation was low and exports were on rise.
z Infotech shares were in z Profit after tax z But high dividend % demand during June 1999 to increased.
resulted in high price April 2001(thanks to Y2K- /equity ratio enabling companies to encash high premium. z Dividend payout % z Dividend and long term capital gains from shares both were tax z Economic growth India - From License Raj to Liberalisation
"Whoever can make two blades of grass grow where only one
grew before deserves better of mankind than any speculative
philosopher or metaphysical system builder"

The Year 2006-2007 has been an excellent year on all counts- booming economy, bullish stock markets, buoyant tax collections (coffers full), burgeoning forex reserves andbetter and better management of the fiscal deficit-from 3.8% to 3.0% of GDP. Theassumption made is that the Indian economy will continue to grow at, at least, 8.5-9.0 percent per annum. As the Finance Minister puts it : "There are many pluses and a few minuses, and I shall deal with both candidly.
The biggest plus is that the growth rate of GDP has improved from 7.5 per cent in
2004-05 to 9 per cent (Quick Estimate) in 2005-06 and, according to Advance
Estimate, to 9.2 per cent in 2006-07. The average growth rate in the three years of
the UPA Government is, therefore, 8.6 per cent."
(Speech of the Finance Minister
Mr. P. Chidambaram as on Feb. 28, 2007)
The Finance Minister is ambitious and is entertaining an optimistic expectation that the Indian economy will, grow at a double digit rate-10% per annum. Considering that theChinese economy grew at 10.7% per annum in recent times, India has to keep up andimprove to come up to expectations. It is rather heartening to note that the economy hasgathered greater and greater momentum. The industrial growth has gone up to 11% duringJan. 2007. During April 2005-2006 industrial growth was placed at 8%. This augurs wellfor every one including the optimistic expectations of the Finance Minister Mr. P.
Chidambaram (TOI, 13th March 2007, pp-21). In particular, our foreign exchange reservesare surging ahead almost every day- placed at 195 billion USD as on 04.03.2007. It isbelieved that in March 2007, 1 billion USD was added within just 7 days. A mind bogglingsituation compared with the rather pathetic figure of 1.1 bn USD in August 1991.
The issue today is slightly different. In 1997 the Finance Minister proudly announced that foreign institutional investor's investment had accumulated to a total of 7 billion USDsince 1993 when they were first allowed. Today, this is a rather meagre amount because in2006 alone 8 billion USD came through Foreign Institutional Investors (FII's). In 2005, a10 bn USD entered the country through the FII route. India is now talking of its forexreserves in billions of USD and the issue is how to use the surging, surfeit, foreign exchangereserves which are standing at more than 190 billion USD (March 07). The future seemsto be very bright as per all indicators and from all quarters.
It is said that "India's per capita GDP will grow four times by 2020." (TOI, 24th Jan 07, pp-01).
Research Department - Dr V.N. BRIMS
Per Capita Income, GDP Growth and Indian Middle Class
The per capita income has moved up progressively from Rs. 9,913 in 1990-91 to 10,711 in 1995-96. Further the per capita income moved up from Rs.12,916 in 2000-01to Rs. 15,357 in 2005-06. The GDP growth at factor cost also revived from 5.57% in1990-91 to 7.34% in 1995-96. Again after a slump in 2000-2001 at 4.37 %, the GDPgrowth looked northwards at 8.43 % in 2005-06.
India's middle class market of more than 300 million is one of the largest markets of the World. Further they represent a global movement. Again the high net worth individualsin India are also growing at nearly 15 per cent per annum. The averages spend per headper year is nearly USD 10,000.
The Indian economy will be a leading economy in the World. A Goldman Sachs report says that there has been a structural increase in India's growth potential from thehistoric Hindu growth rate of 2 per cent or 3 per cent to 5% and now new levels of 8%and above. To quote the report "Productivity growth has been the key driver behind thejump in GDP growth, contributing to nearly half of overall growth since 2003 comparedwith a contribution of roughly one-quarter in the 1980's and 1990's," (TOI, 24th Jan, 07,pp-01).
Productivity growth will help India sustain over 8% growth until 2020 and make it the second largest economy in the World, even ahead of the US,(next only to China) by2050.(TOI, 24th Jan. 07). In fact, it is gratifying to note that, today productivity is slowlygaining grounds. It seems that the key factor to high growth is going to be productivityimprovement and that too quickly through quantum jumps.
