Raju Research Paper 28

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CAPITAL STRUCTURE PATTERN OF COMPANIES IN INDIA: WITH SPECIAL

REFERENCE TO THE COMPANIES LISTED IN NATIONAL STOCK EXCHANGE
Article · March 2022
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INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW
ISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:4.236
VOLUME 5, ISSUE 6, JUNE 2017
UGC APPROVED JOURNAL - NEWLY ADDED JOURNAL S.NO:7095
CAPITAL STRUCTURE PATTERN OF COMPANIES IN INDIA: WITH
SPECIAL REFERENCE TO THE COMPANIES LISTED IN
NATIONAL STOCK EXCHANGE
ILYAS.P.C 1 Dr RAJU.G 2
1
Research Scholar, Faculty of Commerce, ICKS, University of Kerala, Trivandrum
2
Associate Professor, School of Business Administration, CET, Trivandrum
ABSTRACT
The corporate capital structure is one of the important financial decisions for the financial
well being of the companies. The decision on appropriate sources of fund for capital structure is a
major policy decisions taken by a firm. In practice, it is observed that finance managers use different
combinations of debt and equity. This study seeks to provide evidence on capital structure patterns of
the selected companies and to test the extent of variations in capital structure among industries. The
analysis was carried out by using data from 20 companies selected at random which are listed in the
National Stock Exchange (NSE) during the year 2006-07 to 2015-16. The overall result shows that
capital structure as measured by debt-equity ratios vary significantly among selected industries such
as Automobile, Pharmaceuticals, Metals and Mining, and Telecom industries over the period of the
study. At the same time, there were no statistically significant differences in the debt-equity ratio
between Automobile and Pharmaceutical industries. Companies in these two sectors almost kept the
similar capital structure pattern during the period of study. Thus it is statistically proved that various
industries in India have indeed followed different capital structure pattern.
Keywords: Capital structure, financial decisions, National Stock Exchange.

JEL Classification: G32
1. INTRODUCTION
The present business environment is complex, dynamic, and uncertain and the survival of the fittest is
the slogan of the corporate world. Complexity is one of the salient hallmarks of the 21 st century. It is
evident not only in business, but also in every facet of the globalized world in which we live.
Companies are continuously exposed to innumerable challenges, including innovation, technological
disruptions, global competition, leadership change, and shifting economic, social and regulatory
conditions. To ensure survival and growth, decision makers must lead their enterprise with an
effective data-driven transformation strategy. The managers of the present corporate world have to
follow systems approach in their decision making process because a decision taken in isolation can
bring a firm the verge of disaster.
Of all of the aspect of financing decision, capital structure decision is the vital one because
the performance of an enterprise is directly affected by such decision. Therefore much care and
attention need to be given while making the capital structure decision. Capital structure decision
involves the decision about the combination of the various sources of funds required for financing
assets and business operation. These sources include the use of long term and short term debt
financing as well as equity financing. For determining the appropriate mix of these funds, capital
structure analysis plays an important role. There should be a correct proportion of these finances to
keep up an optimum capital structure. Optimum capital structure provides to the firm a good condition
to operate in a profitable manner.
An Open Access, Peer Reviewed, Refereed, Online and Print International Research Journal
www.icmrr.org 67 icmrrjournal@gmail.com
Capital structure theories was developed for the first time by a well known financial
economist, David Durand in 1952 stating that firm can increase its value or lower the cost of capital
by using the debt capital (Net income Approach). He further suggested through Net Operating Income
approach (quite opposite to the former) which contents that the value of a firm and cost of the capital
is independent to capital structure. Thus the firm cannot increase its value by judicious mixture of
debt and equity capital. These are two extreme approaches to capital structure. Thereafter, Solomon
(1963) developed another approach which states that the cost of capital is dependent on the capital
structure and there is an optimal capital structure which increases firm value.
The idea of modern capital structure theory was pioneered by the contribution of Modigliani
and Miller in 1958. In their work they elaborated on the conditions under which the firm would be
largely indifferent as to the sources of its finance where interest is not tax deductible. Thereafter the
literature on capital structure has expanded by adding many theoretical and empirical researches. The
strict assumption made by the MM theory have been relaxed in the subsequent models by taking into
account corporate taxes (MM in 1963), bankruptcy costs (Baxter, 1967), agency costs (Jenson and
Mecling, 1976) and information asymmetric (Myers and Majluf, 1984) as the potential determinants
of corporate capital structure. Martin and others summarized the debt capacity theories developed by
different scholars during 1970 and concluded that the value of the firm is maximized when marginal
benefit of debt is equal to the marginal cost of debt.
The rest of the paper proceeds as follows: overview of capital structure, review literature,
objectives, development of hypotheses, scope, research methodology, results and discussion and
conclusion.
1.1 OVERVIEW OF CAPITAL STRUCTURE

