Capital Structure
Assignment
1. Some of the key trends in the capital structure of India Inc. are as follows:
Key observations: * Indian corporate employ substantial amount of debt in their capital structure in terms of the debt-equity ratio as well as total debt to total assets ratio. * As a result of debt-dominated capital structure, the Indian corporate are exposed to a very high degree of total risk as reflected in high degree of operating leverage and financial leverage and, consequently, are subject to a high cost of financial distress * The foreign controlled companies in India use less debt than the domestic companies * The dependence of the Indian corporate sector on debt as a source of finance has declined over the years particularly since the mid-nineties * The corporate enterprises in India seem to prefer long-term borrowings over short-term borrowings * The foreign controlled companies use more long-term loans relatively to the domestic companies
Priority order of source of financing in Indian corporate: * Retained earnings are the most favoured source of finance. There is significant difference in the use of internally generated funds by the highly profitable corporate relative to the low profitable firms * The low profitable firms use different forms of debt funds more than the highly profitable firms * Loan from financial institutions and private placement of debt are the next most widely used source of finance * Small sized companies relies more on debt capital as compared to large sized companies. * The average debt-equity ratio of small sized companies were found to be more than 3:1 whereas in case of large sized companies it is 1:1. This shows that the large sized companies followed a strict conservative policy while deciding the debt equity mix * The hybrid securities are the least popular source of finance amongst corporates * They are more likely to be used by low growth firms
1. Some of the key trends in the capital structure of India Inc. are as follows:
Key observations: * Indian corporate employ substantial amount of debt in their capital structure in terms of the debt-equity ratio as well as total debt to total assets ratio. * As a result of debt-dominated capital structure, the Indian corporate are exposed to a very high degree of total risk as reflected in high degree of operating leverage and financial leverage and, consequently, are subject to a high cost of financial distress * The foreign controlled companies in India use less debt than the domestic companies * The dependence of the Indian corporate sector on debt as a source of finance has declined over the years particularly since the mid-nineties * The corporate enterprises in India seem to prefer long-term borrowings over short-term borrowings * The foreign controlled companies use more long-term loans relatively to the domestic companies
Priority order of source of financing in Indian corporate: * Retained earnings are the most favoured source of finance. There is significant difference in the use of internally generated funds by the highly profitable corporate relative to the low profitable firms * The low profitable firms use different forms of debt funds more than the highly profitable firms * Loan from financial institutions and private placement of debt are the next most widely used source of finance * Small sized companies relies more on debt capital as compared to large sized companies. * The average debt-equity ratio of small sized companies were found to be more than 3:1 whereas in case of large sized companies it is 1:1. This shows that the large sized companies followed a strict conservative policy while deciding the debt equity mix * The hybrid securities are the least popular source of finance amongst corporates * They are more likely to be used by low growth firms
References: * http://www.articlesbase.com/finance-articles/emerging-trends-in-capital-structure-decissions-1430622.html * http://mostlyeconomics.wordpress.com/2007/06/06/capital-structure-of-indian-companies/ * Inter-Industry Differences in Capital Structure: The Evidence from India, SUMITRA DAS and MALABIKA ROY * Finances of Public Limited Companies, 2007-08* * Capital Structure of Indian Corporate: Changing Trends, Ashok Kumar Panigrahi, Asian Journal of Management Research * Determinants of Capital Structure of Indian Corporate Sector: Evidence of Regulatory Impact