A STUDY ON STOCK MARKET INTEGRATION WITH SPECIAL REFERENCE TO INDIA STOCK MARKET FOR THE PERIOD APRIL 2004 APRIL 2014

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1 A STUDY ON STOCK MARKET INTEGRATION WITH SPECIAL REFERENCE TO INDIA STOCK MARKET FOR THE PERIOD APRIL 2004 APRIL 2014 Dr. Rajesh C. Jampala 1 Prasanna Kumar Goda 2 ABSTRACT The main purpose of the study is to cover certain risks by international portfolio diversification by analyzing co movements of global stock markets. The empirical study explores the dynamics of integration of stock markets. For this, a sample of nine stock markets has been taken into consideration. They are India, USA, UK, Germany, China, France, Hong Kong, Japan & Singapore during the period from April 2004 to April 2014 using daily closing price data. The study covers all the major stock markets across the world and includes developing and developed stock markets. Here evidence is been drawn from India context where India stock market is been highly integrated with the global peers or not, if so which stock market is been integrated with India much. The results suggest that all the stock markets have a long-term integration as well as dynamic short-term integration. In that, India has high amount of co movements with USA as well as UK Stock Markets. Methodology adopted here is ADF, Correlation coefficient, OLS, Johansens integration test, Variance Decomposition Method. KEYWORDS Co-integration, Stationary, Integration, Least Squares, r-square, f-statistic etc. INTRODUCTION Last two and half decades were been characterized by increasing speed of globalization. Liberalization, Privatization and Globalization played a very prominent role in international growth of business. However, to assess the actual degree of comovements between the international stock markets empirical investigation over longer period on a day-to-day basis is necessary. Every coin has two sides, and so does financial liberalisation. On the one hand, financial liberalisation may reduce or remove the trade obstacles between markets, such as foreign ownership restriction, and therefore enhance the integration of financial markets across borders. Theoretically, financial market integration is expected to improve economic growth, welfare and productivity not only from direct channels but also from collateral benefits. However, financial market integration per se does not possess any positive effect obviously. The effects of financial market integration heavily depend on certain thresholds, such as good institutional quality and the development of domestic financial sector (Masten, Coricelli, & Masten, 2008). Various threshold conditions should be met before countries are able to reap the growth and stability benefits of financial globalisation (Chinn & Ito, 2006). Otherwise, these countries are more likely to experience financial crisis and lower growth rates (Wei, 2006). The efficient market hypothesis states that asset prices in financial markets should reflect all available information; as a consequence, prices should always be consistent with fundamentals. Efficient Stock Markets provide the vehicle for mobilizing savings and investment resources for developmental purposes. They afford opportunities to investors to diversify their portfolios across a variety of assets. In general, ideal market is the one in which prices provide accurate signals for resource allocation so that firms can make productive investment decision and investors can choose among the securities under the assumption that securities prices at any time fully reflect all available information. A market in which prices fully reflect all available information is called efficient. The aim of this paper is to assess the interdependence of international stock markets over the period April 2004 to April The research is important for the above reasons: Portfolio managers and investors are concerned with following questions. Is there still an advantage of international diversification of portfolio? Has the recent crisis changed the relationships between the markets and how? The possible changes can help adjust their portfolios. Managers of listed (and indirectly also non-listed) companies can take advantage of this research. It can help them answer these questions: How does the development in other markets influence value of stocks in our industry? Are our stocks prone to shocks from abroad? Outcomes from this research can be useful for policymakers. The correlation patterns between the national stock markets have implications for the stability of the financial system. 1 Professor & Head, Department of Commerce and Business Administration, P. B. Siddhartha College of Arts & Science, Andhra Pradesh, India, rajeshjampala@yahoo.com 2 Research Scholar (UGC-SRF), Department of Commerce & Business Administration, Acharya Nagarjuna University, Andhra Pradesh, India, kumar_india707@yahoo.co.in 1659 P a g e

2 Table-1: Indexe s Considered for the Integration Study S. No. Stock Index Selected for Study Country S. No. Stock Index Selected for Study Country 1 SENSEX BSE India 6 CAC 40 France 2 S&P USA 7 Hang Sang Hong Kong 3 FTSE UK 8 Nikkei Japan 4 DAX Germany 9 SGX Nifty Singapore 5 Shanghai Composite China Sources: Authors Compilation Null Hypothesis (H0):- There is no significant market integration between Indian stock market vs. world major stock market. Alternative Hypothesis (H1):- There is significant market integration between Indian stock market vs. world major stock market. RESEARCH DESIGN Sample and Period of Study: The study uses data on daily closing price of BSE of India, Standard and Poor (S&P) 500 of United States, FTSE of UK, DAX of Germany, Hang sang of Hong Kong, Nikkei of Japan, SGX Nifty of Singapore, Shanghai Stock exchange of China and CAC 40 of France from 1st April 2004 to 30 th April, We adjusted the data with the previous trading sessions when any series has a missing value due to trading holiday of that particular country. Thus, all data are collected on the same dates across the nine stock exchanges and there are 2503 observations for each series. Many changes took place during the period like transactions in futures and options, the bull run, and the highs in the indices, increased FII inflows across the world stock markets, recession, gradual lifting of restrictions on capital flows and relaxation of exchange controls in many countries etc. These changes might have influenced the degree of co movement among the stock markets. It will be instructive to examine the co integration of the stock markets. Data: For the purpose of analysis the daily data from major national indices of nine countries namely India, USA, UK, Germany, China, France, Hong Kong, Japan and Singapore. The data was obtained from finance.yahoo.com website and the indices choose that are diversified and most comprehensive for the specific country. Methodology Unit Root Test: Augmented Dickey-Fuller (ADF) test is employed to test the validity of market integration hypothesis. A unit root test is a statistical test for the proposition that in an autoregressive statistical model of a time series, the autoregressive parameter is one. It is a test for detecting the presence of stationary in the series. Stationarity time series is one whose mean, variance and covariance are unchanged by time shift. The presence of unit root in a time series is tested with the help of Augmented Dickey- Fuller Test. It tests for a unit root in the univariate representation of time series. For a return series Rt, the ADF test consists of a regression of the first difference of the series against the series lagged k times as follows: The null hypothesis is H0: =0 and H1: <1 The acceptance of null hypothesis implies non-stationary. We can transform the non-stationary time series to stationary time series either by differencing or by de-trending. The transformation depends upon whether the series are difference stationary or trend stationary. Johansen Co-integration: There are two types of Johansen test, either with trace or with eigenvalue, and the inferences might be a little bit different. The null hypothesis for the trace test is the number of co integration vectors r?, the null hypothesis for the eigenvalue test is r =?. Variance Decomposition: A variance decomposition or forecast error variance decomposition (FEVD) is used to aid in the interpretation of a vector auto regression (VAR) model once it has been fitted: 1660 P a g e

3 RESULTS AND DISCUSSION Table depicts the R-Square & Probability F-test for the independent variable contributions to dependent variable in Ordinary Least Square Regression and contribution for movement of Sensex Table-2 S&P FTSE DAX HANG SENG NIKKEI SGX NIFTY SHAN GHAI CAC R Prob. (F-Statistic) Sources: Authors Compilation The above table depicts that least contributor in the movement of SENSEX is been contributed by France CAC 40 (0.03%) & Japans Nikkei (0.20%) and both independent variables are not much significant in influencing the dependent variable. Stationary Test and Discussion A prerequisite for testing co integration between the stock indices is the all variables are non-stationary. The first phase in the estimation process is deciding the order of integration of the individual price index series in natural log levels. The log difference of the indices, denoted as DBSE, DSP500, DFTSE, DDAX, DHANGSENG, DNIKKEI, DSGXNIFTY, DSHANGHAI, DCAC40 are tested for unit roots using the Augmented Dickey-Fuller (ADF) test using lag structure indicated by Schwarz Bayesian Information Criterion (SBIC). The results of the Augmented Dickey Fuller test are given in the table-3. It shows that all variables are non-stationary at their log level. However, they are stationary at their first difference and are integrated of order one as the actual values reported in the table exceed MacKinnon s critical values of -3.43, and at 1%, 5% and 10% levels respectively. Thus, all the series under investigation are I (1). This means that all the series are individually integrated. Table-3 Stock Markets t- statistic P-value Stock Markets First Difference of Logarithmic Series P-value BSE SENSEX LBSE SENSEX S&P LS&P FTSE LFTSE DAX LDAX HANGSENG LHANGSENG NIKEEI LNIKEEI SGXNIFTY LSGXNIFTY SHANGHAI LSHANGHAI CAC LCAC Sources: Authors Compilation Lag selection for Johansens co-integration Optimal Lag Selection (Should be modified) System equation model or vector Auto regression Estimates, here we can choose the number of lags in Johansen and Variance Decomposition Method in VAR, because both the model are system equation model. Table-4: Depicts the Lag Selection Criteria VAR Lag Order Selection Criteria Endogenous variables: SENSEX S_P FTSE DAX HANGSENG NIKKEI SGXNIFTY SHANGHAI CAC_40 Exogenous variables: C Sample: 4/01/2004 4/30/2014 Included observations: 2452 Lag Log L LR FPE AIC SC HQ NA 7.70e e * e e e e e P a g e

4 e * e e e e e+33* e e e e e e * e e e e e e * 2.26e Note: *Indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan - Quinn information criterion Sources: Authors Compilation Table-4 depicts that for better lag selection is lower the AIC Value better the model. Here lag (15) can be taken for the test of Johansen Co integration. JOHANSEN CO INTEGRATION TEST Table-5 Johansen long run co integration equations Here Sensex is the Dependent Variable and remaining eight indices are dependent variable. Table-5 Series: SENSEX S_P FTSE DAX HANGSENG NIKKEI SGXNIFTY SHANGHAI CAC_40 Lags interval (in first differences): 1 to 18 Unrestricted Co integration Rank Test (Trace) Hypothesized Number of CE(s) Eigen value Trace Statistic 0.05 Critical Value Prob.** None * At most 1 * At most 2 * At most At most At most At most At most At most E Note: Trace test indicates 2 co integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Co integration Rank Test (Maximum Eigen Value) Hypothesized Number of CE(s) Eigen value Max-Eigen Statistic 0.05 Critical Value Prob.** None * At most 1 * At most 2 * At most At most P a g e

5 At most At most At most At most E Note: Max-Eigen value test indicates 1 co integrating eqn(s) at the 0.05 level *Denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Sources: Authors Compilation Table-5 depicts that the trace test results suggest that there was clear-cut evidence of co integration among the nine stock markets, since none of its probabilities obtained is more than 0.05 significant levels. Max-eigenvalue test results, however, exhibit one co integrating equation among the region at 5 percent significant level. Due to strong power of the co integration tests, it is concluded that the null hypothesis stating that there were no co integrating vectors, could be rejected. Thus, in the full-year period of April 2004 to April 2014, the nine stock markets had long-term tendency to converge with each other. VARIANCE DECOMPOSITION METHOD Here the short-run dynamic interactions among the nine stock markets of India - Sensex, USA - S&P500, UK - FTSE, Germany - DAX, Hongkong Hang seng, Japan - Nikkei, Singapore SGX Nifty, China Shanghai, France CAC after discovering that there was long-run co-movement among those stock markets by applying vector autoregressive (VAR) models. Table-6: Variance Decomposition of BSE- SENSEX with USA - S&P 500, UK - FTSE, Germany - DAX, Hongkong Hang Seng, Japan - Nikkei, Singapore SGX Nifty, China Shanghai, France CAC (April 2004 to April 2014) Variance Decomposition of BSE SENSEX Period S&P HANG SGX SHAN CAC S.E. SENSEX FTSE DAX NIKKEI (Days) 500 SENG NIFTY GHAI Note: Here Period 5 days to period 200 days has been taken as short term measuring of integration among the stock markets. Sources: Authors Compilation 105 Graph-1 Variance Decomposition of SENSEX SENSEX S_P FTSE DAX HANGSENG NIKKEI SGXNIFTY SHANGHAI CAC_40 Sources: Authors Compilation In 5 day period Sensex impulse or own shocks is been contributed around percent variation of the fluctuation in Sensex for 5 day period that is on its own issues domestically, only a small amount of impulse to other eight stock markets caused by Sensex P a g e

6 In 50 days period Sensex impulse or own shock is been contributed around 88.40% and the reactions by the remaining stock indices in the shocks occurred in Sensex is by FTSE (4.88%), SGX Nifty (5.58%), S&P (3.18%), Hangseng (0.88%), Nikkei (0.66%), DAX (0.33%), Shanghai(0.25%) and the least reacted by CAC(0.08). In 100 days period Sensex impulse or own shock is been contributed around 81.12% and the reactions by the remaining stock indices in the shocks occurred in Sensex is by FTSE (5.78%), SGX Nifty (3.77%), DAX (2.99%), Nikkei (2.16%), S&P (2.01%), Hangseng (1.07%), Shanghai(0.70%) and the least reacted by CAC (0.39). In 200 days period Sensex impulse or own shock is been contributed around 70.90% and the reactions by the remaining stock indices in the shocks occurred in Sensex is by DAX (8.23%), SGX Nifty (5.58%), FTSE (5.25%), Hangseng (3.68%), Nikkei (3.48%), S&P (1.20%), Shanghai(0.94%) and the least reacted by CAC(0.73). CONCLUSION Here Null Hypothesis has been rejected as alternative hypothesis has been accepted that there is significant long term as well as short co integration between BSE - SENSEX with USA - S&P 500, UK - FTSE, Germany - DAX, Hongkong Hang Seng, Japan - Nikkei, Singapore - SGX Nifty, China - Shanghai, France - CAC. So now, the portfolio managers can estimate their investments and can able to predict certain movements by basing upon the above results. Mostly in linkage dynamics, India Stock market has actively moved in both short term as well as long term with US Stock Markets as well UK Stock Markets. Adverse impacts in these stock markets can able to affect directly to the India stock markets. REFERENCES 1. Agarwal, & Singh. (2002). Merger Announcements and Insider trading Activity in India: An empirical Investigation. (NSE research Initiatives, Paper No.8). 2. Ahmad, Ashraf, & Ahmed. (2005). Is the Indian Stock Market Integrated with the US and Japanese Markets? An Empirical Analysis. South Asia Economic Journal, 6(2), Amihud, Y., & Mendelson, H. (1987). Trading Mechanisms and Stock Returns: An Empirical Investigation. The Journal of Finance, 42(3), Ibid, Bhattacharya, & Samanta. (2001). A tale of two indices: the story of the NASDAQ and The Sensex. Journal of Quantitative Economics, 1(1), Brisley, N., & Theobald, M. (1996). A Simple Measure of Price Adjustment Coefficients: A Correction. The Journal of Finance, 51(1), Brown, & Warner. (1985). Using Daily Stock Returns-The Case of Event Studies. Journal of Financial Economics, 14, Charvest, G. (1978). Dividend Information, Stock Returns And Market Efficiency Ii. Journal of Financial Economics, 6, Chung & Ng, (1992). Interactions between the U.S. and Japan Stock Market Indices. Journal of International Financial Markets, Institutions and Money, 2(2), Damodaran, A. (1993). A Simple Measure of Price Adjustment Coefficients. The Journal of Finance, 48(1), Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from ***** 1664 P a g e

7 IFRS BASED ACCOUNTING: OPPORTUNITIES AND CHALLENGES OF ADOPTING IN INDIA Dr. A. Vinayagamoorthy 3 ABSTRACT It is well known that companies all over the world have become more and more internationally oriented during last few decades. They create fusion, make investment, conduct trade and co-operate over country borders. International Financial Reporting Standards (IFRS) is becoming the global language of business with over 40% of the world having moved to IFRS in the past few years. By 2016, it is expected that all companies in major markets will be using IFRS. The globalization creates an increased need for communication in the terms of language, awareness of culture differences and domestic customs. Moreover, the financial communication such as accounting and financial results is just as important for business leaders and employees to master. Hence, Proponents of International Financial Reporting Standards (IFRS) claim that mandating a uniform set of accounting standards improves financial statement comparability that in turn attracts greater cross-border investment. KEYWORDS Globalization, IFRS, Financial Statement, cross-border Investment etc. INTRODUCTION The International Financial Reporting Standards (IFRS) and their evolvement into one of the most common accounting standards used in the world. The International Accounting Standards Board (IASB) was established in 2001 to develop International Financial Reporting Standards (IFRS). This started in 2005 when European Union made it mandatory for publicly traded companies to present consolidated financial statements in conformity with International Financial Reporting Standards (IFRS) starting from January 01, Earlier, since the late 1990s, companies in some European and Asian countries were allowed to use International Accounting Standards (IAS) as a substitute for their respective Domestic Accounting Standards. However, IFRSs were adopted legally first time in 2005 by European Union. Other countries with developed capital markets have adopted or in the process of adopting IFRS for reporting purposes. Many countries are replacing their national standards with IFRSs while some other countries have adopted this approach of first reviewing the IFRS, ensure their suitability with their economic, political and social conditions and then adopt these IFRSs accurately or with minor changes. The companies covered in this phase will prepare an Opening Balance Sheet in accordance with IFRS converged standards as of April 01, 2013 and will follow the IFRS converged standards from this date. Rest of the firms will follow the process from April 01, 2014 when these will prepare their opening Balance Sheet as on that date. Researchers have given various opinions on the utility of adoption of IFRSs across the globe as a single set of Reporting Standards. Existing literature supports this view of researchers that adoption of IFRS as single set of reporting standards improves the quality of financial information and ensures timely loss recognition. Summarily, adopting single set of Financial Reporting Standards bring many benefits to reporting entities, Investors, Bankers and other interested parties as in this period of international boundaries getting eliminated, they will not have to refer to Reporting Statements prepared on the basis of different Reporting standards. IFRS is a set of international accounting and reporting standards that will help to harmonize company financial information, improve the transparency of accounting, and ensure that investors receive more accurate and consistent reports. European Union adopted IFRS legally first time in Other countries with developed capital markets have adopted or in the process of adopting IFRS in for reporting purpose. However, is only possible if all the countries prefer the IFRS reporting. OBJECTIVES OF IFRS The main objective of IFRS development is harmonization in financial statements reporting. Some additional objectives are: To create the global financial reporting infrastructure. To generate sound business sense among the beneficiaries. To generate the dimensions of fair presentation of financial statement. What is the reason to implement the International Financial Reporting Standards (IFRS) in India? 3 Professor, Department of Management Studies, Periyar University, Tamil Nadu, India, uccmsjuly2930@gmail.com 1665 P a g e

8 OVERVIEW OF ADOPTION OF IFRS IFRS are accounting rules ( standards ) issued by the International Accounting Standard Board (IASB), an independent organization based in London, UK. Before the inception of IASB, international standards were issued by the IASB s predecessor organization, the IASC, a body established in 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States of America. Up to 2000, the IASC s rules were described as International Accounting Standards (IAS). In fact, in 1997 after nearly 25 years of achievement, IASC recognized that to continue to perform its role effectively, it must find a way to bring about convergence between national accounting standards and practices and high-quality global accounting standards. In late 1997 IASC formed a Strategy Working Party that published a discussion paper in December 1998 and final recommendations in November The IASC Board approved the proposals in December 1999, and the IASC member bodies did the same in May The new standards-setting body was named as International Accounting Standards Board (IASB) and since April 2001, it has been performing the rule-making function. Components of IASB structure contain- IASB, IASC Foundation, International Financial Reporting Interpretations Committee (IFRIC), previously Standing Interpretations Committee, SIC under IASC), Standards Advisory Council (SAC) and Working Groups. The IASB is better funded, better staffed and more independent than its predecessor. The IASB describes its rules under the new label International Financial Reporting Standards (IFRS), though it continues to recognize (accept as legitimate) the prior rules (IAS) issued by the old standard-setter (IASC). IFRS IMPLEMENTATION PROCEDURE IN INDIA In 1949, Indian government to streamline accounting practices in the country established Institute of Chartered Accountants of India by passing ICAI Act, Accounting Standard Board was constituted by ICAI in 1977 with a view to harmonize the diverse accounting policies and practices in India. The objective of the task force was to lay down a road map for convergence of IFRS in India. Based on the recommendation made by the Task Force and based on outcome of discussions and public opinions on IFRS adoption procedure, a 3 step process was laid down by the Accounting Professionals in India. IFRS Adoption Three Steps Procedure can be summarized as Follows: Stage-1: IFRS Impact Assessment In this step, the firm will begin with the assessment of the impact of IFRS adoption on Accounting and Reporting Issues, on systems and processes, and on Business of the firm. The firm will then identify the key conversion dates and accordingly IFRS training plan will be laid down. Once the training plan is in place, the firm will have to identify the key Financial Reporting Standards that will apply to the firm and the differences among current financial reporting standards being followed by the firm and IFRS. The firm will also identify the loopholes in the existing systems and processes. Stage-2: Preparations for IFRS Implementation This step will carry out the activities required for IFRS implementation process. It will begin with documentation of IFRS Accounting Manual. The firm will than revamp the internal reporting systems and processes. IFRS, which deals with the first time adoption of IFRS, will be followed to guide through the first time IFRS adoption procedure. To make the convergence process smooth, some exemptions are available under IFRS.These exemptions are identified and applied. To ensure that the IFRS are applied correctly and consistently, control systems are designed and put in place. Stage-3: Implementation This step involves actual implementation of IFRS. The first activity carried out in this phase is to prepare an opening Balance Sheet at the date of transition to IFRS.A proper understanding of the impact of the transition from Indian Accounting Standards to IFRS is to be developed. This will follow the complete application of IFRS as and when required. First time implementation of IFRS requires lot of training and some difficulties may also be experienced. To ensure a smooth transition from Indian Accounting Standards to IFRS, Continuous training to staff and addressing all the difficulties that would be experienced while carrying out the implementation is also required. ADVANTAGES FOR INDIA IN ADOPTING IFRS Better reach to Global Capital Markets During the last decade, India has emerged as a strong economy on the global economy map. Indian Firms are expanding. These firms are not only setting plants in other countries but also acquiring other firms across the globe. For this they need funds at cheaper cost which is available in American,European and Japanese Capital Market.To meet the regulatory requirements of these markets, Indian Companies should report their financials as per IFRS. Thus adoption of IFRS not only helps Indian Firms in accessing global Capital Markets for funds but also availability of funds at cheaper cost. Easier Global Comparability Across the globe, Firma is using IFRS to report their financial results. With the adoption of IFRS by Indian firms, the comparison of two becomes easier. Investors, Bankers and Lenders also find it easy to compare the two financial statements following same reporting procedure. Indian companies in the process of raising funds from overseas capital markets have to provide financial results to interested parties. Since majority of Indian Firms are accessing European capital markets, preparation and presentation of financial statements based on IFRS helps firms in getting easy accessibility to these capital markets. Better Quality of Financial Reporting P a g e

9 Easy Cross Border Listing As mentioned earlier, Indian firms require funds for their expansion plans, which are not limited to the economic and political boundaries of India. Indian Firms are acquiring firms outside India also. They are also getting listed in European and American Capital Markets through raising funds from these markets. One of the major pre-requisites of being listed on European Markets is preparation of Accounts as per IFRS requirements. A few Indian Companies, which have raised funds through the European Capital Markets, have started preparing their Financial Statements as per IFRS. Adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of Accounting Principles and improvement in reliability of financial statements. Among various latest trends-based concepts, IFRS follows a concept of fair value, which can help Indian firms to reflect their true worth of Assets held in the financial statements. Since a single body (IASB, London) is preparing IFRS, these are very consistent, reliable and easy to adopt ensuring better quality of financial reporting. Elimination of multiple Reporting standards Large Business Houses in India like TATA, BIRLA, and AMBANI have firms registered in India and firms registered outside India in European and American capital markets. Firms registered in India prepare their Accounts as per Indian Accounting Standards whereas firms registered in other countries prepare their financial statements as per the Reporting standards of the respective country. Adoption of IFRS ensures the elimination of multiple financial reporting standards by these firms as they are following single set of Financial Reporting. This calls for a future scope of study on impact of adoption of IFRS by Indian Companies on Indian Economy and Firms. Challenges in the process of adoption of IFRS in India Institute of Chartered Accountants of India set up a task force in 2006 to study and suggest a path for adoption of IFRS in India. Based on the recommendation of task force, a phased programme (already discussed somewhere in this paper) has been initiated to adapt to IFRS in India. Accounting Professionals in India and across the world have listed various benefits of adopting IFRS. In spite of these benefits, adoption of IFRS in India is difficult task and faces many challenges. Few of these have been listed as: Awareness of International Financial Reporting Practices. Adoption of IFRS means a complete set of different reporting standards have to bring in. The awareness of these reporting standards is still not there among the stakeholders like Firms, Banks, Stock Exchanges, and Commodity Exchanges etc. Training Professional Accountants are looked upon to ensure successful implementation of IFRS. Along with these Accountants, Government officials, Chief Executive Officers, Chief Information officers are also responsible for a smooth adoption process. Existing laws such as Securities Exchange Board of India regulations, Indian Banking Laws & Regulations, Foreign Exchange Management Act also provide some guidelines on preparation of Financial Statements in India. IFRS does not recognize the presence of these laws and the Accountants will have to follow the IFRS fully with no overriding provisions from these laws. Indian Lawmakers will have to make necessary amendments to ensure a smooth transition to IFRS. Taxation IFRS adoption will affect most of the items in the Financial Statements and consequently, the tax liabilities would undergo a change. Currently, Indian Tax Laws. Enough changes are to be made in Tax laws to ensure that tax authorities recognize IFRS Compliant financial statements otherwise; it will duplicate the administrative work for the Firms. Financial Reporting System IFRS provide complete set of reporting system for companies to make their Financial Statements. Indian Firms will have to ensure that existing business-reporting model is amended to suit the requirements of IFRS. All the challenges mentioned here can be worked out by bringing a proper Internal Control & Reporting system in place. Firms, Regulators and Stock Exchanges in India should take some guidelines. IFRS CHALLENGES Increase in cost initially due to dual reporting requirement which entity might have to meet until full convergence is achieved. Unlike several other countries, the accounting framework in India is deeply affected by laws and regulations. Changes may be required to various regulatory requirements under The Companies Act, 1956, Income Tax Act, 1961, SEBI, RBI, etc. so that IFRS financial statements are accepted generally. If IFRS has to be uniformly understood and consistently applied, all stakeholders, employees, auditors, regulators, tax authorities, etc., would need to be trained. Entity would need to incur additional cost for modifying their IT systems and procedures to enable it to collate data necessary for meeting the new disclosures and reporting requirements. *Differences between Indian GAAP and IFRS may impact business decision / financial performance of an entity. Limited pool of trained resource and persons having expert knowledge on IFRSs. Communicating the importance and relevance of IFRS in global markets P a g e

10 STRATEGIES FOR ADOPTION OF IFRS IN INDIA Corporate Institutions like CII (Confederation of Indian Industries), FICCI, ICAI etc., should initiate centralize training and awareness program, which would ensure uniform, effective and efficient (cost effective) awareness across industry. Corporate institutions should represent corporate and industry to liaise with Financial and ERP software providers like SAP, Oracle systems, Tally to provide upgrades and newer versions to existing Software packages at reasonable rates (The Software providers will have to work on codes only once and deploy the software across industry in one go). Corporate institutions as mentions above should take a lead to integrate E-Corporate Governance in the IFRS modules ensuring, integrated transaction, accounting and reporting system. Financial Institutions and Banking sector, although have different legacy systems, should migrate to more standardized and common system to ensure smooth business transaction across the Globe. Universities and educational system should align the syllabus to the new accounting standard, as soon as possible to avoid obsolescence and duplicity. RECOMMENDATIONS Ensuring high-quality corporate financial reporting environment depends on effective enforcement mechanisms. Merely adopting international accounting and auditing standards is not enough. Three important links exist in the enforcement sequence: Directors and top management must ensure that financial statements are prepared in compliance with established standards; Auditors must act independently and judiciously to ensure that financial statements comply with applicable accounting standards and represent a true and fair position of the enterprise s financial condition; Regulators, both self-regulatory organizations and statutory regulators, must implement arrangements for efficient monitoring of regulatory compliance and consistently take appropriate actions against violators. CONCLUSION IFRS has its own advantages and offers a chance for India to align and integrate with common International Accounting standard, which will save the cost, which has to be incurred by MNCs, and internationally listed corporate for maintaining dual accounting and reporting system. It will also provide opportunity for small and mid-size industry and institutions to transact with counterparts across the Globe and harvest efficiencies and broader exposure. However, to adopt IFRS, especially by small and Midsized Industry would be a challenge in terms of scarcity of expertise and prohibitive cost to change upgrade the IT systems. A collective, collaborative and centralized effort for smooth, efficient and effective transition and implementation of IFRS across Government bodies, financial institutions, banking sector, and Corporate Industry and Educational system is required. REFERENCES AND NOTES 1. (2009, April 17). Response to the SEC Release: Roadmap For the Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards By U.S. Issuers (File No. S ). American Accounting Association. Retrieved from: ftp.sec.govlcommentsls ls pdf 2. (2008, May 18). AICPA Council Votes to Recognize the International Accounting Standards Board as a Designated Standard Setter. American Institute of Certified Public Accountants. Retrieved from: 3. (2009). Content and Skill Specifications for the Uniform CPA Examination. Effective Date: January 1, American Institute of Certified Public Accountants. Retrieved from: Release-Version-effective pdf 4. Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17(2), Amir, E., Harris, T., & Venuti, E. (1993). A comparison of the value relevance of US versus non USGAAP Accounting measures using form F-20 reconciliations. Journal of Accounting Research Studies on International Accounting, 31(Supplement), Aubert, F., & Grudnitski, G. (2011). The impact and importance of mandatory adoption of International Financial Reporting Standards in Europe. Journal of International Financial Management and Accounting, 22(1), Barth, M., W. Landsman, & M., Lang. (2008). International accounting standards and accounting quality. Journal of Accounting Research, 46(3), P a g e

11 8. Barth, Mary E. (2008). Global financial reporting: Implications for U.S. academics. The Accounting Review, 83, Bartov, E., S., R. Goldberg, & M., Kim. (2005). Comparative value relevance among German, US, and International Accounting Standards: A German stock market perspective. Journal of Accounting. Auditing and Finance, 20(2), Beneish, M., B., Miller, & T., Yohn. (2009). The effect of IFRS adoption on cross-border investments: Evidence from the widespread mandatory adoption of IFRS in 2005 (Working paper). Indiana University. 11. Byard, D., Li, Y., & Lu, Y. (2011). The effect of mandatory IFRS adoption on financial analysts information environment. Journal of Accounting Research, 49(1), Chakravartly, M. (2009, August 24). The global shift in market capitalization. Retrieved from Coopers, & Lybrand. (1993). International Accounting Summaries: A guide for interpretation and comparison (2 nd Edition). New York: Wiley. 14. Covrig, V., M., DeFond, & M., Hung. (2007). Home bias, foreign mutual fund holdings, and the voluntary adoption of international accounting standards. Journal of Accounting Research, 45(1), Daske, H., L., Hail, C., Leuz, & R., Verdi. (2008). Mandatory IFRS reporting around the world: Early evidence on the Economic Consequences. Journal of Accounting Research, 46(5), Davidson, L. H., & W., H. Francisco. (2009). Changes to the Intermediate Accounting course sequence. American Journal of Business Education, 2(7), (2008, November). IFRS Survey Results. Deloitte. Retrieved from (2009, April 27). International Financial Reporting Standards: What it means for Private Company Reporting. Deloitte. Retrieved from (2010, March 02). IAS Plus--Use of IFRSs by Jurisdiction. Deloitte. Retrieved from: Epstein, B., & Jermakowicz, E. ( ). Interpretation and Application of International Financial Reporting Standards for Indian Companies. Delhi. 21. (2002). International Accounting Standards Committee Foundation (Annual Report). London: International Accounting Standards Board (IASB). 22. Lantto, A., & Sahlstrom, P. (2009). Impact of International Financial Reporting Standard adoption on key financial ratios. Accounting and Finance, 49(2), Mintz, S. (2010). Implementation concerns about IFRS adoption in U.S. Journal of International Business Education, 5, (2010). Adoption of International Financial Reporting Standards. Report of the Committee on Road Map to the Adoption of IFRS. Nigerian Accounting Standards Board. 25. Tomaszewski, S., & Showerman, S. (2010). IFRS in United States: Challenges and opportunities. Review of Business, Williams, J., Haka, S., Bettner, M., & Carcello, J. (2009). Financial & Management Accounting: The Basis for Business Decisions. (14 th Edition). Singapore: McGraw Hill International Edition. 27. Retrieved from Retrieved from Retrieved from ***** 1669 P a g e

12 MEAN-SEMIVARIANCES APPROACH FOR OPTIMAL PORTFOLIO CHOICE SUBJECT TO CVAR CONSTRAINT AND TRANSACTION COSTS Faris Hamza 4 Moad El kharrim 5 ABSTRACT The real-world prominence of portfolio investment raises questions about tail risk management. Thus, current research in the portfolio allocation literature develops models that take into account the percentiles of loss. In this paper, we suggest a way to control the downside risk by introducing CVaR as constraint in the Mean-semi variance (MSV) model. A new mixed integer linear program, which takes into account different types of transaction costs as well as CVaR constraint, is proposed. Hamza and Janssen (1998) showed that separable programming techniques could be applied to solve that kind of program. While the added CVaR constraint increases realism in the portfolio choice process according to the investor s preferences, it limits however the set of feasible portfolios. KEYWORDS Portfolio, Optimization, Mean-semi Variances, Constraint, CVaR etc. INTRODUCTION Harry Markowitz (1952, 1959) developed his portfolio selection technique, which used to derive optimal portfolio in a meanvariance MV framework. Prior to Markowitz s work, security selection models focused primarily on the returns generated by investment opportunities. There is a lot of literature has improved the MV model. One line of work has focused on the assumption that portfolio return with normal distribution, but there is substantial empirical evidence that financial returns exhibit fat-tails and excess kurtosis after accounting for the clustering of volatility and autocorrelation. Hamza and Janssen (1995) proposed the meansemi variances model MSV as an alternative to the MV model. This takes as a risk function the convex combination of the MSV of the portfolio rate of return. As the MSV model is not based upon any probabilistic assumption on the distribution of stock data, it has considered well behaved with fat-tailed distributions and supposed to be equivalent to the MV model in the case of multivariate normality of the rates of returns. Hamza and Janssen (1998) proposed a mixed integer program, which takes into account the transaction costs. Current financial systems formulate some of the risk management requirements in terms of percentiles of loss distributions. This led to the introduction of a new risk measure called Value-at-Risk or VaR. Essentially, VaR models as discussed by Saunders et al. (2010) seek to measure the minimum loss in value of a given asset or liability over a given time period at a given confidence level. VaR has been fundamentally criticized as a risk measure on the grounds that is has poor aggregation properties. This critique has its origins in the work of Artzner et al. (1997, 1999), who showed that VaR is not a coherent risk measure since it violates the property of sub-additively that they believe reasonable risk measures should have. This led to the introduction of another new risk measure called Conditional Value-at-Risk or CVaR. In this paper we propose a new version of the mixed integer program proposed by Hamza and Janssen (1998) by introducing a CVaR constraint to control the down side risk and to increase realism in portfolio choice process. Theoretical models very often consider an ideal situation where optimization of a portfolio is performed without considering transaction costs. More realistic models where transaction costs are included are analyzed by many specialists. (Speranza 1996), (Mansini and Speranza 1997, Mansini and Speranza 1999a) and (Kellerer, Mansini and Speranza 2000). (Kellerer et al. 2000) proposed their respective portfolio selection models based on Konno and Yamazaki's mean absolute deviation (MAD) model (Konno and Yamazaki 1991). (Speranza 1996) proposed a mixed integer program considering realistic characteristics in portfolio selection, such as minimum transaction lots and the maximum number of securities, and suggested a simple two-phase heuristic algorithm to solve the proposed integer program. Roughly speaking transaction costs decrease the expected return and therefore cannot be neglected in real situation. The suggested program includes transaction costs as a part of a portfolio return and takes into account an existing investor s portfolio. PROBLEM DESCRIPTION AND MODEL FORMULATION The MSV approach is a risk measure mainly based on a convex combination of mean semi-variances of the portfolio rate of return (below and above the average). We briefly recall here the suggested definition of the portfolio risk function (Hamza and Janssen (1995)), i.e. 4 Professor (Finance), University of Abdel Malek Essaâdi, Faculty of Economics, Tetouan, Morocco, fhamza2004@yahoo.fr 5 Ph.D. (Finance) & Lecturer, Financial Mathematics & Computation, University of Abdel Malek Essaâdi, Faculty of Economics, Tetouan, Morocco, moad.elkharrim@gmail.com 1670 P a g e

13 2 2 N E min 0, R x ER x E max 0, R x ER x, (1) Where and are two positive parameters representing the degree of risk aversion of the investor and ( ) ER( x )) is the rate of return (respectively the expected rate of return) of the portfolio. Rx (respectively We assume that the average rate of return r ˆi of asset i (i=1,,n) can be estimated by the average of a set of data 1t for t=1,,t, where r it is the observed (or forecasted) rate of return at time t for asset i. In other word we have 1 rˆ i T r it T t 1 In this case the portfolio risk function is estimated as: 2 2 T 1 n n ˆ N, x r ˆ ˆ it ri xi rit ri x i T 1 t1 i1 i1 where (2) min0, and max 0, let min 0, ˆ n ut rit ri xi i1 n v max 0, ˆ t rit ri xi i1 and ( r,..., r ), It is possible to give the non-linear objective function (2) a quadratic form through the introduction of new variables and constraints. Introducing the variables u and vt for t=1,,t, the objective of the optimization problem becomes T Min ut vt (3) T 1 t1 n i1 subject to r rˆ x v u t=1,..., T it i i t t t x 0 i=1,..., n i u 0, v 0 t=1,..., T. t t Here we formulate the whole optimization model of the approach with budgeting constraint and restriction over the short sales: T Min ut vt (4) T 1 t1 subject to n i1 i1 rx ˆ i i i1 n n x 1 i r rˆ x v u t=1,..., T it i i t t x 0 i=1,..., n i u 0, v 0 t=1,..., T t where is the required rate of return t nt 1671 P a g e

14 In practice, each security must be acquired in multiples of a minimum transaction unit. Let x 1,..., x n be the investor portfolio. x j is defined as the proportion of the capital C invested in security j ( x j is a multiple of the minimum transaction unit of security j ). Let c j be the cost of one transaction unit, the number of securities j acquired is n Let Cx j j for j 1,..., c j p j and j n q be the purchase (respectively, the sale) cost of one transaction unit of security j ( j 1,..., n) x ( x,..., x ) be the initial holding portfolio. In the case of n x the variable x j and the cost of one transaction unit. Formally we have px j j if purchase qx j j In case of if sale 0 x 0 the investment in security j will be 0 0 p j max 0, x j x j p j x j x j if purchase if sale 0 0 q j min 0, x j x j q j x j x j or more generally a p x x q x x (5) 0 0 j j j j j j j 0 and, the investment in security j is obtained by multiplying The suggested optimization program will be subject to proportional transaction purchase or sale costs d j or Here we suppose the existence of a set k ( k K) of securities characterized by a fixed transaction cost d k. Let j a variable which is defined as follow 0 0 x x x x max 0, min 0, j j j j j = x x x x 0 0 j j j j we introduce a binary variable value 0 otherwise z k 1 if j 0 j K 0 otherwise formally (7) can be rewritten as a set of constraints (8) jk z z k k Mz j M 0,1 k k (6) d j respectively. z taking the value 1 when at least one security with fixed transaction cost is acquired and the j (8) jk Where M is a positive number taking an arbitrary large value (see ref 8) The fixed transaction costs can be expressed as fellow kk dz k k (7) 1672 P a g e

15 moreover the constraint on the capital to be invested can be written as fellow n 1d j p j x j x j dj q j x j x j d kzk C (9) j1 kk in practice, the right term of the constraint (9) is the real invested capital, denoted C which is less or equal to the holding capital C ( C C) we have n j j j j j j j j k k (10) C d p x x d q x x d z j1 formally the constraint on the minimum rate of return will be given by E R x C (11) where the expected rate of return of the portfolio n ra ˆj j (12) j1 the constraint on the minimum rate of return becomes kk E R x can be estimated using j a (5) by n 0 0 rˆ ˆ j d j p j x j x j rj dj q j x j x j d kzk 0 (13) j1 VAR CONSTRAINT The fund management and plan sponsor communities as emphasized by Pearson (2002) have become interested in VaR and CVaR as new approaches that aggregate risks to compute a portfolio or plan-level measure of risk. VaR has been widely used for measuring downside risk. It measures how likely the return is to decrease over a certain time period. n For a time horizon T, let f ( x, S) denote the loss of a portfolio with decision variable x and random variable S denote the value of underlying risk factors at T. Without loss of generality, we assume that the random variable has a probability density ps ( ). For a given portfolio x, the probability of the loss not exceeding a threshold is given by the cumulative distribution function (Alexander et al. (2006)): x f ( x, S ), p( S) ds (14) When the probability distribution for the loss has no jumps, x, is everywhere continuous with respect to λ. For a specified confidence λ and time horizon T, VaR associated with a portfolio x is given by x inf / x, (15) Note that under the assumption that x, is everywhere continuous, there exists (possibly not unique) such that x,. VaR as discussed by Alexander C. (2008) is a loss that we are sure will not be exceeded if the current portfolio is held over some period. However, Janssen et al. (2009) showed that VaR is not a coherent as a risk measure. A Major problem with VaR is that it is not sub-additive and thus using the optimal diversification principle of Markowitz, we tend to increase the VaR of the optimal portfolio with respect to the sum of all individual VaR of each component. Due to these deficiencies, other risk measures have been proposed. Among them, the Expected Shortfall (ES) as defined in Acerbi et al. (2001) also called Conditional Value-at-Risk (CVaR) or TailVaR (Artzner et al. (1999)). CVaR function noted where f ( x, S) x kk, is defined (Pflug (2000); Rockafellar and Uryasev (2002)) as 1 x inf 1 E f ( x, S) (16) is defined as S m m 1673 P a g e