It may be noted that 1984-85 onwards the role of the services sector has improved.
In terms of contribution to GDP the services sector is playing a very crucial role as shownbelow : TABLE TWELVE
Sector wise Contribution to GDP (%)
Source : Economic Surveys (GOI, Publications) The contribution of agriculture leaves much to be desired. With a large labour force still in agriculture (60 per cent plus), a meagre contribution to GDP, from the primary India - From License Raj to Liberalisation
sector, could act as a drag on the Indian economy now and even later. This is at a timewhen India is poised to hoist itself as a World economic superpower. Hence productivityimprovements, in agriculture, are a top priority for policy makers and every citizen ofIndia. As Mr. M.S. Swaminathan says "We must remember that if agriculture goes wrong,nothing else can go right" And as Jawahralal Nehru had said in 1947 "everything else canwait, but not agriculture" Indian Economy Vital Statistics.
Productivity in Industry and services is more than four times that in
agriculture, which employs nearly 60% of the labour force.
Since 2003, there has been a structural increase in potential growth
to nearly 8% from 5%-6% in the previous two decades
From 2007 to 2020, India's GDP per capita in US$ terms will
quadruple (a third higher than the original BRIC's projections).
Indians will also buy about five times more cars and consume threetimes more crude oil According to demographic trends, more than 100m people will
enter labour force by 2020
India has 10 of the world's 30 fastest-growing cities and is witnessing
rapid urbanisation. 140 m rural dwellers will move to urban areas
by 2020, while 700 m will urbanise by 2050
Source : TOI, 24th Jan, pp-01 Human Assets Productivity
As part of improved productivity of the country as a whole, human assets management has to assume a new role to take full advantage of, and contribute to, the knowledgesociety. The key input for wealth maximisation is knowledge stemming from newer andnewer ideas that is to say, from creativity and innovation. It is expected that careers whichdevelop the right hemisphere of the brain will be pursued. So far there have been rat-racers for safe careers in engineering, management and civil services. These rat-racers aremainly the left brained group. If we have to appropriate fully the benefits of knowledgesociety, risk taking is inevitable and imminent. Hence parents should start encouragingtheir children to pursue new professions which provide for proper nursing and nourishmentof the right hemisphere of the brain. Innovation and creativity stems from people with the Research Department - Dr V.N. BRIMS
right kind of risk taking ability. Developed countries like US and Japan had focused a loton developing these qualities of creativity and innovation of individuals. If this can happensuccessfully, the growth rates would assume a geometric progression providing opportunitiesfor exponential growth rates in lieu of historic rates in terms of an arithmetic progression.
According to an article The Times of India by M.S.Ghogre-Take a right turn "Indiacannot afford to rest on its laurels, which are largely earned in left-brained professions.
We need to correct this imbalance in order to really take India to the big league. It is herethat parents need to encourage children to create their own professional career, dependingon where their natural strengths lie. The time to take the risk is now." The younger generationmust develop a ‘spirit of inquiry' to create a ‘scientific temper' in our environment.
Expectations of Society
Of course there are a few expectations of one and all in terms of more reforms, further simplification of tax laws and administration, and opportunities for entrepreneurshipof foreigners in India (global expectations) and Indians in foreign lands. The country looksforward for further investments in the tertiary sector like education, health, infrastructuralfacilities and development of younger generation considering that youth is the key factor inthe demographic profile of India.
Will India make it – Super Economic Power -(2050)
There are many ‘ifs' and ‘buts' in India reaching its destination as a World economic super power- third largest, second highest or the top as the case may be. After all 2050is not far off. Fifty years (43 to be precise) is a small span in the life of a country that hasbeen the cradle of civilisation itself. It is not the first time in its life time that India would bea super economic power. Indians and foreigners should know and be informed on thisscore. If vision 2050 materialises it is only a regain of its lost position. The panorama ofIndia's past lends support to its historic, leading, global competitive edge. Similarly periodsof ‘mental stupor' and 350 years of Imperialism and social, economic and politicalbrigandage of the British had brought things to a nought. Things were aggravated furtherby an unparalled holocaust on the eve of 15.08.1947.