Capital structure represents the mixture of long term source of fund which is generally
categorized as equity and debt finance. Equity includes equity share capital, preference share capital,
share premium, reserves and surpluses, provision for contingency and development rebate reserve,
while debt finance includes debentures, borrowings from government, semi government, statutory
financial corporations and other agencies, term loan from banks, financial institutions etc and all
deferred payment liabilities. The different patterns of capital structure are capital structure with;
 Equity shares only
 Equity and preference shares
 Equity and debentures
 Equity shares, preference shares and debentures
The decision on appropriate capital structure is an important managerial task. This is a continues
process too. In India, capital structure patterns are peculiar to specific industries. They differ from
industry to industry but shows homogenous pattern in similar industry (Singh and Luthra, 2003).
Transportation, utilities and capital intensive manufacturing firms have high debt-equity ratios when
compared to mining companies, service firms and technology based manufacturing firms.
2. REVIEW OF LITERATURE
In order to study the corporate capital structure pattern, a lot of research has been undertaken
so far by various researchers all over the world. The review of some of the major studies has been
undertaken so as to develop a clear understanding about the significance of capital structure.
Modigliani and Miller (1958) argued that debt-equity combination does not affect the firm‘s
market value under some strict assumptions as to absence of taxes, asymmetric information,
bankruptcy costs, transaction cost and in an efficient market with homogeneous expectations.
Evidence would suggest that this does not operate in reality and new research work was conducted to
test the relationship between capital structure theories with firm performance. While other theories
such as Net Operating Income supports MM assertion, Net Income approach and Traditional view
rejects the MM theory by arguing that how finance the firm has effect on the value of the firm to a
large extent hence is relevant in decision making.
Rajan and Zingals (1995) investigate the determinants of capital structure choice by analyzing
the financial decisions of public firms in the major industrialized countries. The study put forth that
firm leverage is fairly similar across the G-7 countries.
Feidakis and Rovolis (2007) in their study on capital structure determinants for large
European construction firms from 1996-2004, shows that the size is positively and profitability is
negatively related to leverage.
Tawiah (2014) examined inter-country variation of capital structure of the companies from
India and Ghana and found that due to the existence of high interest rate in Ghana when compared to
India, Ghanaian companies employed less debt finance. Further, Indian companies are decreasing the
debt finance over the period while Ghanaian companies are increasing at (1%) a marginal rate. The
high performance and efficient capital market in India has boosted shareholders confidence thereby
reducing company borrowings.
Hajiha and Akhlaghi (2013) examined the firm specific determinants of debt maturity
structure taking 140 Iranian manufacturing firms listed in Tehran Stock Exchange during the period of
2001-02 to 2009-10 financial years. The result shows that firm specific variables such as profitability,
firm size, tangibility, growth opportunity and financial leverage have significant effects on debt
maturity choice in Iranian firms. This also reveals that tax effect and business risk are not significant
to the debt maturity structure.
Chisti et al. (2013) investigated the impact of capital structure on the profitability of listed
Indian companies from 2007-08 to 2011-12 and found that capital structure do have statistically
significant impact on the profitability of the firm.
Yadav (2014) investigated the determinants of capital structure and financial leverage of
Indian companies during the period of 2002 to 2012. Multiple regression and correlation have applied
on fifty companies listed in the National Stock Exchange. The study reveal that profitability, collateral
value of assets, growth, liquidity, firm size and debt service capacity are positively correlated to debt
equity ratio while tax rate, non-debt tax shield, uniqueness and business risk are negatively correlated.
Tawiah (2014) analyzes the emerging trends in capital structure pattern of companies in
Ghana and India taking 20 listed companies from both countries revealed that companies in Ghana
used less debt in its capital structure as compared to companies in India. This is due to the fact that
there is high interest rate in Ghana. The efficient capital market and high corporate performance has
helped to boost up shareholders confidence and thereby companies reduce borrowing.
It is quite clear from the above review of empirical works that different authors have
approached financial leverage in different perspectives of varying levels of analysis. It throws more
light on the extensive and diverse works on capital structure. The existing empirical research on
capital structure has been largely confined to a few developed countries. In the context of India, it has
received a limited research attention. Besides, most of the work done on Indian market is on the
determinants of capital structure. Hence, there is a sufficient justification to conduct a study on
―Capital Structure Pattern of Companies in India: with Special Reference to the Companies listed in
National Stock Exchange‖. The findings of the study might be useful to all companies to frame an
optimum capital structure. It is also expected that the study will be useful to the management, finance
professionals and researchers in the corporate sector.
3. OBJECTIVES
The present study aimed to achieve the following objectives.
 To examine the capital structure pattern of selected industries in India
 To make inter sector comparison of capital structure pattern of selected industries in India
 To identify the importance of capital structure pattern in corporate sector
4. HYPOTHESIS
In the light of the above objectives, the following hypothesis has been framed in order to test
its validity in the context of selected companies in India.
H0: There is no significant variation in the debt-equity ratio among selected industries
H1: There is significant variation in the debt-equity ratio among selected industries
5. SCOPE OF THE STUDY