16 Volume 4, Number 2, April June 2015 f ( x, S) if f ( x, S) 0 f ( x, S) (17) 0 otherwise Let the function 1, 1 (, ) m (18) S F x f x S p S ds Under the assumption that the loss function f ( x, S) is convex and the loss distribution is continuous, it can be shown (Rockafellar and Uryasev (2000)) that F x, is convex and continuously differentiable with respect to and x convex with respect to x. Moreover, minimizing CVaR over any x over x, F x, X, thus X, where X is a subset of is n, is equivalent to minimizing min x min F x, (19) xx x, X Rockafellar and Uryasev (2000) show that the λ-level CVaR can be obtained through the minimization of the function 1 T F x, 1 pt f ( x, St) (20) t1 where p jare probabilities of scenarios S j. If we use historical data of a range of assets, then scenarios are represented by the assets returns, and the loss function can be written as fellow: n f ( x, S) rjtx j (21) i1 * Furthermore, the that minimize the value of (8) corresponds to the λ-level VaR. The λ-level CVaR for a given time horizon T with specified λ can be finally approximated by the function bellow: T n 1 CVaR( x, ) ( rjt ) x j T 1 (22) t1 i1 Using CVaR as constraint in portfolio optimization was been introduced by Krokhmal et al. (2002). They suggested the usage of this constraint to improve the skewness of the MV portfolios. Tian et al. (2010) extended the Krokhmal et al. s idea to a method that increases the skewness and controls the downside risk of Markowitz MV portfolios by adding one or more CVaR constraints with several different λ-levels to reshape the return distribution for better alignment with investors preferences. The CVaR constraint in our formulation can be expressed as fellow CVaR wc or T n 1 ( rjt ) a j wc T 1 t1 i1 (23) where w is the degree of risk tolerance and wc is the amount of loss maximum accepted by the investor. To address the non-linearity of the n i1 ( rjt ) aj expression in the CVaR constraint in (23), we follow the well-known technique of introducing extra variables to obtain an equivalent problem with only linear constraints. The constraints in optimization problems can be then replaced by a set of linear constraints T 1 t 1 y wc T t1 n yt ( rjt ) a j i1 Furthermore, the (24) * that minimize the value of (22) corresponds to the λ-level VaR P a g e

17 MIXED INTEGER QUADRATIC PROGRAMMING SUBJECT TO CVAR CONSTRAINT Here we write our mixed integer program with a risk function based on the convex combination of the two semi variances of the portfolio rate of return and CVaR constraint i. Objective function ( to minimize) T ut vt (25) T 1 t 1 ii. Additional constraints n j1 0 0 r ˆ jt rj p j x j x j q j x j x j vt ut ( t=1,..., T) (26) iii. Constraint on the capital n 1 1 j j j j j j j j j1 kk k k d p x x d q x x d z C (27) iv. Constraint on the minimum rate of return n 0 0 rˆ ˆ j d j p j x j x j rj dj q j x j x j d kzk 0 (28) j1 kk v. Constraints associated to fixed transaction costs j K 0 0 x x x x Mz k K j j j j z M x x x x k K 0 0 k j j j j jk k 0, 1 z k K k (29) vi. Constraints on the loss (CVaR constraint) T 1 n 0 0 t 1 j j j j 1 j j j j k k 0 1 y w d p x x d q x x dz T t1 j1 kk vii. Restrictions on the variables x is integer for all j 1,..., n j u 0, v 0, y 0 for all t=1,..., T t t t n 0 0 t ( jt ) j j j j j j i1 y r p x x q x x (30) Our non-linear model can be rewritten as a mixed integer quadratic program by introducing 2n auxiliary non-negative variables x j and x j ( j 1,..., n), and a set of n linear equality constraints given by x x x x j 1,..., n (31) 0 j j j j The non-linear program become the following mixed integer quadratic program T Min ut vt (32) T 1 t P a g e

18 Subject to n 1 1 j1 d p x d q x d z C j j j j j j k k kk n j1 rˆ ˆ j d j p jxj rj dj q jx j d k zk 0 n j1 kk r rˆ p x q x v u t=1,..., T jt j j j j j t t T 1 n t 1 j j j 1 j j j k k 1 y w d p x d q x dz T t1 j1 kk n y ( r ) p x q x t jt j j j j i1 jk x x Mz k K j j k z M x x k K k j j jk z 0,1 k K k x x x x j 1,..., n 0 j j j j x is integer, j 1,..., n j x 0, x 0, j 1,..., n j j u 0, v 0, y 0, t=1,..., T t t t The resulting mixed integer quadratic program is so sensible to the quality and size of data, moreover not much progress have been made in solving that kind of programs. We will use the linear separable programming approach proposed by Hamza and Janssen (1998) to reformulate our optimization program. MIXED INTEGER LINEAR PROGRAMMING SUBJECT TO CVAR CONSTRAINT The separable programming technique consists on approximating the quadratic objective function by piecewise linear one (Hamza & Janssen 1998). L ( l 1,..., L) breakpoints, which are represented by their abscissas, a L ( l 1,..., L) have to be selected on the curve with a1 c c and al d d where c min r rˆ / j 1,..., n and t 1,..., T and jt j d max r rˆ / j 1,..., n and t 1,..., T jt j The mixed integer quadratic program (32) can be well approximated to the following mixed linear program (33) T L 1 2 Min al tl (33) T 1 t1 l1 Subject to 1676 P a g e

19 n 1 1 j1 d p x d q x d z C j j j j j j k k kk n j1 rˆ ˆ j d j p jxj rj dj q jx j d k zk 0 n j1 kk r rˆ p x q x v u t=1,..., T jt j j j j j t t T 1 n t 1 j j j 1 j j j k k 1 y w d p x d q x dz T t1 j1 kk n y ( r ) p x q x t jt j j j j i1 jk x x Mz k K j j k z M x x k K k j j jk z 0,1 k K k x x x x j 1,..., n 0 j j j j L t1 L t1 a v u t=1,..., T l tl t t 1 t 1,..., T tl tk 0 t 1,..., T and l 1,..., L x is integer, j 1,..., n j x 0, x 0, j 1,..., n j j u 0, v 0, y 0, t=1,..., T t t t Many other constraints can be added to this program to obtain a greater realism in the problem modeling such as turnover constraint and minimum trading size constraints to reduce undesirable small trades. Many heuristic algorithms can be applied to solve this program. Note that we can add more than one CVaR constraint and reshape the return distribution based on the customers preferences. For example, we can add b CVaR constraints using various quantiles,,..., 0,1 The set of b CVaR constraints will be given by and values w1, w2,..., wb. T n 1 s s t s 1 j j j 1 j j j k k 1,..., 1 y w d p x d q x dz s b s T t1 j1 kk n s yt ( rjt ) p jxj q jx j s t=1,..., T and s 1,..., b i1 Because these constraints are linear, adding several CVaR constraints does not significantly increase computational costs. 1 2 b 1677 P a g e

20 CONCLUDING REMARKS In this paper, a general model for optimal portfolio choice based on mean-semi variances approach subject to CVaR constraint and transaction costs is presented. Many other real investment requirements or constraints can be taken into account in modeling portfolio choice problem. The computational complexity depends on the quality of data used as well as on the real investment constraints taken into account. The introduction of a CVaR constraint is intended to control the downside risk that can undergo the assets of the portfolio investor, and this is computationally efficient, since it adds only linear constraints to the model. More recently Hamza. F and El kharrim. M (2014) studied the impact of adding a CVaR constraint in the mean-semi variances approach on the efficient frontier and the sensitivity of the optimal portfolios to the value changes of the risk tolerance w. The control of the loss by a CVaR constraint and the existence of the transaction costs merely limit the number of feasible portfolios. The approach can handle large number of instruments and scenarios. Finally, and by using separable programming techniques, many heuristic algorithms intended to large-scale mixed integer programming models can solve the problem. REFERENCES 1. Acerbi, C., Nordio, C., & Sirtori, C. (2001). Expected short-fall as a tool for financial risk management (Working Paper). Retrieved from 2. Alexander, C. (2008). Market Risk Analysis (Volume IV): Value at Risk Models. New York: Wiley. 3. Alexander, S., Coleman, T.F., Li, Y. (2006). Minimizing CVaR and VaR for a portfolio of derivatives. Journal of Banking & Finance, Elsevier, 30(2), Artzner, P., Delbaen, F., Eber, J.-M., & Heath, D. (1999). Coherent measures of risk. Mathematical Finance, 9, Artzner, P., Delbaen, F., Eber, J.-M., & Heath, D. (1997). Thinking coherently. Risk Magazine, 10, Hamza, F., & El, kharrim, M. (2014). Theoretical and Empirical Impact of the Tail Risk Management on Mean Semivariances Portfolio Optimization. Journal of Computational Optimization in Economics and Finance, (6)1. 7. Hamza, F., & Janssen, J. (1995). Portfolio Optimization Model Using Asymmetric risk Functions. In Proceedings of the 5th International Actuarial Approach for Financial Risks. Brussels, Belgium, (3) bis, Hamza, F., & Janssen. J. (1998). The Mean-Semi-variances Approach to Realistic Portfolio Optimization Subject to Transaction Costs. Applied Stochastic Models and Data Analysis, 14(4), Wiley. 9. Kellerer, H., R. Mansini. & M., G. Speranza. (2000). Selecting portfolios with fixed costs and minimum transaction lots. Annals of Operations Research, 99, Konno, H., & H., Yamazaki. (1991). Mean-absolute deviation portfolio optimization model and its application to Tokyo Stock Market. Management Science, 37, Krokhmal, P., Palmquist, J., & Uryasev, S. (2002). Portfolio Optimization with Conditional Value-at-Risk Objective and Constraints. Journal of Risk, 4, Mansini, R. & M. G. Speranza (1999a). Heuristic algorithms for the portfolio selection problem with minimum transaction lots. European Journal of Operational Research, Mansini, R., & M., G. Speranza. (1999b). Heuristic algorithms for the portfolio selection problem with minimum transaction lots. European Journal of Operational Research, 114, Mansini, R., & M., G. Speranza. (1997). On selection a portfolio with fixed costs and minimum transaction lots. In Report no Italy: Dip. Metodi Quantitative. 15. Markowitz, H. M. (1952). Portfolio selection. Journal of Finance, 7, Markowitz, H. M. (1959). Portfolio selection: efficient diversification of investments. New York: Wiley P a g e

21 17. Pearson, N. D. (2002). Risk budgeting: Portfolio Problem Solving with Value-at-Risk (1 st Edition). New York: Wiley. 18. Pflug, G. C (2000). Some remarks on the value-at-risk and the conditional value-at-risk. In Probabilistic Constrained Optimization: Methodology and Applications, Methodology and Applications. ed. S. Uryasev, Kluwer, pp Saunders, A., & Allen, L. (2010). Credit Risk Management In and Out of the Financial Crisis: new Approaches to Value at Risk and Other Paradigms (3 rd Edition). Wiley. 20. Speranza, M. G. (1996). A heuristic algorithm for a portfolio optimization model applied to the Milan Stock Market. Computers and Operations Research, Tian, R., Cox, S. H., Lin, Y. & Zuluaga, L. (2010). Portfolio Risk Management with CVaR-like Constraints. North American Actuarial Journal, 14(1), ***** CHECK PLAGIARISM SERVICE Pezzottaite Journals charges nominal fees from Journal Managers, Editors, Section Editors, Copy Editors, Layout Editors, Proof Readers, Subscription Managers, Reviewers, Readers (Subscribers and Individuals), and Authors to get their manuscripts scanned for plagiarism. Indian Users One Manuscript / article = Rs Two Manuscripts / articles = Rs x 2 = Rs As so on... Formulae = (Numbers of Manuscripts x Rs ) = Amount to be paid as Online Bank Transfer before availing the services. International Users One Manuscript = US$15.00 Two Manuscripts = US$15.00 x 2 = US$ 30 As so on... Formulae = (Numbers of Manuscripts x US$15.00) = Amount to be paid as Online Bank Transfer before availing the services. Note: Total amount if computed in US$ must be converted into Indian Rupees as per Currency Exchange Rates on the day of placing the order; Computed amount (in Rupees) is to be transferred in Pezzottaite Journals Bank Account (s); In case, where the transacted currency is not US$, then, purchaser must consider the exchange rate of domestic country s currency against 'US$ / Rupees' and transfer the same. Bank details are available at: INFORMATION FOR AUTHORS Pezzottaite Journals invite research to go for publication in other titles listed with us. The contributions should be original and insightful, unpublished, indicating an understanding of the context, resources, structures, systems, processes, and performance of organizations. The contributions can be conceptual, theoretical and empirical in nature, review papers, case studies, conference reports, relevant reports & news, book reviews and briefs; and must reflect the standards of academic rigour. Invitations are for: International Journal of Applied Services Marketing Perspectives. International Journal of Entrepreneurship & Business Environment Perspectives. International Journal of Organizational Behaviour & Management Perspectives. International Journal of Retailing & Rural Business Perspectives. International Journal of Applied Financial Management Perspectives. International Journal of Information Technology & Computer Sciences Perspectives. International Journal of Logistics & Supply Chain Management Perspectives. International Journal of Trade & Global Business Perspectives. All the titles are available in Print & Online Formats P a g e

22 FACTORS AFFECTING ACCESS TO FINANCE WITH REFERENCE TO MICRO AND SMALL ENTERPRISE IN DILLA TOWN, ETHIOPIA Dr. Brehanu Borji 6 Mesfin Gashu 7 ABSTRACT Micro and Small Scale Enterprises (MSEs) are lifeblood of most economies. These enterprises conduct their business operations successfully only when they have sufficient fund to finance their activities. They need finance to start up, expand and diversify their business operations. Without finance, no business enterprise can achieve its objectives. Even though finance is the backbone of any business enterprise, there are number of determinants affecting access to finance. To this effect, the objective of this study is to assess the factors affecting access to finance with reference to Micro and Small Enterprises in Dilla Town. With this in view, using stratified sampling technique, a sample of 237Micro and Small Enterprises were selected proportionally out of 566 Micro and Small Enterprises currently functioning in Dilla Town. The owners of the selected enterprises were chosen as sample respondents to fill in the questionnaires. In the absence of owners, the managers of the enterprises were taken as respondents. The questionnaires, which had been prepared in English, were translated into Amharic to elicit the desired response and 237questionnaires were administered and distributed to the selected respondents. However, only 219 duly filled in questionnaires were returned back, representing 92.4 percent response rate. The data collected through questionnaire methods were substantiated by the data collected through structured interview. So collected data were analyzed using descriptive statistics such as frequencies, percentages, tables and figures. Accordingly, the study results indicated that there was inadequacy of finance when starting and operating the projects. The formal financial institutions have not been able to meet the credit needs of the MSEs because MSEs are not able to fulfill the requirements such as business plan, governance systems, collateral and other accountability issues which are related to business risk management. However, the supply of credit from the informal institutions is often so limited to meet the credit needs of the SMEs. Therefore, the concerned body should facilitate loan access to Micro and Small Enterprises to start and expand their business operations and bring about the desired growth and development in the study area. KEYWORDS Access to Finance, Formal and Informal Financial Institutions, Loan, Micro & Small Businesses, Sources of Funds etc. INTRODUCTION The small business sector is recognized as an integral component of economic development and a crucial element in the effort to lift countries out of poverty (Wolfenson, 2001). Small-Scale businesses are driving forces for economic growth, job creation, and poverty reduction in developing countries. They are critical means to achieve accelerated economic growth and rapid industrialization. Furthermore, small-scale business has been recognized as a feeder to large- scale industries (Fabayo, 2009). Financing is one of the crucial aspects that assist Small and Medium Enterprises (SME) in the process of their development and expansion. However, there is limited access to institutional finance. Different writers cite various reasons that can affect access to finance. According to Jacob Levitsky and Ranga N. Prasad (1989), they are as follows: (1) Lending to small enterprises is considered risky. The uncertainties facing small enterprises such as high mortality rate of such enterprises and their vulnerability to market and economic changes make banks reluctant to deal with them. (2) Banks and financial institutions are biased in favor of lending to large corporate borrowers. (3) The administrative costs (specifically, transaction costs) of lending to small enterprises are high and cut deep into the profitability of such loans. (4) Small enterprises seeking loans are unable or unwilling to provide accounting records and other documentation required by banks, or they cannot provide securities or collateral for the loans. The focus of this paper is to assess factors affecting micro and small-scale enterprises to access finance from formal sources to properly raise fund and invest it in productive ventures. Investment in any productive sector is very much essential for the growth of industry and obtaining the required finance for investment can enhance the desired growth. Business finance refers to money and credit employed in business. It involves procurement and utilization of funds so that business firms may be able to carry out their operations effectively and efficiently. Business concern needs finance to meet their requirements in the economic world. Any kind of business activity depends on the finance. Hence, it is called as lifeblood of business organization. Whether the business concerns are big or small, they need finance to fulfill their business activities. 6 Associate Professor (Marketing Management), School of Management and Accounting, College of Business and Economics, Hawassa University, Ethiopia, brehanu.borji@yahoo.com 7 MBA-Graduate, Dilla University, Ethio-Telecom Hawassa Branch, Ethiopia P a g e

23 In Ethiopia, MSEs Sector is the second largest employment-generating sector following agriculture (CSA, 2005). A national survey conducted by Ethiopian Central Statistical Authority (CSA) in 2005 in 48 major towns indicated that nearly 585,000 and 3,000 operators engaged in micro and small scale manufacturing industries respectively, and they can absorb about 740,000 labor forces. However, access to finance is difficult, like in many developing countries, for the reasons mentioned here above. Because of such problems, micro and small enterprises, in most cases, as indicated by Haftu et.al., (2009) explained that MSEs attempt to start their businesses obtaining financial assistance from informal sector, but find it extremely difficult to survive and expand their businesses without further financial assistance from the institutional lenders. REVIEW OF LITERATURE Now-a-days, in almost all economies of the world especially in developing countries of Africa like Ethiopia, micro and small enterprises are key factors for sustained growth and development. Okpara and Wynn (2007) elaborated that MSEs are generally regarded as the driving force for economic growth, job creation and poverty reduction. They have been the means through which accelerated economic growth and rapid industrialization to be realized. A healthy MSE sector contributes prominently to the economy through creating more employment opportunities, generating higher production volumes, increasing exports and introducing innovation and entrepreneurship skills. The MSE sector, everywhere, is characterized by highly diversified activities, which can create employment opportunities for a substantial segment of the population. This implies that the sector is a quick remedy for unemployment and poverty problem. The realization of a modest standard of living through curbing unemployment and facilitating the environment for new job seekers and self-employment requires a direct intervention and support of the government and other concerned stakeholders (Mulugeta, 2011). According to the definition given by MoTI (1997), micro enterprises are business enterprises found in all sectors of Ethiopian economy with a paid up capital of not more than Birr 20,000, but excluding high technology consultancy firms and other high technology establishments. However, small enterprises are business enterprises with a paid up capital of more than Birr 20,000 but not exceeding Birr 50,000 and excluding high technology consultancy firms and other high technology establishments. If so, do they have adequate access to finance? Many theories have raised the issues regarding the financing problems of micro and small enterprises (MSEs). When they are given a chance of access to credit, they can use the fund obtained through credit to start up and expand their businesses. Finance is the oil for growth. It is indeed the life-blood of the economic system. The financial system is the vessel that carries this life-blood through the economic system. Faulty vessels prevent the life-blood from reaching essential parts of the economic system (Sowah N.K., 2003). Microfinance is defined as a development tool that grants or provides financial services and products such as very small loans, savings, micro leasing, micro-insurance and money transfer to assist the very or exceptionally poor in expanding or establishing their businesses. It is mostly used in developing economies where MSEs do not have access to other sources of financial assistance (Robinson, 1998). Most of the time, if not always, micro and small business enterprises are getting access to finance through informal system because such a system is not demanding them any collateral. They cannot obtain credit from the formal financial systems like bank, micro finance and other financial institutions because of the inability of the MSEs to meet the stringent requirement of these financial institutions (A.N, Berger & G.F Udell, 2004). Paul Derreumaux, Chairman and CEO of Bank of Africa, highlighted three main issues blocking the flow of credit from formal financial institution to MSEs. These are lack of equity in MSEs, lack of organization in terms of human resources, accounting, and administrative management among others and finally the firm s lack of forward-looking vision. For him, most firms were born on the impulse on the part of the entrepreneur, without any in-depthanalysis of the market or competition, which often leads to disillusion in terms of turnover and, consequently, in repayment capacity for financial institution loan. The empirical studies of Gebrehiwot and Wolday (2006) pointed out that inadequate loan size, loan durations that do not match with the gestation periods and cash flow patterns of borrowers activities financed by the loan, failure to disburse loans timely, and the tendency of group collateral requirements are the problems of MSEs in expanding and diversifying their enterprise. Studies conducted so far concluded that the problem of MSEs are access to working capital, inadequate infrastructure, high transactional cost, limited managerial and technical experts and marketing problems (World Bank, 2008), (Hailay, 2003), and (Gebrehiwot and Wolday, 2006). The main obstacle to access external finance of MSEs is due to lack of collateral. This implied that many MSE owners have been out of access to finance due to lack of sufficient collateral. Large banks and other financial institutions are not willing to lend money for MSEs because these banks and most financial institutions do not have confidence on MSEs in repaying the loan on the specified period. In order to minimize this risk, they mostly ask collateral as pledge. Some of respondents elaborated that bureaucracy of financial institutions has been found to be their main financial problem. MSE owners have asked to complete many bureaucratic activities and should force to wait long time to get the money. On the other hand, few respondents stated that fear of risk by MSE owners have been found as the main financial problem. This means that some MSE owners did not take loan from credit providers due to fear of risk on their business (Tadesse, 2014) P a g e

24 STATEMENT OF PROBLEM Micro and small enterprises are believed to be the bridge to achieve the goals of the government (MoFED, 2011). Okpara and Wynn (2007) elaborated that MSEs are generally regarded as the driving forces of economic growth, job creation and poverty reduction in developing countries. Despite these contributions, they face the major problems such as lack of access to equity and debt financing (lack of access to capital), lack of viable education which may be used to prepare their business plan, lack of security or collateral, high risk, high competition, high taxation rate, delay in loan repayment and default in effecting loan repayment. OBJECTIVES OF STUDY General Objectives The general objective of this study is to assess factors affecting access to finance with reference to micro and small business enterprises in Dilla town. Specific Objectives To examine factors that can affect access of MSEs to finance. To assess the possible sources of finance to start-up ones business. To evaluate the role of the government as a facilitator to alleviate the problem of access to finance. To recommend actions to be taken by the concerned body. METHODOLOGY OF RESEARCH The researcher used the descriptive research to describe and critically assess the factors affecting the MSEs access to finance in Dilla town. The study made use of both primary and secondary data. The primary data were collected from target respondents (owners or managers) by distributing questionnaires. To substantiate the data collected through questionnaire method, structured interview has been used to gather the data from the micro and small enterprise officers and key informants in the study area. The secondary data, on the other hand, were collected from files, pamphlets, office manuals, circulars and policy papers. Moreover, variety of books, published and/or unpublished, government documents, websites, reports and newsletters were reviewed to make the study a success. The target population of the study constitutes all micro and small business enterprises in the study area. There are three sub-cities in Dilla town administration. Each of the sub-cities has its own Micro and Small Business Development Agencies with a registration list of MSEs operating within them. According to the survey report conducted by Dilla town trade and industry bureau (July 2013), there were 566 micro and small business enterprises in five different sectors, namely, manufacture 102, construction 217, service 91, merchandise 127 and 29 urban agriculture. For the purpose of this study, from the 566 MSEs currently registered and working in the town, 237 sample enterprises were selected using stratified random sampling technique and questionnaires translated into Amharic language were distributed to the owners of these enterprises. In the absence of owners, managers were made to fill in the questionnaires, representing the owners. However, out of 237 questionnaires distributed to sample respondents, only 219 duly filled in questionnaires were returned representing 92.3 percent response rate. DATA ANALYSIS AND INTERPRETATION Figure-1: Types of Micro and Small Enterprises in Dilla Town Construction Merchandise Manufacture Service Urban Agriculture Sources: Survey of Dilla Town Trade and Industry Bureau, July P a g e

25 As it can be seen from Figure-1, currently there are five micro and small enterprises, namely, Construction (38%), Merchandise (21.9%), Manufacturing (17.8%), Service (16.4) and Urban-agriculture (5.5). According to the information from CSA, the population size of Dilla town is 78,365 (41,469 male and 37,205 female). Consequently, like any other towns of developing countries, there is acute problem of unemployment in the town. To do away with such persisting problems of unemployment, as it can be seen from figure-1, unemployed job seekers formed different micro and small enterprises to create job and employment for themselves and their families particularly and for the society in general. Wolfenson (2001) also pointed out that the small business sector is an integral component of economic development and a crucial element in the effort to lift countries out of poverty. Fabayo (2009) also underlined the contribution of micro and small businesses to job creation, poverty reduction and economic growth stating, Small-scale businesses are driving forces for economic growth, job creation, and poverty reduction in developing countries. According to a national survey conducted in 48 major towns by Ethiopian Central Statistical Authority (2005), nearly 585,000 and 3,000 operators engaged in micro and small scale manufacturing industries respectively, and created the opportunity of employment for about 740,000 unemployed job seekers. From this, it can be implied that MSEs established in Dilla Town can serve as a stepping-stone to job creation and poverty reduction. These MSEs need fund to finance their projects. Without fund, it may be very difficult to start and expand any business in the competitive marketing environment. In business, money may be required for various operations as well as to buy different plants and machineries. Table-1: Amount of Startup Capital Item Amount of Capital Frequency Percent How much was the amount of startup capital when you start your business Less than Birr 10, B/n Birr 10,000 50, B/n Birr 50, , Above Birr 100, Total % Sources: Survey Data, 2014 According to Table-1 here above, 110 (50%) of the respondents answered that they started their businesses with the amount of capital not exceeding Birr 10, (24.7%) of the respondents replied that they started their business with the capital ranging between Birr 10,000-50, (14%) of respondents replied that they started their business with the seed capital of Birr 50, ,000 whereas 25 (11.4%) of MSEs developers replied that they had started their business with the capital more than Birr 100,000. From this, it can be implied that MSEs can be established with small amount of startup capital at the beginning even though more capital is required to expand business operation, later on. Table-2: Current Status of Capital Item Amount of Capital Frequency Percent What is the current status of your Less than Birr 10, business in terms of capital growth? B/n Birr 10,000 50, B/n Birr 50, , Above Birr 100, Total % Sources: Survey Data, 2014 To assess the current status of MSEs in Dilla Town, it is necessary to compare the initial capital of MSEs in Table-1 with the current capital of the same in Table-2. When Table-1 is compared against Table-2, the number of MSEs with startup capital between Birr 10,000 and Birr 50,000 were declining whereas the number of MSEs having capital more than Birr 50,000 is increasing. According to Table-1, 50 percent of MSEs started their business with startup capital not exceeding Birr 10,000. However, during its operation, the number of MSEs using the capital less than Birr 10,000 declined to 22 (10%) in Table-2 from 110 (50%) in Table-1. In the same fashion, the number of MSEs using capital more than Birr 50,000 was 56 (25.4%), according to Table-1. However, in Table-2, the number of MSEs employing capital more than Birr 50,000 increased to 165 (75.4%). This shows that the amount of capital used by MSEs is increasing. Table-3: Educational status of Owners Education Level of MSE Owners Frequency Percent High school certificate TVET graduate First degree Total Sources: Survey Data, P a g e

26 To assess the impact of the owners education on the performance of their businesses, the owners are grouped into three categories such as high school certificate holders, TVET graduates and first-degree graduates. As it can be seen from Table-3, 48 (21.9%) of MSEs owners replied that they completed only high school studies. 144 (65.7%) of owners replied that they are TVET graduates. 27 (12.4%) of respondents replied that they are first-degree graduates. In association with their studies, the first degree graduates highly expressed the contribution of their education to their business thereby enabling them to record business transactions, prepare different financial statements for internal and external financial information users and that this in turn increased their skills to manage and efficiently utilize financial resource of the business venture. Table-4: Adoption of Business Plan for Their Business Item Responses Frequency Percent Have you adopted a business Yes plan for your business? No Total % Sources: Survey Data, 2014 According to Table-4, 129 (59%) of owners of micro and small enterprises responded that they adopted proper business plan which could assist the operation of their businesses. They also added that they are deriving various benefits such as accessing loan from formal sources of finance even though it failed because of not fulfilling collateral requirement. On the other hand, 90 (41%) of the owners of the enterprises answered that they do not possess any business plan for their business and described that they faced number of problems one of which being lack of access to formal financial institutions for loan because business plan is a proposal that describes a business opportunity to financing agencies or investors. In addition, it spells out the goals and objectives of a business and clearly outlines how and when they will be achieved. Table-5: Grant of Loan from Formal Sources of Finance Item Responses Frequency Percent Have you ever been granted any Yes loan from formal financial institutions? No Total % Sources: Survey Data, 2014 According to Table-5, 180 (82%) of the respondents replied that their request for loan was rejected by formal financial institutions whereas 39 (18%) of the respondents reported that they were granted a loan. The reason for rejection was attributed to many factors such as lack of collateral, which may be provided as a security, the perceived high-risk nature of these MSEs, small portfolios of these businesses, and high transaction cost that financial institutions incur in granting credit to SMEs. Table-6: Grant of Loan from Formal Sources of Finance Item Responses Frequency Percent Why was your request for loan rejected by the Default on previous loan formal financial institutions? Lack of security or collateral Too small equity base Lack of experienced management Sources: Survey Data, 2014 According to Table-6, the loan request of majority of the MSEs owners 179 (81.7%) was rejected because of inability to provide the required security or collateral to loan. 35 (16%) of the loan request was declined because of small portfolios of these businesses. 7 (3.2%) of request for loan was rejected because of lack of experienced management in the organization to properly manage the operation of the business organization. Finally, 4 (2%) of request was put down because of default on the previous loan. Table-7: Major Constraints for Growth of SMEs Item Responses Frequency Percent What are major constraints for Taxes 13 6 the growth of MSEs? High utility expenses 0 0 Competition 13 6 Lack of access to finance Lack of infrastructure 20 9 Sources: Survey Data, P a g e

27 According to Table-7, 173 (79%) of the respondents replied lack of access to finance as the major constraint to the growth of their business and 20 (9%) of the respondents complained infrastructure as one of the constraints affecting the growth of their business. 13 (6%) of the respondents complained competition and taxes as the constraints for their growth, respectively. Some of the respondents are heard complaining taxes as a constraint that is highly affecting the growth and expansion of their business. However, none of them did give answer to it by circling the multiple choices in the questionnaire. This implies that even though lack of access to finance is ranked as the major constraint to the growth and expansion of MSEs, all others also can significantly affect the growth and expansion of MSEs. This finding is in line with the findings of Cuevas et al (1993), Aryeetey et al. (1993) and Schiffer and Weder (1991). In their study, they also agreed that these constraints, specifically lack of access to credit could seriously affect the growth and expansion of MSEs. Table-8: Major Sources of financing to get loan for Start-Up Capital Source of Fund Frequency Percentage Cumulative percentage Bank Loan Personal Savings Trade Credit Family / Friends Microfinance Institution Ikub Sources: Survey Data, 2014 Hisrich and Peters (1995) classified sources of funds into two: internal and external funds. MSEs, therefore, can use internal or external sources of funds to finance their operations and investments based on the accessibility and/or availability of the alternative sources of capital. Internally generated funds come from a number of sources within a company and are more frequently employed. They include operational and investment profits, sales of assets, extended payment terms, reduction in working capital and accounts receivable. In this study, the researcher questioned the MSEs owners about the sources of their finance when they started their business. According to Table-8, 74 (40%) of respondents agreed that the source of their seed capital was personal savings. 60 (27.3%) of respondents answered that they financed their business by the fund earned from micro finance institutions. 35 (16.1%) of MSEs owners replied that they financed their business by fund from family / friends. 25 (11.3%) of MSEs replied that the source of their finance is trade credit whereas 22 (10%) of owners responded that the source of finance for their business is Ikub (traditional source of micro finance). From this, it can be implied that bank loan, personal savings, trade credit, family, friends, micro financial institutions and ikub are some of sources of finance that can be used by micro and small firms to finance their business especially when they start their business at the beginning. This finding is in line with the findings presented by Gebrehiwot and Wolday (2006). According to them, family, friends and close business associates are sources of finance when a new business is commenced. Study made by Kuriloff (1993) and Longenecker (1994) also supported the findings of this study stating Loans and contributions from friends and relatives are common sources of funds to finance especially a new business since the financial institutions are reluctant to grant loans to start-up business because of the risks involved. As stated by Kuriloff et al., (1993), it can be clearly understood that formal financial institutions like banks are reluctant to provide loans to MSEs simply because they do not possess fixed assets that can be presented as security or collateral to mitigate or minimize the associated risks. Table-9: Reasons for Defaults of Repayment Question Responses Frequency Percent High interest rate Why MSEs default to repay their Short duration for repayment loans as per scheduled agreement? Low turnover High monthly repayment 11 5 Total Sources: Survey Data, 2014 As it can be seen from Table-9, 99 (45%) of the respondents mentioned high interest rate as a cause for their default of repayment to lending institutions. 85 (39%) of the respondents replied that the time duration scheduled for repayment is very short to earn enough money for repayment. 25 (11%) complained that sales of their products is low not enabling them to generate sufficient profit that can contribute to repayment of their loans. Moreover, 11 (5%) of respondents complained that monthly repayment is high and they cannot generate such high amount from their sales in a month P a g e

28 SUMMARY OF FINDINGS Micro and small-scale businesses are driving forces for economic growth, job creation, and poverty reduction in developing countries. Being organized makes, them loudly heard and get assistances from different agencies involved in development issues. As it can be seen from table-1, MSEs can be established with small amount of startup capital at the beginning even though more capital is required to expand business operation, later on. According to table-3, the participants of MSEs, especially the graduates of first degree, highly expressed the contribution of their education to their business thereby enabling them to record business transactions, prepare different financial statements for internal and external financial information users and that this in turn increased their skills to manage and efficiently utilize financial resource of the business venture. From this, it can be implied that education is very important to commence micro and small business enterprises. The concerned development agents have to give training to MSEs on how to prepare a sound business plan. According to Table-4, the adoption of business plan benefited MSEs in creating a fertile ground to access formal financial institutions for loan if MSEs are in position to meet requirement of security in terms of collateral to minimize the associated risks. According to Table-5, the request of majority of MSEs to formal financial institutions for loan was rejected. The reason for rejection was attributed to many factors such as lack of collateral, which may be provided as a security, the perceived high-risk nature of these MSEs, small portfolios of these businesses, and high transaction cost that financial institutions incur in granting credit to SMEs, default on previous loan and lack of experienced management. According to Table-7, MSEs identified taxes, high utility expenses, competition, lack of access to finance, lack of infrastructure as challenges affecting their growth and development. According to Table-8, the respondents identified bank loan, personal savings, trade credit, family, friends, micro financial institutions and Ikub as some sources of financing that can grant loan to MSEs to start up their businesses. However, the loan obtained from such sources is limited and could not support the business to expand and diversify its operations. According to Table-9, MSEs mentioned the major causes that are affecting their repayment to the lending institutions. They are high interest rate, Short duration for repayment, low turnover, high monthly repayment short duration for repayment of principal and interest. The realization of a modest standard of living through curbing unemployment and facilitating the environment for new job seekers and self-employment requires a direct intervention and support of the government and other concerned stakeholders. This finding is in line with that of Mulugeta (2011). Formal Financial Institutions have to provide loan to MSEs without too much insisting on collateral and thereby simply considering feasibility of their business plan. The government has also to set up packages that could provide large amount of loan to MSEs without collateral when their financial plan is approved by Trade and Industry Bureau of the Region where MSEs are operating in. CONCLUSION It is well known reality that small business sectors do have high relevance to developing countries like Ethiopia because they are driving forces for economic growth, job creation, and poverty reduction. MSEs are highly believed to have crucial role in an economy and are a key source of economic growth, dynamism and flexibility; and can adapt quickly to changing market demand and supply situations. To start such indispensable businesses, startup or seed capital is necessary. Why because starting any business requires finance. If one s own finance is not sufficient to start the business, which is believed to bring about the growth and development, the required fund can be obtained either from internal or external financing sources. The amounts that may be obtained from internal financing agents are limited and cannot enable the firm to expand further. To this effect, when MSEs are in need of expanding their ventures, they have to turn their face to external formal financing agents to get the desired loan. However, they could not obtain the loan from the formal financial institutions because of not being able to fulfill the requirement of provision of collateral as security to minimize the associated risks. As far as micro and small enterprises (MSEs) are concerned, as they are the part of business enterprises, they need finance to start up, expand, diversify and for working capital of the business firms. Without finance, no business enterprise can achieve its objectives. If they are not supported to expand their businesses, they could not accommodate more number of employees thereby reducing unemployment and contributing towards generating personal income and improving standards of living. DIRECTION FOR FUTURE RESEARCH This study is conducted to assess the factors affecting access to finance in Dilla Town. It would be far better if it were conducted nationwide in all towns and cities to get results that are more reliable. The future study should be conducted with the objective to see whether the loan obtained from Micro Financial Institutions has brought about the desired growth and development to micro and small businesses P a g e

29 The future study has to be undertaken by concerned researchers to find out means and ways that enable micro and small enterprises to access finance from formal financial sources without provision of collateral in order to expand their business operations. The impact of Government intervention on enabling MSEs to access formal financial institutions to get loan with minimum requirement of security / collateral. Here the government prepares the body that looks-over the operation of MSEs and gives them guarantee certificate that serves like collateral to take loan from the formal financial institutions. The body gives a certificate to them only thoroughly assessing their business plan and financial performance during their previous business operations. REFERENCES 1. (2005). National Survey. Central Statistical Authority (CSA). Ethiopia: Addis Ababa. 2. Eshetu, B., & Mammo, M. (2009). Promoting micro, small and medium Enterprises (MSMEs) for sustainable rural Livelihood Development, Innovation and International Political Economy Research (Working Paper No. 11). Denmark: Aalborg University. 3. Haftu, Berihun, Tseahye, Tsegaye, Teklu, Kidane, & Tassew, W/Hanna. (2009). Financial Needs of Micro and Small Enterprise (MSE) Operators in Ethiopia (Occasional Paper No. 24). Ethiopia: Addis Ababa. 4. Hisrich, R. D. (2005). Entrepreneurship: New Venture creation (5 th Edition). New Delhi: Tata McGraw Hill. 5. Hisrich, R. D., & Michael P. P. (1995). Entrepreneurship: Starting, Developing and Managing a New Enterprise (3 rd Edition). Chicago: Irwin. 6. Gebrehiwot, A., & Wolday, A. (2006, January). Eastern Africa Social Science Research Review, 22(1), Kuriloff, Arthur H., John, M. Hemphill, Jr & Douglas, Cloud. (1993). Starting and Managing the Small Business (3 rd Edition). New York: McGraw-Hill, Inc. 8. Levitsky, Jacob, & Ranga. (1989). Credit Guarantee Schemes for Small and Medium Enterprises (World Bank technical paper No. 58). Washington DC: World Bank. 9. Longenecker, Justin G., Carlos W. Moore, & J., William Petty. (1994). Small Business Management: An Entrepreneurial Emphasis (9 th Edition). Cincinnati Publishing Company. 10. Malhotra, M. (2006). Expanding Access to Finance, Good Practice and Polices for SMEs. USA. Washington DC: World Bank. 11. Mckernan, S. M., & Chen, H. (2005). Small Business and Micro Enterprise as an Opportunity and Asset Building Strategy. USA. Washington DC. : The Urban Institute. 12. (1997). MSE development strategy. Ministry of Trade and Industry. Ethiopia: Addis Ababa. 13. Okpara, J., & Wynn, P. (2007). Determinants of micro and Small Business Growth. Constraints in a Sub- Saharan African Economy. South Africa: Sam Publication. 14. MoFED. (2011). Growth and Transformation Plan. Addis Ababa: Ethiopia. 15. Robinson, M. S. (1998). The Paradigm Shift From credit Delivery to Sustainable Financial Intermediation, In Mwangi S Kimenyi, Robert C Wieland and J D Von Pischke (eds), 1998, Strategic Issues in Microfinance. 16. Schiffer, M. (2001). Firm Size and the Business Environment: Worldwide Survey Results. The World Bank and International Finance Corporation (IFC), USA: Washington DC. 17. Sowah, N. K. (2003). Comments on the Golden Age of Business: The Role of the Banking Sector. CEPA Research Working Paper. 18. Wolfenson, J. D. (2001) Comparing the Performance of Male and Female-controlled businesses: Relating Output to Inputs. Entrepreneurship Theory and Practice, 26(3), ***** 1687 P a g e