Now the ‘ifs' and ‘buts', enumerated below can still act as inhibitors, constraints and obstructing factors. It is believed, and the belief is not untrue, that the foundation ofthe present boom is rather shaky. A few thoughts in this behalf : 350 million middle class consumers slowly moving up the ladder of purchasingpower ; however more than one out of every 5 Indians is officially poor , - 35 percent of our population gets by with under Rs 45 a day and another 45 per centlives on Rs 45 – Rs. 90 a day.
India is ranked 126th out of 177 countries in the UNDP Human DevelopmentIndex.
India - From License Raj to Liberalisation
In Maharashtra power failure is a serious problem. Major cities lose power oneday a week to reduce the pressure on the grid. Intel Corporation chose Vietnamover India as the site for a new chip assembly plant. Lack of reliable power isbelieved to be an important factor.
India's export, even as it is increasing, accounts for less than 1 per cent of global trade compared with 7 per cent of China.
Industry is losing millions of USD on account of weak and woefully inadequate infrastructure viz. inefficient roads and rail services, erratic power supply, poorair and ship ports facilities, inadequate health facilities and low levels of literacyand education amongst masses.
Public debt stands at 82% of GDP, the eleventh worst ranking in the World.
Hence much of infrastructure financing has to come through private financingfrom home and abroad. However India captured only 3 billion USD as foreigndirect investment in 2006 compared to a whopping 65 billion USD mobilised byChina through the same route for infrastructure projects.
Inadequate size of Indian enterprises, by global standards, which may inhibit enterprise from taking full advantage of the economic prowess of size ; Inadequate investments in research and development to set into motion the engine of economic growth in full momentum.
Corruption index of India is amongst the highest in the world. A polished lingo used to describe corruption is ‘leakage'. Corruption has emerged to stay.
Unfortunately, it has been accepted as a way of life. Perhaps the rest of theWorld has also accepted the same. It is not without reason that Swaminomicssays "So, perhaps democracy explains why India, despite being as corrupt asmany African failures can nevertheless register 7.5% GDP growth. Democracyis probably good enough reason for the World Bank to keep lending to corruptIndia". (TOI, 15th April 2006). India unpoised could pose many problems to vision 2050.
Research Department - Dr V.N. BRIMS
India is not Poised !
India is poised. Yes. But which India? Millions of Indian do not know whotheir President is, or for that matter, who their MP or MLA is! Our GDP iszooming, but mainly due to the redoubtable services sector. Agriculture, onwhich 65% of Indians are still directly dependent, does not appear to be"poised" at all. Sensex has scaled peaks of 14,000 plus. But less than 1%Indians invest in stocks. 70% Indians do not have even a bank saving account.
India is poised indeed, but for what? Wither India? Source : Dr. Tapan K Pradhan, My Times, My Voice Mr. N.R. Narayana Murthy has gone on record to say "If our infrastructuregets delayed, our economic development, job creation and foreign investmentget delayed. Our economic agenda gets delayed – if not derailed." Further Prof Jadgish Bhagwati has rightly pointed out that "domestic productgrowth would run two percentage points higher if the country had decentroads, railways and power".
If India is to be a super economic power by 2050 certain efforts are requiredin a given direction and required pace, as shown in Box- 66. If we are ableto meet the said bench marks then Indians will hold the global fort and Indiawill rule the World waves.
If India has to emerge as a World Economic Power 2050
India Inc has to improve its size by 8-20 times in terms of revenues, 10-33 times with respect to assets and 10-20 times in terms of size of profitsvis-a-vis US Inc ( based on Fortune 500 data for 2005-06). (See Boxes 73and 74) India has to grow at an average rate of 10.52 % p.a. China may growat7.97% p.a. US may grow at 5.43% p.a., and Japan may grow at 1.51% p.a. However, as far as India is concerned, the growth rate of 10.52%is necessary to achieve a projected GDP size of $69,630.07bn. Comparedtothe projected US GDP of $ 136,006.38 bn. by the year 2050, ceterisparibus. Even, with a 10.52 %p.a. there is a gap between the twocountries India & USA. US GDP continues to be ahead.
Indian demographic pattern shows the highest percentage, (57% and more) Box 72 contd. India - From License Raj to Liberalisation
of working population in the age group of 15-59 years, in the World.
Unlike their forefathers who were predominantly risk averters, thispercentage of workingpopulation have to be risk takers to take advantageof the benefits of entrepreneurship.