The present study is primarily restricted to the public limited companies which are listed in
the National Stock Exchange (NSE) of India. The study covers financial data for a period of ten years
from 2006-07 to 2015-16. An investigation in the capital structure pattern of the selected companies
listed with National Stock Exchange (NSE) of India is to be done to test the extent of variation among
selected industries.
6. METHODOLOGY
The study is based on secondary data. The data for the study has been taken from published
annual reports of twenty companies selected at random from four major sectors namely Automobile,
Pharmaceuticals, Metals and Mining and Telecom. This study covers a period of ten financial years
from 2006-07 to 2015-16. To fulfill the objectives of the study, ratio analysis of capital structure for a
period of ten years has been considered. Mathematical and statistical tools like averages, percentages,
ANOVA. etc. have been used for analysis. Tables and charts of various types are also used for
presentation.
Table 1: Industry Group wise Classification of Selected Companies
Sector Sl.No. Name of the Company Year of Registered Paid up Capital

s Incorporation Office (Rs.in Crors)
1 Hero Motor Corporation 1984 New Delhi 39.94
2 Bajaj Auto 2007 Maharashtra 289.37
Automobile
3 Escorts 1994 Haryana 119.39

4 Tata Motors 1945 Mumbai 679.18
5 Maruti Suzuki 1981 New Delhi 151.00
6 Sun Pharma 1993 Vadodara 240.66

Pharmaceutical
7 Glenmark 1977 Mumbai 28.22
8 Cipla 1935 Mumbai 160.68
9 Lupin 1983 Mumbai 90.12
10 Dr.Reddys Laboratories 1984 Hyderabad 85.30
Metals & Mining 11 JSW Steel 1994 Mumbai 302.75
12 Coal India 1973 West Bengal 6316.36
13 Hindalco 1958 Mumbai 206.52
14 Jindal Steel 1979 Hissar 91.49
15 SAIL 1973 New Delhi 4130.53
16 Bharti Airtel 1995 New Delhi 1998.70