30 PROBLEMS OF SILK HANDLOOM CO-OPERATIVE SOCIETIES IN CHITTOOR DISTRICT Dr. N. Gangisetty 8 ABSTRACT Silk weaving is one of the ancient methods of making cloths, which exemplifies the richness of our country. The employment generation of the silk handloom industry in the country is 7.65 million persons in and 7.85 million persons in with a growth rate of 2.61%. As silk handloom industry belongs to decentralized sector, there are many problems related to weavers, inputs, raw material, finance, marketing etc. Most of the problems faced by silk handloom industry are perennial in nature. The present study is an effort to understand the various problems faced by Handloom silk Weavers Co-operative Societies. The study is descriptive in nature. The data required for the study was collected from the primary sources. A total sample of 150 Handloom silk Cooperative Societies Weavers in Chittoor District was selected by using Stratified Random sampling technique and Henry Garrett ranking Technique and percentage analysis have been used to analysis of the data. Silk Weavers, Co-operative Societies etc. INTRODUCTION KEYWORDS Handloom industry is generating more employment, next to agriculture sector in India. The silk handloom industry plays a vital role in India s economy. India, the second largest producer of raw silk and it is 26,480 MT in Andhra Pradesh, Karnataka, West Bengal, Tamil Nadu and Jammu & Kashmir are the major states producing about 96.37% of the mulberry silk production in the country. Silk Handloom Weaving is one of the major economic activities in Andhra Pradesh. Government of India and ministry of textiles have taken steps to bring weavers under the roof co-operative sector and more than 35% of the silk handloom weavers have been brought under the Co-operative fold. However, of late the functioning and performance of the co-operative societies in the study area has been affected badly. There are so many factors and reasons that are responsible for decreasing the performance of silk handloom Societies, of which the problems associated with weavers, inputs, raw materials, financing and marketing are having more weight. REVIEW OF LITERATURE Gurumoorthy and Rengachary (2002) studied the problems of handloom industry and revealed that in the handloom sector, pricing is major problem. In addition, that problem of inputs, working capital and marketing of their products are the some other problems. It is suggested that handloom industry has to produce goods as required by consumers but not what they know. Mathiraj and Rajkumar (2008) in his study on Handloom products production and marketing narrated the production related problems of the Handloom Weavers Societies like wide fluctuation in the prices of yarn, lack of availability of skilled labour force. Modernization of handloom industry and formulation of production pattern, sales design are the suggestions of the study. Tripathy (2009) was opined in his study problems and perspectives of Handloom Industry in Orissa that there are many problems in decentralized handloom industry due to illiteracy, inadequate finance facilities, cost control, quality control, procurement of raw material, fluctuation in prices in raw material etc. The study suggested that the weavers have to develop more designs and understand the customer preferences. OBJECTIVES OF STUDY To analyze the problems related to inputs of silk Handloom co-operative Societies, To study the problems of weavers faced by silk Handloom co-operative Societies, To highlight the marketing related problems of silk Handloom co-operative Societies. 8 Associate Professor, Department of Management Studies, Madanapalle Institute of Technology & Science, Andhra Pradesh, India, gangisetty2006@yahoo.co.in 1688 P a g e

31 RESEARCH DESIGN AND SAMPLING METHOD The present study has been conducted in Chittoor District of Andhra Pradesh where weaving industry is concentrated. This study is descriptive in nature. The present study is mainly based on primary data. The data was collected through structured questionnaire, which has been mainly composed of ranking scale. A total sample of 150 Handloom silk Cooperative Societies Weavers in Chittoor District was selected by using Stratified Random sampling technique and Henry Garrett ranking Technique and percentage analysis have been used to analysis of the data. Tools for Analysis For analysis of data, Henry Garrett Ranking Technique has been used to rank the factors to identify the problems faced by the silk Handloom Societies weavers in the study area. In this method, the respondents were asked to rank their opinion regarding the problems faced by them. The order of merit given by the respondents was converted into ranks by using the following formula. Percentage Position = 100 (R ij 0.5) N j Where, Rij = Ranking Position, Nj - Total Number of Ranks By referring the Henry Garrett table, the percentage position of each rank thus obtained is converted into scores. Then the scores of individual respondents for each factor were added and divided by the total number of respondents for whom the scores were added. For all the factors, mean scores were arranged in order of ranks and from this inference were drawn. ANALYSIS AND INTERPRETATION OF DATA Table-1: Input Related Problems of Sample Respondents S. No. Nature of the problem Total Score Mean Score Rank 1 Poor quality of Raw Materials II 2 Inadequacy in supply of yarn IV 3 High Cost of Production I 4 Delay in supply in yarn and Zari V 5 Scarcity of looms III Sources: Authors Compilation From the above table it is clear that high cost of production is the major inputs related problem faced by the silk co-operative societies, which is ranked with a Garrett score of 9176 points. Next to this the poor quality of raw materials (7778 points), Scarcity of looms (6486 points) and inadequacy in supply of yarn (6453) were ranked second, third and fourth respectively. Delay in supply in yarn and zari placed last rank with a Garrett score of 5247 points. From the above analysis it is clear that majority of respondents revealed that high cost of production and poor quality of raw material are the major input problems that they have been facing. Table-2: Weavers Related Problems of Sample Respondents S. No. Nature of the Problem Total Score Mean Score Rank 1 Aged People II 2 Lack of Skilled weavers IV 3 Lack of active members I 4 Lack of Training VI 5 Poor knowledge about modern technique V 6 Dissatisfaction with wages III 7 Not satisfied with schemes provided VII Sources: Authors Compilation It is evident from the above table number 2 that co-operative societies consider lack of active member is a main problem as it was obtained first rank with a Garret score of 9038 points. Aged people (8612 points), dissatisfaction with wages (7717 points) and lack of skilled weavers (6669 points) are ranked next respectively. Poor knowledge about modern technology and lack of training are ranked fifth and sixth. Finally not satisfied towards schemes provided is ranked seventh rank with a score of 5165 points P a g e

32 Table-3: Marketing Problems of Sample Respondents S. No. Nature of the problem Total Score Mean Score Rank 1 Lack of intensive distribution III 2 Not stressing the Unique Selling Proposition IV 3 Lack of attractive promotion II 4 Lack of Customer Relationship Management IX 5 Lack of commercially marketable products V 6 Competitive price fixation VIII 7 Not understanding the customer preferences VI 8 Competition from mills and power looms I 9 Lack of export Marketing knowledge VII Sources: Authors Compilation From the above table that shows marketing problems faced by the co-operative societies, it is clear that handlooms are facing cutthroat competition from mills and power looms, as is occupied first rank with 9822 points of Garret score followed by lack of attractive promotion with 8671 points of Garret score. Lack of intensive distribution (7771 points of Garret score), not stressing the Unique Selling Proposition (7198 points of Garret score), Lack of commercially marketable products (7058 points of Garret score), not understanding the customer preferences (6149 points of Garret points) are occupied third, fourth, fifth and sixth position respectively. Lack of customer relationship Management is ranked ninth rank, which is last rank among various marketing problems with 5124 points of Garret score. SUMMARY OF FINDINGS The following are the findings drawn from the above analysis: Majority of co-operative societies stated that cost of production is their major problem. This is because of continuous hike in the silk yarn prices and import of China silk is one of the reasons for high cost of production. Among the weaver related problems, majority societies opined that lack of active member is their main problem followed by high age of the members. In case if marketing problems, cutthroat competition from mills and power looms is a major problem faced by cooperative societies followed by lack of attractive promotion. SUMMARY OF SUGGESTIONS The government of India should take steps to set up organisations to control the silk yarn price fluctuations and the government of India should take steps to open silk yarn sales depots/stalls all over the country to maintain stability in prices of silk yarn. The government should increase the wages of the weavers so that the members gets motivation and becomes active members in the society. The government should take steps to implement orders given by honorable Supreme Court of India that silk handloom weavers are permitted to produce 20 varieties of silk products. These are reserved to produce on handlooms only. The government should conduct frequently some training programs to upgrade the knowledge levels of the weavers. CONCLUSIONS Handloom industry is oldest cottage industry in India. It is generating more employment opportunities to lacks of artistic weavers, but in the recent past it have been facing more problems and many of the silk weavers in particular and weavers in general committed suicide also. To revive the industry, the government should take steps to implement various schemes and programmes in addition to the above mentioned. REFERENCES 1. Gurumoorthy, T. R., & Rengachary, R. T. (2002). Problems of Handloom Sector. In Soundarapandian M. (Ed.), Small Scale Industries: Problems, 1, ). New Delhi: Concept Publishing House. 2. Retrieved from 3. Mathiraj, S. P., & RajKumar, P. (2008, March). Analytical study on Handloom products production and marketing. Tamilnadu Journal of Cooperation, P a g e

33 4. Tripathy. (2009, December). Odisha Handlooms: Problems and Perspectives. Orissa Review, Handlooms and textiles- Policy note for the year ( ). Retrieved from 6. Roy, T. (1998). Indian Handlooms in the 20th Century. Retrieved from jwg_146_ pdf 7. Retrieved from 8. Retrieved from 9. Retrieved from Retrieved from Retrieved from Retrieved from ***** PEZZOTTAITE JOURNALS MESSAGE TO AUTHORS We require that, prior to publication; authors make warranties to these effects when signing their Agreements. An author must not submit a manuscript to more than one journal simultaneously, nor should an author submit previously published work, nor work which is based in substance on previously published work. An author should present an accurate account of research performed and an objective discussion of its significance, and present sufficient detail and reference to public sources of information so to permit the author's peers to repeat the work. An author must cite all relevant publications. Information obtained privately, as in conversation, correspondence, or discussion with third parties, should not be used or reported in the author's work unless fully cited, and with the permission of that third party. An author must make available all requisite formal and documented ethical approval from an appropriate research ethics committee using humans or human tissue, including evidence of anonymisation and informed consent from the client (s) or patient (s) studied. An author must follow national and international procedures that govern the ethics of work done on animals. An author must avoid making defamatory statements in submitted articles which could be construed as impugning any person's reputation, for example, making allegations of dishonesty or sharp practice, plagiarism, or misrepresentation; or in any way attacking a person's integrity or competence. An author must ensure all named co-authors consent to publication and being named as a co-author, and, equally, that all those persons who have made significant scientific or literary contributions to the work reported are named as co-authors. Additionally, the author understands that co-authors are bound by these same principles. (sd/-) (Editor-In-Chief) FOR ANY CLARIFICATION OR SUGGESTION, WRITE US: Editor-In-Chief Pezzottaite Journals, 64/2, Trikuta Nagar, K. K. Gupta Lane, Jammu Tawi, Jammu & Kashmir , India. (Mobile): editorinchief@pezzottaitejournals.net contactus@pezzottaitejournals.net 1691 P a g e

34 MERGER WAVES: AN INSIGHT INTO MERGERS & ACQUISITIONS ACTIVITY IN U.S., U.K. AND INDIA Taminder Kaur 9 ABSTRACT There has been upsurge in Mergers and Acquisitions activity all over the world in last few decades. It has been witnessed that mergers and takeovers occur in waves. Few researchers have attempted to study these waves but the subject has not been well explored so far. This paper is an attempt to study the mergers and activities in US UK and India and postulates the need to study the factors that determine the M&A phenomenon under given economic circumstances. Merger, Acquisitions, Takeovers etc. INTRODUCTION KEYWORDS Because of globalization, competition has been increasing between companies, which led to dramatic increase in merger and acquisition activity all over the world. Andrade et al, (2001) assert that mergers come in waves. Generally, these merger waves occur due to some major economic event in the economy like change in regulations or technological changes. Auster and Sirower, (2002) explained the merger waves with the help of institutional theory. They presented a three stage conceptual framework of merger waves (Figure 1). The three stages of a merger waves are Development, Diffusion and Dissipation (Table 1). In the development stage Auster and Sirower, (2002) recognized key factors and forces which stimulate a wave and lead to initial M&A activity. These factors are macro environment factors, competitive forces and uncertainty. The macro environment factors include technological, political, economic and social factors. Competitive forces include drive to grow bigger in size to fight technological changes and innovations. Macro environment factors interact with competitive forces along with uncertainty to initiate merger activity. The second stage of merger wave is diffusion in which micro forces such as limited information processing, imitating other firms strategies, adopting merger strategies as a legitimate behavior further legitimate the M&A activity. In this stage, Auster and Sirower propose that firm s decision to enter into mergers may be based upon their perception of future benefits of mergers such as synergy, but it may lack other important strategic information and may start following other firms strategies to enter M&A activity thinking it to be the acceptable strategy to grow. The third stage - dissipation is characterized by saturation, failures of mergers and fall of icons which leads to dissolution. Table-1: Three Stages of merger Wave Stage-1 Proposition 1 Proposition 2 Proposition 3 Proposition 4 Stage-2 Proposition 5 Proposition 6 Proposition 7 Proposition 8 Development Macro environmental forces create receptive conditions for the development of initial M&A activity. Competitive factors interact with macro environmental forces to reinforce the development of initial M&A activity. Uncertainty created by macro environmental and competitive factors increase the likelihood of the development of initial M&A Activity. Early highly visible success combines with fashion setters and supporting techniques to create initial legitimization of M&A activity. Diffusion Micro dynamics including cognitive simplification, blind spots, hubris and self-interest increase diffusion of M&A activity and further increase legitimacy. Coercive isomorphism (pressure from one organization on another) stemming from investment bankers, law firms and top managers increase diffusion of M&A activity. Mimetic isomorphism (firms imitating actions of other firms adopting strategies thinking it to be acceptable and legitimate behaviour) increase diffusion. Normative isomorphism stemming from media coverage and academic and professional research and reinforcing management techniques increase the diffusion of M&As in stage-2. 9 Associate Professor, Chitkara University, Punjab Campus, Punjab, India, taminder.ubs@gmail.com 1692 P a g e

35 Micro dynamics and isomorphic processes interact with uncertainty to lead to increasing levels of Proposition 9 legitimacy, which further fuel diffusion. Because of the role of institutional pressures and processes interacting with uncertainty and micro Proposition 10 dynamics, isomorphism will continue through moderate levels of economic efficiency. Stage-3 Dissipation Disintegrating forces including the saturation of activity, increasing evidence of failures, the fall of Proposition 11 icons and negative media coverage decrease legitimacy and lead to dissipation of the wave. Sources: Adapted from Austen, Ellen R and Mark L Sirower (2002), The Dynamics of Merger and Acquisition Waves-A Three Stage Conceptual Framework with Implications for Practice, The Journal of Applied Behavioral Science p221, available at Figure-1: Mergers Waves- A Three Stage Conceptual Framework Sources: Adapted from Austen, Ellen R and Mark L Sirower (2002), The Dynamics of Merger and Acquisition Waves-A Three Stage Conceptual Framework with Implications for Practice, The Journal of Applied Behavioral Science p221, available at MERGERS WAVES: INTERNATIONAL EVIDENCE Several countries witnessed merger waves. In US, five different periods of merger waves have been recognized. The first merger wave came in predominated mainly by horizontal mergers with industry clustering including manufacturing sector, mainly petroleum products, mining, food products, and transportation. The second merger wave began during World War II, which witnessed mainly vertical mergers. Most mergers occurred in primary metals, food products, petroleum products, transportation equipment s and chemicals industry. There was more control of government and mergers during this wave mainly result in oligopolies rather than monopolies. The third merger wave in US was witnessed during 1940s, which largely included unrelated mergers involving companies acquiring firms in much diversified product lines thus forming conglomerates. Equity financing, high interest rates and strict antitrust laws characterized the mergers during these waves by govt. The most prominent ones were the INCO-ESB merger; United Technologies and OTIS Elevator merger between Colt Industries and Garlock Industries. The fourth wave came during and mergers during this period resulted mainly due to environmental factors like globalization, deregulation of industrial sector and increased competition. These mergers were larger than mergers in earlier waves most of them were friendly mergers but some hostile mergers also occurred during this wave. Mergers during this phase took place between the oil and gas industries, pharmaceutical industries, banking and airline industries. The fifth merger wave occurred during and the mergers during this period were more focused on long-term strategies of growth rather than 1693 P a g e

36 short-term benefits of cost reduction, or downsizing. The fifth wave mergers took place mainly in the banking and telecommunications industries. Some of the top mergers during this period are Disney-Capital Cities, Exxon-Mobil, AOL-Time Warner and HP-Compaq. The first merger wave occurred in Europe during 1920s when companies used mergers and acquisitions with the aim of taking advantage of scale economies, which resulted in great increase in production. The second period of merger wave occurred during 1960s due to internationalization of the economy. The third boom in merger wave came during 1980s, which witnessed high growth in mergers in UK. The fourth wave came in 1990s 1. The regulations on merger came into force on Sept. 21, 1990 until 2001 the number of mergers in Europe notified at European Commission was They include majority ownership, joint ventures and minority ownership 2. It is widely believed that the introduction of the Euro, the globalization process, technological innovation, deregulation and privatization as well as the financial markets boom spurred European companies to take part in M&As during the 1990s ( Marine and Renneboog, 2006). UK saw peak of M&A activity in 1968, 1972 and The first wave being in 1964, which coincided with the creation of Industrial Reorganization Corporation (IRC) for the development of large companies through horizontal mergers. At the same time Mergers and Monopolies Act was also passed to prohibit mergers and acquisitions, which are monopolistic in nature. Another merger wave was witnessed in 1972 in which large number of conglomerate deals was witnessed. The next peak of merger and acquisition activity took place in 1980s and during this period, more focus was on market for corporate control rather than increasing the size of company through horizontal mergers. The M&A activity during 1990s could be referred as the most recent wave in UK history of mergers and acquisitions. According to M&A Note issued by European commission 2004, 70% of M&A activity in EU-25 countries was accounted for by the four largest economies (Germany, France, UK, and Italy) during Table 2 and 3 present the targets M&A deals in Europe and Asia-Pacific based on value since Table-2: Top M&A Deals in Europe Rank Year Acquirer Target Deal Value (in Million USD) Glaxo Wellcome Plc. SmithKline Beecham Plc. 75, Royal Dutch Petroleum Co. Shell Transport & Trading Co 74, Sanofi-Synthelabo SA Aventis SA 60, Pending: E.on AG Endesa SA 56, France Telecom SA Orange Plc. 45, Pending: Suez SA Gaz de France SA 39, Merger: Banca Intesa SpA SanPaolo IMI SpA 37, Mittal Steel Co. NV Arcelor SA 32, Telefónica SA O2 Plc. 31, Merger: Statoil ASA Norsk Hydro ASA 30,793 Sources: Authors Compilation Table-3: Top M&A Deals in Asia-Pacific Rank Year Acquirer Target Deal Value (in Million USD) Merger: Mitsubishi Tokyo Financial Group Inc. UFJ Holdings Inc. 41, Pacific Century Cyber Works Ltd. Cable & Wireless HKT 37,442 Beijing Mobile, Shanghai Mobile, Tianjin Mobile Ltd., Hebei Mobile Ltd., China Mobile Liaoning Mobile Ltd., Shandong Ltd., (Hong Kong) Ltd. 34,008 and Guangxi Mobile Ltd Deposit Insurance Corporation of Japan Resona Bank Ltd. 16, Sanwa Bank Ltd. Tokai Bank Ltd. 14, BB Mobile Corporation Vodafone KK 14, Citigroup Inc. Nikko Cordial Corporation 13, Vodafone Group Plc. Hutchison Essar Ltd. 13, Ito-Yokado Co. Ltd. Seven-Eleven Japan Co. Ltd. 12, Cemex SAB de CV Rinker Group Ltd. 11,636 Sources: Authors Compilation 1 The Database on Mergers in Europe (DOME) has been compiled at the Kel Institute of World Economics available at 2 See (Sudarsanam, 1997), Owen (2006) 1694 P a g e

37 MERGER ACTIVITY IN INDIA In India M&A activity picked up pace after 1991 liberalized policy, though M&As were not uncommon in the pre liberalization period, which is considered as period of first merger wave. During this period, big corporate groups like Manu Chhabria group, RP Goenka, Swaraj Paul rule the corporate sector. They used mergers and acquisition route extensively as their way to growth 3. The companies taken over by RP Goenka group are Dunlop, Ceat, Philips, Carbon Black, Gramophone India Ltd. During the period , 120 mergers and takeover occurred in India. Horizontal mergers were preferred option during this period as they covered 65 percent of all merger in 1988, 50 percent in 1991 and 65 percent in Mergers within same group were also initiated during this period, for instance, Furmanite Nicco merged with NICCO Ltd., both belonging to Rajiv Kaul Group, Likewise Tata Fertilizers merged with Tata Chemicals 4. The second wave came in 1990s, when India saw tremendous growth in mergers and acquisitions. This was the era of economic reforms, liberalization and structural adjustments. M&As around may be regarded as third wave and the present M&A activity can be categorized under fourth wave in which lot of global deals have been taking place. The period of was a period of corporate restructuring. Consolidation occurred in key sectors like cement and telecom 5. Some of the prominent mergers occurred during this period were merger of Piramal Healthcare with Nicholas Piramal, Eicher Tractor Ltd with Royal Enfield Motors Ltd, Kelvinator of India with Whirlpool Corporation. The reasons for this upsurge in M&A activity in India are multifold. Removal of restrictions under the legal framework regarding M&As opened ways for companies to expand. Further, under the impact of globalization, lot of MNCs set up their base in India resulting in increased competition and lot of pressure on domestic companies to fight for survival, which led these companies to go for M&A, route for growth and expansion. The trends of mergers and acquisitions in India have changed over the years. With the increasing number of Indian companies opting for mergers and acquisitions, India became one of the leading nations in the world in terms of mergers and acquisitions. The period after 1990s recorded exponential growth in mergers and acquisitions in India. Grant Thornton a global consulting firm in its annual publication of corporate deals has reported 46 percent rise for Indian entities in merger and acquisitions 6. Another consulting firm Price Waterhouse Cooper (PwC) says that India has fastest growing M&A market in the Asia- Pacific region in 2005, second only to Japan s 7. Indian companies concluded deals worth $25.6 billion in the first six months of 2006, up from $8 billion in the first half of 2005, and $23.6 billion for the whole of the previous year, according to a PwC M&A report. Indian companies also outperformed the average increase in M&A of 32 per cent in the Asia Pacific region during the period bagging third rank in terms of M&A deal value with Japan and Australia bagging the first and second slots, with deals worth $64.2 billion and $33.2 billion, respectively. Few prominent mergers in India have been listed in Table-4 and 5. Table-4: A Few Prominent Mergers in India Target Acquirer Year Share exchange ratio TOMCO HLL :15 BBLIL HLL :20 RPL RIL :1 Smith Kline Pharma Glaxo :1 Indal Hindalco :1 Tata Chemicals HLCL :1 Ambuja Cement Gujarat Ambuja :2 ETC Networks E-connect India :1 Sources: Authors Compilation Table-5: Top Cross Border M&A Deals in India Acquirer Target Deal Value (in US $ billion) Tata Steel Corus 12.2 Vodafone Hutch Essat 10 Hindalco Novellis 6 ONGC Imperial Energy 2.8 Tata Motors Jaguar Land Rover 2.3 Bharti Airtel Zain Telecom 10.7 Sources: Authors Compilation 1 The Database on Mergers in Europe (DOME) has been compiled at the Kel Institute of World Economics available at 2 See (Sudarsanam, 1997), Owen (2006) 3 Banerjee Gargi (2005), Year of Deals, Business World October 17, 2005, p Des Rajan and Udayan Kumar Basu (2004), Corporate Restructuring - Enhancing the Shareholder Value, Tata McGraw Hill, New Delhi 5 Ibid. p 3. 6 The Hindu Business Line (Investment World), April 16, Banerjee Gargi (2005), Year of Deals, Business World October 17, 2005, p P a g e

38 The total number of M&A deals was 287 from the month of January to May in According to Grant Thornton, there have been 480 deals amounting to $27.4 billion during 2013 involving Indian companies, as on December 13, 2013 as compared to 598 M&A deals worth $35.4 billion in 2012 and 644 transactions worth $44.6 billion a year ago in Although it has been observed that, there is decline in number of deals for last two consecutive years but it is expected to pick up the momentum after the general elections A stable political environment definitely paves way to augmented economic and industrial growth and it has been evident in all major economies of the world. Some of the important acquisitions during this period are Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million. Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million. Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million. Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million. Suzlon Energy acquired Hansen Group through a deal of $565 million. The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd. The deal amounted to $500 million. VSNL acquired Teleglobe through a deal of $239 million. SUMMARY AND SUGGESTIONS Many companies have grown as big empires through mergers and acquisitions programs. However, there are some unsuccessful mega merger deals too. In spite of such big failures, mergers and acquisitions have been increasing worldwide. In the year 2005, worldwide acquisitions reached 2.3 trillion dollars in value 9. The M&A activity have seen a major upsurge in all the countries of the world. United States has witnessed 5 merger waves so far. In Europe also, the uptrend of mergers and acquisitions has been witnessed. India has also seen periods of four merger waves since 1980s. The period after mid-nineties saw a tremendous growth in mergers and acquisitions. Even during the present times of the recession, where GDP levels are decreasing in Asian market, Asian countries like India and China are still considered to be favorable destinations for foreign acquisitions by US as well as Europe. A large strand of research in mergers and acquisitions has focused on wealth impact of mergers and acquisitions in short run as well as long run. In 1999, KPMG examined 700 of the most expensive deals between 1996 and 1998 and concluded that only 17 percent created value for the combined firm, 30 percent were value neutral and 53 percent destroyed value. The empirical research evidence shows mixed results regarding wealth impact of mergers. In most of the studies the evidence show that target companies experience positive gains around merger announcement (Andrade et al.2001, Asquith, 1983, Bradley, Desai and Kim, 1998) and there is negative impact of mergers on acquiring companies. In UK also, Franks, Broyles and Hechts (1977) report positive returns to targets. In another study by Firth (1979), it is reported that no gains are associated with takeovers as gains to targets are more than offsets by the losses to bidders. The studies during recent times have more focus on long-run performance of acquiring firms. Most of the long-run event studies show negative returns to acquirers in case of mergers (Loughran and Vijh, 1997; Agrawal, Jaffe and Mandelkar, 1992). Studies that focused on operating performance showed improvement in cash flow returns after merger (Healy et al,1992; Parrino and Harris, 1999) whereas some studies reported no improvement after mergers [Sharma and Ho, 2002 (Australia); Pawaskar, 2001(India)]. Very few studies attempted to delve into the understanding of merger waves phenomenon or determinants that cause mergers and acquisitions to occur (Austen 2002; Andrade, 2001). In India, the subject has not been well explored and there is need to investigate further the factors that lead to occurrence of merger waves, which will help not only corporate managers but also policy makers to take decisions and formulate policies, which augment the development of economy as a whole. REFERENCES 1. Austen, Ellen R., & Mark, L. Sirower. (2002). The Dynamics of Merger and Acquisition Waves-A Three Stage Conceptual Framework with Implications for Practice. The Journal of Applied Behavioral Science, pp Retrieved from 2. Andrade, Gregor, Mark, Mitchell, & Eric, Stafford. (2001). New Evidence and Perspectives on Mergers. The Journal of Economic Perspectives, 15(2), Brown, Stephen J., & Jerold, B. Warner. (1980). Measuring Security Price Performance. Journal of Financial Economics, 8(3), Brown, Stephen J., & Jerold, B. Warner. (1985). Using Daily Stock Returns: The Case of Event Studies. Journal of Financial Economics, 14(1), P a g e

39 5. Das, Ranjan, & Udayan, Kumar Basu. (2004). Corporate Restructuring Enhancing the Shareholder Value. New Delhi: Tata McGraw Hill. 6. Fama, Eugene F., & Merton, H. Miller. (1972). The Theory of Finance. New York: Holt, Rinchart & Winston. 7. (2004, May). Procedure for Mergers and Amalgamations. The Chartered Accountant, pp ICFAI-ARF Group. 8. Kar, Rabi Narayan. (2004). Mergers and Acquisitions in India; Evolution, Causes and Implications. Executive Chartered Secretary, 1(8), Kumar, Nagesh. (2000). Multinational Enterprises and M&As in India; Patterns and Implications. Economic and Political Weekly, 35(5), Roll, Richard. (1986). The Hubris Hypothesis of Corporate Takeovers. The Journal of Business, 59(2), Saha, Malayandu. (2005). Cross-border Mergers and Acquisitions: A Global Perspective. The ICFAI Journal of Mergers and Acquisitions, Sudarsanam, P. S. (1997). The Essence of Mergers and Acquisitions. New Delhi: Prentice Hall of India. 13. Thakur, Jayant. (1997). Law and Practices of Mergers and Acquisitions. Mumbai: Snow white Publications. 14. Verma, J. C. (1997). Corporate Mergers, Amalgamations and Takeovers. New Delhi: Bharat Publishing House. 15. Weston, J. Fred, K., Wang, S., Chung, & Susan, E. Hoag. (2000). Mergers, Restructuring, and Corporate Control. New Delhi: Prentice Hall of India. 16. Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from ***** 1697 P a g e

40 SEASCAPING OF PREFERENCE SHARE CAPITAL: AN EMPIRICAL CASE Gurnam Singh Rasoolpur 10 ABSTRACT This study is an in-depth empirical attempt to make the seascaping of preference share capital through a case of Mangalore Chemicals & Fertilizers Ltd. from the fertilizer industry of the Indian corporate sector which covers a time span of ten years (effective nine years) extending from the year to The company is lying in top ten companies of fertilizers industry of the Indian corporate sector based on sales for the year for the purpose of this study. The study reveals that leverage ratio2 of the company has rising trend during the period under study whereas aggregate leverage ratio2 of the company is worked out percent during the period under study. It is found that preference share capital to equity networth ratio2 is also having declining trend over the period under study excepting for the year when it is percent. However, aggregate preference share capital to equity networth ratio2 of the company is worked out percent during the period under study. It is observed that cost of preference share capital (Kpat) is varying from 9.50 percent to 13 percent during the period under study whereas aggregate cost of preference share capital (Kpat) of the company is worked out percent during the period under study. It is also found that rate of return on total networth on after tax basis (RONat) and rate of return on equity networth (ROENat) are having declining trend over the period under study whereas aggregate rate of return on total networth on after tax basis (RONat) and aggregate rate of return on equity networth (ROENat) has been worked out percent and percent respectively during the period under study. It is found that for one out of nine years under study, amount of total networth has been negative, making it impossible to compute the rate of return on total networth. This happened for the year when it is crores whereas for two out of nine years under study, amount of equity networth is negative, making it impossible to compute the rate of return on equity networth. This happened for the years and when equity networth is crores and -.63 crores respectively. It is also found that spread and net gain are negative for five out of nine years under study. In nut shell, it is concluded that the company is enjoying favourable leverage with regard to use of preference share capital during four out of nine years under study, however, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital over the period under study. It means that use of preference share capital in the capital structure of the company has positive impact on the profitability of the company during four out of nine years under study which consequently contributing to the equity networth of the company which is ultimately benefitting to the equity share holders of the company, whereas, on aggregate basis, it has negative impact on the profitability of the company during the study period. KEYWORDS Return on Networth, Return on Equity Networth, Cost of Preference Share Capital etc. INTRODUCTION Among the different sources of finance, debt is the cheapest source of finance followed by preference share capital. Cost of debt is lower than cost of preference share capital as well as equity share capital because the debt holders are the first claimants on the firm s assets at time of its liquidation. Similarly, they are the first to be paid their interest before any dividend is paid to preference and equity shareholders. Interest paid to the debt holders is an item chargeable to profits of a firm. However, the interest and principal repayment on debt are definite obligations that are payable irrespective of the financial situation of a firm. Therefore, debt is riskier. It enhances the financial risk. Also, if interest and principal payments on debt are not promptly met when due, bankruptcy, loss of control for the owners may occur. It will turn out that use of some debt by the firm is desirable and a strong case can be made for the existence of an optimal capital structure, or debt/equity mix. A firm should make a judicious mix of both debt and equity to achieve a capital structure, which may be the optimal capital structure. Modigiliani and Miller (1959) gave logically consistent behavioral justification for this relationship and denied the existence of an optimum capital structure. Barges (1963) tested the M-M hypothesis and found that the cost of capital comes down with leverage. Singh (1998) observed that cost of capital is a significant factor in case of large-size companies, while it is not a significant factor affecting capital structure of companies in case of medium and small-size companies. The primary aim of corporate management is to maximize shareholders value and the value of a firm in a legal and ethical manner. So, a financial manager should consider a number of factors to set an optimal capital structure for a firm giving considerable weight to earning rate, collateral value of assets, age, cash flow coverage ratio, cost of borrowing, size (net sales), dividend payout ratio, debt service ratio, cost of borrowing, corporate tax rate, current ratio, growth rate, operating leverage and uniqueness (selling cost/sales) etc. The choice between debt and equity to finance a firm s assets involves a trade-off between risk and return (Pandey, Chotigeat & Ranjit, 2000). The excessive use of debt may endanger the survival of a firm, while a conservative use of debt may deprive the firm in leveraging return to equity owners. Therefore, for taking more benefits of debt capital also by keeping away firms from risks, a desirable debt equity combination 10 Associate Professor (Commerce), P.G. Department of Commerce & Business Management, Guru Nanak College, Punjab, India, gsrasoolpur@gmail.com 1698 P a g e

41 must be used in the total capital structure. Thus, the decision regarding debt equity mix in the capital structure of a firm is of critical one and has to be approached with a great care. OBJECTIVES OF STUDY The present empirical study has been undertaken to make the seascaping of preference share capital with the following objectives: To measure the extent of leverage of Mangalore Chemicals & Fertilizers Ltd. from the fertilizer industry of the Indian corporate sector. To study the impact of use and cost of preference share capital on the profitability of Mangalore Chemicals & Fertilizers Ltd. of fertilizer industry from the Indian corporate sector. RESEARCH METHODOLOGY Data Source, Sample Size & Methodology The present empirical case belongs to Mangalore Chemicals & Fertilizers Ltd. from the fertilizer industry of the Indian corporate sector, which is lying in top ten companies of fertilizer industry of the Indian corporate sector based on sales for the year and, also still existing. The study covers a time of ten years extending from the year to for the purpose of our research study. For conducting the present study, data has been compiled from the different volumes of the Bombay Stock Exchange Official Directory. A number of studies has been conducted so far for highlighting the impact of debt on profitability of concerns in different industries. However, hardly any study has been carried out to study the seascaping of preference share capital on the profitability of concerns in the Indian corporate sector. So, in the present study a maiden attempt has been made to make an in-depth analysis for achieving the main objectives of the present study through a case of Mangalore Chemicals & Fertilizers Ltd from fertilizer industry of the Indian corporate sector. To analyses the data, the following ratios along with simple statistical tools like tables, percentages, etc. have been used for achieving the objectives of present study. Preference Share Capital to Equity Networth Ratio: It can be calculated in the following manner: Pref Share Capital to Equity Networth Ratio1 = Preference Share Capital Equity Networth Pref Sh Cap to Equity NetworthRatio2 = Pref. Share Capital Pref. Share Capital + Equity Networth 100 Leverage Ratio: It can be calculated in the following manner: Leverage Ratio1 = Term Debt + Short Term Loans and Advances + Pref. Share Capital Equity Networth Leverage Ratio2 = Term Debt + Short Term Loans and Advances +Pref. Share Capital 100 Term Debt + Short Term Loans and Advances + Pref. Share Capital + Equity Networth Return on Total Networth on Before Tax Basis (RONbt): It can be calculated in the following manner: Return on Total Networth (RONbt) = Pre Tax Profits Total Networth x100 Return on Total Networth on After Tax Basis (RONat): It can be calculated in the following manner: Return on Total Networth (RONat) = Profits after Intt. & Taxes x100 Total Networth Return on Equity Networth (ROENat): It is calculated in the following manner: 1699 P a g e

42 Return on Equity Networth (ROENat) = Profits after Intt & Taxes Pref Dividend Total Networth Pref Share Capital Cost of Preference Share Capital (Kpat): The following formula is used to calculate the cost of preference share capital Cost of Preference Share Capital (Kpat) = Preference Dividend x100 Preference Share Capital Net Gain: The following is the formula for calculating the Net Gain x100 Net Gain = Return on Equity Networth (ROENat) - Return on Total Networth (RONat) Spread: The following is the formula for calculating the Spread Spread = Return on Total Networth (RONat) - Cost of Preference Share Capital (Kpat) Here Term Debt plus Short Term Loans & Advances comprise of debentures, long-term loans and short-term loans & advances. Total Networth includes equity share capital, preference share capital, capital reserves including share premium and other reserves & surplus less intangible assets. Intangible Assets include preliminary expenses, expenses on issue of shares and debentures, goodwill, technical expertise charges, drawings & designs, patents, trademarks and copyright. While computing total networth usually accumulated losses are deducted from the aggregate of paid up share capital plus reserves & surplus. However, in the present study in addition to accumulated losses, goodwill, trademark, patents, & copyright have also been deducted. It is so because separate amount of accumulated losses is not available in the Bombay Stock Exchange Official Directory. Total networth has been also adjusted for the accounting year due to the change in the length of accounting year from 1 st of April to 31st of March in the next year. Depreciation, interest charges and profits and/or losses have been changed proportionately. ANALYSIS OF EMPIRICAL RESULTS Preference Share Capital to Equity Networth Ratio As revealed by table 1, preference share capital to equity networth ratio2 is varying from percent in the year 1986 to percent in the year during the period under study. Overall, it has a declining trend during the period under study. It is highest, i.e percent, in the year and lowest, i.e percent, in the year 1986 over the period under study. On overall basis, aggregate preference share capital to equity networth ratio2 of the company is worked out percent during the period under study. Table-1: Preference Share Capital To Equity Networth Ratio Of Mangalore Chemicals & Fertilizers Ltd Year Preference Share Capital to Equity Networth Ratio1 = Pref. Share Capital Equity Networth Preference Share Capital to Equity Networth Ratio2 = Pref. Share Capital 100 Pref. Share Capital + Equity Networth (In Times) (Percentage) Dec Dec Dec Dec * * * Mangalore Chem.& Fert. Ltd. (Aggregate Basis) (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 31(iii), p Note: *The amount of Equity Networth is negative, making it impossible to compute Preference Share Capital to Equity Networth Ratio in the years & P a g e

43 Leverage Ratio As revealed by table-2, leverage ratio2 is varying from percent in the year 1984 to percent in the year during the period under study. For eight out of nine years under study, leverage ratio2 is above 82 percent. Overall, leverage ratio2 has rising trend during the period under study. It is highest, i.e percent, in the year on account of negative amount of total networth and losses suffered by the company. It is lowest, i.e percent, in the year 1984 due to the higher profits earned by the company under study. On overall basis, aggregate leverage ratio2 of the company is worked out percent during the period under study. Table-2: Leverage Ratio of Mangalore Chemicals & Fertilizers Ltd Year Leverage Ratio 1 = Term Debt + Short Term Loans and Advance + Pref. Share Capital Equity Networth Leverage Ratio 2 = Term Debt + Short Term Loans and Advances + Pref. Share Capital 100 Term Debt + Short Term Loans and Advances + Pref. Share Capital + Equity Networth (In Times) (Percentage) Dec Dec Dec Dec * * M Ch.& Fer. Ltd. (Aggregate Basis) (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 31(iii), p Note: *The amount of Equity Networth is negative, making it impossible to compute Preference Share Capital to Equity Networth Ratio in the years & Cost of Preference Share Capital (Kpat) As revealed by table 3, cost of preference share capital (Kpat) is varying from 9.50 percent to 13% during the period under study. It remained constant to 9.50 percent from 1983 to Subsequently, it started rising and touched the level of 13 percent in the year and remained constant up to the year Overall, it has a rising trend over the period under study. On aggregate basis, cost of preference share capital (Kpat) of the company is worked out percent during the period under study. Return on Total Networth on After Tax Basis (RONat) As revealed by table 3, rate of return total networth on after tax basis (RONat) has been varying from percent in the year 1984 to % in the year during the period under study. For three out of nine years under study, the company incurred losses leading to negative rate of return on net total assets. This happened for the years , and when it is %, % and percent respectively. For one out of nine years under study, amount of total networth has been negative, making it impossible to compute the rate of return on total networth. This happened for the year when it is crores. Overall, it has been declining over the period under study excepting for the years 1984 and 1986 when it is 54.48% and 28.67% respectively. It is highest, i.e % in the year 1984 due to the highest rate of return on net total assets (ROIbt1) as well as net assets (ROIbt2) on before tax basis and highest excess gap of rate of return on net assets (ROIbt2) over cost of debt (Kdbt) on before tax basis. It is lowest, i.e % and %, in the years and due to the losses suffered by the company on account of underutilization of plant capacity, non-availability of imported phosphoric acid for producing DAP, production loss of 132 days on account of failure of HP condenser of urea plant and replacement problem etc. On aggregate basis, rate of return on total networth (RONat) of the company is worked out % during the period under study. Return on Equity Networth (ROENat) As revealed by table 3, rate of return on equity networth (ROENat) is varying from 61.90% in year 1984 to % in the year during the period under study. For two out of nine years under study, amount of equity networth is negative, making it impossible to compute the rate of return on equity networth. This happened for the years and when equity networth was crores and -.63 crores respectively. For three out of nine years under study, the company incurred losses leading to negative rate of return on equity networth. This happened for the years , & when it is -.75%, P a g e

44 211.50% and % respectively. Overall, it has a declining trend over the period under study excepting for the years 1984 and 1986 when it is 61.90% and 30.87% respectively. It is highest, i.e %, in the year 1984 due to the highest rate of return on net total assets (ROIat1) as well as net assets (ROIat2) on after tax basis and highest excess gap of rate of return on total networth (RONat) over cost of preference share capital (Kpat). It is lowest, i.e % in the year due to the losses suffered by the company on account of underutilization of plant capacity, non-availability of imported phosphoric acid for producing DAP, production loss of 132 days on account of failure of HP condenser of urea plant and replacement problem etc. On aggregate basis, rate of return on equity networth (ROENat) of the company is worked out %t during the period under study. Impact of Preference Share Capital on Return on Equity Networth Table 4 also shows the effects of use and cost of preference share capital (Kpat) on rate of return on equity networth (ROENat) for a period of nine years from the years 1983 to over the period under study. Comparison of cost of preference share capital (Kpat) with rate of return on total networth (RONat) shows that latter is higher than former for all the years excepting the years 1983, 1984, 1985 and 1986 over the period under study. This leads to conclude that company is enjoying favourable leverage with regard to use of preference share capital for four out of nine years under study. Consequently, rate of return on equity networth (ROENat) is higher than cost of preference share capital (Kpat) as well as rate of return on total networth (RONat) in the above said four years over the period under study. As revealed by tables 3 & 4, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital during the period under study. Further detail regarding spread and net gain have also been given in table 3. In this company spread and net gain have been highest, i.e percent and 7.42 percent, respectively in the year 1984 during the period under study. On aggregate basis, spread and net gain of the company is percent and percent respectively during the period under study. Table-3: Impact of Preference Share Capital on Return on Equity Networth in Mangalore Chemicals & Fertilizers Ltd Year Return on Total Networth RONat= Profit after Intt & Taxes x100 Total Networth (Percentage) Cost of Preference Share Capital Kpat= Pre. Dividend x100 Pref Share Capital (Percentage) Return on Equity Networth ROENat= Profits after Intt & Taxes Pref Dividend Total Networth Pref Share Capital (Percentage) Dec, Dec, Dec, Dec, * 13 * * M Ch.& Fer. Ltd. (Aggregate Basis) (Aggregate Basis) (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 31(iii), p Note: *The amount of Total Networth is negative, making it impossible to compute Return on Total Networth for the year & Return on Equity Networth in the years & Year Table-4: Analysis of Spread and Net Gain in Mangalore Chemicals & Fertilizers Ltd Spread between RONat & Kpat(RONat - Kpat) (Percentage) Leverage Impact Net Gain Leverage Ratio2 (Percentage) ROENat-RONat (Percentage) Dec, Favourable Dec, Favourable Dec, Favourable Dec, Favourable Unfavourable * * Unfavourable Unfavourable * Unfavourable M Ch.& Fer. Ltd Unfavourable (Aggregate Basis) (Aggregate Basis) (Aggregate Basis) (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 31(iii), p Note: *RONat & ROENat could not be computed; therefore, Spread & Net Gain could not be computed. x P a g e