Mergers and Acquisition seems to be the only choice for quick growth.
Tata- Corus was worth about $ 12.01 bn. We require 14 such Tata- Corusdeals to simply come upto the level of the largest acquisition in the US byAmerica Online – Time Warner ( January, 2000; $166 bn.), not consideringthe time value of money and fluctuations in exchange rates. However, wellbegun is half done. (See Tables 13 to 17) Research and Development ( R and D)efforts have to improve by leapsand bounds. Ranbaxy laboratories have a R & D expenditure of about $4.05 million, which is about 17.88 % of its revenues for 2005-2006. Theefforts of Ranbaxy have to be replicated across the network of India Inc.
Source : Raj Singh and Amit Pal Singh Ossan, Vision 2050, India as Super ‘ Economic Power, March 2007 ( Working Paper). Research Department - Dr V.N. BRIMS
Table – 13
US Largest Acquisition in 2000-2006
Source: Wikipedia (URL: http://en.wikipedia.org/wiki/Merger_and_acquis Table – 14
Europe Largest Acquisition in 2000-2006
Glaxo SmithKline Source: Wikipedia (URL: http://en.wikipedia.org/wiki/Merger_and_acq Table – 15
Top 10 India Acquisition till February 2007
Gujarat Heavy Chemicals Best Manufacturing Valecha Engineering Source: BusinessWorld, 26th February, 2007 N.B: The top two acquisitions shown above are also the top two Asian Acquisition.
India - From License Raj to Liberalisation
Table – 16
Top China Acquisition in 2006
China's Guangdong 3.114 Source:All-China Federation of Industry and Commerce (ACFIC)(China.org.cn), Jan 07 Mar ket Ca pitalisation (in US $ Bn)
Source – S&P Emerging Stock Market Fact book 2004 Comparison Of Exxon Mobil And India
India M arket Cpitalisation Source- Fortune 500

While the stock market is bullish for a long period now (since Oct. 05) and had scaled a new peak of 14,500 (January 07) Exxon Mobil alone accounts for morethan the market capitalisation of entire India INC quoted on the Bombay Stock Exchange.
Research Department - Dr V.N. BRIMS
(Million Tonnes)Cement Production Health Expenditure (% of GDP)Electricity Production 3,717 363.2 2,500 (Billion kwh)% age of Roads Paved Overall Productivity per 7279 50594 74625 50825 -- Agricultural Productivity 382 26557 36863 26897 373 (Value added per worker-USD) INDIA INC : PROFILE OF DIVIDEND PAYOUTS OF SELECT
y e t h
E q u i t y C a p i t a l
D i v i d e n d
India - From License Raj to Liberalisation
H e r o
E q u i ty
D i v i d e n d
H o n d a
C a p i ta l
Legend: Equity Capital and Dividend (Rs. Crores).
Dividend Yield (%)
Average Payouts (%)
Colgate Palmolive Lakshmi Machine Works Glaxo SmithKline Pharma Legend : Dividend yield = ( dividend per share divided by market price per share ) * 100 Dividends Paid Average Payout = —————————— * 100 Profit After Tax Research Department - Dr V.N. BRIMS

What is P/V Ratio ? What is Margin of Safety ? What is Turnover Ratio ? What is Profit Margin ? What is Financial Operations Ratio ? What is Tax Management ? Computation of WACC (Ko) and Capital Assest Pricing Model(CAPM) Responsibility Centres India - From License Raj to Liberalisation
Return on Equity (ROE) = Profits after Tax
Return on Capital Employed Financial Leverage Operating Profit Capital Employed Profit beofre tax Capital Employed Profit before tax P/VRatio (%) = Contribution Margin X 100
Margin of safety (%) = Operating Profit X 100
Contribution Margin Turn over Ratio = Captial Employed
Research Department - Dr V.N. BRIMS
What is R.O.I ?
is a ratio expressed as a percentage.
has a numerator which captures ‘Profits' i.e. Results,
a denominator which shows ‘Total Assets' or ‘capital employed' or
‘net worth' i.e. resources committed in business.