17 Idea Cellular 1995 Gandhi 3600.51
Telecom
Nagar
18 Reliance Communication 2004 New Mumbai 1244.00
19 Tata Communication 1986 Mumbai 285.00
20 Nu Tek India 1993 New Delhi 77.26
Source: www.moneycontrol.com
Automobile Industry
India‘s automotive industry is one of the most competitive in the world. The industry
accounts about 7.1 per cent of the country's Gross Domestic Product (GDP). The Two Wheelers
segment with 81 per cent market share is the leader of the Indian Automobile market owing to a
growing middle class and a young population. Moreover, the growing interest of the companies in
exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV)
segment has 13 per cent market share.
India is also a prominent auto exporter and has strong export growth expectations for the near
future. In April-March 2016, overall automobile exports grew by 1.91 per cent. PV, Commercial
Vehicles (CV), and Two Wheelers (2W) registered a growth of 5.24 per cent, 16.97 per cent, and 0.97
per cent respectively in April-March 2016 over April-March 2015. In addition, several initiatives by
the Government of India and the major automobile players in the Indian market are expected to make
India a leader in the 2W and Four Wheeler (4W) market in the world by 2020. For the current study,
five companies from the Industry were randomly selected viz, Hero Motor Corporation, Bajaj Auto,
Escorts, Tata Motors and Maruti Suzuki.
Pharmaceutical Industry
The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth
largest in terms of value, as per a report by Equity Master. India is the largest provider of generic
drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of
volume. Of late, consolidation has become an important characteristic of the Indian pharmaceutical
market as the industry is highly fragmented. The market is expected to grow to US$ 55 billion by
2020, thereby emerging as the sixth largest pharmaceutical market globally by absolute size. Branded
generics dominate the pharmaceuticals market, constituting nearly 80 per cent of the market share (in
terms of revenues). The Union Cabinet has given its nod for the amendment of the existing Foreign
Direct Investment (FDI) policy in the pharmaceutical sector in order to allow FDI up to 100 per cent
under the automatic route for manufacturing of medical devices subject to certain conditions. For the
current study, five companies from the Industry were randomly selected, viz, Sun Pharma, Glenmark,
Cipla, Lupin and Dr.Reddys Laboratories.
Metals and Mining Industry
With a strong but volatile outlook for the sector, the global mining and metals industry is
focused on future growth through expanded production, without losing sight of operational efficiency
and cost optimization. The sector is also faced with the increased challenges of changing expectations
in the maintenance of its social license to operate, skills shortages, effectively executing capital
projects and meeting government revenue expectations. India is the third-largest steel producer in the
world. In 2015, India produced 91.46 million tonnes (MT) of finished steel.
Driven by rising infrastructure development and growing demand for automotives, steel
consumption is expected to reach 104 MT by 2017. During the month of September 2016, the
consumption of finished steel was estimated at 6.7 MT, showing a significant improvement of 7.6 per
cent year-on-year growth. India has the fifth-largest coal reserves in the world at 60.6 billion tones.
Also, the country ranks fourth globally in terms of iron ore production. The Mining
industry in India is a major economic activity which contributes significantly to the economy of India.
The GDP contribution of the mining industry varies from 2.2 percent to 2.5 percent only but going by
the GDP of the total industrial sector it contributes around 10 percent to 11 percent. Even mining done
on small scale contributes six percent to the entire cost of mineral production. Indian mining industry
provides job opportunities to around 700,000 individuals. For the current study, five companies from
the Industry were randomly selected viz, JSW Steel, Coal India, Hindalco, Jindal Steel and SAIL.
Telecom Industry
India is currently the world‘s second-largest telecommunications market and has registered
strong growth in the past decade and half. The Indian mobile production is growing rapidly and will
contribute substantially to India‘s Gross Domestic Product (GDP), according to report prepared by
GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG). The liberal
and reformist policies of the Government of India have been instrumental along with strong consumer
demand in the rapid growth in the Indian telecom sector. The government has enabled easy market
access to telecom equipment and a fair and proactive regulatory framework that has ensured
availability of telecom services to consumer at affordable prices. The deregulation of Foreign Direct
Investment (FDI) norms has made the sector one of the fastest growing and a top five employment
opportunity generator in the country.
The Indian telecom sector is expected to generate four million direct and indirect jobs over
the next five years according to estimates by Randstad India. The employment opportunities are
expected to be created due to combination of government‘s efforts to increase penetration in rural
areas and the rapid increase in Smartphone sales and rising internet usage. International Data
Corporation (IDC) predicts India to overtake US as the second-largest Smartphone market globally by
2017 and to maintain high growth rate over the next few years as people switch to smart phones and
gradually upgrade to 4G. For the current study, five companies from the Industry were randomly
selected and analyzed, viz, Bharti Airtel, Idea Cellular, Reliance Communication, Tata
Communication and Nu Tek India.
Calculation of Capital Structure Ratio

The debt-equity ratio is considered for studying the capital structure pattern. Debt-Equity
Ratio is a capital structure ratio used to measure a company's financial leverage, calculated by
dividing a company‘s total long term debt by its stockholder‘s equity. The D/E ratio indicates how
much debt a company is using to finance its assets relative to the amount of value represented in
shareholders‘ equity. In this study, it is calculated by applying the following formula
7. RESULTS AND DISCUSSIONS
This section presents the findings of the study and it is divided into two parts. Part one deal
with capital structure pattern of selected industries and the part two present the capital structure
variations among industries with hypothesis testing.
7.1 Capital Structure Pattern of Industries

Table 2 shows the capital structure pattern measured by debt-equity ratio of the selected
industries
Table 2: Mean Debt-Equity Ratios of Selected Industries from 2006-07 to 2015-16
Years Sectors
Automobile Pharmaceuticals Metals & Mining Telecom
2015-16 0.16 0.15 1.00 0.61
2014-15 0.32 0.14 0.91 0.37
2013-14 0.21 0.17 0.82 0.48
2012-13 0.23 0.11 0.74 0.42
2011-12 0.21 0.15 0.57 0.29
2010-11 0.30 0.29 0.57 0.35
2009-10 0.28 0.20 0.66 0.35
2008-09 0.52 0.35 0.63 0.39
2007-08 0.50 0.29 0.55 0.64
2006-07 0.43 0.70 0.63 0.67
Mean 0.32 0.26 0.71 0.46
Source: Compiled from annual report of companies.
Table 2 reveals that among the four industries selected, the Metals and Mining companies has
used highest borrowed fund for financing their assets and operations ranging from 0.55 to 1.00
(mean=0.71), followed by Telecom sector 0.29 to 0.67 (mean = 0.46), Automobiles 0.16 to 0.52
(mean = 0.32) and Pharmaceuticals 0.11 to 0.70 (mean = 0.26). From the analysis, it is found that
these industries in India have not been used debt finance as substantial part. More than 50 percent of
the total assets of the companies from all these sectors in India are financed by owner‘s fund. This less
dependence of Indian companies on debt finance could be due to the higher and instable interest rate.
7.2 Variations in Capital Structure