45 SUMMARY AND CONCLUSIONS Among the different sources of finance, debt is the cheapest source of finance followed by preference share capital. A number of studies have been conducted so far for highlighting the impact of debt on profitability of concerns in different industries. However, hardly any study has been carried out to study the impact of preference share capital on profitability in the Indian corporate sector. So, in the present study, a maiden attempt has been made to make an in-depth analysis of seascaping of preference share capital on the profitability through a case of Mangalore Chemicals & Fertilizers Ltd in fertilizer industry. So, the study is confined to Mangalore Chemicals & Fertilizers Ltd. from the fertilizer industry of the Indian corporate sector. The study covers a time of ten years extending from the year to The company is lying in top ten companies of fertilizer industry of the Indian corporate sector based on sales for the year , still existing, for the purpose of this study. The following are the conclusion and findings of the present study. It is observed that leverage ratio2 has rising trend during the period under study whereas aggregate leverage ratio2 of the company is worked out percent during the period under study. It is found that preference share capital to equity networth ratio2 is also having declining trend over the period under study excepting for the year when it is percent. However, aggregate preference share capital to equity networth ratio2 of the company is worked out percent during the period under study. It is observed that cost of preference share capital (Kpat) is varying from 9.50 percent to 13 percent during the period under study whereas aggregate cost of preference share capital (Kpat) of the company is worked out percent during the period under study. It is also found that rate of return on total networth on after tax basis (RONat) and rate of return on equity networth (ROENat) are having declining trend over the period under study whereas aggregate rate of return on total networth on after tax basis (RONat) and aggregate rate of return on equity networth (ROENat) have been worked out percent and percent respectively during the period under study. It is found that for one out of nine years under study; amount of total networth has been negative, making it impossible to compute the rate of return on total networth. This happened for the year when it is crores whereas for two out of nine years under study, amount of equity networth is negative, making it impossible to compute the rate of return on equity networth. This happened for the years and when equity networth was crores and -.63 crores respectively. It is also observed that company is enjoying favourable leverage with regard to use of preference share capital during four out of nine years under study, however, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital over the period under study. It is also found that spread between rate of return on total networth on after tax basis (RONat) & cost of preference share capital (Kpat), and net gain {i.e. rate of return on equity networth (ROENat) minus rate of return on total networth on after tax basis (RONat)} are highest, i.e percent, 7.42 percent, during the year 1984 over the period under study. In nut shell, it is concluded that the company is enjoying favourable leverage with regard to use of preference share capital during four out of nine years under study, however, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital over the period under study. REFERENCES 1. Allen, D. E., & Mizuno, H. (1989, May). The Determinants of Corporate Capital Structure: Japanese Evidence. Applied Economics, 21(5), Anthony, Robert N., & Reece, James S. (1982). Management Accounting Principles. New Delhi: D.S. Taraporewala and Sons. 3. Chandra, Prasanna. (1984). Financial Management Theory and Practice. New Delhi: Tata McGraw Hill Publishing Company Limited. 4. Chandra, Prasanna. (1985). Management s Guide to Finance and Accounting. New Delhi: Tata McGraw Hill Publishing Company Limited. 5. Guthman, Harry G. Analysis of Financial Statements (4 th Edition). New Delhi: Prentice Hall of India. 6. Gangadhar, V., & Begum, Arifa. (October 2002-March 2003). Impact of Leverage on Profitability. Journal of Accounting & Finance, 17(1), Garg, Mahesh Chand, & Shekhar, Chander. (2002, February). Determents of Capital Structure in India. The Management Accountant, 37(2), P a g e

46 8. Khan, M. V., & Jain, P. K. (1983). Financial Management. New Delhi: Tata McGraw Hill. 9. Kraus, Alan, & Litzenberger, Robert H. (1973, September). A State Preference Model of Optimal Financial Leverage. The Journal of Finance, 28, Kulkarni, P. V. Business Finance-Principles & Problems. Bombay: Himalaya Publishing House. 11. Narender, & Sharma. (2006). Determinants of Capital Structure in Public Enterprises. Finance, 12(7), Narang, & Kaushal. (2006). Business Ethics. Ludhiana: Kalyani Publishers. 13. Pandey, Indra Mohan. (1978, March). Leverage, Risk and the Choice of Capital Structure. The Management Accountant, 13(3), Pandey, Indra Mohan. (1978, July). Impact of Corporate Debt on the Cost of Equity. The Chartered Accountant, 27(I), Pandey, I. M. (2003). Financial Management. New Delhi: Vikas Publishing House. 16. Pandey, I. M. (1985, March). The Financial Leverage in India: A Study. Indian Management, Rasoolpur, G. S. (2012, September). An Empirical Analysis of Capital Structure Determinants: Evidence from the Indian Corporate Sector. International Journal of Management & Information Technology, 1(3), Rasoolpur, G. S. (2012, December). Composition of Capital Structure Decisions: Comparative Empirical Evidence from India. International Journal of Research in Business and Technology, 1(1), Rasoolpur, G. S. (2013, May). Leverage Decisions: A Case of Textile & Readymade Garments Industry of the Indian Corporate Sector. International Journal of Research in Business and Technology, 2(2), Rasoolpur, G. S. (2014, August). Impact of Cash Flow Coverage, Debt Service, & Current Ratio on Capital Structure Decisions: Empirical Evidence from the Indian Corporate Sector. Journal of Research in Marketing, 3(1), Titman, S., & Wessells, R. (1988, March). The Determinants of Capital Structure Choice. The Journal of Finance, XLIII (1), Venkatesan, S. (1983, January). Determinants of Financial Leverage an Empirical Extension. The Chartered Account, 32, Vashishth, Neeru, & Rajput, Namita. (2010). Corporate Governance Value & Ethics. New Delhi: Taxmann Publications (P) Limited. 24. Retrieved from Retrieved from Retrieved from ***** FOR ANY CLARIFICATION OR SUGGESTION, WRITE US: Editor-In-Chief Pezzottaite Journals, 64/2, Trikuta Nagar, K. K. Gupta Lane, Jammu Tawi, Jammu & Kashmir , India. (Mobile): editorinchief@pezzottaitejournals.net contactus@pezzottaitejournals.net 1704 P a g e

47 CAPITAL STRUCTURE IS A FUNCTION OF UNIQUENESS OF FIRMS: EVIDENCE FROM THE INDIAN CORPORATE SECTOR Gurnam Singh Rasoolpur 11 ABSTRACT This empirical paper attempts to study whether capital structure is a function of uniqueness of firms through a case of Indian corporate sector by classifying the capital structure of sample companies by uniqueness over a period under study. The study is limited to top 298 firms from different industries out of the list of top 500 manufacturing firms from the Indian corporate sector selected on the basis of turnover for the year which covers the time span of eleven years commencing from to The study reveals that the largest number of companies, i.e percent and percent, is lying in percent capital structure range, which is below the well-established standard of 2:1, during and respectively which represents use of less amount of debt (conservative approach) by the largest number of companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also observed that under percent capital structure range the number of companies are increasing by 7.35 percent (i.e =7.35) during as compared to the number of companies during which represents use of less amount of debt by such companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also observed that under percent capital structure range, the number of companies is decreasing in the higher uniqueness ranges which further means that companies having higher uniqueness are using less amount of debt (liberal and safe approach) in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure during the period under study. It is also observed that under percent capital structure range the number of companies are decreasing by percent (i.e =10.03) during as compared to the number of companies during which represents companies using higher debt in their capital structure are decreasing by percent when the uniqueness of companies is examined in relation to capital structure over the period under study. However, number of firms in and more than 300 percent capital structure ranges are considerably less i.e percent each in the year and 7.34 percent and 3.50 percent in the year which represents companies using higher debt (aggressive approach) in their capital structure as compared to even their own capital are considerably less when the uniqueness of companies is examined in relation to capital structure over the period under study. Overall, rise in uniqueness results in the shrinkage of number of capital structure ranges as well as decline in the distribution of companies to the higher capital structure ranges during the period under study. Thus, it emerges that at lower uniqueness, there exists higher capital structure ranges and vice-versa, which represents negative relationship between capital structure and uniqueness ranges which further concludes that capital structure is a function of uniqueness of firms during the period under study. Higher uniqueness means more outflows of cash for creating specialization in marketing. Consequently, the companies can t afford more amount of debt in their capital structure due to the risk of fixed interest commitments and repayment of principal amount. It shows that due to high uniqueness, companies are using lesser amount of debt for financing purposes. However, debt capital is a cheaper source of finance, thus, the use of debt may maximize the value of wealth of shareholders. It is also concluded that largest number of companies are following conservative approach, very lesser number of companies are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through debt when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also found that in our empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during and which are near to the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study. KEYWORDS Uniqueness of Firms, Capital Structure Ranges, Shareholders etc. INTRODUCTION The question of the optimal capital structure of a business firm has attracted considerable attention by the economists in recent years. The company will have to plan its capital structure initially at the time of its promotion. Subsequently, whenever funds have to be raised to finance investments, a capital structure decision is involved. A company can finance its investments through debts/or equity. The company may also use preference capital. The rate of interest on debt is fixed irrespective of the company s rate of return on assets. The company has a legal binding to pay interest on debt. The rate of preference dividend is fixed, but preference dividends are paid when the company earns profits. The common shareholders are entitled to the residual income. That is, earnings after interest and taxes (less preference dividends) belong to them. The rate of equity is not fixed and depends on the 11 Associate Professor (Commerce), P.G. Department of Commerce & Business Management, Guru Nanak College, Punjab, India, gsrasoolpur@gmail.com 1705 P a g e

48 dividend policy of the company. (Pandey, I. M., 2010, p ). The choice between debt and equity to finance a firm s assets involves a trade-off between risk and return (Pandey, Chotigeat & Ranjit, 2000). The excessive use of debt may endanger the survival of a firm, while a conservative use of debt may deprive the firm in leveraging return to equity owners. Therefore, for taking more benefits of debt capital also by keeping away firms from risks, a desirable debt equity combination must be used in the total capital structure. The primary aim of corporate management is to maximize shareholders value and the value of a firm in a legal and ethical manner. So, a financial manager should consider a number of factors to set an optimal capital structure for a firm giving considerable weight to earning rate, collateral value of assets, age, cash flow coverage ratio, non-debt tax shield, size (net sales), dividend payout ratio, debt service ratio, cost of borrowing, corporate tax rate, current ratio, growth rate, operating leverage and uniqueness (selling cost/sales) etc. However, the choice between debt and equity from the point of view of shareholders and lenders is an important one and it will be useful to list the special advantages of either form of capital relative to the other. The greater use of debt, where the interest rate is lower than the average rate of return on the investment, increases the net return to equity shareholders. Higher debt does not impair the control of shareholders over the enlarged operations of the company/firm. Debt is cheaper source of finance, cost of debt is lower than cost of preference share capital as well as equity share capital because debt holders first claim on the firm s assets at time of its liquidation, payment of interest before any dividend is paid to preference and equity shareholders, and interest is an item chargeable to profits of a company/firm. Deductibility of the interest on debt before computing profits charge to tax, as against payment of dividends out of profits after tax, implies an effective lowering of the tax rate on a company/firm more or less in proportion to the extent to which debt is substituted for equity in the company is financing pattern. However, it is not desirable to resort to excessive debt financing because the excessive proportion of debt in the capital structure increases the financial risks of the firm. This is because debt being a contractual obligation. The same along with interest must be paid out ultimately. Any failure in doing so shall result in technical insolvency if not a real one. Further, the use of debt capital will not automatically improve the overall return of the firm. It will increase the return if the firm s rate of return on assets is higher than the cost of debt capital. Therefore, in order to take the benefit of debt financing and protecting the firm risks, it is better to have an appropriate debt-equity mix in the total capital structure. Thus, the decision regarding debt equity mix in the capital structure of a firm is of critical one and has to be approached with a great care. The paper is organized into five sections. Section I provides the introduction about the capital structure. Section II shows the objectives of the present study. Section III deals with data source and sample size. Section IV deals with research methodology: selected variable, its definition and expected relationship with capital structure. Section V presents reports and analyses the empirical results of the study. Section VI summarizes and concludes the study. OBJECTIVES OF THE STUDY The main objective of the present paper is to study whether capital structure is a function of uniqueness of firms through a case of Indian corporate sector by classifying the capital structure of sample companies by uniqueness which covers a time span of eleven years commencing from to over a period under study. DATA SOURCE & SAMPLE SIZE In order to study whether capital structure is a function of uniqueness of firms in the Indian corporate sector, the firm level data is collected from the corporate data base PROWESS maintained by the Center for Monitoring the Indian Economy (CMIE). This database contains the detailed information on the financial performance of all the public listed companies in all the segments in India, compiled from various sources such as profit and loss accounts and balance sheets, stock price data, the annual reports etc. The database also contains background information including ownership pattern, products, profit, plant location, new investment and so on for the companies. This is a reliable source of information and many researchers in India have used the data for their empirical analysis. The data used in the analysis consists of the manufacturing firms listed on the Bombay Stock Exchange (BSE). We have also restricted our analysis to firms that have no missing data continuously for eleven years. Therefore, the sample size is a function of available data. Finally, we ended up with 298 out of the list of top 500 private sector manufacturing firms published in the Business Today, based on sales turnover for the year Therefore, these 298 firms constitute sample for our empirical study. The study covers time span of eleven years commencing from to RESEARCH METHODOLOGY: VARIABLE, DEFINITION AND EXPECTED RELATIONSHIP WITH CAPITAL STRUCTURE The following table exhibits the selected variable to be used for studying whether capital structure is a function of uniqueness of firms in the Indian corporate sector i.e. Uniqueness, its definition and expected relationship with capital structure. In the present study, the ratio of total borrowings to net worth is being used for measuring the capital structure (debt equity ratio) of a firm. Here, borrowings include all forms of debt-interest bearing or otherwise. All secured and unsecured debt is included under total borrowings. Thus, total borrowings include debt from banks (short term as well as long term) and financial institutions, intercorporate loans, fixed deposits from public and directors, foreign loans, loan from government, etc. Funds rose from the capital 1706 P a g e

49 market through the issue of debt instruments such as debentures (both convertible and non-convertible) and commercial paper are also included here while net worth includes equity share capital, preference share capital and reserve & surpluses minus revaluation reserves & miscellaneous expenses not written off. Preference share capital is irredeemable in nature. So, it is considered as a part of net worth. Short-term borrowings are included in the debt or total borrowings because it is observed that short-term borrowings are being used as a long-term source of finance in the Indian contest. The capital structure has been divided into thirty one ranges (i.e percent, percent, percent > 300 percent) and uniqueness has been divided into nine ranges (i.e. 0-2, 2-4, 4-6, 6-8, 8-10, 10-12, 12-14, and more than 16 percent) during the period for our empirical study for doing comprehensive analysis. These capital structure ranges are classified into four broader categories i.e percent (for deciding conservative approach), percent (for deciding liberal and safe approach), percent and more than 300 percent (for deciding free aggressive approach) for deciding which financing policy is being used by the companies with respective to uniqueness further analysis. For studying whether capital structure is a function of uniqueness of firms in the Indian corporate sector, the capital structure of all the firms is also classified based on uniqueness of firms over the period under study. EMPIRICAL RESULTS Table-1: Variable, Definition and Expected Relationship with Capital Structure S. No. Variables Definition Expected Relationship 1 Uniqueness Selling Cost/Sales Negative Sources: Authors Compilation It is evident from that Table 2 & 3 more than two third of the companies are in three ranges of uniqueness of 0-2, 2-4 and 4-6 during (70.11 percent) and slightly less than three fifth of the companies are in the three ranges of uniqueness of 0-2, 2-4 and 6-8 during (58.19 percent), respectively. Uniqueness wise, the highest number of companies is in 0-2 uniqueness range during (29.15 percent). However, during (24.74 percent), the highest number of companies is in 2-4 uniqueness range. The lowest number of companies is in uniqueness range during (1.48 percent) and in uniqueness range during (3.48 percent) respectively. Under 0-2 and 2-4 uniqueness ranges, where highest number of companies is lying, it has been observed that percent and percent companies are in only thirteen and nine out of thirty one capital structure ranges during and , respectively. It has been observed that, in , when uniqueness ranges are moving from 0-2 to more than 16 in relation to capital structure ranges, initially the spread of number of companies starts expanding over the entire capital structure ranges. This spread, then, contracts from higher capital structure ranges to the lower capital structure ranges with the rise in uniqueness. Similar trend has been observed in with a few exceptions here and there. Notably, the contraction in this year is somewhat lower. Capital structure range wise, it has been observed that the highest number of companies (8.12 percent) is in percent capital structure range, followed by 7.38 percent companies in percent capital structure range, while no company is lying in percent, percent and percent capital structure ranges during During , the highest number of companies (19.51 percent) is in 0-10 percent capital structure range, followed by 6.27 percent companies in percent capital structure range. No company is lying in percent and percent capital structure ranges during this year. It has been observed that largest number of companies is in percent capital structure range which is below the well-established standard of 2:1 during (minimum = percent, maximum = 75 percent, industry average = percent) and (minimum = percent, maximum = 80 percent, industry average = percent), respectively, which represents that the largest number of companies are using lesser amount of debt in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. It means that such companies are following conservative approach of financing through debt although it is a cheaper source of finance. With the rise in uniqueness ranges, the number of companies is shifting to this broader capital structure range and reaches to more than 70 percent in four ranges of uniqueness during However, declining trend has been observed during in this broader range of capital structure. It is also observed that under percent capital structure range the number of companies are increasing by 7.35 percent (i.e =7.35) during as compared to the number of companies during which represents use of less amount of debt by such companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. In percent capital structure range, declining trend in but mixed trend in has been observed. Such companies are following liberal and safe approach of financing through debt. These companies are using more amount of debt in their capital structure than their own capital but less than the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also observed that under percent capital structure range the number of companies are decreasing by percent (i.e =10.03) during as compared to the number of companies during which means that companies using more debt in their capital structure as compared to even their own capital are decreasing when the uniqueness of companies is examined in relation to capital structure over the period under study. The lowest number of companies is in percent and more than 300 percent capital structure ranges during (4.06 percent each) and (7.32 percent and 3.48 percent), respectively. It means that such companies are using debt freely as a source of finance. Such companies are using debt beyond the well-established standard range of 200 percent (2:1). However, these companies are very lesser in number which alternatively represents use of less amount of debt by the large number of companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. In 1707 P a g e

50 percent capital structure range, the number of companies in two third ranges of uniqueness is nil during , and shows rising trend during No trend has been observed in more than 300 percent capital structure range during the study period. In nutshell, it has been observed that with the rise in uniqueness ranges, the number of companies is moving from higher capital structure ranges towards lower capital structure ranges under the four broader categories of capital structure ranges when the uniqueness of companies is examined in relation to capital structure over the period under study. Overall, rise in uniqueness results in the shrinkage of number of capital structure ranges as well as decline in the distribution of companies to the higher capital structure ranges during the period under study. Thus, it emerges that at lower uniqueness, there exists higher capital structure ranges and vice-versa, which represents negative relationship between capital structure and uniqueness ranges which further concludes that capital structure is a function of uniqueness of firms during the period under study. Higher uniqueness means more outflows of cash for creating specialization in marketing. Consequently, the companies can t afford more amount of debt in their capital structure due to the risk of fixed interest commitments and repayment of principal amount. It shows that due to high uniqueness, companies are using lesser amount of debt for financing purposes. It is also concluded that largest number of companies are following conservative approach, very lesser number of companies are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through debt when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also found that in our empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during and which are near to the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study. Capital Table-2: Capital Structure of Sample Companies by Uniqueness in Uniqueness (Times) Str. (%) > 16 Avg > Total % Average Sources: Authors Compilation 1708 P a g e

51 Capital Table-3: Capital Structure of Sample Companies by Uniqueness in Uniqueness (Times) Str. (%) > 16 Avg > Total % Average Sources: Authors Compilation SUMMARY AND CONCLUSIONS This section examines whether capital structure is a function of uniqueness of firms through a case of Indian corporate sector by classifying the capital structure of sample companies by uniqueness over a period under study. The present study, although an exploratory effort, is limited to 298 out of top 500 private sector manufacturing firms selected on the basis of sales turnover for the year , published in Business Today, which covers time span of eleven years commencing from to The following are the conclusion and findings of the present study. It is observed that largest number of companies, i.e percent and percent, is lying in percent capital structure range which is below the well-established standard of 2:1 during and respectively which represents that the largest number of companies are using lesser amount of debt in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. It means that such companies are following conservative approach of financing through debt although it is a cheaper source of finance when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also observed that under percent capital structure range the number of companies are increasing by 7.35 percent (i.e =7.35) during as compared to the number of companies during which means that the 1709 P a g e

52 number of companies are increasing under this low capital structure range by 7.35 percent during the period under study which further represents use of less amount of debt by such companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. Under percent capital structure range, the number of companies is more in the higher uniqueness ranges and less number of companies in lower uniqueness ranges which further means that companies in higher uniqueness ranges are using less amount of debt in their capital structure as compared to even their own capital and vice-versa when the uniqueness of companies is examined in relation to capital structure during the period under study. The number of companies is lower in percent capital structure range, i.e percent and percent, during and respectively which means that lesser number of companies are in high capital structure range which alternatively represents use of less amount of debt by the higher number of companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. Such companies are following liberal and safe approach of financing through debt. These companies are using more amount of debt in their capital structure than their own capital but less than the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also observed that under percent capital structure range the number of companies are decreasing by percent (i.e =10.03) during as compared to the number of companies during which means that the number of companies are decreasing under this high capital structure range by percent during the period under study when the uniqueness of companies is examined in relation to capital structure over the period under study. Under percent capital structure range, the number of companies is lesser in the higher uniqueness ranges as compared to the higher number of companies in lower uniqueness ranges which further means that companies in higher uniqueness ranges are using less amount of debt in their capital structure as compared to even their own capital and viceversa when the uniqueness of companies is examined in relation to capital structure during the period under study. It is found that very lesser number of companies is distributed in percent and more than 300 percent capital structure ranges during (i.e percent each) and (i.e percent and 3.48 percent), respectively. It means that such companies are using debt freely as a source of finance. Such companies are using debt beyond the wellestablished standard range of 200 percent (2:1). However, these companies are very lesser in number which alternatively represents use of less amount of debt by the large number of companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also found that in our empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during and which are near to the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study percent and 8.12 percent companies are lying in percent and more than 200 percent capital structure ranges during while percent and percent companies are lying in same capital structure ranges during , respectively, when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also found that largest number of companies are following conservative approach, very lesser number of companies are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through debt when the uniqueness of companies is examined in relation to capital structure over the period under study. It is observed that under capital structure range wise, the highest number of companies is in percent capital structure range i.e percent during the year and in 0-10 percent capital structure range percent during the year , respectively, when the uniqueness of companies is examined in relation to capital structure over the period under study. It is observed that under capital structure range wise, no company is lying, for the variable under study, in percent, percent and percent capital structure ranges during the year and in percent and percent capital structure ranges during the year , respectively, when the uniqueness of companies is examined in relation to capital structure over the period under study. It is observed that under uniqueness wise, highest number of companies, i.e percent, is lying in 0-2 uniqueness range followed by percent in 2-4 uniqueness range and percent in 4-6 uniqueness range during the year and percent in 2-4 uniqueness range followed by percent in 0-2 uniqueness range during the year , respectively, when the uniqueness of companies is examined in relation to capital structure over the period under study P a g e

53 Overall, rise in uniqueness results in the shrinkage of number of capital structure ranges as well as decline in the distribution of companies to the higher capital structure ranges during the period under study. Thus, it emerges that at lower uniqueness, there exists higher capital structure ranges and vice-versa, which represents negative relationship between capital structure and uniqueness, which further concludes that capital structure is a function of uniqueness of firms during the period under study. Higher uniqueness means more outflows of cash for creating specialization in marketing. Consequently, the companies can t afford more amount of debt in their capital structure due to the risk of fixed interest commitments and repayment of principal amount. It shows that due to high uniqueness, companies are using lesser amount of debt for financing purposes. It is also concluded that largest number of companies are following conservative approach, very lesser number of companies are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through debt when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also found that in our empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during and which are near to the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study. REFERENCES 1. Allen, D. E., & Mizuno, H. (1989, May). The Determinants of Corporate Capital Structure: Japanese Evidence. Applied Economics, 21(5), Anthony, Robert N., & Reece, James S. (1982). Management Accounting Principles. New Delhi: D.S. Taraporewala and Sons. 3. Chandra, Prasanna. (1984). Financial Management Theory and Practice. New Delhi: Tata McGraw Hill Publishing Company Limited. 4. Chandra, Prasanna. (1985). Management s Guide to Finance and Accounting. New Delhi: Tata McGraw Hill Publishing Company Limited. 5. Guthman, Harry G. Analysis of Financial Statements (4 th Edition). New Delhi: Prentice Hall of India. 6. Gangadhar, V., & Begum, Arifa. (October 2002-March 2003). Impact of Leverage on Profitability. Journal of Accounting & Finance, 17(1), Garg, Mahesh Chand, & Shekhar, Chander. (2002, February). Determents of Capital Structure in India. The Management Accountant, 37(2), Khan, M. V., & Jain, P. K. (1983). Financial Management. New Delhi: Tata McGraw Hill. 9. Kraus, Alan, & Litzenberger, Robert H. (1973, September). A State Preference Model of Optimal Financial Leverage. The Journal of Finance, 28, Kulkarni, P. V. Business Finance-Principles & Problems. Bombay: Himalaya Publishing House. 11. Narender, & Sharma. (2006). Determinants of Capital Structure in Public Enterprises. Finance, 12(7), Narang, & Kaushal. (2006). Business Ethics. Ludhiana: Kalyani Publishers. 13. Pandey, Indra Mohan. (1978, March). Leverage, Risk and the Choice of Capital Structure. The Management Accountant, 13(3), Pandey, Indra Mohan. (1978, July). Impact of Corporate Debt on the Cost of Equity. The Chartered Accountant, 27(I), Pandey, I. M. (2003). Financial Management. New Delhi: Vikas Publishing House. 16. Pandey, I. M. (1985, March). The Financial Leverage in India: A Study. Indian Management, Rasoolpur, G. S. (2012, September). An Empirical Analysis of Capital Structure Determinants: Evidence from the Indian Corporate Sector. International Journal of Management & Information Technology, 1(3), Rasoolpur, G. S. (2012, December). Composition of Capital Structure Decisions: Comparative Empirical Evidence from India. International Journal of Research in Business and Technology, 1(1), P a g e

54 19. Rasoolpur, G. S. (2013, May). Leverage Decisions: A Case of Textile & Readymade Garments Industry of the Indian Corporate Sector. International Journal of Research in Business and Technology, 2(2), Rasoolpur, G. S. (2014, August). Impact of Cash Flow Coverage, Debt Service, & Current Ratio on Capital Structure Decisions: Empirical Evidence from the Indian Corporate Sector. Journal of Research in Marketing, 3(1), Titman, S., & Wessells, R. (1988, March). The Determinants of Capital Structure Choice. The Journal of Finance, XLIII (1), Venkatesan, S. (1983, January). Determinants of Financial Leverage an Empirical Extension. The Chartered Account, 32, Vashishth, Neeru, & Rajput, Namita. (2010). Corporate Governance Value & Ethics. New Delhi: Taxmann Publications (P) Limited. 24. Retrieved from Retrieved from Retrieved from Retrieved from ANNEXURE A B B Ltd. Aarti Industries Ltd. Aban Offshore Ltd. Abbott India Ltd. Abhishek Industries Ltd. Aditya Birla Nuvo Ltd. Ador Welding Ltd. Ahmednagar Forgings Ltd. Alfa Laval (India) Ltd. Alok Industries Ltd. Ambuja Cement Eastern Ltd. [Merged] Amforge Industries Ltd. Amtek Auto Ltd. Andhra Sugars Ltd. Apar Industries Ltd. Apollo Tyres Ltd. Areva T & D India Ltd. Arvind Mills Ltd. Asahi India Glass Ltd. Ashapura Minechem Ltd. Ashok Leyland Ltd. Asian Paints Ltd. Asian Star Co. Ltd. Assam Co. Ltd. Astra Microwave Products Ltd. Astrazeneca Pharma India Ltd. Atlas Copco (India) Ltd. Atul Ltd. Aurobindo Pharma Ltd. Automotive Axles Ltd. Avaya Globalconnect Ltd. Aventis Pharma Ltd. B A S F India Ltd. B O C India Ltd. Bajaj Auto Ltd. Bajaj Electricals Ltd. Bajaj Hindusthan Ltd. Balkrishna Industries Ltd. Ballarpur Industries Ltd. List of Sample Companies Force Motors Ltd. G M R Industries Ltd. G S L (India) Ltd. Gillette India Ltd. Glaxosmithkline Consumer Healthcare Ltd. Glaxosmithkline Pharmaceuticals Ltd. Glenmark Pharmaceuticals Ltd. Godfrey Phillips India Ltd. Godrej Industries Ltd. Graphite India Ltd. Grasim Industries Ltd. Greaves Cotton Ltd. Grindwell Norton Ltd. Gujarat Alkalies & Chemicals Ltd. Gujarat Ambuja Cements Ltd. Gujarat Fluorochemicals Ltd. Gujarat N R E Coke Ltd. Gulf Oil Corpn. Ltd. H B L Power Systems Ltd. H C L Infosystems Ltd. H E G Ltd. Havell'S India Ltd. Henkel Spic India Ltd. [Merged] Hero Honda Motors Ltd. Hikal Ltd. Himachal Futuristic Communications Ltd. Himatsingka Seide Ltd. Hindustan Lever Ltd. Hindustan Motors Ltd. Hindustan Oil Exploration Co. Ltd. Hindustan Powerplus Ltd. Hindustan Sanitaryware & Inds. Ltd. Hindustan Zinc Ltd. Hindusthan National Glass & Inds. Ltd. Honeywell Automation India Ltd. Hyderabad Industries Ltd. I T C Ltd. Igarashi Motors India Ltd. Ind-Swift Laboratories Ltd. N L C Nalco India Ltd. N R B Bearings Ltd. Nagarjuna Fertilizers & Chemicals Ltd. Nahar Exports Ltd. Nahar Industrial Enterprises Ltd. Nahar Spinning Mills Ltd. Narmada Chematur Petrochemicals Ltd. [Merged] Natco Pharma Ltd. National Organic Chemical Inds. Ltd. National Peroxide Ltd. National Steel & Agro Inds. Ltd. Nava Bharat Ventures Ltd. Navneet Publications (India) Ltd. Nectar Lifesciences Ltd. Nestle India Ltd. Nirma Ltd. Novartis India Ltd. O C L India Ltd. Omax Autos Ltd. Opto Circuits (India) Ltd. Orchid Chemicals & Pharmaceuticals Ltd. Orient Paper & Inds. Ltd. P S L Ltd. Panacea Biotec Ltd. Paper Products Ltd. Parry Agro Inds. Ltd. Pfizer Ltd. Pidilite Industries Ltd. Polyplex Corporation Ltd. Praj Industries Ltd. Prakash Industries Ltd. Prism Cement Ltd. Punjab Tractors Ltd. Radico Khaitan Ltd. Rain Calcining Ltd. Rallis India Ltd. Rama Newsprint & Papers Ltd P a g e

55 Balrampur Chini Mills Ltd. Bannari Amman Sugars Ltd. Bata India Ltd. Bayer Cropscience India Ltd. [Merged] Berger Paints India Ltd. Bhansali Engineering Polymers Ltd. Bharat Bijlee Ltd. Bharat Forge Ltd. Bharati Shipyard Ltd. Bhushan Steel & Strips Ltd. Birla Corporation Ltd. Blue Star Ltd. Bombay Burmah Trdg. Corpn. Ltd. Bombay Dyeing & Mfg. Co. Ltd. Bosch Chassis Systems India Ltd. Britannia Industries Ltd. C C L Products (India) Ltd. C E S C Ltd. Cadila Healthcare Ltd. Carborundum Universal Ltd. Castrol India Ltd. Ceat Ltd. Century Enka Ltd. Century Textiles & Inds. Ltd. Chambal Fertilisers & Chemicals Ltd. Chemplast Sanmar Ltd. Chettinad Cement Corpn. Ltd. Ciba Specialty Chemicals (India) Ltd. Clariant (India) Ltd. [Merged] Colgate-Palmolive (India) Ltd. Coromandel Fertilisers Ltd. Crompton Greaves Ltd. Cummins India Ltd. D C M Ltd. D-Link (India) Ltd. Dabur India Ltd. Dalmia Cement (Bharat) Ltd. Deepak Fertilisers & Petrochemicals Corpn. Ltd. Denso India Ltd. Dhampur Sugar Mills Ltd. Divi'S Laboratories Ltd. Dr. Reddy'S Laboratories Ltd. E I D-Parry (India) Ltd. Eicher Motors Ltd. Elder Pharmaceuticals Ltd. Electrosteel Castings Ltd. Elgi Equipments Ltd. Emami Ltd. Emco Ltd. Ennore Foundries Ltd. Esab India Ltd. Escorts Ltd. Essar Oil Ltd. Eveready Industries (India) Ltd. Exide Industries Ltd. F A G Bearings India Ltd. F D C Ltd. Federal-Mogul Goetze (India) Ltd. Finolex Cables Ltd. Finolex Industries Ltd. Forbes Gokak Ltd. Sources: Authors Compilation India Cements Ltd. India Glycols Ltd. Indian Petrochemicals Corpn. Ltd. Indo Rama Synthetics (India) Ltd. Indoco Remedies Ltd. Infomedia India Ltd. Ingersoll-Rand (India) Ltd. Ipca Laboratories Ltd. Ispat Industries Ltd. J B Chemicals & Pharmaceuticals Ltd. J B F Industries Ltd. J B M Auto Ltd. J C T Ltd. J K Industries Ltd. J K Lakshmi Cement Ltd. J K Paper Ltd. J S W Steel Ltd. Jagatjit Industries Ltd. Jain Irrigation Systems Ltd. Jayaswals Neco Ltd. Jindal Poly Films Ltd. Jindal Saw Ltd. Jindal Steel & Power Ltd. Jubilant Organosys Ltd. Jyoti Structures Ltd. K C P Sugar & Inds. Corpn. Ltd. K S B Pumps Ltd. Kajaria Ceramics Ltd. Kalpataru Power Transmission Ltd. Kalyani Steels Ltd. Kesoram Industries Ltd. Kirloskar Brothers Ltd. Kirloskar Ferrous Inds. Ltd. Kirloskar Oil Engines Ltd. L G Balakrishnan & Bros. Ltd. Lakshmi Machine Works Ltd. Lloyds Steel Inds. Ltd. Lupin Ltd. M R F Ltd. Macmillan India Ltd. Madras Aluminium Co. Ltd. Madras Cements Ltd. Maharashtra Scooters Ltd. Maharashtra Seamless Ltd. Mahindra Ugine Steel Co. Ltd. Man Industries (India) Ltd. Marico Ltd. Marksans Pharma Ltd. Maruti Udyog Ltd. Matrix Laboratories Ltd. Max India Ltd. Merck Ltd. Micro Inks Ltd. Mid-Day Multimedia Ltd. Mirc Electronics Ltd. Mirza International Ltd. Monnet Ispat & Energy Ltd. Monsanto India Ltd. Moser Baer India Ltd. Motherson Sumi Systems Ltd. Munjal Auto Inds. Ltd. Munjal Showa Ltd. ***** Ramco Industries Ltd. Ranbaxy Laboratories Ltd. Raymond Ltd. Reliance Energy Ltd. Rico Auto Inds. Ltd. Ruchi Infrastructure Ltd. Ruchi Soya Inds. Ltd. S K F India Ltd. S Kumars Nationwide Ltd. S P L Industries (Shivalik Prints) Ltd. S R F Ltd. Shreno Ltd. Shyam Telecom Ltd. Siemens Ltd. Sintex Industries Ltd. Solectron Centum Electronics Ltd. Sona Koyo Steering Systems Ltd. Southern Iron & Steel Co. Ltd. Sterling Biotech Ltd. Sterlite Industries (India) Ltd. Strides Arcolab Ltd. Sun Pharmaceutical Inds. Ltd. Sundaram-Clayton Ltd. Sunflag Iron & Steel Co. Ltd. Supreme Industries Ltd. Supreme Petrochem Ltd. Suryalakshmi Cotton Mills Ltd. Swaraj Mazda Ltd. T V S Motor Co. Ltd. Tata Chemicals Ltd. Tata Coffee Ltd. Tata Metaliks Ltd. Tata Power Co. Ltd. Tata Steel Ltd. Tata Tea Ltd. Texmaco Ltd. Thermax Ltd. Titan Industries Ltd. Torrent Pharmaceuticals Ltd. Torrent Power A E C Ltd. [Merged] Torrent Power S E C Ltd. [Merged] Ucal Fuel Systems Ltd. Uflex Ltd. United Phosphorus Ltd. Uttam Galva Steels Ltd. V S T Industries Ltd. Vardhman Textiles Ltd. Vesuvius India Ltd. Videocon Industries Ltd. Voltas Ltd. Walchandnagar Industries Ltd. Wartsila India Ltd. Welspun India Ltd. Wheels India Ltd. Whirlpool Of India Ltd. Wimco Ltd. Wyeth Ltd. Yokogawa India Ltd. Z F Steering Gear (India) Ltd. Zuari Industries Ltd P a g e

56 MAJOR ISSUES AND CHALLENGES BEFORE MIDDLE CLASS SENIOR CITIZENS IN INDIA Dr. Lokanath Mishra 12 ABSTRACT This research study has attempted to analyze the issues and challenges faced by educated middle class senior citizens in India. It has dealt with health related issues, financial issues, issues related to living arrangement of senior citizens, dependency and family support systems, issues pertaining to re-engagement as well as perception related issues. It has further attempted to test their level of awareness of the benefits, concessions, exemptions etc., including legal provisions, that are already available for them under various schemes, laws and regulations in India. Finally, it has also touched upon some of the expectations the middle class senior citizens have from the government and other stake holders to effectively address some of these issues. KEYWORDS Demography, Longevity, Experience Survey, Elderly Abuses, Re-engagement, Geriatric Healthcare, Family Support System etc. INTRODUCTION "Age is an issue of mind over matter. If you don't mind, it doesn't matter." - Mark Twain Senior Citizens, by definition, are elderly persons, who have crossed their age of retirement. As per The Maintenance and Welfare of Parents and Senior Citizens Act, 2007, Senior Citizen means any person being a citizen of India, who has attained the age of sixty years or above. According to 2011 census, senior citizens (60- plus) accounted for 8% of total population. The elderly people or senior citizens constitute an important component of Indian society. They are considered a repository of profound knowledge, rich experience and invaluable wisdom. As per the data given by the Ministry of Social Justice and Empowerment, the projected population of aged 60-plus and their percentage share in the total projected population of the country, for the year 2016 to 2026 would be as follows: Indian Demography is Changing Table-1: Projected Senior Citizen Population in India Year Projected Senior Citizens Population in Crore As % of Total Population Sources: Ministry of Social Justice and Empowerment The ageing process is a biological reality, which has its own dynamics, largely beyond human control (WHO). Ageing brings with it a host of challenges engineered by continuous changes in body, mind, thought process and the living environment. These issues and challenges, for both the individuals and the society, cannot be ignored. In India, social fabrics are changing rapidly. Nuclear families are more and more replacing joint families. In search of greener pastures, children are moving away from their parents, virtually deserting them at their old age. Longevity is increasing. The prices of food articles, essential commodities and expenses for medical treatments are increasing over time. A recent UNFPA-India report (Nov,2012) has revealed 71% of senior citizens in India in the age group 61 to 80 are working due to economic compulsion and not by choice. 13% are working even after 80. Only 16% are getting some sort of financial help from children. Pension or retirement benefits are not available to a large majority. These are posing serious financial problems to senior citizens. IIM, Ahmadabad study (2012) has found out that, Only about 10% of the (983) retired respondents (mostly educated) depend on their children/ spouse/ relatives for their income. On the average women (68) in India are outliving their male counter parts (66) by 2 to 3 years. Because of low level of interest in money matters and fear of going wrong, women are allowing men (father / brother/ husband) to take financial decisions on their behalf, but facing immense difficulty when they are required to take such decisions independently later in their life. In India, the number of women is higher than men in the age group 60 years and above in both rural and urban areas 1021 women per 1000 men against overall 940 women per 1000 men (UNFPA Survey Nov, 2012).59% of elderly women are widows. The Global Burden of Disease Study 2010 (GBD 2010) published in December, 2012 has revealed that Indians in 2010 were living longer compared 12 Adjunct Professor and Advisor, Centre for Financial Planning, Training & Research for Women, Banasthali University, New Delhi, India, mishra.lokanath@gmail.com 1714 P a g e