is an indicator of financial productivity or profitability and is expressed asa percentage.
is an indicator of the financial returns generated on every rupee investedin business.
is a grand overall measure of business performance that guides managementin various business decisions.
is expressed in different ways for different purposes – different ROI fordifferent purposes.
can be expressed as Return on Capital Employed (ROCE) to indicatethe financial productivity of every rupee invested in business, or as Returnon Equity (ROE) to indicate the financial productivity of every rupeeinvested by the owner (equity share capital plus reserves).
What is P/V Ratio?
defined as contribution margin divided by sales P/V ratio (%) = Profit /Volume Ratio = Contribution Margin x 100 shows the speed with which the company is moving towards its profit goal.
options open to improve PV ratio include : selling price increase per unit variable cost decrease per unit shows the rate at which surplus (sales minus variable costs i.e. contributionmargin) is earned to recoup fixed costs and eventually contribute to profits.
India - From License Raj to Liberalisation
What is Margin of Safety?
Margin of Safety (%) is defined as operating profit dividend by contributionmargin.
Operating Profit Margin of Safety (%) =
Contribution Margin Margin of safety (%) is also defined as (Budgeted sales minus Breakeven sales) divided by Budgeted sales.
Margin of safety refers to the extent to which sales can be depressedbefore losses start.
Margin of safety also refers to the distance between budgeted or actualsales vis-a-vis break even sales.
What is Turnover Ratio?
shows the efficacy with which capital is utilised; shows how many times the capital has turned over or the velocity ofcapital; ‘result – resource ratio'; to improve the turnover ratio a business should : improve sales (capital being constant – say) ; reduce capital (sales being constant – say) ; increase sales and reduce capital ; and an unwanted situation would be a reduction in sales accompanied by an increase in capital.
can also be used to project the additional capital required to sustainplanned additions to sales level; can be used to project the additional sales required to sustain the plannedadditions to capital.
Research Department - Dr V.N. BRIMS
What is Profit Margin (%) ?
Profit Margin (%) is an indicator of : profit margin (%) =
marketing performance or productivity of every rupee of sales; cost performance or cost productivity because (1 – profit margin %)represents the cost incidence as percent of sales; and amount of profit generated for every rupee of revenue.
What is Financial Operations Ratio?
Financial Operations Ratio refers to two aspects of treasury management in particular and financial management in general. The relevant ratios include : Profit before Tax  Indicates the extent to which profit  Indicates the mix of finance i.e. Debt : before tax is depressed on account of interest.
 Higher the debt greater the risk and vice  High borrowings and high Interest rates unduly depress operatingprofit.
 Risk - return relationship play their  Judicious use of debt and competitive pricing of borrowed funds is key tosuccess.
India - From License Raj to Liberalisation
Profit after tax Profit before tax Indicates the role of taxes in depressing profit after tax.
Successful tax planning will help transmission of profit before tax to shareholdersin increasing proportion.
Treasury management and line managers have to co-ordinate to time investmentdecisions to suit the cutoff points prescribed by income tax authorities to claimdepreciation and other deductions.
Supernormal profits, not finding itself reinvested into new ventures, get taxed forwant of adequate deductions, including depreciation.
Research Department - Dr V.N. BRIMS
The cost of capital is usually a weighted cost inasmuch as the portfolio of sources of finance of any business is made up of funds procured from different sources. Thus, WACCfor any given capital structure is defined as follows : k = (k x w1) + (k x w2) + (k x w3)
k = cost of shareholders equity(%) k = cost of preference shares capital(%) k = cost of debt (%), w1, w2 and w3 are proportions which the respective sources of finance viz preference share capital, shareholders equity and debt bear to the total sources of finance w1 + w2 + w3 equal unity The cost of debt is a standard measure and is arrived at using the formula (l – t)i where t=marginal tax rate and i=interest rate, contracted for the loan. There may bevariations in cost depending on the method used to value debt viz historic cost as againstmarket value.
The cost of preference shares is again a contracted rate of dividend. However there is no tax deductibility in case of dividends. Hence the contracted rate of dividend isthe cost of capital. However there can be variations in the cost of preference sharecapital depending on the method used-again historic cost as against market value of thepreference shares. Alternative formula could be the yield concept defined as dividend pershare divided by market price per share.
The computation governing cost of equity is beset with many difficulties and the issues are unresolved. There are many options as shown in Boxes 79 and 80.