From the earlier analysis, it was observed that capital structure varied in different industries.
In this section an attempt has been made to test statistically the variations among industries with
regard to the capital structure.
7.2.1 Variations in Capital Structure among Different Industries

The following hypothesis has been used in order to test its validity with regard to variations in
capital structure among different Industry.
H0: There is no significant variation in debt-equity ratio among selected industries
In order to examine whether there is any significant variation in the capital structure among
the selected industries, ANOVA test has been conducted. The result is given below.
Table-3: Analysis of Variance of the Capital Structure Pattern of Selected Industries.
Source SS df MS F P-Value
Between Groups 1.216 3 0.4052 18.134
0.000
Within Groups 0.804 36 0.022
Total 2.020 39
The f-ratio value is 18.134. The result is significant at p < .05.
The research hypothesis were tested at 5% level of significance (95% confidence level) and
observed from the Table-3 that the calculated ‗P‘ value is below 0.05. Therefore the null hypothesis,
that is, there is no significant variation in debt-equity ratio among selected industries, is rejected.
Hence, it is concluded that capital structure as measured by debt-equity ratios vary significantly
among different industries over the period of study.From the result so far, it shows that there are
statistically significant differences between the groups as a whole. The Table 4, multiple comparisons,
shows which group differed from each other.
From the Table 4, it is seen that there is a statistically significant difference in debt-equity
ratio between the sectors from Automobile, and Metal and mining (p = 0.00), Automobile and
Telecom (p = 0.236), Pharmaceutical, and Metal and mining (p = 0.00), Pharmaceutical and Telecom
(p = 0.041) as well as Metal and mining, and Telecom (p = 0.007). However, there were no
statistically significant differences in the debt-equity ratio between Automobile and Pharmaceutical
industries.
8. CONCLUSION
An optimum capital structure is that which maximizes the shareholder‘s wealth with best
combination of debt and equity mix by minimizing the firm‘s cost of capital. The findings of this
study contribute towards a better understanding of today‘s capital structure patterns of Indian context.
This study analyses the capital structure of the companies listed in National Stock Exchange of India.
In addition, an attempt was also made to present evidence on whether capital structures as measured
by debt-equity ratios vary significantly among industries. The results show that capital structure
pattern as measured by debt-equity ratios vary significantly among selected industries such as
Automobile, Pharmaceuticals, Metals and Mining and Telecom industries over the period of the
study. At the same time, capital structure between Automobile and Pharmaceutical industries does not
show a significant variation, which implies that, these sectors almost kept the similar capital structure
pattern. The analysis of the study concludes that companies are using both debt and equity finance as
their capital structure. However various industries have indeed followed different capital structure
pattern. Further research should be conducted in the Indian market on more sectors to check the
consistency of the results across the various industries. Furthermore, addition of new variables or
other market based measures may disclose some more insights from the Indian market.
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CAPITAL STRUCTURE PATTERN OF COMPANIES IN INDIA: WITH SPECIAL

Article · March 2022

Challenges and Opportunities of Corporate Debt Market in India View project

The user has requested enhancement of the downloaded file.

Keywords: Capital structure, financial decisions, National Stock Exchange.

1.1 OVERVIEW OF CAPITAL STRUCTURE

5. SCOPE OF THE STUDY

Table 1: Industry Group wise Classification of Selected Companies

Sector Sl.No. Name of the Company Year of Registered Paid up Capital

3 Escorts 1994 Haryana 119.39

6 Sun Pharma 1993 Vadodara 240.66

7 Glenmark 1977 Mumbai 28.22

8 Cipla 1935 Mumbai 160.68

9 Lupin 1983 Mumbai 90.12

10 Dr.Reddys Laboratories 1984 Hyderabad 85.30

16 Bharti Airtel 1995 New Delhi 1998.70

Calculation of Capital Structure Ratio

7.1 Capital Structure Pattern of Industries

7.2 Variations in Capital Structure

7.2.1 Variations in Capital Structure among Different Industries

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