57 to those in 1970, but in poor health in old age. Though the longevity for men and women in India has gone up by 15 and 18 years respectively compared to 1970, the number of years they are remaining healthy has declined. As per this study report, though the longevity of Indian male has increased to 63.2 years and that of female to 67.5 years, average male remains healthy only up to 54.6 years and average female up to 57.1 years. While the number of deaths from communicable diseases like malaria, TB, pneumonia, HIV has gone down over the years, the deaths from life-style related non-communicable diseases such as heart diseases, hypertension, and diabetes have gone up. LITERATURE REVIEW A World Bank study (2001) titled World Bank Activities and Position of Aging has reported that The proportion of persons aged 60 years and older throughout the world is expected to more than triple in the next half century. According to UN projections, 72 percent of the population over 60 years of age will be living in developing countries by the year The majority of aging people are women. Today, there is an estimated 81 men for every 100 women over 60. At age 80, this ratio decreases to 53 men for every 100 women. An aging, mostly female population has important implications for the World Bank's work to reduce poverty. An OECD (2012) report has stated that, The ratio of the elderly to the working age population, the elderly dependency rate, is steadily growing in OECD countries. The higher the regional elderly dependency rate, the higher the challenges faced by regions in generating wealth and sufficient resources to provide for the needs of the population. Concerns may arise on the financial selfsufficiency of these regions to generate taxes to pay for these services. Central Statistics Office, Ministry of Statistics & Programme Implementation, Government of India (2011) has observed that For a developing country like India, ageing of population may pose mounting pressures on various socio economic fronts including pension outlays, health care expenditures, fiscal discipline, savings levels etc. Again, this segment of population faces multiple medical and psychological problems. There is an emerging need to pay greater attention to ageing-related issues and to promote holistic policies and programmes for dealing with the ageing society. National Human Rights Commission in its Know Your Rights series for elderly people (2011) has concurred with the view that Old Age is usually associated with declining faculties, both mental and physical, and a reduction in social commitments of any person, and has observed that Article 41 of Directive Principles of State Policy has particular relevance to Old Age Social Security. According to this Article, the State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance to all, including elderly people. The Union Ministry of Social Welfare has maintained that exclusive health services for the elderly may be difficult, but some priority for them should be assigned in health care centers like hospitals. This has not happened, and the elderly, especially the poor, continue to be plagued with worries about health care financing. Chen, B. And Mahal, A.(2010) have observed that, In particular, with a growing share of the elderly in developing countries such as China and India, the health of older populations constitutes an issue of growing policy importance. Rajan, S.I. (2006) has observed that, Health problems are supposed to be the major concern of a society as older people are more prone to suffer from ill health than younger age groups. It is often claimed that ageing is accompanied by multiple illnesses and physical ailments. Besides physical illnesses, the aged are more likely to be victims of poor mental health, which arises from senility, neurosis and extent of life satisfaction. Thus, the health status of the aged should occupy a central place in any study of the elderly population. Bloom et al (2011) have noted that, The world s population is growing older, leading us into uncharted demographic waters. There will be higher absolute numbers of elderly people, a larger share of elderly, longer healthy life expectancies, and relatively fewer numbers of working-age people. There are alarmist views both popular and serious in circulation regarding what these changes might mean for business and economic performance. However, the effects of population aging are not straightforward to predict. Population aging does raise some formidable and fundamentally new challenges, but they are not insurmountable. These changes also bring some new opportunities, because people have longer, healthier lives, resulting in extended working years, and different capacities and needs. The key is adaptation on all levels: individual, organizational, and societal. They have concluded that, population aging poses challenges that are formidable, but not insurmountable. Population Research Bureau (2012) has found out that While the vast majority of older Indians live in multigenerational households, a growing share lives alone or with only a spouse. A number of trends may explain these changes in living arrangements, including declining fertility leaving fewer children available to care for older parents, rural to urban migration for employment that separates families, and changing social expectations regarding intra-family obligations (Bloom et al. 2011). Recent surveys confirm this shift in attitudes, with a 40-percentage point decline in the share of adult children who said caring for their elderly parents was their duty. Intergenerational conflict may also explain why elderly live in separate residences from their offspring. Both generations may prefer living separately and there is evidence that even when they reside apart, adult children and 1715 P a g e

58 elderly parents remain economically and socially interdependent. Help Age India Elderly Abuse Report (2014) has mentioned that the facilities that exist for senior citizens are very limited. Retirement homes, as they are now called, are often depressing places and isolate the elderly from interacting with younger people, like their grandchildren and children. Most old-age homes tend to be poorly funded and do not offer clean or healthy living conditions. Help Age India Elderly Abuse Report (2012) has indicated, 31% of older persons reported facing abuse. 24% older people faced abuse almost daily. 75% of those who faced abuse lived with family and 69% were owners of the house in which they were living. The primary abuser was the son in 56% cases, followed by the daughter-in-law with 23% cases. 55% of those abused, did not report it to anyone. More than 80% of these did not report the matter to uphold family honor. 62% older persons suggested the most effective mechanisms to tackle Elder Abuse was sensitization of children and strengthening of intergenerational bonding and 38% stated it to be economic independence. The older persons considered disrespect, neglect and verbal abuse as Elder Abuse. Disrespect, followed by neglect and verbal abuse, were thought to be the form in which Elder Abuse was most prevalent in Indian society. OBJECTIVES OF RESEARCH STUDY The prime objective of this research study is to analyze the issues and challenges faced by middle class senior citizens in India. It also seeks to analyze whether there is a gender divide as regards to the issues and challenges faced by them or both senior men and senior women face similar situations and challenges in their life. Because of paucity of cost and time, the research study has not been able to deal with all issues and challenges. This leaves enough scope for further in depth studies to be undertaken by researchers in future. RESEARCH DESIGN Figure-1: A Perspective of Research Process Sources: Authors Compilation This research design model acknowledges inputs from Pawar s book (2009) on Theory Building. Whatever one sees, feels, observes or experiences individually, or in a group, may not represent the actual reality or absolute truth. It could at best be one of the manifestations of the observed reality. Until the time the truth about the existence of solar system became known, it was being presumed that earth is stationary and the sun is moving. In this context, the current research study only attempts to generate empirical facts based on research that are commonly believed to be a representative of actual reality. As per Pawar (2009), a researcher often makes certain conjectures or predictions about what is likely to be observed in the actual reality if the presumed reality is an appropriate representation of the reality.conjectures for this research study have been constructed based on the outcome of (i) Literature Review (ii) Experience Survey and (iii) Experts Opinion. Experience survey has been conducted with a small sample of 15 persons who shared their practical experience on the subject. The idea of conducting an experience survey stems from the benefits it offers to the research study with minimal data collection. Expert opinion on the other hand is another way to elicit relevant information from experts who are supposed to have superlative knowledge, skill and wisdom on a given field of knowledge. For this research study, 12 experts chosen from the field of Sociology, Psychology, Demography, Policy Making and Social Research have been used. Some of the conjectures derived from Literature Review, Experience Survey and Expert Opinion (Delphi Study) have been presented below. Oxford Advanced Learner s Dictionary defines a conjecture as an opinion or idea that is not based on definite knowledge and is formed by guessing P a g e

59 In educated middle class families, daughters take care of their parents more than sons. In this age of intense competition, human beings are becoming more and more selfish and this has reflection in parentchildren caring relationships. Our children have lesser time for us than we had for our parents Most middle class parents prefer to stay independently or even in old-age homes than to live with their children While health remains a prime concern in the old age, most middle class senior citizens do not have medical insurance Inflation, rise in prices of essential commodities, increasing cost of hospitalization together constitute a major concern for senior citizens with fixed income. Most senior citizens die without writing a will. Very few children provide any kind of financial support to their parents in their old age. Depression, loneliness, humiliation by children and neglect of the society are prime causes of physical and mental agony for senior citizens. While longevity is increasing and senior citizens are living longer post retirement, most of them have not gone for proper retirement planning More than financial support, most middle class senior citizens need emotional support from their children in the old age Middle class senior citizens in most occasions have been found to be abused by their own children (including daughterin-laws) The cause for abuse is mostly related to desire for owning parental property sooner While Government provides many incentives to senior citizens, most senior citizens are not aware of these schemes / benefits and as such they fail to register their claim for these benefits. Most senior citizens, even their children are not aware of the legal provisions made in the support of senior citizens including the Maintenance and Welfare of Parents and Senior Citizens Act, Conducting Periodic financial-health check-ups for senior citizens and appropriate counseling by experts can help revitalizing their financial health. Not all these conjectures, however, because of limitation of cost and time, as stated earlier have been considered for this research study. It is not possible to directly access and measure the actual reality. Hence, one can start with presumed reality, which is observed by most people and presumably represent the real world phenomena. The proposed research study has been planned to start with a set of conjectures (out of the list provided above) about the presumed realities. The study has been carefully designed in order make appropriate observations from the empirical world. Two separate surveys have been conducted with two different questionnaires, one meant for senior citizens (parents) and the second one for adult children. The questions in the questionnaire have been framed broadly taking into account the above noted conjectures. One of the objectives of these two surveys has been to match the expectations of senior citizen parents from their children with the ability and willingness of children to serve their parents. Random sample of about 115 senior citizens and 107 children have been considered for this study. Survey of Senior Citizens 115 senior citizens responded for the first survey. All of them were from educated middle class background and computer (internet) savvy. The responses were taken by using internet based survey technique. There were 83% male respondents and 17% female respondents. 77% of respondents were in the age group 60-65,10% in the age group 66-70, 7% in the age group 71-75, 3% in the age group and the remaining 3% were in the above 80 age group. The respondents were from 18 states and union territories of India, viz., Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, Odisha, Bihar, MP, UP, J&K, Punjab, Haryana, Rajasthan, Gujarat and Delhi. 93% of respondents were happily married and living with their spouse,4% were widow /widower, 1% divorced and 2% unmarried. 3% had no child, 17% had one child,48% two children, 23% three children,7% four children and 2% more than 4 children.46% of respondents were from government service,28% were in private employment,10% were in PSU jobs, 7% were hose wives, 8% were from business back ground and 1% from politics. Survey of Adult Children 107 persons responded for this internet-based survey. Women were found to be more enthusiastic for this survey titled paying back to parents. 43% respondents were male (46) while 57% were female (61). 64% of respondents were in the age group 21-30, 23% in the age group 31-40, 7% were from the age group and 6% were from age group The respondents were from 15 states and union territories of India, viz., Andhra Pradesh, Bihar, UP, Uttarakhand, Tamil Nadu, Chandigarh, Odisha, Delhi, Maharashtra, Karnataka, Kerala, Rajasthan, Haryana, MP and Himachal Pradesh. 9% of the respondents were PhD holders, 22% with Post Graduate qualification, 17% were engineering graduates, 5% simple graduates, 38% management graduates and 9 % under graduates P a g e

60 HYPOTHESES FOR THIS RESEARCH STUDY Whether daughters have more positive intentions and inclinations towards parental care than sons? Whether elderly women have lesser confidence to deal with financial products compared to elderly men? Whether there exists a perception difference among senior men and senior women towards the benefits and necessity of (i) Budgeting, (ii) Investment Planning (iii) Retirement Planning and (iv) Estate Planning? Hypothesis Testing For testing of the above 3 sets of hypotheses the difference between two proportions (two-proportion Z test) has been used. All the 4 pre-conditions for using this test / technique, viz., (i) the sampling method used to be simple random sampling (ii) the samples are to be independent. (iii) Each sample to include at least 10 successes and 10 failures and (iv) each population at least to be 10 times as big as its sample, have been fulfilled. This technique is used as follows: Table-2: Test of Hypothesis using Difference of Two Proportions Type of Problem Null Hypothesis Alternative Hypothesis Number of tails 1 P1 - P2 = 0 P1 - P P1 - P2 > 0 P1 - P2 < P1 - P2 < 0 P1 - P2 > 0 1 Sources: Authors Compilation Where P1 = Proportion for the first sample and P2 = Corresponding Proportion for the second sample. 5% significance (95% confidence) level was used for the analysis. The Standard Error (S.E.) of the difference between two proportions has been calculated as follows: Standard Error of difference (P1 P2) = {P (1-P) (1/n1 1/n2)} 1/2, where P = (n1 P1 + n2 P2) / (n1 +n2) and n1 and n2 are size of 1 st and 2 nd sample. Z = (P1 P2) / Standard Error. If Z value lies between and (5% significance level or 95% confidence level), then Null Hypothesis is accepted i.e., the difference between two samples is only regarded due to random sampling variation (statistically not significant). If the difference is beyond this, then the alternative hypothesis is to be accepted. For testing the first hypothesis, type 3 has been used, i.e., Null Hypothesis is P1 P2 < 0 and Alternative Hypothesis is P1 - P2 > 0. Here P1 = Proportion of adult daughters who have expressed their desire to provide long-term care support to their parents and P2 = Proportion of adult sons who have expressed their desire to provide long-term care support to their parents. Here null hypothesis was rejected and alternative hypothesis was accepted. [In the survey, for the adult children (107), there were 61 female (n1) and 46 male (n2) respondents. 48 out of 61 female respondents and 12 out of 48 male respondents had indicated their desire to provide long-term care to their parents. Thus for computation, n1 = 61, n2 = 46, P1 = 48/61=0.79 and P2=12/46=0.26. Now P = {(P1n1 + P2n2) / (n1+n2)} = {(0.79 x x46) / (46+61)} = 60.15/107 =0.56. Standard Error = {P x (1-P) x (1/n1 + 1/n2)} 1/2 = { 0.56 x0.44 x(1/61 +1/46)} 1/2 = {0.56 x0.44x0.038} 1/2 = { } 1/2 = So Z = (P1 P2) / Standard Error = 0.53 / = Since Z value is more than 1.96, the Null Hypothesis is rejected and Alternative Hypothesis is accepted. Further since Z value is greater than +1.96, it can be concluded that the difference between P1 and P2 is statistically significant at the right side tail of the normal distribution curve, or, it can be concluded that the adult daughters do have more positive intentions and inclination towards long term parental care compared to sons.] For testing second set of hypotheses, Null Hypothesis is P1 - P2 =0 and Alternative Hypothesis is P1 - P2 0. Here P1= Proportion of senior men who have confidence in dealing with a particular financial product and P2 = Proportion of senior women who have confidence in dealing with the same financial product. This testing was done separately for financial products like (i) savings bank account (ii) credit / debit cards (iii) Post Office Deposits (iv) PPF Account (v) Insurance Products and (vi) Stock Market Investments and (vii) Safe Deposit Lockers. In this case, while null hypothesis was accepted in case of all other financial products, it was rejected for insurance products and stock market investments. For these two products, type 3 was used where null hypothesis is P1 P2 < 0 and Alternative Hypothesis is P1 - P2 > 0. Here Null hypothesis was rejected and Alternative Hypothesis was accepted. For testing third set of hypotheses type 1 was used, i.e., Null Hypothesis is P1-P2 =0 and Alternative Hypothesis is P1 - P2 0. Here P1 = Proportion of Senior Men who have positive perception towards benefit of (i) budgeting, (ii) investment planning, (iii) retirement planning and (iv) estate planning and P2 = Proportion of Senior Women who have positive perception about benefits of 1718 P a g e

61 (i) budgeting, (ii) investment planning, (iii) retirement planning and (iv) planning. In all these 4 tests Null Hypotheses were accepted. Results of Hypotheses Testing The results of Hypothesis Testing were as follows: Daughters do have more positive intentions and inclination towards long term parental care compared to sons. Elderly women have lesser confidence in dealing with insurance and stock market related products compared to elderly men. No difference was observed in dealing with other financial products There is no perception difference among senior men and senior women as regards to the benefits and necessity of (i) Budgeting, (ii) Investment Planning, (iii) Retirement Planning and (iv) Estate Planning. ANALYSIS OF FINDINGS Findings have been analyzed under different heads like (i) Health Related Issues (ii) Financial Issues (iii) Issues Related to Living Arrangement (iv) Dependency & Family Support Related Issues (v) Re-engagement Issues (vi) Perception Related Issues etc. Health Related Issues Health remains a major concern for most senior citizens. There is no denying the fact that both physical and mental faculties become weak, when a person grows old. However, a person should be mentally prepared to face this challenge. World famous boxer Muhammad Ali has said, Age is whatever you think it is. You are as old as you think you are. Tryon Edward, a famous American scientist has rightly observed, Age does not depend upon years, but upon temperament and health. Some men are born old, and some never grow up. Incidence of communicable diseases has drastically come down during the last decade or so for all age groups in India. However, many senior citizens in India are found to be suffering from life style and old age related diseases. In earlier days, even elderly people use to walk for long distances and do regular physical exercise. Food habit was different. Currently most people are leading a sedentary life style. Life style change is one of the prime causes of various types of health related problems in today s senior citizens. The survey conducted had two questions for middle class senior citizens one enquiring whether they are suffering from any common/ life style / old age related diseases or problems and the second one enquiring about whether they have any medical insurance. To the first question, 52% of the respondents have indicated that they suffer from high blood pressure, 39% from diabetes (sugar related problem), 31% from back pain, 26% from eyesight / vision problem, 12% from Bronchial Asthma, 11% from Hearing problem, 11% from Osteoporosis, 9% from paralysis / physical movement problem, 5% from mental depression, 1% from Parkinson/ Alzheimer s disease and 1% from Cancer.17% of respondents have expressed that they are perfectly healthy and do not have any of the above diseases / problems. This shows that majority of middle class senior citizens are suffering from life style related diseases. Incidences of old age related diseases among Indian middle class senior citizens like Parkinson / Alzheimer s disease etc., are relatively much lower. Responding to the second question, 37% indicated that they are continuing to have their own medical insurance which also cover their spouse, 25% indicated that they have medical insurance which has been provided by their employer and in most cases do not cover their spouse and 38% have indicated that they do not have any kind of medical insurance either for themselves or for their spouse. This is understandable from the fact that a decade back insurance companies in India were not providing fresh cover to senior citizens after they retire. Besides, many senior citizens perhaps were not aware of existence of such insurance facilities. The respondents were also asked the questions as to how they think the health related problems of middle class senior citizens could be addressed. 70% of respondents felt that the medical insurance cover for senior citizens should be comprehensive in nature and should cover besides life style related problems, treatment for mental, visual, hearing and learning disabilities (brain injury). Present coverage does not include most of the old related problems. 44% felt that geriatric care units should compulsorily be available in public hospitals. 89% of respondents wanted that hospitals should consider providing concessions to senior citizens for their treatment and hospitalization bills. The Hindustan Times, New Delhi Edition dated the 30 th December 2014 has reported, The Indian Medical Association (IMA) is in the process of formulating guidelines at par with international standards to sensitize doctors and healthcare workers about the caring for the aged. Financial Issues Financial independence is of paramount importance for leading a healthy and dignified retired life. An UNFPA-India report (Nov,2012) has revealed that 71% of senior citizens in India in the age group 61 to 80 are working due to economic compulsion and not by choice. 13% are working even after 80. In order to ascertain the position obtaining for middle class senior citizens in India, respondents were asked a question as to what is the reason for their working even after 60. To this question, 76% said that they work because they want to remain engaged, 61% responded that they work because they want to remain relevant for self and the society, 46% observed that they work in order to meet their day to day financial requirements, 45% opined that they work in order to avoid loneliness at home, 31% said that they do so to fulfill certain pending social obligations in life. To understand the financial position of middle class senior citizens in India, the current survey asked questions to respondents regarding their 1719 P a g e

62 financial position at the time of responding and how comfortable they would be to lead a healthy and dignified retired life in future. 4% of respondents described their current financial position as excellent, 25% as very good, 70% as good and the remaining 1% as bad. 9% of respondents felt that they would be highly comfortable to lead a healthy and dignified retired life, 70% felt that they would be comfortable, 18% felt that they would be somewhat comfortable but may suffer later if they live longer. 3% felt that they would be barely comfortable. Regarding familiarity and use of various financial products, 91% indicated that they use bank savings bank and fixed deposit accounts, 48% observed that they use debit / credit cards, 43% said they use post office savings accounts, 40% indicated that they have PPF account, 30% observed that they are familiar with mutual funds, 27% in stock market dealings, 43% with pension schemes, 37% with life insurance products, 36% with safe deposit locker facility and 29% with medical insurance. 59% of respondents indicated that they are continuing to pay income tax. Financial independence can only come through proper financial planning during early years of life. Addison Joseph, a famous British essayist, poet and playwright has rightly observed, He, who would pass his declining years with honor and comfort, should, when young, consider that he may one day become old, and remember when he is old, that he has once been young. Issues Related to Living Arrangements Place of living after retirement is an important consideration to make for senior citizens. There are various options available, viz., (i) Living with Children (ii) Independent Living (iii) Assisted Living (in Old Age Homes / Nursing Homes), (iv) Living at an intimate distance i.e., living independently at an intimate distance from children in the same housing society / city they live (v) Living at Holy Places. 69% of the respondents surveyed, indicated that they are living in their own flat / house with their spouse, 7% are staying in their own flat / house alone, 9% are living in their own flat / house with spouse and children, 4% living with spouse and parents in their own flat / house, 7% are living in rented accommodation and the remaining 4% have indicated that they have gone back to their parental house in the village. None of the respondents was found to use either assisted living in old age homes or have preferred to live in a holy place. This could be because in India, we have neither good old age homes nor suitable permanent accommodation for living in holy places. It may also be observed that none of the middle class senior citizens surveyed is living with their children in children s flat / house. Children prefer to live independently in separate accommodation. Dependency & Family Support System Related Issues Ann Landers, an American advice columnist has written that, "At age 20, we worry about what others think of us. At age 40, we do not care what they think of us. At age 60, we discover they haven't been thinking of us at all." This feeling comes to most senior citizens. They start having a feeling of no more wanted. Besides physical support, at this age, they mostly need emotional support from children. The senior citizen parents require this research survey wanted to find out what sort of support. 58% indicated that they need emotional support, 36% wanted physical support and expressed desire to live with children, 34% needed long-term care support, 10% required financial support, while 28% observed that they don t need any sort of support from the children. The second survey titled Paying Back to Parents tried to find out the intention of children to provide support to their parents. 73% of respondents expressed desire to provide emotional support, 71% observed that they would like to provide physical support, even offered to keep the parents with them, 73% expressed that they are ready to provide financial support and 56% said they are willing to provide long-term care support. Comparison of the results of these two surveys clearly points towards existence of a healthy parent-children relationship as far as support system is concerned. The result leads to another conclusion that perhaps parents are hesitating to avail support of children for fear of mental and physical abuses. Re-engagement Issues When a person is working (before retirement), he / she leads a routine life. During this time, he/she usually has a number of public and private engagements. Retirement brings a closure to many of these engagements. He suddenly starts having lot of leisure time without engagement and feels lonely. Loneliness can bring frustration and may lead to depression. This can bring a feeling of no more wanted by the family and the society. It is therefore said, while not everyone need go for full time jobs after retirement, it is wise to remain somehow engaged and pursue whatever he / she likes. In this context, it is worth considering the sayings of Amos Bronson Alcott, An American teacher, writer, philosopher, and reformer, The surest sign of age is loneliness. While one finds company in himself and his pursuits, he cannot feel old, no matter what his years may be. The survey tried to find out from middle class senior citizens as to how they keep themselves engaged. 27% indicated that they are in full time jobs, 28% in social service, 40% responded that they read books, literature, philosophical and mythological texts, 28% spend time with old friends & colleagues, 34% spend time with children and grandchildren, 29% in attending religious discourses, 21% in providing consultancy and advisory services, 10% in teaching, 29% in visiting places of interest, 42% in doing exercises/ meditation / walking, 10% in gardening and 17% in social networking. It is very important to remain engaged as long as a person is healthy P a g e

63 Perception Related Issues Whether the senior citizens are following a particular set of behaviour or not, the study tried to know their perception about desired behaviors, i.e., what attitude they have towards the so-called positive behaviors. 89% of the respondents felt that one should go for retirement planning at an early age, so that he/she can accumulate enough money for a healthy / comfortable retirement. 91% of the respondents observed that one should go for monthly budgeting to control and manage his / her expenditures efficiently. 96% felt that one should create an emergency fund to manage contingencies / sudden unexpected expenditures, 96% observed that one should know his / her risk taking ability before investing. 95% felt that one should not risk everything on one endeavor. In order to reduce risks one should have a diversified investment portfolio. 86% felt that one should, to the extent possible, transfer his/her assets to his/her successors during his/her life time and write a will for the remaining assets to avoid future conflicts and 90% observed that One should clearly state his / her last wishes, share his / her advice and secrets, make provision for funeral and related expenses before his/ her death. Awareness of Rights/ Benefits / Concessions / Facilities available to senior Citizens Senior citizens have several rights, benefits, concessions and facilities, which they can claim. The U.N. General Assembly, while deliberating on the rights of the older persons, on December 16, 1991 had adopted 18 principles, which were organized into 5 clusters, namely: independence, participation, care, self-fulfillment, and dignity of the older persons. These principles provide a broad framework for action on ageing: (i) Older Persons should have the opportunity to work and determine when to leave the work force. (ii) Older Persons should remain integrated in society and participate actively in the formulation of policies, which affect their well-being. (iii) Older Persons should have access to health care to help them maintain the optimum level of physical, mental and emotional well-being. (iv) Older Persons should be able to pursue opportunities for the full development of their potential and have access to educational, cultural, spiritual and recreational resources of society.(v) Older Persons should be able to live in dignity and security and should be free from exploitation and mental & physical abuse. Ministry of Social Justice and Empowerment, Government of India on its website has mentioned about concessions and facilities given to Senior Citizens by Different Ministries/Departments of the Government. These include income tax concession, higher interest rate on bank deposits, announcement of special senior citizen saving schemes, priority in reservation of seats and issue of concessional tickets in road transports, trains and airlines to senior citizens, priority in treatment at concessional rates in hospitals etc. This research study tried to ascertain the level of awareness among elderly persons about some of these benefits, and concessions available to senior citizens. For most of the schemes / benefits available to senior citizens, the level of awareness was found to be quite low. Special mention here may be made of the Maintenance & Welfare of Parents and Senior Citizens Act, As per this Act, a senior citizen parent who is unable to maintain himself/herself from his/her own earning or out of the property owned by him/her, shall be entitled to make an application under section 5 of the Act in case of (i) parent or grand-parent, against one or more of his children not being a minor; (ii) a childless senior citizen, against such of his relatives mentioned in this Act. This is a very important provision for senior citizens who are suffering being neglected by their children. Though the Act was promulgated with all good intentions and motives, perhaps no special efforts were made to develop awareness towards its provisions. This research study found out that barely 12% of the senior citizens and 22% of adult children surveyed are aware of the provisions of this Act. Similarly the level of awareness for (i) Old Age Pension scheme, (ii) Widow Pension Scheme (iii) Long-term Care Insurance scheme (iv) Reverse Mortgage Scheme and (v) Annapurna scheme was found to be very low. Table-3: Level of Awareness of Senior Citizens Type of Benefit / Scheme / Facility Awareness Level in (%) National Pension Scheme 40% Term Insurance for Senior Citizens 25% Medical Insurance for Senior Citizens 43% Long- term Care Insurance for Senior Citizens 12% Reverse Mortgage Facility 29% Income-tax related benefit for Senior Citizens 62% Travel Related Benefits (Concessional road/rail/air fares) 57% Higher Interest Rates in Banks and Post Office Deposits 64% The Provisions of the Maintenance & Welfare of Parents and Senior citizens Act, % Indira Gandhi National Old Age Pension Scheme 16% Indira Gandhi National Widow Pension Scheme 15% Annapurna Scheme 9% Sources: Authors Compilation Expectations of Senior Citizens The senior citizens surveyed were asked to indicate their expectations from the Government, society and other stakeholders so that their issues and problems could be adequately addressed. Their observations have been listed below: 1721 P a g e

64 Table-4: Expectations of Senior Citizens Expectations Percentage of Respondents Supported Old Age Homes should be set up in as many centers as possible. 54% The Pension / Assistance under old age pension scheme/ old age disability scheme should be 66% increased uniformly for all states / UTs to Rs. 3,000 per month. Counseling Centers manned by experts for advising senior citizens on various matters of their 51% interest should be opened in each district. Hospitals should offer concessions to senior citizens on their medical bills. 77% A separate help line for advising on urgent legal, financial and medical problems of Senior Citizens 54% should be opened in all cities. Prompt settlement of retirement benefits ( Pension, Gratuity, PF etc.) should be ensured. 73% Resource Centers and Reemployment Bureaus should be set up for senior citizens. 43% Appropriate steps should be taken to prevent abuse of senior citizens and their properties by 62% relatives. Free Legal Aids should be provided to senior citizens. 55% A free financial-health- check-up facility for all senior citizens with expert advice be made available 69% to all Senior Citizens. Print, Visual and Social Media should be extensively used to educate senior citizens about their 92% rights (statutory and otherwise) and the schemes / benefits / exemptions available to senior citizens. Facility for geriatric care should be made available compulsorily in all public and private hospitals 38% Sources: Authors Compilation Concluding Remarks (Art of Living for Elderly) Henri Frederic Amiel, a Swiss philosopher has observed, To know how to grow old is the master work of wisdom, and one of the most difficult chapters in the great art of living. The secrets of ageing well lies in (i) accepting age and the associated age related issues & challenges; (ii) being in employment as long as possible (don t retire) : If one has to retire, he/she should retire from his/her job, but never retire from life; (iii) taking good care of one s health; (iv) avoiding meddling with others lives and not expecting anything from anyone; and (v) finding a group / community / hobby/ faith and getting immersed in it. Robert Browning, the famous British poet and playwright has said, Grow old along with me! The best is yet to be. Les Brown, a famous American motivational speaker has observed, You are never too old to set another goal or to dream a new dream. Henry Ford, the famous American industrialist who founded Ford Motor Company has aptly remarked, Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young. The greatest thing in life is to keep your mind young. There is no doubt a person would face certain age related issues and challenges as he / she grows old but one can easily overcome these challenges by self-confidence, self-determination and wise thinking. William Wordsworth has said that, "The wiser mind mourns less for what age takes away than what it leaves behind." Abraham Lincoln has observed, In the end, it's not the years in your life that count. It's the life in your years. REFERENCES 1. Bhattacharya, P. (2005). Implications of an Aging Population in India: Challenges and Opportunities. Society of Actuaries. 2. Bloom, D. E., Canning, D., & Fink, G. (2011). Implications of population ageing for economic growth (PGDA Working Paper No. 64). Program on the Global Demography of Ageing, Harvard school of Public Health 3. Bloom, D. E., Boersch-Supan, A., McGee, P., & Seike, A. (2011). Population Aging: Facts, Challenges, and Responses (Working Paper No.71). Program on the Global Demography of Ageing, Harvard school of Public Health. 4. Branigan, T. (2012, March 20). China faces time bomb of ageing population. The Guardian. 5. (2011, June). Situation Analysis of Elderly in India. Government of India. Ministry of Statistics & Programme Implementation: Central Statistics office. 6. Chen, B., & Mahal, A. (2010). Measuring the health of Indian elderly: evidence from national sample survey data. Department of global health and population, Harvard School of Public Health Fund (UNFPA). New Delhi. 7. (2011). National Policy on Senior Citizens. Government of India P a g e

65 8. (2014). Report of Elder Abuse in India. Help Age India. 9. (2012, June). A Survey of Financial Literacy among Students, Young Employees and the Retired in India. IIM, Ahmedabad. 10. Institute for health metrics and Evaluation (2013). The Global Burden of Disease: Generating Evidence Guiding Policy, Based on Global Burden of disease Study Institute for International Cooperation, Japan International Cooperation Agency (2007). Aging Population in Asia: Experience of Japan, Thailand and China. 12. (2011). National Policy for Senior Citizens. Ministry of Social Justice & Empowerment. 13. (2011). Know Your Rights Elderly People. National Human Rights Commission. 14. (2005). Aging Populations: High Time for Action. OECD. 15. (2012, March). Today s research on Ageing, Program and Policy Implications, (25). Population Research Bureau. 16. Pawar, B. S. (2009). Theory Building For Hypothesis Specification in Organizational Studies. Response Books (SAGE Publication). 17. Rajan, S. I. (2006). Population Ageing and Health in India. Centre for Enquiry into Health and Allied Themes. 18. Raju, S. S. (2011). Studies on Ageing in India (BKPAI Working Paper No. 2). United Nations Population. 19. Saliba, S., Elliott M., Rubenstein, L. A., & Solomon, D. H. (et. Al). (2001). The Vulnerable Elders Survey (VES-13): A Tool for Identifying Vulnerable Elders in the Community. Journal of the American Geriatric Society, 49, Singh, R. K. (2008). Rights of Senior Citizens. Legal Service India. Com 21. (2012). Building a knowledge base in population ageing in India: Report on the status of elderly in selected states in India United Nation s Population Fund. 22. (2011, October). Global Health and Ageing (NIH Publication no ). World Health Organization. 23. Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from ***** FOR ANY CLARIFICATION OR SUGGESTION, WRITE US: Editor-In-Chief Pezzottaite Journals, 64/2, Trikuta Nagar, K. K. Gupta Lane, Jammu Tawi, Jammu & Kashmir , India. (Mobile): editorinchief@pezzottaitejournals.net,contactus@pezzottaitejournals.net 1723 P a g e

66 A COMPARATIVE ANALYSIS OF PERFORMANCE OF PUBLIC & PRIVATE SECTOR BANKS IN INDIA THROUGH CAMEL RATING SYSTEM Dr. Apoorva Trivedi 13 Dr. Anis ur Rehman 14 Dr. Yasir Arafat Elahi 15 ABSTRACT In today s scenario, the banking sector is one of the fastest growing sectors and many funds are invested in Banks. Also today s banking system is becoming more complex. So, we thought of evaluating the performance of the banks. There are so many models of evaluating the performance of the banks, CAMEL Rating has been considered as one of the widely used tools for judging capital adequacy, asset quality, management capacity, earnings ability, and liquidity of the financial institutions including commercial banks by the principal regulators all around the world. This paper examines the comparative performance of leading public and private sector banks, i.e. Axis Bank and Kotak Mahindra Bank from Private Sector and Bank of Baroda and State Bank of India from the public sector. Data have been collected though annual reports of the consecutive five years i.e to of all the banks. Then calculated ratios for all the banks and interpreted them. After that weightage was assigned to each parameter of the CAMELS Model. According to their importance and understandings the weightage were allocated to each ratios of the each parameter. From the weighted results of each ratio, The marks have allocated on the bases of the performance of the bank. In addition, after addition of all the marks, the rank to the banks was given. KEYWORDS Camels Rating System, Performance Analysis, Capital Adequacy, Assets Quality etc. INTRODUCTION In present era banks play a vital role in all countries? In addition, their policies and strategies influence economic development, employment, prices, national income, etc. The procedure of banks is known as one of the most crucial economic occupation in the world. Any occupation, which needs investments and financial resources, certainly requires the participation of banks and financial institutions. Thus, banks have the apex role in economy. On the contrary, managing of a country's financial organization demands a different ways that facilitate financial organization to recognize management issues to be liable for defending the citizens and the financial organization, because current issues which occurred due to poor management of bank, pressurize the entire financial organization of a country. Accomplishing the mechanism of a strong and effective banking system, achieving goals, optimum use of resources and operating efficiently have been measured for many years so it demands evaluation of bank's performance. Evaluation of bank performance is very significant for Bankers due to the necessity to safeguard the banking operations against constant risks or due to gambling, incentives related to capital market. Moreover, there are various studies on financial interference and its effect on efficiency of economic growth and other studies on bank failures and its relationship with systemic crisis, which reveals the significance of performance evaluation. Nowadays, the bank performance has become a preferred subject for many stakeholders such as customers, investors and the public. There is a wide scope of indicators of financial reports to evaluate financial performance. However, the major principle to determine the compatibility and health of a financial organization act as some intermediaries to determine profitability and liquidity of the organization. Among the various criteria, Basel Committee on Banking Supervision proposed the CAMEL component to investigate financial organizations in LITERATURE REVIEW Many researchers have tried to analyze the financial performance of banks (both public and private) by using CAMEL model in the last decade. Some of the prominent studies are given below: Cole et al. (1995) conducted a study on A CAMEL Rating's Shelf Life and their findings suggest that, if a bank has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMEL rating. 13 Project Assistant, Shailesh J. Mehta School of Management, IIT Mumbai, Maharashtra, India, apurvaa14@gmail.com 14 Assistant Professor, Department of Business Management, Integral University, Uttar Pradesh, India, anisur.rehman11@gmail.com 15 Assistant Professor, Oman College of Management and Technology, Sultanate of Oman, yaelahi@rediffmail.com 1724 P a g e

67 Kwan and Eisenbeis (1997) observed that Asset Quality is commonly used as a risk indicator for financial institutions, which also determines the reliability of capital ratios. Their study indicated that capitalization affects the operation of financial institution. More the capital, higher is the efficiency. Godlewski (2003) tested the validity of the CAMEL rating typology for bank's default monetization in emerging markets. He focused explicitly on using a logical model applied to a database of defaulted banks in emerging markets. Prasuna (2003) analyzed the performance of 65 Indian banks according to the CAMEL Model. The performance of 65 banks was studied for the period The author concluded that the competition was tough and consumers benefited from better services quality, innovative products and better bargains. Said and Saucier (2003) examined the liquidity, solvency and efficiency of Japanese Banks using CAMEL rating methodology, for a representative sample of Japanese banks for the period , they evaluated capital adequacy, assets and management quality, earnings ability and liquidity position. Sarker (2005) scrutinized the CAMEL model for regulation and supervision of Islamic banks by the central bank in Bangladesh. The study enabled the regulators and supervisors to get a Shariah benchmark to supervise and inspect Islamic banks and financial institutions from an Islamic perspective. Bhayani (2006) analyzed the performance of new private sector banks through the help of the CAMEL model. Four leading private sector banks Industrial Credit & Investment Corporation of India, Housing Development Finance Corporation, Unit Trust of India and Industrial Development Bank of India - had been taken as a sample. Derviz et al. (2008) investigated the determinants of the movements in the long term Standard & Poor s and CAMEL bank ratings in the Czech Republic during the period when the three biggest banks, representing approximately 60% of the Czech banking sector's total assets, were privatized (i.e., the time span ). Gupta and Kaur (2008) conducted the study with the main objective to assess the performance of Indian Private Sector Banks based on Camel Model and gave rating to top five and bottom five banks. They ranked 20 old and 10 new private sector banks based on CAMEL model. They considered the financial data for the period of five years i.e., from Siva and Natarajan (2011) empirically tested the applicability of CAMEL norms and its consequential impact on the performance of SBI Groups. The study concluded that annual CAMEL scanning helps the commercial bank to diagnose its financial health and alert the bank to take preventive steps for its sustainability. Chaudhry and Singh (2012) analyzed the impact of the financial reforms on the soundness of Indian Banking through its impact on the asset quality. The study identified the key players as risk management, NPA levels, effective cost management and financial inclusion. CAMELS RATING SYSTEM The CAMEL rating system is based upon an evaluation of five critical elements of a credit union's operations: Capital Adequacy, Asset Quality, Management, Earnings and Liquidity. This rating system is calculated to take into account and reproduce allimportant financial and operational factors examiners assess in their estimation of a credit union's performance. Credit unions are evaluated using an amalgamation of financial ratios and examiner judgment. Since the multifaceted CAMELS rating is a meter of the feasibility of a credit union, it is significant that auditor rate credit unions based on their performance in absolute terms rather than against peer averages or predetermined benchmarks. The auditor must use specialized judgment and regard both qualitative and quantitative factors when analyzing a credit union's performance. Since numbers are often lagging indicators of a credit union's condition, the auditor must also conduct a qualitative analysis of current and projected operations when assigning CAMELS ratings. Although the CAMELS composite rating should normally bear a close association to the component ratings, the auditor should not derive the composite rating exclusively by computing and arithmetic average of the component ratings. (I) Capital Adequacy Capital base of financial organization make easy to depositors in forming their risk awareness about the organization. In addition, it is the key factor for financial managers to uphold adequate levels of capitalization. In addition, gripping unexpected shocks, it signals that the organizations will continue to respect its obligations. The most widely used factor of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation Committee (The Basle Committee) of Bank for International Settlements, a minimum 8 percent CRWA is required P a g e

68 a) Capital Risk Adequacy Ratio: CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 % prescribed in Basel documents. b) Debt Equity Ratio: This ratio denotes the scale of influence of a bank. It specify how much of the bank business is financed through debt and how much through equity. This is evaluated as the part of total asset liability to net worth. Outside liability contains total borrowing, deposits and other liabilities. c) Total Advance to Total Asset Ratio: This is the ratio of the total advanced to total asset. This ratio indicates banks aggressiveness in lending which ultimately results in better profitability. Higher ratio of advances of bank deposits (assets) is preferred to a lower one. Total advances also include receivables. The value of total assets is excluding the revolution of all the assets. (ii) Asset Quality Asset quality establishes the toughness of financial organization in opposition to loss of value in the assets. The failing value of assets, being major source of banking troubles, directly transfer into other areas, as losses are eventually written-off against capital, which at last put at risk the earning capacity of the organization. With this background, the asset quality is estimate in relation to the level and harshness of non-performing assets, adequacy of provisions, recoveries, distribution of assets etc. a) NPA: Non-Performing Assets: Advances are categorized into performing and non-performing advances (NPAs) as per RBI guidelines. NPAs are extended into sub-standard, doubtful and loss assets based on the principle predetermined by RBI. An asset, consist of a leased asset, becomes nonperforming when it ceases to generate income for the Bank. b) Gross NPA: This ratio is exercise to ensure whether the bank's gross NPAs are increasing quarter on quarter or year on year. If it is, representing that the bank is adding up a fresh stock of bad loans. It would mean the bank is also not exercising sufficient concern when offering loans or is too permissive in terms of following up with borrowers on timely repayments. c) Net NPA Ratio: Net NPAs reveal the functioning of banks. A high level of NPAs proposes high probability of a large number of credit non-payments that affect the profitability and net-worth of banks and wear down the value of the asset. Loans and advances usually symbolize the largest asset of most of the banks. It observes the quality of the bank loan portfolio. The higher the ratio, the higher the credits risk. (iii) Earnings Earnings and profitability, the prime source of increase in capital base, is examined about interest rate policies and adequacy of provisioning. In addition, it also helps to support present and future operations of the institutions. The single best indicator used to gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset ratio. Strong earnings and profitability profile of banks reflects the ability to support present and future operations. a) Return on Assets (ROA): A pointer of how profitable a company is competent to its total assets. ROA gives an idea as to how effective management is at using its assets to produce earnings. Considered by dividing a company's annual earnings by its total assets, ROA is designed as a percentage. Sometimes this is referred to as "return on investment". The continued viability of a credit union depends on its ability to earn an appropriate return on its assets. b) Total Advance to Total Deposit Ratio: This ratio measures the efficiency and ability of the banks management in converting the total deposits available with the banks (excluding other funds like equity capital, etc.) into high earning advances. Total deposits include demand deposits, saving deposits, term deposit and deposit of other bank. Total advances also include the receivables. c) Business per Employee: Revenue per employee is a measure of how efficiently a particular bank is utilizing its employees. Ideally, a bank wants the highest business per employee possible, as it denotes higher productivity. In general, rising revenue per employee is a positive sign that suggests the bank is finding ways to squeeze more sales/revenues out of each of its employee. d) Profit per Employee: This ratio shows the surplus earned per employee. It is arrived at by dividing profit after tax earned by the bank by the total number of employee. The higher the ratio shows good efficiency of the management P a g e