India - From License Raj to Liberalisation
ke = dividends per share X 100 market price per share earnings per share market price per share dividends per share + g (growth rate of dividend in per cent) market price per share As a final improvement, the cost of equity is computed using the CAPM formula which defines cost of equity as follows : R =R + β (R – R ) >
R = cost of equity
R = risk free rate
β = riskness of the stock and is known as Beta R = Risk Premium Rate
CAPM establishes the relationship between risks and return.
Risk of a portfolio is measured through Beta (β).
β reflects a co-efficient which quantifies the tendency of stock to moveup or down with the market : β can have a value as follows β= 1 means Average Risk β > 1 means Above Average Risk β < 1 means Less than Average Risk Research Department - Dr V.N. BRIMS
Interpretation is that the extent of increase in market and stock prices are uniform.
β = 2 : Intepretation is that stock is twice as volatile as average stock
β < 1: (say β = 0.5) Interpretation is that stock is half as volatile as average stock.
An average risk stock is defined as "one that tends to move up and down in step with the general market as measured by some index Dow Jones on S&P 500.Such a
stock has a β =1
Illustrative list of β coefficients in India:
Microsoft Corp.
Energen Corp.
Source : E. F. Brigham and J.F. Houston, Fundamentals of Financial Management pp-189 to 195, Thomson, Tenth Edition - 2004 India - From License Raj to Liberalisation
INDIA INC :β of Select Companies
Company Name
Gujarat Ambuja Cements Ltd.
Hindustan Lever Ltd.
Hindustan Petroleum Corpn. Ltd.
I C I C I Bank Ltd.
Infosys Technologies Ltd.
Oil & Natural Gas Corpn. Ltd.
Ranbaxy Laboratories Ltd.
Tata Motors Ltd.
Tata Steel Ltd.
Source : CMIE DATA BASE – PROWESS - 2006 Research Department - Dr V.N. BRIMS
Responsibility Centre means a subdivision of the organisation around which
responsibility is measured by some yardsticks depending on the nature or status
of the responsibility centre
Responsibility Centres include Revenue Centres, Profit Centres, Cost Centres,
Expense Centres and Investment Centres
Revenue Centres are those segments of business or subdivisions of an
organisation around which revenue is identified for purpose of control
Cost Centres are segments of business around which costs which have an
engineered relationship with output are identified for purposes of control. The
costs collected are known as ‘engineered costs' or 'variable costs'
Expense Centres are those segments of business around which non-engineered
costs are identified for purposes of control. The expenses identified include
discretionary fixed costs and committed fixed costs
Profit Centres are those segments of business around which profits, defined as
revenue minus cost (engineered and non engineered) are identified for purpose of
Investment Centres are those segments of business around which profits and
investment/ asset employed/ capital employed are identified for purposes of control
investment centre is the segment of business where the ROI (return on investment)
or ‘return on assets' or ‘return on capital defined as ‘profits divided by investment/
assets/ capital' is measured.
India - From License Raj to Liberalisation
Madhukar Shukla, Competing through Knowledge, Response Books A division ofSage Publications, 1997.
Dr. Guruprasad Murthy, Financial Management, Seth Publishers, 1978.
Dr. Guruprasad Murthy, Role of Management Accounting, Himalaya Publishers,2002.
Ezra Solomon, The Theory of Financial Management, Oxford University Press,1961.
RBI Reports on Currency and Finance.
Business Today 15th Anniversary Issue, January 14, 2007.
Annual Reports of ICI Ltd, Infosys Ltd, Nicholas Piramal India Ltd, and BharatForge Ltd.
Research Department - Dr V.N. BRIMS

Source: http://www.vpmmpcoe.co/Proceedings/2007%20brims/Tramsforming%20India%2007.pdf


Sudden Clinical Development Of Ectopic Cushing's Syndrome Due To A Non-Catecholamine Producing Pheochromocytoma Shannon Comley Sood, DO; Matthew Leinung, MD; Ming-Tseh Lin, MD; Timothy Jennings, MD; and Daniel W. Lee, MD Department of Medicine, Division of Endocrinology and Division of Pathology and Laboratory Medicine Albany Medical College, Albany, New York

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What are prohibited substances ? What samples are collected from the horse ? Most medicines and drugs are prohibited if detected in a If your horse needs veterinary assistance or treatment at Usual y urine and blood are col ected under the direct su- horse at the time of competition. This ruling is based on the an event, your treating/team veterinarian must obtain