69 (iv) Liquidity A sufficient liquidity position refers to a situation, where financial organization can obtain adequate funds, either by increasing liabilities or by exchanging its assets rapidly at a reasonable cost. It is, consequently, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is preserved. The mainly used tool to calculate the interest rate exposure is the Gap between RSA and RSL, while liquidity is measured by liquid to total asset ratio. a) Liquidity Asset to Total Asset: Liquidity for a bank means the aptitude to encounter its financial duty as they come due. Bank lending finances investments in relatively illiquid assets, but it fund its loans with mostly short term liabilities. Therefore one of the major threaten to a bank is assuring its own liquidity under all reasonable circumstances. Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. b) Government Securities to Total Asset: Government Securities are the most liquid and safe investments. This ratio calculates the government securities as a proportion of total assets. Banks invest in government securities chiefly to meet their SLR requirements, which are around 25% of net require and time liabilities. This ratio measures the risk involved in the assets hand by a bank c) Approved Securities to Total Asset: Approved securities consist of securities other than government securities. This ratio calculates the Standard Securities as a proportion of Total Assets. Banks invest in Standard securities mainly after meeting their SLR requirements, which are around 25% of net demand and time liabilities. This ratio measures the risk involved in the assets hand by a bank. d) Liquidity Asset to Demand Deposit: This ratio calculates the aptitude of a bank to meet the order from deposits in a specific year. Demand deposits offer increased liquidity to the depositor and hence banks have to invest these assets in a liquid form. e) Liquidity Asset to Total Deposit: This ratio measures the liquidity available to the deposits of a bank. Total deposits include demand deposits, savings deposits, term deposits and deposits of other financial institutions. Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. (v) Sensitivity to Markets Sensitivity to the market risk is the measurement scale to which a bank might be revealed to adverse financial market situations. It is also asses on the development of interest rate of a bank. Interest spread gap is also a wing of sensitivity measurement. If the interest gap between deposit and advance goes up more than 4% then the market sensitivity earmarks as satisfactory, fair, marginal or unsatisfactory gradually. OBJECTIVE OF STUDY To comprehend the financial performance of the banks. To explain the CAMELS model of ranking banking institutions so as to make a comparative analysis of various banks. To analyze the banks performance through CAMEL model and give suggestion for improvement if necessary. Provide recommendations for improvement of bank performance. RESEARCH METHODOLOGY Methodology Adopted Research Design: To achieve our objective we have done descriptive research. We have selected four banks for our study. Private Sector Bank Axis Bank and Kotak Mahindra Bank, Public Sector Bank Bank of Baroda and State Bank of India. The period for evaluating performance through CAMELS in this study is five years, i.e. from financial year 2009 to The data is collected from various sources as follows: Primary Data: Primary data collected from the Bank s Balance Sheets, Profit & Loss statements and also by taking personal visit to the employees of the banks P a g e

70 Secondary Data: Secondary data for the ratio analysis & interpretation was collected from journals, bank s prospectus, bank s annual reports and internet. ANALYSIS AND INTERPRETATION Now each parameter will be taken separately & discussed in detail (A) Capital Adequacy i) Capital Adequacy Ratio (CAR) Ratio= Capital/ Risk Where, Risk can be either weighted assets (a) or the respective national regulator's minimum total capital requirement. Table-1: Capital Adequacy Ratio Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: CRAR is the ratio of capital funds to risk weighted assets. Reserve Bank of India prescribes bank to maintain a CRAR of 9% about credit risk, market risk and operational risk on an ongoing basis as against 8% prescribed in BASEL. From the above table it is clear that Axis bank has the most favorable Capital Adequacy Ratio for the year Higher the ration, higher is the risk taking capacity of bank due to unexpected loss in banking portfolio. With respect to RBI norms of 9%, every bank analyzed is in favorable position ii) Debt Equity Ratio Debt= Deposits + borrowings + unsecured debts debt Equity = Capital + Reserves and surplus equity Ratio = Debt/ equity Table-2: Debt to Equity Ratio Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: The Debt to Equity Ratio measures how much money a bank should safely be able to borrow over long periods. Generally, any bank that has a debt to equity ratio of over 40% to 50% should be looked at more carefully to make sure there are no liquidity problems. Higher ratio indicates less protection for the creditors and depositors in the banking system. If we look at debt to equity ratio of Bank of Baroda is highest as it relies more on cheaper funds like CASA, which is the cheapest form of debt available to banks. Private Banks like Kotak Mahidra bank had less debt to equity ratio mainly because the bank raises equity capital more than debt. iii) Total Advance to Total Asset Ratio Ratio= Total Advances/ Total Assets 1728 P a g e

71 Table-3: Advances to Assets Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: This ratio indicates a bank's aggressiveness in lending which ultimately results in better profitability. Higher ratio of advance/deposits (assets) is preferred to a lower one. Here in SBI, this ratio has continuously increased because of increase in advances more than the increase in assets, which shows growth in investment. Axis bank too shows the same trend until where the invested more on assets. (B) Asset Quality i) Gross NPA to Net Advances Ratio= Gross NPA/ Net Advances Table-4: Gross NPA to Advances (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB 2, KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: This ratio is used to check whether the bank's gross NPAs are increasing quarter on quarter or year on year. If it is, indicating that the bank is adding afresh stock of bad loans. It would mean the bank is either not exercising enough caution when offering loans or is too lax in terms of following up with borrowers on timely repayments. The NPAs of SBI are increasing year on year, which is a threat to the bank. ii) Net NPA to Net Advances Ratio= Net NPA/ Net Advances Table-5: Net NPA to Advances (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Net NPAs reflects the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and wear down the value of the asset. Loans and advances usually represent the largest asset of most of the banks. It monitors the quality of the bank s loan portfolio. The higher the ratio, the higher the credits risk. The ratio for Axis bank is the lowest and so it is the best performer among the four banks. (C) Management i) Total Advance to Total Deposit Ratio Ratio= Advances/ Deposits 1729 P a g e

72 Table-6: Advances to Deposits (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: This ratio shows the investment of the bank through approving the loans against accepting the loan. In SBI the ratio is continuously increasing year-on-year. This shows a good sign of the bank. ii) Business per Employee Business= Advances+ deposits Ratio= Business/ Number of Employees Table-7: Business per Employee (Rs Lakhs) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Revenue per employee is a measure of how efficiently a particular bank is utilizing its employees. Ideally, a bank wants the highest business per employee possible, as it denotes higher productivity. In general, rising revenue per employee is a positive sign that suggests the bank is finding ways to squeeze more sales/revenues out of each of its employee. The maximum revenue per employee is for Bank of Baroda, which is 18.6lakh. This shows the quality of workforce with has increased the profit year-on-year. iii) Profit per Employee Profit = Net Profit Ratio= Profit/ Number of Employees Table-8: Profit per Employee (Rs Lakhs) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Profit per employee is a measure of how efficiently a particular bank is utilizing its employees. Ideally, a bank wants the highest profit per employee. Here all the banks profit per employee is increasing year on year. Axis Bank employees have highest profit per employee. (D) Earnings i) Operating profit To Average Working Capital Ratio= Operating profit/average Working Capital 1730 P a g e

73 Table-9: Operating Profit to Working Capital (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Earning reflect the growth capacity and the financial health of the bank. High earnings signify high growth prospects. The earnings were highest for Kotak Mahindra Bank for the year Later it decreased due to more working capital funds. However, among the four banks it still has a better ratio. ii) Interest Spread Ratio= Interest Earned - Interest expenditure Table-10: Interest Spread (Rs Cr) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: This ratio helps in calculating how much interest the bank has gained after paying its own interest on debt. Higher the ratio better is the interest gained by the bank. From the above table all of the four banks have consistently gained more interest than the previous year. No bank has a negative interest spread. Thus, performance wise all the banks are doing well. However, the highest gain is by Bank of Baroda. iii) Net profit To Average Assets Average Assets = (Opening Assets+ Closing Assets) /2 Ratio= Net Profit/ Avg. Assets Table-11: Net Profit to Average Assets (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Net profit to average asset indicates the efficiency of the banks in utilizing their assets in generating profits. A higher ratio indicates the better income generating capacity of the assets and better efficiency of management. In the current scenario, all banks have profits well above their investment in assets. The State Bank of India has a better consistency though the highest profit is for Kotak Bank. iv) Interest Income to Total Income Ratio= Interest income / Total income 1731 P a g e

74 Table-12: Interest Earned To Total Income Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Interest income to total income ratio shows that how much interest income earn from total income. Higher the ratio better is the proportion of interest earned from the total income. The interest income of Bank of Baroda is constitute almost 91% of total income for the year and is lowest for Axis bank, which is 74% in the year v) Return On Assets Ratio= Net Income / Average Total Assets Table-13: Return on Assets Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI 1, , , , BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Return on Asset Ratio shows that how much return bank can get from their total asset. Higher the ratio is good for the bank. Because if ratio is higher than we can say that the return of bank is high. The ratio is consistently increasing for Axis bank and Bank of Baroda for the five years. However, it is highest for State Bank of India. This shows that the investment of SBI in its assets give a higher return. vi) Dividend Payout Ratio= Dividend/ Net profit Table-14: Dividend Payout Ratio (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Dividend payout ratio shows the percentage of profit shared with the shareholders. The more the ratio will increase the goodwill of the bank in the share market. The shareholders of Bank of Baroda enjoy more percentage of profit of the bank. However, this ratio does not give how much is the exact amount of profit given to the shareholders. (E) Liquidity I) Liquid Asset to Total Asset Liquid Asset= Cash with RBI+ Cash for short notice Ratio= Liquid asset/ Total Asset 1732 P a g e

75 Table-15: Liquid Assets to Total Assets (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: Liquidity for a bank means the ability to meet its financial obligations as they come. Bank lending finances investments in relatively illiquid assets, but it fund its loans with mostly short-term liabilities. Thus, one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions. SBI has highest liquid assets. It can easily build up cash immediately whenever necessary by liquidating its assets. ii) Liquid Asset to Total Deposit Ratio= Liquid Assets/ Total Deposits Table-16: Liquid Assets to Total Assets (%) Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: The ratio shows how much part of the deposits invested into the liquidity asset, which can be easily convert in to monetary value in the time of need. iii) Liquid Asset to Demand Deposit Ratio= Liquid Assets/ Demand Deposits Table-17: Liquid Assets on Demand Deposits Banks Years MAR'13 MAR'12 MAR'11 MAR'10 MAR'09 SBI BOB KOTAK BANK AXIS BANK Sources: Authors Compilation Interpretation: The ratio shows the power of liquidity asset against total demand deposits. It means what part of the demand deposits can be easily converted into monetary form in need. (F) Sensitivity to Market Sensitivity can be calculated using Beta of the company Table-18 Sensitivity to Markets BANKS Beta SBI 1.39 BOB 1.24 KOTAK BANK 1.62 AXIS BANK 1.48 Sources: Authors Compilation 1733 P a g e

76 FINDINGS Now, after analyzing the ratio next, task to do is find the average of the ratio of all five years and then give the rank for each parameter as per the value. Capital Adequacy Table-19 Banks Ratio Total Rank A b c SBI BOB Kotak Mahindra Bank Axis Bank Sources: Authors Compilation Asset Quality Table-20 Ratio Total Rank A b SBI BOB Kotak Mahindra Bank Axis Bank Sources: Authors Compilation Management Capability Table-21 Banks Ratio Total Rank A b c SBI BOB Kotak Mahindra Bank Axis Bank Sources: Authors Compilation Earnings Table-22 Banks Ratio Total Rank A B C D E F SBI BOB Kotak Mahindra Bank Axis Bank Sources: Authors Compilation Liquidity Banks Ratio Total Rank A B c SBI BOB Kotak Mahindra Bank Axis Bank Sources: Authors Compilation 1734 P a g e

77 CONCLUSION The report makes an effort to inspect and distinguish the performance of four banks of India i.e. from private sector banks, Axis Bank and Kotak Mahindra Bank and from the public sector banks, Bank of Baroda and State Bank of India. The analysis is based on the CAMEL Model. The study has brought many interesting results, some of which are mentioned as below: For the capital adequacy, all banks have capital above the required level of capital required. This proves that the risk of default of these banks is less. Furthermore Bank of Baroda has the highest capital base reinforcement the confidence of the depositors. The asset quality can be measure as the number of non-performing loans to the total loans sanctioned by the bank. The bank with lowest non-performing loans from the above four banks is Axis bank. This indicates that Axis bank adopts and enforces effective policies for all its loans sanctioned. The bank has strong asset quality and minimal portfolio risk. The highest non-performing assets are with State Bank of India. There may have to monitor the portfolios of the customers more efficiently before approval of the loan. The management quality is the most important factor. The performance of all other five CAMELS factors depend on it. The management and board of Kotak Mahindra Bank as per the ratio analysis of the four banks are fully effective. On the other hand, the Axis bank is applicable to critically deficient management. Replacing or strengthening may be needed to achieve sound and safe operations. The quality and trend of earning of the bank depends largely on how well the management manages its assets and liabilities. In the context of earning, a rating of 1, given to State Bank of India, reflects strong earnings that are sufficient to maintain adequate capital and loan allowance, and support operations. On the other hand, a rating of 4 given to Kotak Mahindra Bank, experiences consistent losses and represents a distinct threat to the institution s solvency through the erosion of capital. In the context of liquidity, Kotak Bank represents strong liquidity levels and well-developed funds as the institution has access to sufficient sources of funds to meet present and anticipated liquidity needs. On the other hand, the Axis bank signifies critical liquidity deficiency, and the institution demands immediate external assistance to meet liquidity needs. REFERENCES 1. Barr, R. S., Seiford, L. M., & Siems, T. F. (1994). Forecasting bank failure: A non-parametric frontier estimation approach. Recherches Economiques de Louvain, 60, Barth, J. R., Caprio, G., & Levine, R. (2008). Bank Regulations Are Changing: For Better or Worse? (Working Paper). World Bank. 3. Bhayani, S. (2006). Performance of the New Indian Private Sector Banks: A Comparative Study. Journal of Management Research, 5(11), Chaudhry, Sahila, & Singh, Sultan. (2012). Impact of Reforms on the Asset Quality in Indian Banking. International Journal of Multidisciplinary, 5(2), Cole, Rebel A., & Gunther, Jeffery. (1995). A CAMEL Rating's Shelf Life. Retrieved from 6. Cole, R. A., & Gunther, J. W. (1998). Predicting bank failures: A comparison of on-and off- site monitoring systems. Journal of Financial Services Research, 13, Derviz, A., & Podpiera, J. (2008). Predicting Bank CAMEL and S&P Ratings: The Case of the Czech Republic. Emerging Markets, Finance & Trade, 44(1), 117. Retrieved on April 13, 2010, from ABI/INFORM Global. (Document ID: ). 8. Godlewski, C. (2003). Bank s Default Modelisation: An Application to Banks from Emerging Market Economies. Journal of Social Science Research Network, 4(3), Gupta, Omprakash K., & Chinubhai, Aneesh. (2008). Dynamics of Productive Efficiency of Indian Banks. International Journal of Operations Research, 5(2), Gupta, R. (2008). A CAMEL Model Analysis of Private Sector Banks in India. Journal of Gyan Management, 2(1), Hirtle, B. J., & Lopez, J. A. (1999). Supervisory information and the frequency of bank examinations. Federal Reserve Bank of the US, New York. Economic Policy Review, 5, Kwan, S., & Eisenbeis, R. A. (1997). Bank risk, capitalization, and operating efficiency. Journal of Financial Services Research, 12(2/3), P a g e

78 13. Prasad, K. V. N. G., Ravinder, & D., Maheshwari Reddy. (2011). A CAMEL Model Analysis of Public and Private Sector Banks in India. Journal of Banking Financial Services and Insurance Research, 1(5), Prasuna, D. G. (2003). Performance Snapshot Chartered Financial Analyst, 10(11), Purohit, K. K., & Majumder, B. C. (2003). Post-mortem of financial performance and prediction of future earning capability of a bank: An application of CAMEL rating and balanced scoreboard. The Indian Journal of Accounting. 16. Said, M. (2003). Liquidity, solvency, and efficiency: An empirical analysis of the Japanese banks distress. Journal of Oxford, 5(3), Sarker, A. (2005).CAMEL Rating System in the Context of Islamic Banking: A Proposed S for Shariah Framework. Journal of Islamic Economics and Finance, 1(1), Retrieved from Retrieved from India/ Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from ***** 1736 P a g e

79 PROBLEM AND RECOVERY OF NPAs Parameshwara 16 ABSTRACT Providing financial assistance to the needy is an essential function of a banker. By meeting the financial requirements of various segments of the society, banks contribute to the economic development of our nation. Banks and financial institutions have heavily financed industries both corporate and individual. Large sums remain unrecovered and the normal process of recovery of debts through the courts is lengthy. Institutions face considerable difficulties in recovery of dues and enforcement of securities charged to them due to delay in legal processes. A significant portion of their funds is thus blocked in unproductive assets, the values of which deteriorate over the period. Banks and financial institutions also spend substantial amounts on legal charges, which add to their overheads Recovery of debt is a difficult task and involves a lengthy process. The recovery process begins with issuing notices to the borrowers and ends with sale of property and recovery of debt. Recovery of bank dues is attained by legal and non-legal measures. The legal measures include recovery of debt through DRTs, SARFAESI Act, Lok Adalath, ARCs and the like. The non-legal measures consist of the reminder system, recovery camp, rehabilitation of sick units, restructuring of debt, compromise, re-schedule, and write-off, etc. The adoption of proper methods depends upon the amount of loan, type of security offered, nature of default and the like. It is evident from various studies that majority of the banks recovered the loan amount through OTS / Compromise settlement. The provisions of the other recovery mechanisms will work well if it is effectively used. Because of the loopholes in the legal and non-legal measures followed by the banks, they find difficult in recovery and delay in recovery of dues. The success of lending and recovery is possible only through the proper attention and concerted efforts by all stakeholders like regulators, policy makers, banks and bank customers. KEYWORDS NPAs, Recovery, Legal and Non-Legal Measures, SCBs and RBI etc. INTRODUCTION Diversion of funds for more profitable business other than the original one expansion, modernization, undertaking new projects and for helping associate concerns are the major factors contributing to NPAs. It is well known that bulk of the amount locked up in NPAs has been caused due to snags in legal system. Banks provide working capital finance by hypothecation of movable properties. But it is to note that neither Indian Contract Act nor transfer of Property Act contain any provision for defining hypothecation, rights and obligations of the hypothecator or hypothecate. Now, as a consequence of default in payment of bank dues, right to take hypothecated security is not available to banks and in case borrower refuses to give possession of hypothecated property, banks have no right to take forcible possession except through the court, even if the hypothecation agreement so provides. There are also instances where the banks find that the borrowers have sold the hypothecated property but neglected to deposit the sale proceeds as a part of repayment of loan. But normally court considers such conduct as a breach of contract and not as a crime. Experiences also show that in the matter of other securities like immovable properties, guarantees, banks do not have any right to enforce the securities on their own and have to obtain recovery from courts. It takes a long time to settle the suit since suits filed by the banks do not get priority in courts and by the time the securities deteriorate in value and the recovery becomes impossible (Lodh1991). From the branch manager s angle, many difficulties are faced in management of NPAs. Difficulties in keeping a close supervision and effective follow up mechanism at branches arise due to increasing routine work load, shortage of staff and lack of cooperation from the borrowers in submitting the stock statements, balance sheets and the like(narayanan 2000). The repayment rationale irrespective of the category of borrowers is based on the assumption that the beneficiary implements the techno economic terms / conditions of the loan sanction, makes judicious use of the loan, generates incremental income and repays the loan from the surplus generated. DEBT RECOVERY PROCESS AND DEBT RECOVERY MECHANISMS Providing financial assistance to the needy is an essential function of a banker. By meeting the financial requirements of various segments of the society, banks contribute to the economic development of our nation. Banks and financial institutions have 16 Assistant Professor, Department of Commerce, Mangalore University, Karnataka, India, paramasiddhantha@gmail.com 1737 P a g e

80 heavily financed industries both corporate and individual. Large sums remain unrecovered and the normal process of recovery of debts through the courts is lengthy. Institutions face considerable difficulties in recovery of dues and enforcement of securities charged to them due to delay in legal processes. A significant portion of their funds are thus blocked in unproductive assets, the values of which deteriorate over the period of time. Banks and financial institutions also spend substantial amounts on legal charges, which add to their overheads (Singh2012). An attempt has been made below to explain the debt recovery process and various debt recovery mechanisms followed by the commercial banks. The debt recovery policy of the bank is built around dignity and respect to customers. The policy is built on courtesy, fair treatment and persuasion. The banks believe in following fair practices with regard to recovery of dues from borrowers and taking possession of security (properties / assets charged to the bank as primary or collateral security) and thereby fostering customer confidence and long-term relationship. The repayment schedule for any loan sanctioned by the Banks will be determined by taking into account the repaying capacity and cash flow pattern of the borrower. The banks will explain to the customer upfront the method of calculation of interest and how the Equated Monthly Installments (EMI) or any other mode of repayment will be appropriated against interest and principal due from the customers. The banks would expect the customers to adhere to the repayment schedule and approach the Bank for assistance and guidance in case of genuine difficulty in meeting repayment obligations. Table-1: NPAs of SCBs Recovered through Various Channels (Amount in Rs. Billion) Year No. Particulars Lok Adalats DRTs SARFAESI Act Total No. of cases referred 8,40,691 13,408 1,90,537 10,44,636 2 Amount involved ,058 3 Amount recovered* as per cent of No. of cases referred 16,36,957 28,258 1,94,707 18,59,922 2 Amount involved ,731 3 Amount recovered* as per cent of Sources: RBI bulletin Notes: 1.*: Refers to amount recovered during the given year, which could be with reference to cases referred during the given year as well as during the earlier years. 2. DRTs: Debt Recovery Tribunals. Legal Measures: The following are the legal measures followed by the bankers: Debt Recovery Tribunals (DRTs): DRT is applicable in respect of debts of banks and Financial Institutions (FIs) with outstanding amount of Rs.10 lakh or more. The tribunals follow the summary procedure and are only guided by the principle of Natural Justice. The RBI Report on Trends and Progress of Banking in India revealed that the amount recovered as percentage of amount involved under the DRTs, in the year , as many as cases amounting to Rs.141billion were referred, out of which Rs.39 billion was recovered (27.65%). In the year , as many as cases amounting to Rs.241billion were referred, out of which Rs.41 billion was recovered (17.01 percent). Lok Adalats: Bank suits involving claims up to Rs.20 lakh may be brought before the Lok Adalats. Supreme Court has suggested that personal loan cases up to Rs.10 lakh should be preferably settled through Lok Adalats. The RBI report on trends and progress of banking in India revealed that, during the year , the recovery through Lok Adalats was Rs.2 million out of cases involving Rs.53billion (3.77%). The year witnessed recovery of Rs.2 billion (11.76%) through Lok Adalats out of Rs.17 billion involved in respect of cases referred. Lok Adalats have not proved to be a good means of effecting recoveries from the bad loans as they have accounted for only 3 to 11% of delinquent loan recovered. Asset Reconstruction Companies (ARCs): The primary objective of ARC is rapid disposal of bad assets owned by banks to clean up their balance sheets. Gross NPAs of the banking industry amounted to Rs as of March 2010, which was an indicator of the potential for ARCs in the country. It is further observed that there is 'less flow' from the corporate sector as RBI allowed banks to restructure slippages either by extending the repayment time or giving interest rate relaxation. Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act): This act gives powers to secured lenders to realize their dues through enforcement of securities interest without intervention of court. This ordinance is based on the recommendations of the Narasimham and Andhyarjuna committees of financial reforms. SARFAESI Act deals with three aspects viz, Promoting Securitization, Formation of Asset Reconstruction Company and Enforcement of Security Interest without intervention of courts. The Act not only helps in recovering NPAs of the banks / FIs, but also curbs the instincts towards willful defaults. However, this Act may be required to be fine-tuned to bring in 'natural justice'. As per RBI report on trends and progress of commercial banks in India, during the year , notices were issued under 1738 P a g e

81 SARFAESI Act. The total amount involved was Rs.306 billion and the amount recovered was Rs.116 billion registering 37.9 % recoveries. As many as notices involving an amount of Rs.353 billion were issued during the year , and the recovery affected was Rs.101 billion constituting 28.61% recoveries (RBI ). It evident from the above table that the number of cases referred to Lok Adalats, DRTs and under SARFAESI Act has been increased from to Table also reveals that the percentage of recovery decreased from to under various mechanisms. Non-Legal Measures: The important methods of recovery under non-legal measures consist of: Reminder System, visit to Borrower's business premises / residence, Recovery Camp, Rehabilitation of Sick Companies, Debt Restructuring, Loan compromise, Rephasement / Reschedulement, Write-off, and through Recovery Agents. CONCLUSION In spite of encouragement and support from the government many industries are facing the problem of finance and many banks are experiencing increase in NPAs. Various debt recovery mechanisms must be strengthened and financial support should be given to industries by following aggressive assessment methods. Furthermore, though there are number of institutions and committees, which have been formed to protect and safeguard the interest of the SSIs, the success of the SSIs and the reduction in NPAs depends upon how effectively the regulations and recommendations are implemented in true spirit. Recovery of debt is a difficult task and involves a lengthy process. The recovery process begins with issuing notices to the borrowers and ends with sale of property and recovery of debt. Recovery of bank dues is attained by legal and non-legal measures. The legal measures include recovery of debt through DRTs, SARFAESI Act, Lok Adalats, ARCs and the like The adoption of proper methods depends upon the amount of loan, type of security offered, nature of default and the like. It is evident from various studies that majority of the banks recovered the loan amount through OTS/ Compromise settlement. The provisions of the other recovery mechanisms will work well if it is effectively used. Because of the loopholes in the legal and non-legal measures followed by the banks, they find difficult in recovery and delay in recovery of dues. The success of lending and recovery is possible only through the proper attention and concerted efforts by all stakeholders like regulators, policy makers, banks and bank customers. REFERENCES 1. (2012). Master Circular - Lending to Micro, Small & Medium Enterprises (MSME) Sector. RBI. Retrieved on 05 April, 2013, from rbidocs.rbi.org.in /rdocs /notification/pdfs / MSFL.pdf 2. (2012). Master Circular on Wilful Defaulters. RBI. Retrieved on 11 November, 2012, from accessed from 3. (2013). Master Circular- Loans and Advances Statutory and Other Restrictions. RBI. Retrieved on 10 April, 2013, from BS_ViewMasCirculardetails.aspx?id= (2012). Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances. RBI Retrieved on 20 May, 2013, from /notification/ PDFs/39IR010712FN.pdf 5. Chowdary, R. J., & Venkateshwara, R. B. H. (2005, January). Reduction of NPAs- no longer an insurmountable task. Indian Economic Panorama, 14(1), Lodh, N. (1991, October). Lending opportunities and Non- performing Assets an approach to profit maximization. Banking and Finance, 4(10), Narayanan, V. (2000, October). NPA reduction- New Mantra of slippage Management. IBA Bulletin, 22(10), Namboodiri. (2002, October- December). NPA: Prevention is better than cure. Vinimaya, 22(3), (2011). Master Circular - Management of Advances UCBs. RBI. Retrieved on 11 March, 2013, from Circulardetails.aspx?id= (2013). Master Circular - Lending to Micro, Small & Medium Enterprises (MSME) Sector. RBI. Retrieved on 29 August, 2013, from /scripts/bs_viewmas Circulardetails.aspx?id= P a g e

82 11. (2012). Micro, Small and Medium Enterprise Finance in India A Research Study on Needs, Gaps and Way Forward. IFC. Retrieved on 02 February, 2013, from pdf?MOD=AJPERES 12. Singh, V. K. (2012). Debt Recovery Challenges for Banks and Financial Institutions. Collections & Recovery, Compiled by Profitera Corporation (Articles and Whitepapers), pp Retrieved on 12 January, 2013, from ns.pdf 13. (2012). IBA model policy on collection of dues and repossession of security, pp IBA Retrieved on 15 January, 2013, from http: // /Model% 20Policy/d) %20IBA% 20Model% 20Policy% 20on% 20Collection% 20of% 20Dues% 20&% 20Repossession%20of% 20Security.pdf 14. ( ). Trends and progress of banks in India (Report). RBI. Retrieved on 20 December 2013, from rdocs/ Publications/PDFs/ 0TPB021112FLS.pdf 15. Retrieved from Retrieved from Retrieved from Retrieved from ns.pdf 19. Retrieved from 20Repossession%20of% 20Security.pdf 20. Retrieved from rdocs/ Publications/PDFs/ 0TPB021112FLS.pdf ***** CHECK PLAGIARISM SERVICE Pezzottaite Journals charges nominal fees from Journal Managers, Editors, Section Editors, Copy Editors, Layout Editors, Proof Readers, Subscription Managers, Reviewers, Readers (Subscribers and Individuals), and Authors to get their manuscripts scanned for plagiarism. Indian Users One Manuscript / article = Rs Two Manuscripts / articles = Rs x 2 = Rs As so on... Formulae = (Numbers of Manuscripts x Rs ) = Amount to be paid as Online Bank Transfer before availing the services. International Users One Manuscript = US$15.00 Two Manuscripts = US$15.00 x 2 = US$ 30 As so on... Formulae = (Numbers of Manuscripts x US$15.00) = Amount to be paid as Online Bank Transfer before availing the services. Note: Total amount if computed in US$ must be converted into Indian Rupees as per Currency Exchange Rates on the day of placing the order; Computed amount (in Rupees) is to be transferred in Pezzottaite Journals Bank Account (s); In case, where the transacted currency is not US$, then, purchaser must consider the exchange rate of domestic country s currency against 'US$ / Rupees' and transfer the same. Bank details are available at: P a g e

83 AN OVERVIEW OF RECENT CHANGES IN FINANCIAL INCLUSION IN PREVIEW OF PMJDY Rekha Sharma 17 Sonia Bhatia 18 ABSTRACT The issue of financial inclusion is a development policy priority in many countries. Financial inclusion is very important for country development.in India, we are facing problem of financial inclusion because very few proportion of population is included in financial services. The study will contribute to know the present scenario of financial inclusion and also will highlight the causes and measures for bridging up the gap between financial inclusion and exclusion and will help to understand the behavior and determinants of financial inclusion in India. Moreover, the paper will also give light on RBI reforms and policies for improving financial inclusion. KEYWORDS Financial Inclusion, RBI, Accounts, Beneficiary, Business Correspondents etc. INTRODUCTION Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products (The Committee on Financial Sector Reforms, Chairman: Dr. Raghuram G. Rajan). A strong and sturdy financial system is a pillar of economic growth, development and progress of economy. A mature system always support higher level of investment and promote growth in the economy. In this era of competition, it is important to achieve economic power and self-reliance but it depends more on availability of banking facility and strong bank branch network. Although India has a historic and well-structured banking system yet a large section of society has not been benefited. Financial inclusion is the delivery of formal banking services at affordable cost to the undeserved section of society. As per Chairman, Dr. C. Rangarajan Committee on Financial Inclusion, Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. Financial exclusion means: No Savings, No Insurance, No access to money advice, No affordable credit, No Bank account and No assets. According to K. C. Chakrabarty Financial Exclusion is the lack of access by certain consumers to appropriate, low cost, fair and safe financial products and services from main stream providers. Financial exclusion is classified in three parts: People with no admittance to a regulated financial system People with limited admittance to banks and other financial services People with inappropriate knowledge about financial product available in market so they don t participate. Financially excluded sections largely comprise marginal farmers, landless labourers, self-employed and unorganized sector enterprises, ethnic minorities, socially excluded groups, senior citizens and women. From the difference above we can say that government should adopt such policies that could convert excluded or unprivileged section into included. The goals of financial inclusion can be met by initiative of banking sector to cut across various cluster of society, regions, genders, income and to cultivate banking habits among common masses. Why Financial Inclusion? Even after 66 years of independence, a large section of Indian population remains unbanked. This melancholy has led creation of financial instability among the lower income group who do not have access to financial products and services. The policy makers have been focusing on financial inclusion of Indian rural and semi-rural areas primarily for Creating a platform for inculcating the 17 Assistant Professor, DAV Centenary College, Haryana, India, sharmarekha047@gmail.com 18 Assistant Professor, DAV Centenary College, Haryana, India, rsonia626@gmail.com 1741 P a g e

84 habit to save money and providing formal credit avenues. Financial education, financial inclusion and financial stability are three elements of an integral strategy, These elements are inter related,as financial education makes an individual well equipped about banks and other avenues of investment which lead to financial inclusion and financial inclusion thus, create resources which lead to financial stability. Problems with Current System Currently many programmes are going to be designed by Government for financial inclusion. Many Poverty Elevation Programmes are going to be launched by Government as Swarna Jayanti Gram Swarozgar Yojana (SJGSY), Jawahar Gram Samriddhi Yojana, Employment assurance scheme etc. Despite these initiatives targets are yet unmet and poverty level is too high. Financial inclusion awareness about other facilities of the bank is very low and banking schemes are not poor centric for example for taking loan from bank there is bar of income which cannot be met by poor people so despite of having their accounts in banks they don t get advantage of loan, so they have to depend upon unorganized sector of money market i.e. indigenous bankers and moneylenders. This defeat the objective of financial inclusion. Banks also find it a burden to open branches in rural areas because of lack of financial benefits. All above problems leads to diversion of funds in black market. OBJECTIVE OF STUDY To Know the impact of Financial Inclusion To Know the difference of PMJDY from other schemes To study the measures adopted by RBI to enhance Financial Inclusion Steps taken by RBI to initiate Financial Inclusion in India a) Opening of no-frills accounts: No-frills account means customers are privileged with nil or very low minimum balance and with less charges, that accessibility of such accounts could be enjoyed by vast sections of the population. Banks have been advised to provide small overdrafts in such accounts. RBI had introduced no-frills accounts in 2005 to provide basic fundamental banking facilities to poor and promote financial inclusion. This account shall have: No requirement of any minimum balance... No limit on number of deposits in a month, Allowed more withdrawals in a month, Issued ATM free of cost, No extra charges. b) Relaxation on known-your-customer (KYC) norms: know your customer enables banks to know or understand their customer and their fin dealings to serve them better. Under the KYC guidelines certain personal information of the customer is obtained KYC guidelines of RBI mandates banks to collect three proofs from their customers they are: Photographs, Proof of identity, Proof of address. For getting success in Financial Inclusion, RBI has simplified KYC norms for low risk customers. These are those customers whose money laundering lies between fifty thousand to one lakh throughout the year and their transaction will not exceed Rs in a month and their balance will not exceed Rs at any point in time. These small accounts will be valid for a period of twelve months. They are allowed to submit their documents within six months of opening their account c) Engaging business correspondents (BCs):.Business Correspondents Model allows banks to provide doorstep delivery of services, especially Cash In-Cash Out transactions. RBI permitted banks to engage business facilitators and correspondents as intermediaries and list of eligible individuals and entities for providing services is being widened from time to time. BCs are representatives of bank to provide basic banking services i.e. opening of basic Bank accounts, Cash deposits, Cash withdrawals, transfer of funds, balance enquiries, mini statements etc. According to amended guidelines of RBI following can be appointed as Business Correspondents: Retired Bank officers, Retired Army officers, 1742 P a g e

85 Teachers, Retired Post Office Officers etc. d) Information and Communication Technology: RBI has also encouraged banks to use the technological advancement for maximizing the reach to the local level. Like with the Bio Metric Machine even the illiterate are also enjoying the banking facility without any question on security. e) Adoption of EBT: With the emphasis on Financial Inclusion and extension of banking facilities in the uncovered area, the reach of banking services has increased considerably and will increase further. Therefore, greater impetus is given to Electronic Benefit Transfer (EBT). It will also reduce the pressure on the bank branches for dealing with transactions and accounts. f) General Credit Cards: With a hope to access, easy Credits To poor and disadvantage group RBI has asked banks to introduce credit card facility up to Rs`25,000 at their rural and semi-urban branches. The objective of the scheme is to provide hassle-free credit to banks customers based on the assessment of cash flow without insistence on security, purpose or end use of the credit. This is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned. g) Simplified Branch Authorization: According to new amendment, RBI has permitted banks to freely open branches in Tier III and Tier VI Centers with population less than subject to reporting. Banks are also allowed to open branches in any Centre-Rural, Semi Urban or Urban in the Northeast without applying for permission. h) Overcoming Language Barriers: Banks normally issue documents or forms in either Hindi or English. It s a great barrier between the Bank and customer who can only conversate in their native language. Therefore, RBI has issued guidelines to banks to provide forms pertaining to open and close of account in regional language. i) Three Year Plan for Financial Inclusion: According to the amendments of April 2010 by RBI three year plan for financial inclusion under which it include providing banking service in unbanked areas by appointing business correspondents to speed up the Cash In & Cash Out transaction especially in rural branch and to issue General Credit Cards and also to design product in such a way so that it could be beneficial package for deprived section. j) Financial Education: Financial education refers to set of skills and knowledge that allow an individual to make informed effective decisions with all of their financial resources. In nutshell, it is ability to understand how money works in the world. In Financial Inclusion the objective of financial education is: To provide information and counseling to community on financial product and services, To educate economically disadvantaged people in Urban and Semi Urban area. In the present scenario banking network of the India in march 2014 comprises of a bank branch network and an ATM network of 1,15,082 and 1,60,055 respectively. Of these, 43,962 branches (38.2%) and 23,334 ATMs (14.58%) are in rural areas. Besides, there are more than 1.4 lakh Business Correspondents (BCs) of Public Sector Banks and Regional Rural Banks. It is estimated that 6 Crore households in rural and 1.5 Crore in urban area needs to be covered by 31May, Banking services are in the nature of public product, but in country like India, which is highly populated, a large section is still deprived from financial inclusion. On 15 august 2014 Prime Minister Narender Modi has taken gigantic drive Pradhan Mantri Jan-Dhan Yojana to provide banking and payment services to the entire population without discrimination. This will enable them to come out of the grip of moneylenders, manage to keep away from financial crises caused by emergent needs, and most importantly, benefit from a range of financial products/benefits. The Prime Minister sent an to all bank officers stressing them to enroll over 7 crore households and to open their accounts on urgent basis. The main features of the scheme include an overdraft facility of Rs 5,000 for Aadhar-linked accounts, a RuPay Debit Card with an inbuilt Rs 1 lakh accident insurance cover and a minimum monthly remuneration of Rs 5,000 to Business Correspondents who will connect the last link between the account-holders and the Banks. What is this Yojana and how it is going to be different from the earlier schemes: The programme for financial inclusion under the PMJDY is based on six pillars: The country will be segmented into a number of sub-service areas (SSA), with each having 1,000-1,500 households. One banking division or will be recognized within an expanse of five km from every SSA by August P a g e

86 One bank account will be opened for each household by August 2015, along with a RuPay debit card and an accident cover worth Rs.1,00,000. If the credit history is suitable for the period of the first six months, the account holder will become entitled for a bank overdraft value Rs.5,000. Financial literacy programmes will be extended by August 2015 to multiply awareness about financial services. A Credit Guarantee Fund will be created before August 2018 to envelop potential defaults in overdrafts. All keen and qualified persons will be provided with micro-insurance by August Pension payments under the Swavalamban Yojana scheme for workers in the unorganized sector will be paid through bank accounts by August 20. STATUS OF FINANCIAL INCLUSION IN THE COUNTRY The implementation strategy of the plan is to make use of the existing banking infrastructure as well as enlarge the same to cover all households. While the presented banking network would be fully geared up to open bank accounts of the revealed households in both rural and urban areas, the banking sector would also be rising itself to set up an extra 50,000 Business correspondents (BCs), more than 7000 branches and more than new ATMs in the first phase.a comprehensive plan is essential to take into reflection the past experience where a gigantic number of accounts opened remained inactive, resulting in costs incurred for banks and no reimbursement to the beneficiaries. The plan, therefore, proposes to channel all Government reimbursement (from Centre/State/Local body) to the beneficiaries to such accounts and approaching the Direct Benefits Transfer (DBT) scheme of the Union Government including restarting the DBT in LPG scheme. MGNREGS sponsored by Ministry of Rural Development is also likely to be integrated in Direct Benefit Transfer scheme. REFERENCES 1. Agarwal, B. P. (2006, January 16). Bank of India. Retrieved from Innovations in Banking theory, law and practice, Bombay, Himalaya publishing House. 2. Asli, Demirguc Kunt, & Klapper, L. (2012). Measuring Financial Inclusion (Policy Research Working Paper, 6025). 3. Asli, Demirguc-Kunt, & Maria, Soledad Martinez Peria. (April). World Bank Policy. World Bank. 4. ( ). As per Trends and Progress of Banking in India (Research, WPS 3754). RBI. World Bank. 5. Chakrabarty, K. C. Keynote address on Furthering Financial Inclusion through Financial Literacy and Credit Counseling. DG, RBI. 6. Thorsten, Beck. (2006). Economic Growth, Financial Deepening and Financial Inclusion. Reserve Bank of India. 7. (November 20). Speech by Rakesh Mohan, Deputy Governor of the Reserve Bank of India, Retrieved from 8. Usha Thorat, Deputy Governor of the Reserve Bank of India 2006, Financial Inclusion and Millennium Development Goals. 9. Sharma, Anupamaa, & Kukreja, Sumita. (2013). Annual Report Srivastava, P. (2004). Financial and legal aspect of derivative trading in India. International Journal of Engineering and Science, 2(6). ISSN: Retrieved on March 2013, from Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from ***** 1744 P a g e

87 A STUDY ON OPTION STRATEGIES B. Sudheer Kumar 19 Dr. T. Narayana Reddy 20 Dr. N. Kumara Swamy 21 Y. V. Siva Krishna Reddy 22 ABSTRACT The emergence of the market for the derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are risk management instruments, which derive their value from an underlying asset. The following are the three broad categories of participants in the derivatives market hedgers, speculators and arbitragers. Prices in an organized derivatives market reflect the perception of market participants about the future and lead the price of underlying to the perceived future level. In recent times the derivatives market have gained importance in terms of their vital role in the economy. The increasing investments in stocks have attracted my interest in this area. Numerous studies on the effects of future and options listing on the underlying cash market volatility have been done in the developed markets. The derivative market is newly started in India and is not known by every investor, so SEBI has to take steps to create awareness among the derivative segment. In cash market, the Profit/loss of the investor depends on the market price of underlying asset. The investor may incur huge profit or he may incur huge loss. But in derivatives segment the investor enjoys huge profits with limited downside. Derivatives are mostly used for hedging purpose. In order to increase he derivatives market in India, SEBI should revise some of their regulations like contract size, participation of FII in the derivatives market. Briefly, the study throws a light on the derivatives market. And also the methodology is used here the existing strategies is used on empirical data for find outing the risk and return of the strategies here the different strategies are gives different returns based on market conditions but finally we suggest different strategies for different investors based on their perception. Options, Futures, Derivatives etc. INTRODUCTION KEYWORDS A derivative is a financial contract whose value is derived from, or depends on, the rate of some underlying asset. The underlying asset may be bullion, index, share, bonds, currency, interest, etc., the value of derivative changes with derivative contracts: forwards, future, swaps and options. However, because of forwards, future, swaps are very similar types of contract many believe that there are really only two types of derivatives: options and forwards. With derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices; derivative product minimizes the impact of fluctuations in the asset prices. Bank, security firms companies and investors to hedge risks, to gain access to cheaper money and to make profits, us derivatives. The main reason for going derivative is low risk that here in a derivative contract the time is up to 3 to 6 months so this maturity period is useful to the investor to protect his money. In these derivatives, futures and options are more contracts that are tradable because those are traded at stock exchange as well OTC. However, options are more flexible to investor to minimize the risk and maximize the profits because in this option contract the optional buyer has a right to buy or sell or not exercise the contract because at the beginning of the contract the optional buyer pays the premium to the seller or writer of the contract. Here we are having the two types of options those are call and put. Call means buying of an asset and put means selling of an asset Based on the position the buyer has to exercise the contract when he has to expect he get the profits he exercise the contract otherwise he leave the contract it means here the loss is only premium when he can t exercise the contract. In option contract the buyer fix his risk in the form of premium. Now a day s most the investor they are enter into derivative contract for getting more profits with less risk so within a span of time it was become a lead position. But when the investor assumes a wrong trend of market at the time the investor loss his premium so to avoid this type of less risk form investor he prefer strategies. 19 Assistant Professor, Department of MBA, Vaagdevi Institute of Technology & Science, Andhra Pradesh, India, bskmba06@gmail.com 20 Assistant Professor, Department of Humanities, JNTUA College of Engineering, Andhra Pradesh, India, tnreddyjntua@gmail.com 21 Professor, Department of MBA, Vaagdevi Institute of Technology & Science, Andhra Pradesh, India, kumaraswamy41@gmail.com 22 Student ( MBA), Vaagdevi Institute of Technology & Science, Andhra Pradesh, India, yvkrishna@gmail.com 1745 P a g e

88 To get optimum profits with low investment, the investor uses significant strategies in options trading. In these contracts, the investor can create many option positions with combination of call, put, stock and bond. Generally, strategy means it is a re planned activity to achieve a long-term goal. Normally common investor cannot create new strategies and implement strategies without understanding return and return adjust risk in each strategy. Hence, an attempt has been made to study risk and return relationship involved in each proposed strategy using live data of various companies options. Introduction to Derivatives The emergence of the market for derivative product, most notably Forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of Fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. With derivative products, it is possible to partially or fully transfer price risks by locking in asset prices, As Instruments of risk Management; these generally do not influence the fluctuations in the underlying asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk adverse investors. Derivative Products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. Since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transaction in derivatives products, In recent years, Market for Financial Derivatives has grown tremendously in terms of variety of instruments available, their, complexity and also turnover. In the class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on individual Stocks. Derivatives in India Trading in Derivatives of Securities commenced in June 2000 with the enactment of enabling legislation in early Derivatives are formally defined to include: (a) a Security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any others from of Security, and (b) a contract Which derives its value from the price, or index of prices, or underlying Securities. Derivatives trading commenced in India in June 2000 after SEBI granted the approval to this effect in May SEBI permitted the derivative segment of two Stock exchanges, i.e. NSE and BSE, and their clearinghouse / corporation to commerce trading and settlement in approved derivative contracts. To begin with, SEBI approved trading in index futures contracts based on S & P CNX Nifty Index and BSE-30 (Sensex) Index. This was followed by approval for trading in options based on these two indices and Options on individual securities. The derivatives trading on the NSE commenced with S&P CNX Nifty Index futures on June 12, 2000.The trading in S&P CNX Nifty Index Options Commenced on July 4, 2001 and trading in Options on individual securities commenced on July 2, Single stock futures were launched on November 9, In June 2003, SEBI-RBI approved the trading on interest rate derivative instruments. The mini derivative future & Option contract on S&P CNX Nifty was introduced for trading on January 1, 2008 while the long term option Contracts on S&P CNX Nifty were introduced for trading on March TYPES OF DERIVATIVES Forwards, Futures, Options, Warrants, Swaps. NEED OF STUDY The stock exchanges provide an organized market place for the investors to buy and sell securities freely. In the stock exchange, there is an active bidding and a two-way auction trading takes place. The Stock market, which is an integral part of the capital market, has a major impact on the functioning of the economy. In the security market, the most reliable and flexible and risk free investment and abnormal profits we can gain through derivatives which are options in that option strategies can be play a vital role in option contracts to get more profits with low investments P a g e

89 OBJECTIVES OF STUDY To study the status of option trading in India and problems and remedies. To study and understanding various mechanism involved in various strategies. To test empirically the existing strategy using optional trading data. To propose new strategies based on finding, risk and return. REVIEW OF LITERATURE Option In the most technical definition, an option is the right but not the obligation to purchase or sell shares of stock at a predetermined price, by a prearranged date. The predetermined price is known as the strike price, and is chosen by the options trader when he/she enters a position. The prearranged date is known as the expiration date. Depending on which direction you think the underlying stock will go in, there exist options strategies to take advantage of that stock price movement. John Seibert Option Strategies for a Down Market A put option gives the buyer of that option the right to sell a stock at a pre-determined price known as the option strike price. Buyers of put options are making bearish bets against the underlying company. The price you would pay for that put option will be determined, among other things, by the length of time you want the option to last. The longer the time, the more you pay. Sham Gad Iron Butterfly Option Strategy The iron butterfly strategy is a member of a specific group of option strategies known as wingspreads because each strategy is named after a flying creature such as a butterfly or condor. The iron butterfly strategy is created by combining a bear call spread with a put spread with an identical expiration date that converges at a middle strike price. A short call and put are both sold at the middle strike price, which forms the body of the butterfly, and a call and put are purchased above and below the middle strike price respectively to form the wings. This strategy differs from the basic butterfly spread in two respects; it is a credit spread that pays the investor a net premium at open, whereas the basic butterfly position is a type of debit spread, and it requires four contracts instead of three like its generic cousin. Mark P. Cussen. Hedging with Bear Spreads A basic bear spread consists of buying a higher strike option (call or put - but not calls and puts in the same spread) and selling another call or put with the same expiration but with a lower strike price. Such a spread constructed with puts is called a bear put spread, while one constructed with calls is named a bear call spread. When you create a bear put spread, you pay a net debit of premium since you are buying the (higher strike) higher premium put and selling the (lower strike) lower premium put. When you create a bear call spread, you receive a net credit of premium because you are selling the (lower strike) higher premium call and buying the (higher strike) lower premium call. Lawrence D. Cavanagh June 19, 2009 METHODOLOGY OF RESEARCH Methods Adopted With Detailed Procedure: Sources of Data Primary Data Data observed or collected directly from first-hand Published data and the data collected in the past or other is called secondary data. Data collected from exchange Secondary Data Secondary data is the data that have been already collected by and readily available from other sources. Such data are cheaper and more quickly obtainable than the primary data and may be available when primary data cannot be obtained at all. Data collected from internet, Data collected from books, journals, Data collected from websites P a g e

90 Research methodology typically involves a strategy we select a strategy and implement it on company, which selected and draw a graph table for that strategy based on strategy requirements (ITM or OTM). Then compare the strategy with the other strategy which is gives the best return with a low return and ultimately select a best strategy which gives more return with low risk and proposing a new strategy which gives high return based on existing strategies. DATA ANALYSIS AND INTERPRETATIONS a) Testing Empirically the Existing Strategy using Optional Trading Data Long straddle = buy a cal + buy a put Interpretation: It shows optoin premium and strke price of call and put of reliance industires int this hedging stratedy buyer loss is limited in the form of premium and the profit is umlimited becouse if the price of the asset is incresed then autometically the buyer get profis so he exercise the contract. Interpretation: It shows a different market prices and different profits and only three strike prices 1150,1100,1060 it will gives the loss those are limited losses in form of premium other wise the market is rises are fall the buyer get the profits on this strategy at the same time the seller get losses on the same position and also at what price except those three he exercise the contract he get profits becouse by the computating of the put and call options in this strategies. STRATEGY2 : LONG COMBO LONG COMBO : buy a call + sell a put For Buying a Call Option for Tata Steel Interpretation: Option premium and strike prices of put and call of tata steel company in this hedging strategy buyer pay the premium in one postion and also sumultaniously he recive the premium on put option those are compensated to each other when the price of asset is incresed he exercise the contract the above mentioned two tables are merged and to form a table called as long combo. For Ultimate Return on Long Combo Strategy Interpretation: Different market prices it gives different profits buyer get profits if the market is rise or the market is fall becouse when the market is rise his long position on tata steel is makes profits to him and when the market is fall his short position is makes profits to him when the comparison of the both of this positions ultimately both postions are saves him. When the market is fall 510 to 450 he gets minimum profit and when the market pirce is rise to 750 he get the high profit upto 90 this is the total return of long combo strategy. STRATEGY3 : CALL SPREAD CALL SPREAD : buy a call(itm) + sell a call (OTM) Interpretation: Option premium and srtike price of call option of infosis company the strategist buy one call and sell one call which one is out the money and one is in the money. in the money buying a call option profits is unlimted and loss is limited in the form of premium in other option selling of call postion loss is unlimited due to market conditions those combinations of this positions we framed the strategy that is call spread. Interpretation: Different market prices it gives different profits or losses only form the above 3250 market price thebuyer will get the profits when the market is fall he get the losses because the call positions are make proftis only when the market rising so when the market is inceses the buyer can make more profits when the market is incresed both postions will make the profits otherwise when the market is fall both positions will get losses so the proftis is may incresed from market fall to rise. STRATEGY4 : LONG COMBO LONG COMBO : Sell a put + buy a call Interpretation: Option premium and strike price of call and put option of hundustan petolium limited company in this hedging strategy buyer profit is unlimited and and loss is limited in form of premium in call option when the matket is rices call option wil makes the profits and at the same time he use another position for making profits he sell the put option for making profits when the market is fall so ultimately two tabels merged and to form a new table that is long combo P a g e

91 Interpretation: Different strike prices gives different profits here the buyer only get losses at the prices 370 and 350 those are constant losses when the market is fall here the buyer fix his risk in the from of the premium the risk will be increses only upto the 15 otherwise when the market is inceses he get the more profits here by the using of the put and call options the buyer can get standard returns on his investment positons when the market rise or fall the profit and losses are compensated by both of them so the buyer will get more profits. STRATEGY5 : LONG STRADDLE LONG COMBO : Buy a put + buy a call Interpretation: Option premium and strike price of call and put of tat steel compay in this hedging strategy buyer loss is limited in the form of premium and the profit is unlimited because if the price of the asset is incresed then autometically the buyer get profits so he exercise the cotntract. The above menteioned two tables are merged and ot form a table that is long staddle. Interpretation: In different market pirces it gives different profits or losses only at the strike prices 570,530 and 510 he get losses which is also limited losses those are only -5/- otherwise the market is rice or fall he will get the profits here the buyer will take strike prices on the different prices in call and put positions and pays the premium here the loss is fixed in the form of premium when the market is rises more and more he get the profit or when the market is fall to very loss still he also get profit so there is no risk for investor investment. STRATEGY6 : CALL SPREAD CALL SPREAD : Sell a call(otm) + buy a call(itm) Interpretation: Option premium and srtike price of call option of infosis company the strategist buy one call and sell one call which one is out the money and one is in the money. in the money buying a call option profits is unlimted and loss is limited in the form of premium in other option selling of call postion loss is unlimited due to market conditions those combinations of this positions we framed the strategy that is call spread. Interpretation: In different market prices it gives different profits or losses only form the above 860 market price thebuyer will get the profits when the market is fall he get the losses because the call positions are make proftis only when the market rising so when the market is inceses the buyer can make more profits.when the market is incresed both postions will make the profits otherwise when the market is fall both positions will get losses so the proftis is may incresed from market fall to rise. b) Propose New Strategies Based on Finding Risk and Return Strategy = sell call + buy a call Conditions: Strike price of a selling call should be less than strike price buying call option. Selling cal premium should be more than difference between strike prices + buying call option premium. Interpretation: Option premium and srtike price of call option of SBI company the strategist buy one call and sell one call here two conditions are taken for making profits those are selling strike price of a option is must be less than the buying the call option and also the difference between the strike pices and premum payed by the longcall must be less then the short call premium. Those combinations of this positions we framed the strategy table that is call spread. Interpretation: In different market prices it gives different profits only form the above 2480 market price thebuyer will get the profits 10/- when the market is fall he get the profit because the short call positions are make proftis only when the market falling so when the market is fall the buyer can make more profits.when the market is incresed long postions will make the profits so in this strategy the buyer never get losses because both are preotected by them when the market conditions are change. c) Growth of Derivative Market Interpretation: Turnover of the derivative mareket in india from 2001 to Here from 2003 to 2009 there a rapid growth in the derivtive market which is futures and options because both contracts are have low risk and high return the highest growth of market in 2009 after that the market is decrese because uncertinity in the software sector and financial crisis in developed countries. After that the market is slowly pick up due to increse of software boom P a g e

92 d) Growth of Options in Derivative Market with Time Interpretation: Turnover of the option cotnract in derivative market in india with time here in this data we can observe that the options are incresed from 2002 upto 2006 because investors are ready to inveset the money in low risk securites after it will decrese to 2009 due to speculators and mark to market transation.after 2009 it will increses slowly due to real investors. VARIATION OF OPTIONS AND FUTURES IN DERIVATIVE MARKET WITH TIME Interpretation: Turnover of options and futures cotnracts in market with time here in this contracts there is a equalent percentage of growth in both contracts but in the options more contracts are traded than futures because in the options the risk is fix in the form of premium so the buyer has only rights but not obligations on asset so it is low risk investmet so most of the investors are intrested to invest the money in option contract. FINDINGS Here the different companies and different strategies gives the different risk and returns. The straddle strategy is a volatile strategy when the market is bullish gets the profits and when market is down get the profits. The long combo has no profits but by the increasing of the market the profit is decreased up to 10/-. Call spread have the both profits and losses only when the market is bullish investor get the profits. The new proposed strategy gives the only profits between the 30/- to 10/- it means only due to the market conditions the profits are change. With the comparison of the futures, options are contracts that are more tradable because options are low investment contracts than futures. REFERENCES 1. Retrieved from 2. Retrieved from 3. Retrieved from 4. Retrieved from 5. Retrieved from 6. Retrieved from 7. Retrieved from 8. Retrieved from 9. Retrieved from ***** FOR PAPER SUBMISSION & CLARIFICATION OR SUGGESTION, callandinvitation@pezzottaitejournals.net callandinvitations@pezzottaitejournals.net callforpapers@pezzottaitejournals.net Editor-In-Chief Pezzottaite Journals, 64/2, Trikuta Nagar, K. K. Gupta Lane, Jammu Tawi, Jammu & Kashmir , India. (Mobile): P a g e

93 COMPARATIVE STUDY OF MOVING TREND OF NIFTY & SENSEX Nitin Sethi 23 Dr. Sonia Gupta 24 ABSTRACT The CNX Nifty is the flagship index on the National Stock Exchange of India Ltd. (NSE). The Index tracks the behaviour of a portfolio of blue chip companies, the largest and liquid Indian securities. BSE s popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa). Both Nifty and Sensex makes the market so volatile and it affects the prices of stocks. The Nifty and Sensex moves up or goes down their moving trend mostly on the same direction. This moving trend of Nifty and Sensex affect the traders of both NSE and BSE. The objective of this paper is to measure the nature of correlation of Nifty and Sensex. This research paper is an attempt to consider the moving trend of Nifty and Sensex are correlated or not. The results were analyzed with the help of statistical tools and techniques i.e. Average method, and Karl Pearson Correlation Coefficient Method. It was identified that there exists high degree of positive correlation between moving trend of Nifty and Sensex. Nifty, Sensex, Correlation etc. INTRODUCTION NIFTY KEYWORDS The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE was setup by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes. The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualization of stock exchange governance, screen based trading, compression of settlement cycles, dematerialization and electronic transfer of securities, securities lending and borrowing, professionalization of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive use of information technology. The CNX Nifty is the flagship index on the National Stock Exchange of India Ltd. (NSE). The Index tracks the behaviour of a portfolio of blue chip companies, the largest and most liquid Indian securities. It includes 50 of the approximately 1600 companies listed on the NSE, captures approximately 65% of its float-adjusted market capitalization and is a true reflection of the Indian stock market. The CNX Nifty covers 21 sectors of the Indian economy and offers investment managers exposure to the Indian market in one efficient portfolio. The Index has been trading since April 1996 and is well suited for benchmarking, index funds and index-based derivatives. The CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between the NSE and CRISIL. IISL is India s first specialized company focused on an index as a core product. The CNX Nifty is a 50 stock, float-adjusted market-capitalization weighted index for India. It is used for a variety of purposes, such as benchmarking fund portfolios, index based derivatives and index funds. The CNX Nifty is derived from economic research and is created for those interested in investing and trading in Indian equities. The CNX Nifty stocks represent about 65% of the total float-adjusted market capitalization of the National Stock Exchange (NSE) and the Nifty is a diversified index, accurately reflecting the overall market. The reward-to-risk ratio of CNX Nifty is higher than other leading indices, offering similar returns but at lesser risk. Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify for inclusion in the CNX Nifty, it has to reliably have market impact cost below 0.50 %, when doing CNX Nifty trades of Rupees (Rs) 2 crores. 23 Research Scholar, T.M.I.M.T., Teerthanker Mahaveer University, Uttar Pradesh, India, sonu19nitinsethi@gmail.com 24 Faculty, T.M.I.M.T., Teerthanker Mahaveer University, Uttar Pradesh, India, sonia2853@gmail.com 1751 P a g e

94 Index Maintenance Index maintenance plays a crucial role in ensuring the stability of the index, as well as in meeting its objective of being a consistent benchmark of the Indian equity markets. IISL has constituted an Index Policy Committee, which is involved in the policy and guidelines for managing the CNX Nifty. The Index Maintenance Subcommittee makes all decisions on additions and deletions of companies in the index. Changes in the index level reflect changes in the market capitalization of the index, which are caused by stock price movements in the market. They do not reflect changes in the market capitalization of the index, or of the individual stocks, that are caused by corporate actions such as dividend payments, stock splits, and distributions to shareholders, mergers, or acquisitions. When a stock is replaced by another stock in the index, the index divisor is adjusted so the change in index market value that results from the addition and deletion does not change the index level. The index is calculated real-time on all days that the National Stock Exchange of India is open. Corporate Actions and Share Updates Maintaining the CNX Nifty index includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price adjustments due to restructurings or spin-offs. Some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the index. Other corporate actions, such as share issuances, change the market value of an index and require a divisor adjustment to prevent the value of the index from changing. Adjusting the divisor for a change in market value leaves the value of the index unaffected by the corporate action. This helps keep the value of the index accurate as a barometer of stock market performance, and ensures that the movement of the index does not reflect the corporate actions of the companies in it. Divisor adjustments are made after the close of trading and after the calculation of the closing value of the index. Any change in the index divisor also affects corresponding sub-indices and divisors. Each sub-index is maintained in the same manner as the headline index. Corporate actions such as splits, stock dividends, spin-offs, rights offerings, and share changes are applied on the ex-date. All singular instances of share changes arising out of additional issue of capital, such as ESOPs, QIPs, ADR/GDR issues, private placements, warrant conversions, and FCCB conversions, which have an impact of 5% or more on the issued share capital of the security, are implemented after providing a five days notice period. Share repurchase (buyback) also have the same rules as applicable to share changes. Index Data Total Return The CNX Nifty reflects the return one would get if an investment is made in the index portfolio. As the CNX Nifty is computed in real- time, it takes into account only the stock price movements. However, the price indices do not consider the return from dividend payments of index constituent stocks. Only the capital gains and losses due to price movement are measured by the price index. In order to get a true picture of returns, the dividends received from the index constituent stocks also need to be included in the index movement. Such an index, which includes the dividends received, is called the total return index. The total return index reflects the returns on the index from stock prices fluctuation plus dividend payments by constituent index stocks. Hedging Effectiveness The CNX Nifty has been tested against numerous randomly chosen, equally-weighted portfolios of different sizes, varying from 1-to- 100 small, mid and large cap companies, as well as many industry indices/sub-indices provided by CMIE, for hedging effectiveness. Using monthly returns data, it was observed that the correlation (R2) for various portfolios and indices on the CNX Nifty was significantly higher than other benchmark indices, indicating that the CNX Nifty had higher hedging effectiveness. Trading in derivative contracts based on CNX Nifty The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with index futures on June 12, The futures contracts on the NSE are based on the CNX Nifty. The exchange introduced trading on index options based on the CNX Nifty on June 4, P a g e

95 Index Governance A professional team at IISL, a company setup by NSE and CRISIL, manages the CNX Nifty. There is a three-tier governance structure comprising the board of directors of IISL, the Index Policy Committee, and the Index Maintenance Subcommittee. IISL has constituted the Index Policy Committee, which is involved in the policy and guidelines for managing the CNX Nifty. The Index Maintenance Sub-committee makes all decisions on additions and deletions of companies in the Index. The CNX Nifty has fully articulated and professionally implemented rules governing index revisions, corporate actions, etc. These rules are carefully considered, using Indian market conditions, to dovetail with operational problems of index funds and index arbitrageurs. Index Policy The CNX Nifty uses transparent, researched and publicly documented rules for index maintenance. These rules are applied regularly to manage changes to the index. Index reviews are carried out semi-annually to ensure that each security in the index fulfills eligibility criteria. SENSEX Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia s first Stock Exchange and one of India s leading exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock Brokers' Association" in BSE is a corporatized and demutualized entity, with a broad shareholder-base, which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for trading in equities of small and medium enterprises (SME). More than 5000 companies are listed on BSE making it world's No. 1 exchange in terms of listed members. The companies listed on BSE Ltd command a total market capitalization of USD 1.32 Trillion as of January It is also one of the world s leading exchanges (3rd largest in December 2012) for Index options trading (Source: World Federation of Exchanges). BSE also provides a host of other services to capital market participants including risk management, clearing, settlement, market data services and education. It has a global reach with customers around the world and a nation-wide presence. BSE systems and processes are designed to safeguard market integrity, drive the growth of the Indian capital market and stimulate innovation and competition across all market segments. BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certifications. It is also the first Exchange in the country and second in the world to receive Information Security Management System Standard BS certification for its On-Line trading System (BOLT). It operates one of the most respected capital market educational institutes in the country (the BSE Institute Ltd.). BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm. BSE s popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa). BSE has won several awards and recognitions that acknowledge the work done and progress made like The Golden Peacock Global CSR Award for its initiatives in Corporate Social Responsibility, NASSCOM - CNBC-TV18 s IT User Awards, 2010 in Financial Services category, Skoch Virtual Corporation 2010 Award in the BSE StAR MF category and Responsibility Award (CSR) by the World Council of Corporate Governance. Its recent milestones include the launching of BRICSMART indices derivatives, BSE-SME Exchange platform, S&P BSE GREENEX to promote investments in Green India. S&P BSE SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of S&P BSE SENSEX was taken as S&P BSE SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology. Since September 1, 2003, S&P BSE SENSEX is being calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, and Dow Jones use the free-float methodology. The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the investors. S&P BSE SENSEX has captured all these happenings in the most judicious manner. One can identify the booms and busts of the Indian equity market through S&P BSE SENSEX. As the oldest index in the country, it provides the time series data over a long period (from 1979 onwards). Small wonder, the S&P BSE SENSEX has become one of the most prominent brands in the country P a g e

96 Heritage BSE Ltd, the first ever stock exchange in Asia established in 1875 and the first in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956, has had an interesting rise to prominence over the past 137 years. While BSE Ltd is now synonymous with Dalal Street, it was not always so. The first venue of the earliest stockbroker meetings in the 1850s was in rather natural environs - under banyan trees - in front of the Town Hall, where Horniman Circle is now situated. A decade later, the brokers moved their venue to another set of foliage, this time under banyan trees at the junction of Meadows Street and what is now called Mahatma Gandhi Road. As the number of brokers increased, they had to shift from place to place, but they always overflowed to the streets. At last, in 1874, the brokers found a permanent place, and one that they could, quite literally, call their own. The new place was, Aptly, called Dalal Street (Brokers Street). The journey of BSE Ltd. is as eventful and interesting as the history of India's securities market. In fact, as India's biggest bourse in terms of listed companies and market capitalization, almost every leading corporate in India has sourced BSE Ltd. services in raising capital and is listed with BSE Ltd. Even in terms of an orderly growth, much before the actual legislations were enacted, BSE Ltd. had formulated a comprehensive set of Rules and Regulations for the securities market. It had also laid down best practices, which were adopted subsequently by 23 stock exchanges, which were set up after India gained its independence. BSE Ltd., as an institutional brand, has been and is synonymous with the capital market in India. Its S&P BSE SENSEX is the benchmark equity index that reflects the health of the Indian economy. REVIEW OF LITERATURE Since the beginning of trading in financial futures, the effect of financial derivatives trading on the underlying spot markets has been of great interest to both academics and practitioners. One of the issues commonly investigated by finance researchers is whether the precious metal prices are correlated or not. Previous studies provide mixed evidence on this issue. One attempt at estimating such relationship for use in simulating monetary effects within a macroeconomic model is described in the research of Robert H. Rasche and Harold T. Shapiro (1968) 1. A fuller discussion of this common stock valuation formula can be found in Burton G. Malkeil (1963) 2, Martin Feldstein (1980) 3 discussed a crucial cause of the failure of share prices to rise during a decade of substantial inflation. The analysis here indicates that this inverse relation between higher inflation and lower share prices during the past decade was not due to chance or to other unrelated economic events. One of the analyses by Franco Modigliani and Richard Cohn (1979) 4 also shows that it is unnecessary to invoke a theory of systematic error of the type. According to Kenneth E. Homa & Dwight M. Jaffee (1971) 5, while forecasting share prices, further realism could be introduced. In particular, short sales of stock, the tax treatment of short term and long term capital gains, bills perhaps other assets, all could be introduced into the simulation. Finally, use that is more practical might be made of timing implications of the model if forecasts were generated on a monthly or weekly basis. Hull and White (1987) 6 explain an option-pricing problem of a European call on assets having stochastic volatility. Determine the prices of put options non-dividend paying stocks in a series form, holding the stochastic volatility independent of the stock price. The study finds the volatility to be correlated with the stock price. The frequent overpricing of options by the Black-Scholes model as well as the degree of overpricing increases with the time to maturity. Rubinstein (1994) 7 develops a new method for inferring risk-neutral probabilities (or state-contingent prices) from the simultaneously observed prices of S&P 500 index options following the crash of These probabilities are then used to infer a unique, fully specified recombining binomial tree that is consistent with these probabilities, where a simple backwards recursive procedure solves for the entire tree. Finally, the study observes that "crash-o-phobia" causes a slightly bimodal implied distribution to be quite common after the crash. The smile pattern in the implied volatilities prior to the crash changed into a "sneer" in the post-crash period. Bakshi, Cao, and Chen (1997) 8 examine the pricing and hedging performance of different option pricing models compared to the Black-Scholes model for S&P 500 call options from June 1, 1988 through May 31, Alternative models are examined from three perspectives: (1) internal consistency of implied parameters/volatility with relevant time series data, (2) out-of-sample pricing, and (3) hedging. The other models allow for stochastic volatility, stochastic interest rates and jumps in different combinations from the smile pattern evidenced by using the Black-Scholes model. The Black-Scholes IV exhibits a clear U- shaped pattern across moneyless, where the most distinguished smile evident for options happens near expiration. Dumas et al. (1998) 9 develop a Deterministic Volatility Function (DVF) model for option pricing. This model fits different specifications of the volatility using S&P 500 index options from June 1988 through December A relatively parsimonious volatility function works well for describing the observed volatility structure, whereas the Black-Scholes constant volatility model 1754 P a g e

97 appears to be better for determining hedge ratios. However, the results indicate that the volatility functions implied by the option prices are not stable over time. Peña et al. (1999) 10 analyses the determinants of the smile pattern in IV on the Spanish IBEX-35 index from January 1994 to April The study performs a simple regression framework together with more sophisticated techniques of both Linear and Nonlinear Granger causality to understand the behaviour of the IV function. The results suggest strong seasonal behaviour in the curvature of the volatility smile, as well as a bidirectional Granger causality between transaction costs (proxied by the bid-ask spread). Calvo, et al., (1999) 11 suggest that foreign investors purse irrational trading strategies such as herding and quick changes in sentiments that make the emerging stock markets more volatile. They argue that information disadvantage and diversified international portfolio investment create incentives for rational herd behaviour causing financial markets in emerging economies to be volatile. Hafner and Wallmeier (2000) 12 examine the pattern of DAX implied volatilities across exercise prices and their determinants using daily call and put prices from 1995 to A spline regression model with two segments was formulated and the weighted least square method applied. The results show a very accurate fit to the data and demonstrate cross-sectional variation of implied volatilities. The study by Naeem Muhammad and Abdul Rasheed (2001) 13 uses monthly data on four South Asian countries, including Pakistan, India, Bangladesh and Sri- Lanka, for the period January 1994 to December They employed co integration, vector error correction modeling technique and standard Granger causality tests to examine the long run and short-run association between stock prices and exchange rates. The results of this study show no short-run association between the said variables for all four countries. There is no long-run relationship between stock prices and exchange rates for Pakistan and India as well. However, for Bangladesh and Sri Lanka there appear to be a bi-directional causality between these two financial variables. Jo (2002) 14 has shown empirically tested instances where FII flows induce greater volatility in markets compared to domestic investors while Bae et.al. (2002) 15 have proved that stocks traded by foreign investors experience higher unpredictability than those in which such investors do not have much interest. On the contrary, Gordon and Gupta (2003) 16 have shown that lagged domestic stock market returns are an important determinant of FII flows. Bekaert and Harvey (1998) 17, and Errunza (2001) 18 have found evidences that FII flows do not have significant effect in increasing volatility of stock returns. Varma (2002) 19 examines the mispricing of volatility using closing Nifty futures and options prices from June 2001 to February The study fit a volatility smile and used the Breeden-Litzenberger formula to compute the implied probability distribution for the terminal stock index price from the fitted smile. The implied probability distribution is then compared with the theoretical models to determine whether the observed smile is a reasonable one. The study finds that the market appears to be underestimating the probability of market movements in either direction and indicates severe underpricing volatility. The study also observes overpricing of deep in-the-money calls and some inconclusive evidence of violation of put-call parity. Chow et. al, (2002) 20 have examined the various aspects of trading behaviour and found that both the institutional traders and individual traders supply liquidity in Taiwan stock exchange. The institutional traders do not trade on margin. Here, some of institutional traders trade on margin much less than the individual investor. Again, they have found that the liquidity and the settlement risk might be at odds affecting each other. Bondarenko and Sung (2003) 21 have concluded in their paper that the market makers wish to trade against the market trend when the realized depth of the limit book is significantly lower than the critical value and vice versa. This value of the limit book depth is the conditional value where the expected profit to limit order is zero. Again, they have stated that the market order traders are better off when the limit book is certain. Chung et. al, (1999) 22 have examined the role of the limit order traders intraday competitiveness, in limit order placements and executions. Gurucharan Singh (2004) 23 highlighted that the securities market in India has come a long way in terms of infrastructure, adoption of best international practices and introduction of competition. Today, there is a need to review stock exchanges and improve the liquidity position of various scripts listed on them. A study conducted by the World Bank (1997) reports that stock market liquidity improved in those emerging economies that received higher foreign investments. Douma, Pallathiatta and Kabir (2006) 24 investigated the impact of foreign institutional investment on the performance of emerging market firms and found that there is positive effect of foreign ownership on firm performance. They also found impact of foreign investment on the business group affiliation of firms. Aggarwal, Klapper and Wysocki (2005) 25 observed that foreign investors preferred the companies with better corporate governance. Investor protection is poor in case of firms with controlling shareholders who have ability to expropriate assets. The 1755 P a g e

98 block shareholders affect the value of the firm and influence the private benefits they receive from the firm. Companies with such shareholders will find it expensive to raise external funds. Yin-Hua and Woidtke (2005) 26 found that when company boards are dominated by members who are affiliated to the controlling family, investor protection will be relatively weak and it is difficult to determine the degree of separation of management from ownership. They also observed that firm value is negatively related to board affiliation in family controlled firms. Misra et al. (2006) 27 investigate the volatility surfaces and determinants of IV for NSE Nifty options from 1 ST January 2004 to 31 December The study reveals that deeply in-the-money and deeply out-of-the-money options' volatility is higher than the atthe-money options; the IV of out-of-the-money call options is more than in-the-money calls; IV is higher for far month contracts than for near month contracts; deeply in-the-money and out-of-the-money options with shorter maturity have higher volatility than those with longer maturity; put options' volatility is higher than call options'; and IV of high liquid options is greater than that of low liquid options. The results provide evidence the existence of the volatility smile in India as experienced by the US market before the stock market crash of Naresh (2006) 28 has found that in National Stock Exchange of India Ltd. (NSE), the market participants are satisfied with the existing systems like the investors protection, position limits, contract on the new indices, and use of derivatives by mutual funds. Along with this, they are also not satisfied with the margining, cross-margining, minimum contract size, transaction tax, physical settlement, and eligibility requirement for the introduction of new derivatives. PURPOSE OF STUDY The CNX Nifty is the flagship index on the National Stock Exchange of India Ltd. (NSE). BSE s popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. The moving trend of Nifty and Sensex affects the stock prices of both exchange i.e. NSE and BSE. The main purpose of this study to consider the moving trend of Nifty and Sensex are correlated or not. Therefore, in order to achieve the purpose, the objective of study is: Comparative Study of Moving Trend of Nifty & Sensex. Research Hypothesis H0 - There is positive relation of moving trend between Nifty and Sensex. H1 - There is negative relation of moving trend between Nifty and Sensex. METHODOLOGY OF RESEARCH The research design of the paper is causal in nature. Data was collected from different journals, magazines, and internet sites. Though the number of study conducted in the area is limited. The nature of data collection is secondary in nature. Data was analysed through Karl Pearson s Correlation Coefficient Method. In order to find out the correlation of Nifty and Sensex, data collected was summarize averagely. Data collected was monitored on daily basis for twenty-four months. Nifty and Sensex were taken into consideration and their day-to-day data was collected and averaged for twenty-four months. DATA ANALYSIS The moving trend of Nifty and Sensex is mostly on the same direction either equally or little bit differ but this helps to investor to invest in the market according to current situation. To find out the moving trend of Nifty and Sensex is correlated or not we need the data of Nifty and Sensex, for this, we collect it from secondary resources. Table-1: Average closing index of Nifty and Sensex (Yearly / Quarterly / Monthly) Year wise Monthly details Nifty Sensex 2011: Quarter 1 January February March Mean Standard deviation Value of R Interpretation: The quarter shows, there is positive correlation between Nifty and Sensex P a g e

99 2011: Quarter 2 April May June Mean Standard deviation Value of R Interpretation: This quarter shows there is positive correlation between Nifty and Sensex and little bit higher than first quarter. 2011: Quarter 3 July August September Mean Standard deviation Value of R Interpretation: The quarter shows, there is positive correlation between Nifty and Sensex. 2011: Quarter 4 October November December Mean Standard deviation Value of R Interpretation: This is the last quarter of the year and there is same result as above all quarters positively correlated. 2012: Quarter 1 January February March Mean Standard deviation Value of R Interpretation: The quarter shows, there is positive correlation between Nifty and Sensex. 2012: Quarter 2 April May June Mean Standard deviation Value of R Interpretation: The quarter shows, there is positive correlation between Nifty and Sensex. 2012: Quarter 3 July August September Mean Standard deviation Value of R Interpretation: The quarter shows, there is positive correlation between Nifty and Sensex and higher than first & second quarter of same year. 2012: Quarter 4 October November December Mean Standard deviation Value of R Interpretation: This is the last quarter of the year and there is same result as above all quarters positively correlated. Overall Details For 24 Months 1757 P a g e

100 Overall Mean Overall Standard deviation Value of R 0.99 Interpretation: Overall, there exists high degree of positive correlation between Nifty and Sensex. This highly positive correlation inferred that moving trend of Nifty and Sensex are same either in bullish or bearish trend. This approves our null hypothesis. Sources: Authors Compilation Graph-1: Graphical Representation of Change in Index Nifty & Sensex (Monthly) Sensex Nifty Sources: Authors Compilation CONCLUSION The data analysis proves that there is positive correlation between Nifty & Sensex. In the data analysis, the result found that both Nifty and Sensex are moving on same direction either on bullish trend or in bearish trend. It shows that there is positive relation between Nifty and Sensex movement. The movement of Nifty and Sensex in either bullish trend or bearish trend affects the stock prices of NSE and BSE, which directly or indirectly affect the economic condition of nation. The data analysis represents the positive linear relationship between moving trend of Nifty and Sensex movement. SCOPE OF RESEARCH There is so much scope of this research because there is effect of Nifty and Sensex movement in the same direction to the economic condition of any nation or individuals. The same direction movement indicate to the investor what type of step they should take during the investment in the market either buy the stocks or sell their stock, it s totally depend on the moving trend of the market. REFERENCES 1. Robert, H. Rasche, & Harold, T. Shapiro. (1968). The F.R.B.-M.I.T. Economic model: its special features. American Economic Review, LVIII(2), Burton, G. Malkeil. (1963). Equity yields, growth, and the structure of share prices. American Economic Review, LIII (5), Martin, Feldstein. (1980). Inflation and the stock market. The American Economic Review, 70(5), Franco, Modigliani, & Richard, Cohn. (1979). Inflation, Rational valuation, and the market. Finan. Analysis J., 35, P a g e

101 5. Kenneth, E. Homa, & Dwight, M. Jaffee. (1971). The supply of money and common stock prices. Journal of Finance, 26, Hull, J., & White, A. (1987). The pricing of options on assets with stochastic volatilities. Journal of Finance, 42, Rubinstein, M. (1994). Implied binomial trees. Journal of Finance, 49, Bakshi, G., Cao, C., & Chen. (1997). Empirical performance of alternative option pricing models. Journal of Finance, 52, Dumas, B., Fleming, J., & Whaley, R. (1998). Implied volatility functions: Empirical tests. Journal of Finance, 53, Peña, I., Rubio, G., & Serna, G. (1999). Why do we smile? On the determinants of the implied volatility function. Journal of Banking and Finance, 23, Calvo, Guillermo, & Enrique, G. Mendoza. (2000). Rational Contagion and the Globalization of Securities Markets. Journal of International Economics, Vol # Hafner, R., & Wallmeier, M. (2000). The dynamics of DAX implied volatilities (Working Paper). Germany: University of Augsburg. 13. Naeem, Muhammad, & Abdul, Rasheed. (2001). Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries. Karachi-Pakistan: Applied Economics Research Center. 14. Jo, Gab-Je. (2002). Foreign Equity Investment in Korea. Association of Korean Economic Studies. 15. Bae, Kee - Hong, Kalok, Chan, & Angela, Ng. (2002). Investability and Return Volatility in Emerging Equity Markets. In Proceedings of the International Conference on Finance. National Taiwan University and Department of Finance. 16. Gordon, J., & Gupta, P. (2003, January). Portfolio Flows into India: Do Domestic Fundamentals Matter? (IMF Working Paper No. 03/20). Washington DC: International Monetary Fund. 17. Bekaert, Geert, & Campbell, R. Harvey. (2000, April). Foreign Speculators and Emerging Equity Markets. Journal of Finance, LV (2). 18. Errunza, Vihang. (2001). Foreign Portfolio Equity Investments, Financial Liberalization and Economic Development. Review of International Economics, 9(4). Special Issue: International Financial Liberalization, Capital Flows and Exchange Rate Regimes. 19. Varma, J. R. (2002). Mispricing of volatility in the Indian index options market (IIMA Working Paper). India. Ahmedabad: Indian Institute of Management. 20. Chow, Edward H., Yuan Lin Hsu, & Ivan, Tso. (2002). Liquidity Providers on an Electronic Order-Driven Market, pp Retrieved from SSRN ID Bondarenko, Oleg, & Jaeyoung, Sung. (2003). Specialist Participation and Limit Orders. Journal of Financial Markets, 6, Chung, Kee H., Bonnie F. Van Ness, & Robert, A. Van Ness. (1999). Limit Order and the Bid-Ask Spread. Journal of Financial Economics, 53, Retrieved from SSRN ID : Singh, Gurucharan. (2004). Illiquidity in Stock Exchanges: Some Issues. The Indian Journal of Commerce, 57(4), Douma, S., Rejie, G., & Kabir, R. (2006). Foreign and domestic ownership, business groups and firm performance- Evidence from large emerging market. Strategic Management Journal, 27(7), Aggarwal, R., Klapper, L., & Wysocki, P. D. (2005). Portfolio preferences of foreign institutional investors. Journal of Banking and Finance, 29(12), P a g e

102 26. Yin-Hua, Y., & T. Woidtke. (2005). Commitment or entrenchment? Controlling Shareholders and Board composition. Journal of Banking and Finance, 29(7), Misra, D., Kannan, R., & Misra, S. D. (2006). Implied volatility surfaces: A study of NSE NIFTY options. International Research Journal of Finance and Economics, 6, Naresh, G. (2006). Views of the Market Participants on Trading Regulations in the Derivatives Market. Retrieved from SSRN ID , pp Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from ON_THE Retrieved from ***** BUSINESS PROPOSAL FOR CONFERENCES PUBLICATIONS IN JOURNALS / AS PROCEEDINGS We are pleased to present this proposal to you as publisher of quality research findings in / as Journals / Special Issues, or Conference Proceedings under Brand Name Pezzottaite Journals. We aims to provide the most complete and reliable source of information on current developments in the different disciplines. The emphasis will be on publishing quality articles rapidly and making them available to researchers worldwide. Pezzottaite Journals is dedicated to publish peer-reviewed significant research work and delivering quality content through information sharing. Pezzottaite Journals extends an opportunity to the Organizers of Conferences & Seminars from around the world to get Plagiarism Free research work published in our Journals, submitted and presented by the participants within the said events either organized by /at your Department / Institution / College or in collaboration. As you know, the overall success of a refereed journal is highly dependent on the quality and timely reviews, keeping this in mind, all our research journals are peer-reviewed to ensure and to bring the highest quality research to the widest possible audience. The papers submitted with us, will follow a well-defined process of publication and on mutual consent. Publications are made in accordance to policies and guidelines of Pezzottaite Journals. Moreover, our Journals are accessible worldwide as Online and Print volumes. We strongly believe in our responsibility as stewards of a public trust. Therefore, we strictly avoid even the appearance of conflicts-of-interest; we adhere to processes and policies that have been carefully developed to provide clear and objective information, and it is mandate for collaborating members to follow them. Success Stories: We had successfully covered 4 International Conferences and received appreciation from all of them. If you have any query, businessproposal@pezzottaitejournals.net. We will respond to your inquiry, shortly. If you have links / or are associated with other organizers, feel free to forward Pezzottaite Journals to them. It will indeed be a pleasure to get associated with an educational institution like yours. (sd/-) (Editor-In-Chief) 1760 P a g e

103 FINANCIAL DETERMINANTS OF EQUITY SHARE PRICES: AN EMPIRICAL ANALYSIS STUDY WITH REFERENCE TO SELECTED COMPANIES LISTED ON BOMBAY STOCK EXCHANGE Kiran Challa 25 G. V. Chalam 26 ABSTRACT The stock market plays a crucial role in the economic development of any economy. From both industry and investor point of view, the stock market is imperative. It is necessary to analyze the basic factors of stock market, which might influence the investors' investment decision. The market price of share depends on many factors, such as earnings per share, dividend per share, dividend payout ratio, size of the firm and dividend yield, management, diversification, etc. Against this background, the present study examines the empirical relationship between equity share prices and explanatory variables, such as book value per share, return on net worth, size in terms of sales, etc. and also to analyze the relationship between the equity share price and variables, such as earnings per share, price-earnings ratio, dividend yield, dividend per share, dividend payout during the period of study. The sample companies from the complementary groups of Cement and Steel are selected based on the convenience of the researcher, whose financial data is available continuously for a period of ten years, i.e., from to in Bombay Stock Exchange Directory. It is find out from the analysis that the explanatory variables, like book value and size are the determinants of market price of the equity, while from the select financial variables, only dividend payout ratio and dividend yield are observed to be determining factors. The other variables, like dividend per share, dividend yield, dividend payout ratio and price to earnings ratio are all influencing the market price, while earnings of the company has nothing to do with the market price of the equity share. KEYWORDS Book Value of Share, Market Price of Stock, Explanatory Variables, Earnings Per Share, Return on Net Worth etc. INTRODUCTION The stock market plays a crucial role in the progress of the industry of any economy that in due course affects the country s economic status largely. From both industry and investor point of view, the stock market is imperative. Hence, the stock market is renowned as an indicator of economic growth of a nation. The Bombay Stock Exchange in India being one of the fastest stock exchanges in Asia is a key financial organization and plays a very vibrant role in increasing investment. It is necessary to analyze the basic factors of stock market, which might influence the investor to invest in the equity share prices. In fact, investment in equity share is one of the liquid forms of investment. The market price of the share (MPS) is one of the most important factors, which affects the investment decision of investors. The MPS depends upon many other factors, such as earnings per share, dividend per share, dividend payout ratio, size of the firm and dividend yield, management, diversification, etc. At the first place, the inclusive asset and strength of a company is repeatedly enumerated by its price of shares. It is also put forward from the theories that there are many factors on which the market price of the share depends, for instance earning per share, dividend per share, price-earnings ratio, dividend payout ratio, size of the firm, dividend yield, etc. Therefore, comprehending the influence of several fundamental variables on share price plays a vital role in taking decisions for parties like investors, government, etc. As far as stocks are concerned, the most recent price that the particular stock has been traded is known as the market price of a stock. But no assurance is given that an investor will obtain similar price upon procurement of the stock subsequently. However, the book value has been the original prices of the assets as of the books; it does not show the current market price of the company's assets. Accordingly, while estimating the market price of the shares, this ratio has a limited use. However, the minimum price of the company's shares can be understood for the estimation. It will also help in judging whether the share price is overpriced or underpriced. What is meaningful to investors is the benefits on the valuation of impending income spawning prospects. Once the investment is done on the equity share, future income can be in two ways, viz., dividend income and appreciation of market price of the share. Hence, the factors that can influence the forthcoming prospects can be characterized as value pavilions of the share. Thus, 25 Research Scholar (FT), Department of Commerce & Business Administration, Acharya Nagarjuna University, Andhra Pradesh, India, saykiran@gmail.com 26 Professor, Department of Commerce & Business Administration, Acharya Nagarjuna University, Andhra Pradesh, India, chalam.goriparthi@gmail.com 1761 P a g e

104 It is always better to have higher cash reserves in the balance sheet, Increase in book value per share as carried out in balance sheet, Increase in the sales volume of the company, Increase in earnings per share and net income, Subsiding number of shares outstanding in the market (share buyback), Affirmative net cash flow of the company, Standard dividend policy, dividend payout, type of dividend, etc. OBJECTIVES OF STUDY Against this backdrop, the present study has undertaken the following specific objectives: To examine the empirical relationship between equity share prices and explanatory variables, such as book value per share, return on net worth, size in terms of sales, etc. To analyze the relationship between the equity share price and variables, such as earnings per share, price-earnings ratio, dividend yield, dividend per share, dividend payout during the period of study. HYPOTHESES OF STUDY For this study, eight hypotheses have been formulated based on the relationship between the seven accounting ratios and market price of share applied Pearson s correlation and multiple regression models to measure the strength of these relationships: H1: There is a positive relationship between BV and MPS H2: There is a positive relationship between size and MPS H3: There is a positive relationship between RONW and MPS H4: There is a positive relationship between DPS and MPS H5: There is a positive relationship between EPS and MPS H6: There is a positive relationship between DY and MPS H7: There is a positive relationship between DP and MPS H8: There is a positive relationship between P/E and MPS Selection of Financial Variables The present study identified seven financial ratios to test the impact of these ratios on Market Price of Share (MPS) of the select listed companies. The financial ratios include the Book Value per Share (BV), Dividend per Share (DPS), Dividend Payout Ratio (DP), Dividend Yield (DY), Earnings per Share (EPS), Price to Earnings ratio and Return on Net worth (RONW). In general, Dividend per share has emerged as a significant determinant of share price; yield also emerged as highly significant determinant with its negative association with market price of share. The coefficient of book value was positive and highly significant with market price of share. The influence of price-earning multiplier on share prices is more. Hence, this study tries to examine the financial factors responsible for affecting the market price of equity shares in select companies. Research Design Based on the above-mentioned objectives of the study, a descriptive research has been adopted. Further, the non-probability sampling technique is used for the analysis of the study. The sample companies are selected based on the convenience of the researcher, whose data is available continuously for a period of ten years. The Steel and Cement are complementary industries, which are major contributors of construction industry in any economy. The companies of respective industries are selected for an empirical analysis of the present study, which are listed in Bombay Stock Exchange. Selection of Sample While selecting a sample of ten companies, five each from Cement and Steel industrial groups, a company has been regarded as eligible for selecting as a sample, if it satisfies the following conditions: It is listed in Bombay Stock Exchange, the necessary financial data required for calculating the measures of dependent and independent variables pertaining to all the years to is available and thus only those companies, whose price data is continuously available. The following are the companies selected for the empirical analysis in the present study: Grasim Industries Limited. OCL India Limited. Prism Limited. RAMCO Cements Limited P a g e

105 Sagar Cements Limited. FACOR Steel Limited. JSW Steel Limited. RATHI Steel and Power Limited. Steel Authority of India Limited. Tata Steel Limited. ANALYSIS OF DATA & INTERPRETATION Table-1: ANOVA, Model Summary & Regression Analysis for Each Variable (BV, SIZE, and RONW) with dependent variable (MPS) of Cement Industry Model Un-standardized Coefficients Standardized Coefficients B Std. Error Beta t Sig. Constant Book Value(BV) Size of the Firm(SIZE) Return on Net Worth (RONW) R Square Value.789 F Value F- Sig.000 Note: a. Dependent Variable: Market Price of Share (MPS) b. Predictors: (Constant), Return on Net Worth (RONW), Book Value (BV), Size of the Firm (SIZE). Sources: Computed from the collected data of the select Industrial Companies Table-1 shows the coefficient of multiple determinations R Square that explains the degree to which the independent variables affect the dependent variable. In this case, or 78.9 per cent of the variation in the dependent variable are explained by the independent variables, while or 12.1 per cent were affected by other variables outside the independent variables. The adjusted R-square, a more conservative way of looking at the coefficient of determination is also more than 75 per cent. This indicates that Book value, size and RONW are the major determining factors of MPS. The analysis of variance (ANOVA) is used in testing the hypotheses and to measure the differences and similarities between the variables according to their different characteristics. The results from the Fisher's ratio (i.e. the F-Statistics, which is a proof of the validity of the estimated model) as reflected in table-1, indicates that the F is about and a p-value that is less than to 0.05 (P-value =0.000), this consistently suggests clearly that the explanatory variables are significantly associated with the dependent variable. It explains, they strongly determine the behavior of the market value of the share prices. The data on regression analysis shows that the book value has a strong and positive relationship with market price. The t calculated of book value with significance value 0.00 is statistically significant. The beta value represents that for one per cent increase in book value, the market price of the companies will increase by about 0.67 percent, which is significant. Hence, H1 is accepted since the BV has a significant relationship with MPS. In addition, the return on net worth has a positive relationship with MPS. The 't' calculated of RONW is observed as 0.86 with p-value > 0.05, which is statistically insignificant. Hence, we reject H2. On the other hand, the size has a positive relationship with MPS with P<0.05, which is statistically significant. Hence, an increase in terms of size invariably brings about an increase in market price. The empirical findings from the regression analysis also shows that this outcome principally implies that an increase in book value and size will invariably bring about a significant increase in MPS, while RONW shows no impact. Therefore, the BV and Size has significant relationship with MPS during the period of study, stating that the select variables have explanatory power towards stock price movement. Thus, the weight of the evidence suggests that we accept both H1 and H2 and reject the H3. Table-2: Correlation Co-efficient for each variable (BV, SIZE, and RONW) with dependent variable (MPS) of Cement industry Variables Market Price of the share Book Value Return on Net Worth Size Market Price of the Share **.308 *.756 ** Book Value.871 ** *.744 ** Return on Net Worth.308 *.282 * Size.756 **.744 ** Note: ** Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Sources: Computed from the collected data in Annual Reports of the Select Companies 1763 P a g e

106 The Pearson co-efficient of correlation is used to find out the relationship between market price of share and book value, return on net worth, size of the firm at 1 per cent and 5 per cent level of significance. The result presented in table-2 shows that there is a positive correlation between MPS and the independent variables BV (correlation coefficient = 0.871), RONW (correlation coefficient 0.308), SIZE (correlation coefficient 0.756). The BV and SIZE is showing a significant relationship with dependent variable MPS at 1 percent probability level, whereas, the RONW is showing a significant relationship with dependent variable MPS at 5 per cent probability level. It indicates that the independent variables, viz., BV, RONW and SIZE are showing an impact on dependent variable MPS. Table-3: ANOVA, Model Summary & Co-efficient for each variable (DPS, EPS, DY, DP, P/E) with dependent variable (MPS) of Cement industry Model Un-standardized Coefficients Std. Coefficients T Sig. B Std. Error Beta Constant Dividend Price Share (DPS) Earnings Per Share (EPS) Dividend Yield (DY) Dividend Paid (DP) Price to Earnings Ratio (P/E) R Square Value F Value F- Sig Note: a. Dependent Variable: Market Price of Share (MPS) b. Predictors: (Constant), Price to Earnings Ratio (P/E), Dividend Price Share (DPS), Dividend Yield (DY), Dividend Paid (DP), Earnings per Share (EPS). Sources: Computed from the collected data of the select Industrial Companies The R-square of the regression model is the fraction of the variation in the dependent variable that is predicted by the independent variables. It can be observed from table-3 that the R has a value of.894, which shows a simple correlation between market price of the share and explanatory variables. The R-square, which is also a measure of the overall fitness of the model, indicates that the model can explain about 91.5 percent of the variability between independent and dependent variables. This model does not capture the remaining 9.5 percent of variation, because there might be many other factors that can explain this variation. The next part of the output report is analysis of variance (ANOVA). The data also shows that the various sums of squares and the degree of freedom associated with each. From these two values, the average sums of squares (mean squares) can be calculated by dividing the sums of squares by the associated degrees of freedom. The most important part of data in the above table is the F-ratio, which reveals the associated significance value. For the data, F is with the p value less than 0.05, which is significant (P-value =.000), this unvaryingly suggests that the select explanatory factors are significantly associated with the dependent variable. It implies that they are strongly determining the behavior of the market values of share prices. However, further empirical findings provided in the above table shows that there is a significant relationship between the DPS, DY and the MPS of select companies in Cement industry during the period of study. This is evident in the t-statistics value (DPS) with a P-Value 0.00, which is statistically significant at 5 per cent level. That means, a change in DPS will have an impact on the market price of the share positively. Simultaneously, dividend yield with t- statistic shows that there is a sturdy and negative relationship with MPS. The t-calculated value of DY, and P-value.011 is also statistically significant at 5 per cent level of significance. This significant negative relationship shows that the yield could significantly affect the market price of the share of Cement industry. In addition, the EPS, DP and P/E are statistically insignificant with P-value greater than 0.05, which means that these independent factors are not having a significant relationship with the market price of the share. Hence, we accept H4 and H6 and reject H5, H7 and H8. Table -4: Correlation Co-efficient for each variable (DPS, DP, DY, EPS, P/E) with dependent variable (MPS) of Cement Industry Variables MPS DPS EPS DY DP P/E MPS **.883 ** DPS.937 ** ** EPS.883 **.937 ** * DY DP * ** P/E ** 1 Note: ** Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Sources: Computed from the collected data in Annual Reports of the Select Companies 1764 P a g e

107 The Pearson co-efficient of correlation is used to find out the relationship between MPS and DPS, EPS, DY, DP and P/E at 1 per cent and 5 per cent level of confidence. The results of analysis shows that there is a positive correlation between MPS and the independent variables DPS (correlation coefficient = 0.937), EPS (correlation coefficient = 0.833) and shows a negative correlation between MPS and the independent variables DY (correlation coefficient = ), P/E (correlation coefficient = -.021) and DP (correlation coefficient = -1.50). The DPS and EPS are having a significant relationship with dependent variable MPS at 5 per cent probability level, whereas, the DP, DY and P/E are having an insignificant relationship with dependent variable MPS. It indicates that out of the five variables, only two independent variables DPS and EPS are showing an impact on dependent variable MPS. Table-5: ANOVA, Model Summary & Regression for each variable (BV, SIZE, and RONW) with dependent Variable (MPS) of Steel Industry Model Un-standardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta Constant Book Value(BV) Size of the Firm(SIZE) Return on Net Worth (RONW) Return on net worth R Square Value F Value F- Sig.000 Note: a. Dependent Variable: Market Price of Share (MPS) b. Predictors: (Constant), Return on Net Worth (RONW), Book Value (BV), Size of the Firm (SIZE) Sources: Computed from the collected data of the select Industrial Companies The R square of.579 indicates 57.9 per cent of the variations in the dependent variable, which are expounded by the independent variables, while or 42.8 per cent were affected by other variables outside the independent variables. The adjusted R-square, a more conventional method of observing at the coefficient of determination is less than 60 per cent. In this case, 55.2 per cent of the variations in the dependent variable is not explained by the independent variables. Hence, this indicates that independent variables are the some of the determining factors of MPS. Outcomes from the Fisher's ratio as shown in table-5 indicates that the F is about and a p-value that is less than 0.05 (P-value = 0.00), reliably recommends that the explanatory factors which are independent variables associated with the dependent variable has relevance. It can be said that they determine the behavior of the market values of the share prices in the Steel industry during the period of study. It can also be observed from the data in table-5 that only the book value has a significant relationship with MPS. The t-calculated of book value (6.590) indicates that the BV has a strong and positive relationship with MPS with its significance level of 0.00, which is statistically significant. Thus, the weight of the evidence shows that we accept H1. It can also be observed from the data in table-5 that both size and return on net worth has a positive relationship with MPS. The t calculated of size and RONW shows a positive relationship with the MPS. However, the significance level of and of size and RONW respectively are statistically insignificant, which indicates that the H2 and H3 are rejected. Therefore, in case of Steel industry, size and RONW are not playing any vital role towards the changes in market price of equity stocks. Table-6: Correlation Co-efficient for each variable (BV, SIZE, and RONW) with dependent variable (MPS) of Steel industry Variables Market Price of the share Book Value Return on Net Worth Size Market Price of the share ** ** Book Value.716 ** ** Return on Net Worth * Size.503 **.488 **.358 * 1 Note: ** Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Sources: Computed from the collected data in Annual Reports of the Select Companies The correlation matrix in table-6 shows the relationship between market price of share and book value, return on net worth, size of the firm at 1 per cent and 5 per cent level of confidence. The data indicates that there is a positive correlation between MPS and the independent variables BV (correlation coefficient=0.716), RONW (correlation coefficient 0.256), SIZE (correlation coefficient.503). The BV and SIZE are showing significant relationship with dependent variable MPS at 5 per cent probability level, while RONW is not showing significant relationship with dependent variable MPS. It indicates that the independent variables BV and SIZE are showing an impact on dependent variable MPS P a g e

108 Table -7: ANOVA, Model Summary & Co-efficient for each variable (DPS, EPS, DY, DP, P/E) with dependent Variable (MPS) of Steel industry Model Un-standardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta Constant Dividend Price Share (DPS) Earnings Per Share (EPS) Dividend Yield (DY) Dividend Paid (DP) Price to Earnings Ratio (P/E) R Square Value F Value F- Sig Note: a. Dependent Variable: Market Price of Share (MPS) b. Predictors: (Constant), Price to Earnings Ratio (P/E), Dividend Price Share (DPS), Dividend Yield (DY), Dividend Paid (DP), Earnings per Share (EPS). Sources: Computed from the collected data of the select Industrial Companies From the data in table-7, it is found that the R-Square, which is the coefficient of determination of the variables is The R- square, which is also a measure of the overall fitness of the model indicates that this is capable of explaining about 81.5 per cent of the variability of the share prices of the selected companies. On the other hand, it is about 18.5 per cent of the variation in MPS of the select companies are effected by other factors not captured by this model. This result is complimented by the adjusted R- square of 83.5 per cent, which is the essence of the proportion of total variance that is explained by the model. Similarly, findings from the Fisher's ratio indicates that the F is about and a p-value that is less than to 0.05 (P-value =0.000), which clearly suggests that simultaneously the explanatory variables are significantly associated with the dependent variable. That shows, they strongly determine the behavior of the market values of share prices. The empirical data shown in table-7 also explains that there is a significant positive relationship between DPS and MPS of the listed select companies in Bombay Stock Exchange. This is evident in the t-statistics value of with a P-value of 0.006, which is significant at 5 per cent level of significance. This outcome basically implies that with all other variables held constant, an increase or a change in DPS of companies, say 1 per cent, will on the average bring about a 77 per cent increase in the MPS. That is an increase in the DPS of selected companies will also lead to a positive improvement in the MPS. From this, it is evident that the DPS of the selected companies have a significant positive impact on the MPS. Hence, we accept the H4. Moreover, an insignificant positive relationship between EPS and MPS can be observed which is evident from the t-statistics value and the P-Value This implies that an increase in EPS will invariably bring about no significant increase in the MPS. Hence, we reject H5. Another empirical finding from the regression analysis shows a negative relationship between DY and MPS. This is evident from the t-statistics value of and the P-Value is This result explains that with the influence of other variables held constant, as DY changes, say 1 per cent on an average, MPS changes by per cent in the opposite direction. This result further indicates that the DY is a significant determinant of MPS for the sample listed companies in BSE. Hence, we accept H6. Finally, other variables, like DP and P/E also have a significant impact on the MPS with P-values of and respectively. Hence, we accept H7 and H8. However, this indicates that the firms' earnings have no explanatory power towards stock price movement during the period of study. Table-8: Correlation Co-efficient for each variable (DPS, DP, DY, EPS, P/E) with dependent variable (MPS) of Steel Industry Variables MPS DPS EPS DY DP P/E MPS **.852 ** DPS.838 ** ** EPS.838 ** ** DY * DP ** P/E ** * 1 Note: ** Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Sources: Computed from the collected data in Annual Reports of the Select Companies 1766 P a g e

109 The correlation matrix in table-8 shows the relationship between MPS and DPS, EPS, DY, DP, P/E at 1 per cent and 5 per cent level of confidence. The Pearson s correlation analysis explains that there is a positive correlation between MPS and the independent variables DPS (correlation coefficient = 0.838), EPS (correlation coefficient = 0.838), DP (correlation coefficient = 0.044), P/E (correlation coefficient =.017) and found a negative correlation between MPS and the independent variables DY (correlation coefficient = ) and MPS. The DPS and EPS are having a significant relationship with dependent variable MPS at 5 per cent probability level, whereas DP, DY and P/E are having an insignificant relationship with dependent variable MPS. It indicates that out of the five variables only two independent variables, i.e., DPS, EPS and DY are showing an impact on dependent variable MPS. Table-9: ANOVA, Model Summary & Regression for each variable (BV, SIZE, and RONW) with dependent variable (MPS) of Cement and Steel Industry Model Un-standardized Coefficients Std. Coefficients T Sig. B Std. Error Beta Constant Book Value(BV) Size of the Firm(SIZE) Return on Net Worth (RONW) R Square Value.764 F Value F- Sig.000 Note: a. Dependent Variable: Market Price of Share (MPS) b. Predictors: (Constant), Return on Net Worth (RONW), Book Value (BV), Size of the Firm (SIZE). Sources: Computed from the collected data of the select Industrial Companies Table-9 shows the R-square as or 76.4 per cent of the variation in the dependent variable are explained by the independent variable, while the rest were affected by the other variables. The adjusted R-square, a more conservative way of looking at the coefficient of determination is also more than 75 per cent. This indicates that the book value, size and RONW are the major determining factors of MPS. Findings from the Fisher's ratio as shown in table indicates that the 'F' is about and a P-value that is less than 0.05 (P-value =0.00), which reliably advocates that the explanatory variables are significantly associated with the dependent variable. It implies that they strongly determine the behavior of the market values of the share prices. The regression analysis in table-9 shows that the book value has a strong and positive relationship with market price. The 't' calculated book value is with P-value 0.00 is statistically significant. The beta value represents that for 1 per cent increase in book value, the market price of the companies will increase by.87 per cent, which is significant. Hence, H1 is accepted because BV has a significant relationship with MPS. In addition, the return on net worth has a positive relationship with MPS. The 't' calculated of RONW is with P-value > 0.05, which is statistically insignificant. Hence, we reject H2. On the other hand, the size has a negative relationship with MPS and P>0.05, which is statistically insignificant concluding that we reject H3. It can be concluded from the results of regression analysis that the increase in book value will invariably bring a significant increase in MPS, whereas RONW and Size shows no impact. Therefore, the weight of the evidence during the period of study suggests that we accept H1 and reject H2, H3. Table-10: Correlation Co-efficient for each variable (BV, SIZE, and RONW) with dependent variable (MPS) of Cement and Steel Industry Variables Market Price of the Book Value Return on Net Size share Worth Market Price of the share ** ** Book Value.871 ** ** Return on Net Worth ** Size.341 **.381 **.318 ** 1 Note: ** Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Sources: Computed from the collected data in Annual Reports of the Select Companies The correlation matrix in table-10 shows the relationship between market price of share and book value, return on net worth, size of the firm at 1 per cent and 5 per cent level of confidence. The data explains that there is a positive correlation between MPS and the independent variables BV (correlation coefficient = 0.871), RONW (correlation coefficient 0.147), SIZE (correlation coefficient.341). The BV and SIZE are showing a significant relationship with dependent variable MPS at 5 per cent probability level, whereas, RONW is not showing significant relationship with dependent variable MPS. It indicates that the independent variables BV and SIZE are showing an impact on dependent variable MPS P a g e

110 Table-11: ANOVA, Model Summary & Co-efficient for each variable (DPS, EPS, DY, DP, P/E) with dependent Variable (MPS) of Cement and Steel industry Model Un-Standardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta Constant Dividend Price Share (DPS) Earnings Per Share (EPS) Dividend Yield (DY) Dividend Paid (DP) Price to Earnings Ratio (P/E) R Square Value F Value F- Sig Note: a. Dependent Variable: Market Price of Share (MPS) b. Predictors: (Constant), Price to Earnings Ratio (P/E), Dividend Price Share (DPS), Dividend Yield (DY), Dividend Paid (DP), Earnings per Share (EPS) Sources: Computed from the collected data of the select Industrial Companies In Table-11, the R-square value is observed as or 86.3 percent indicating the variations in the dependent variable that are explained by the independent variables, while the rest were affected by other variables outside the independent variables. The adjusted R-square, a more conservative way of looking at the coefficient of determination is also more than 80 percent. Hence, it indicates that the independent variables are the major determining factors of MPS. The observations from the analysis of variance in table-11 states that the F value is and the P-value stands at 0.00, which is less than 5 per cent level of significance shows the goodness of the model. Hence, all the independent variables selected for the study are determining factors of the market price of the share in the select companies during the period of study. On the other hand, further empirical results shows that there is a significant relationship between DPS and MPS of the select companies. It is also evident in 't' statistics value of with a P-value of is significant at 5 per cent level. This implies that with all other variables held constant, an increase or a change in DPS, say 1 per cent will bring 59.1 percent in the MPS. That is an increase in DPS will lead to a positive improvement in the MPS. From this, it is evident that the DPS of selected companies have a significant positive impact on the MPS. Hence, we accept the H4. Further, data also shows a significant relationship between EPS and MPS, which is evident in t-statistics value of and P-value This implies that an increase in EPS will invariably bring about a significant increase in MPS, say 1 percent on the average will bring 32.7 percent increase in MPS. Hence, we accept H5. Another empirical result from the regression analysis shows a negative relationship between DY and MPS. This is evident in 't'-statistic value of and the P-value This result explains that as DY changes, say 1 per cent on an average, MPS changes by percent in the opposite direction. This result further indicates that DY is a significant determinant of MPS for the listed sample companies in BSE. Hence, we accept H6. Finally, other variables like DP and P/E have an insignificant impact on MPS. However, this indicates that the DP and P/E have no explanatory power toward stock price movement of select firms during the period of study period. Hence, we reject H7 and H8. Table-12: Correlation Co-efficient Analysis for each variable (DPS, DP, DY, EPS, P/E) with dependent variable (MPS) of Cement and Steel Industry Variables MPS DPS EPS DY DP P/E MPS **.884 ** * DPS.891 ** ** EPS.884 **.938 ** DY * ** DP ** P/E **.828 ** 1 Note: ** Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Sources: Computed from the collected data in Annual Reports of the Select Companies The co-efficient of correlation in table-12 explains the relationship between DPS, EPS, DY, DP, P/E and MPS at 1 per cent and 5 per cent level of significance. The result shows that there is a positive correlation between MPS and the independent variables DPS (correlation coefficient = 0.891), EPS (correlation coefficient = 0.884), P/E (correlation coefficient = 0.017) and found a negative correlation between MPS and the independent variables DY (correlation coefficient = ), DP (correlation coefficient = ). The DPS, EPS and DY are having a significant relationship with dependent variable MPS at 5 per cent probability level, whereas DP and P/E is having an insignificant relationship with dependent variable MPS. It can be concluded from the foregoing analysis that out of the five variables, only three independent variables DPS, EPS and DY are showing an impact on dependent variable MPS P a g e

111 FINDINGS AND CONCLUSIONS In case of the select companies of Cement industry, the explanatory variables like book value and size are the determining factors of market price of the equity share, while from the select variables, only dividend payout ratio and dividend yield are observed to be determining factors. On the other hand, in case of select companies of Steel industry, only book value emerged as a determining factor of the market price. The other variables, like dividend per share, dividend yield, dividend payout ratio and price to earnings ratio are all influencing the market price, while earnings of the company has nothing to do with the market price of the equity share. Therefore, for both the Cement and Steel industries together, the book value seems to be a determinant factor of market price of the share. On the other hand, the DPS, EPS, DY are observed to be influential factors of market price of the share. SUGGESTIONS As market price of the share is significantly associated with the book value of both Cement and Steel industries, it is suggested to the investors to make a note of BV while taking investment decisions. A steady dividend policy with a consistent book value would help a company to be in a lucrative path as dividend per share and yield are also playing an important role. Hence, the present study concludes that the analysis on the financial determinants of equity share prove to be helpful to the investors before they take investment decisions. As the selected explanatory variables possess strong influence towards the stock price movements, it is useful for both investors and the company to predict while investing in shares. REFERENCES 1. AL-Shubiri, F. N. (2011). Analyze the Determinants of Market Stock Price Movements: An Empirical Study of Jordanian Commercial Banks. International Journal of Business and Management, 5(10), Balkrishan. (1984). Determinants of Equity Prices in India. Management Accountant, 19(12), Bhatt, P., & Sumangala, J. K. (2012). Impact of Earnings per share on Market Value of an Equity share: An Empirical study in Indian Capital Market. Journal of Finance, Accounting and Management, 3(2), Bodnar, G. M., & Gentry, W. M. (1993). Exchange Rate Exposure and Industry Characteristics: Evidence from Canada, Japan, and the USA. Journal of International Money and Finance, 12, Chang, H. L., Chen, Y. S., Su, C. W., & Chang, Y. W. (2008). The relationship between Stock Price and EPS: Evidence based on Taiwan panel data. Economic Bulletin, 3(30), Jorion, P. (1991). The Pricing of Exchange Rate Risk in the Stock Market. Journal of Financial and Quantitative Analysis, 26, Malkar, B., & Gupta, R. (2002, December). Determinants of Share Price - A System Approach: The Modified Model. Finance India, 16(4), Malhotra, M., & Prakash, N (2001). Determinants of Market Price of A-Group and B-Group Shares. The ICFAI Journal of Applied Finance, 7(3), Mehta, S. K., & Turan, M. S. (2005). Determinants of Stock Prices in India: An Empirical Study. The Journal of Indian Management and Strategy, 10(4), Midani, A. (1991). Determinants of Kuwaiti Stock Prices: An Empirical Investigation of Industrial Services and Food Company Shares. Retrieved April 9, Nirmala, P. S., Sanju, P. S., & Ramachandran, M. ( 2011). Determinants of Share Prices in India. Journal of Emerging Trends in Economics and Management Sciences, 2(2), Nisa, M. U., & Nishat, M. (2012). The Determinants of Stock Prices in Pakistan. Asian Economics and Financial Review, 1(4), Taulbee, N. (2005). Influences on the Stock Market: An Examination of the Effect of Economic Variables on the S&P 500. The Park Place Economist, IX, Retrieved from Retrieved from ***** 1769 P a g e

112 STUDY OF RISK APPETITE OF RETAIL INVESTORS OF RANCHI IN INDIAN STOCK MARKET Jyoti Kumari 27 Sukanta Chandra Swain 28 ABSTRACT In spite of the possibility of appropriating huge returns making investments in Stock Market, less than 1.5% of Indian Population is associated with Stock Market. It may, probably, because of risk involved in such investment, ascertaining risk with no or little information and improper rating of risk tolerance capacity of retail investors. India having one of the highest savings rate in the world, city like Ranchi has potential to increase its contribution in the Indian capital market. However, the reality is far behind the potential. Thus, it has been important to study thought processes and perceptions, challenges and bottlenecks i.e., investing behavior of the investors of this city. Keeping this in backdrop, the project titled An Analysis of Investment Behaviour of Retail Investors of Ranchi in Indian Stock Market has been taken up for doctoral degree. This paper is a part of the macro project in progress, the brief of which is mentioned in the paper itself. Each retail investor has his or her own tolerance of and attitude towards risk so that an investment considered high risk by one investor may be considered low risk by another investor. Thus assessing investors to their appropriate risk tolerance category is the objective of the paper. Retail Investors, Indian Stock Market, Risk Appetite etc. INTRODUCTION KEYWORDS Despite India s GDP has increased 4.5 times from $414 billion in 2001 to $1.87 trillion in 2013, the development of the capital market has been uneven and its penetration has been limited. For instance, only 1.4% of Indian population is having Demat Accounts (a measure of direct participation in the stock market) as against 17.7% in USA, 16.4% in UK, and 9.4% in China. In addition, the total number of active stock exchanges across India has reduced from 16 at the start of the decade to 4 in , including two national exchanges, namely The National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE). Moreover, National Stock Exchange s share of total turnover across stock exchanges has surged dramatically from 61.53% in to 92.52% in Apart from NSE and BSE, the only two stock exchanges that are active are Calcutta Stock Exchange and Uttar Pradesh Exchange as per data. Almost 80% of the NSE s turnover in India continues to come from the top five cities of Mumbai, Delhi, Kolkata, Ahmadabad and Chennai as on In fact, Mumbai accounts for more than half the total NSE turnover at 55%; whereas Delhi, contributor of the second largest turnover has a market share of 14.97%. In such context, it would not be difficult to ascertain about the contribution of a city like Ranchi. However, India having one of the highest savings rate in the world, city like Ranchi has potential to increase its contribution in the Indian capital market. However, it is important to study thought processes and perceptions, challenges and bottlenecks i.e., investing behavior of the investors of this city. That is why the macro project titled An Analysis of Investment Behaviour of Retail Investors of Ranchi in Indian Stock Market has been taken up for doctoral degree. Following section reveals about the macro Project. An Analysis of Investment Behaviour of Retail Investors of Ranchi in Indian Stock Market Projected Macro Study: This project will help us to comprehend the investment behaviour of retail investors, trading through different trading firms. It will help to understand: What percentage of their income they invest in stock market by taking their demography and their earning source/jobs, social and economic strata into account. The return expectations of the retail investors About the risk appetite of different investors from different background. SCOPE OF STUDY The Study is confined to the retail investors based at Ranchi (India). Mostly trading houses have Depository Participant (DP) accounts along with trading accounts. However, some other organizations like banks to provide DP account facility. Therefore, our study will although mostly consider the retail investors trading through trading houses; we will also extend our study to include retail investors of Indian stock market who don t trade through trading houses. 27 Research Scholar, ICFAI University Jharkhand, India, jyoti052@gmail.com 28 Assistant Dean, ICFAI University Jharkhand, India, sukanta_swain@yahoo.com 1770 P a g e

113 OBJECTIVES OF STUDY The key objectives of this study are: To study the pattern (including return expectations) of retail investors based at Ranchi. To develop a risk appetite score for retail investors of different background. To devise models for different clusters based on risk appetite score in order to stretch the incidence and depth of investment in Indian stock market. PROBLEM STATEMENT / RESEARCH GAP Researchers have studied the investors investment pattern and risk tolerance capacity of the Investors in metros and big cities but small cities like Ranchi (India) has not been coming under the purview of such researches and the investors of cities like Ranchi are not alike that of metros. Existing literature surveyed so far depicts a wide spectrum of tools assessing risk tolerance capacity of investors in optimum asset allocation within an investment portfolio and consequential opportunity losses or gains for not investing in stocks. However, a concrete approach to assess the investors attitude towards the risk toleration, as a whole, has been missing. As filler, our study will be putting a set of questions from different functions to each investor with quantified weight attached to every option to ascertain holistic risk tolerating capacity. After assessing the risk tolerating capacity, the investors studied will be clustered and the strategies will be developed accordingly for different clusters. METHODOLOGY USED The study will be an empirical one based on the primary data to be collected from the retail investors on their trading pattern, risk appetite and behavioral facets that determine the investment decisions. On the backdrop of this, there will be concrete information about the stock markets of India containing types of market, the way of functioning, scope and perceptions of investors from secondary sources. For studying the trading pattern of retail investors, 200 retail investors will be surveyed for knowing: The investable capacity of the investors, Whether the investors are first timer or matured, Whether they get actively involved in trading, Whether they are traders or investors, How frequently they invest, Whether they invest for need or take investment as an adventurous move, Whether they are well-informed investors or mere speculators, Whether they are investors of their own or due to persuasion/moral pressure, Their return expectations. For developing risk appetite score for retail investors; a questionnaire will be administered on 200 investors to know their risk tolerance capacity and quantification will be done by assigning a score to them to know whether their risk appetite is high, low, or moderate. Two sample questions of proposed Questionnaire are presented here for developing risk appetite score of the investors. Table-1: Two Sample Questions for Developing Risk Appetite Score of the Investor Questions with Options to Tick Q1. You take a job at a fast-growing company and are offered the following choices. Which one would you pick? a) A conventional form of employment contract of working till the retirement age with normal course of prospects. b) A five-year employment contract with an option with a potential to earn a bonus of 50% depending on company performance. c) A five year employment contract with the option to use your 50% bonus accrued to buy the company s shares at a set price. d) A one-year contract with a potential to earn a bonus depending on company performance. Risk Tolerance Score (Will not be shown to the Respondents. Will be used in Analysis) P a g e

114 e) A one year contract with the option to use your bonus to buy the company s shares at a set price. Q2. If you have invested in a share and on the next trading day it declines by 10%, what will be your reaction? a) You will wait and watch the stock since you have chosen fundamentally strong stock. b) You will go for averaging by taking more shares at lower rate. c) You will book losses and exit from the stock to avoid any further deceleration. d) You will retain the stock and at the same time buy some other stocks in speculation. e) You will book losses, exit from the stock and won t be ready to make investment in future on any stock. Sources: Authors Compilation Each question will be assigned with a weight based on its importance in the context of risk involved. Weighted average will be ascertained to arrive at a risk score for each investor. For Clustering of investors, statistical technique of cluster analysis will be used through SPSS. For this, the questions will be put in the following manner. Table-2: One Sample facet for Clustering the Investors (Instruction: Rate all the options of each facet mentioned in 1-5 point scale; 1 for lowest level of agreement.. 5 for highest level of agreement) Facet-1: If you have invested in a share and on the next trading day, it declines by 10%, Options You will wait and watch the stock since you have chosen fundamentally strong stock. You will go for averaging by taking more shares at lower rate. You will book losses and exit from the stock to avoid any further deceleration. You will retain the stock and at the same time buy some other stocks in speculation. You will book losses, exit from the stock and will not be ready to make investment in future on any stock. Sources: Authors Compilation Rating After knowing the responses of all the investors considered, through cluster analysis, they will be categorized into few clusters and thereafter-appropriate strategies will be developed based on the characteristics of each cluster. Data Proposed to be Collected While secondary data will be collected from official websites of SEBI, BSE, NSE, Journals, Magazines and government official Gazettes and Bulletins, the primary data will be collected through personal interview based on as mentioned in the Methodology section from the selected 200 investors based at Ranchi investing in Indian Stock Market. The population of the study is the investors at Ranchi investing in stock markets. The records of those investors will be available with the stock markets and with the brokerage houses through which they invest in the market. For obtaining the required sample units for survey purpose, the help of brokerage houses will be taken. Looking into the population nature, it has been decided to go for 200 investors for the purpose. After obtaining the database from the brokerage houses, by way of judgmental sampling, 200 units will be selected. Backdrop of the Study of Risk Appetite of Retail Investors of Ranchi in Indian Stock Market: This Paper is just a part of the macro project in progress for doctoral degree, the synopsis of which has been presented in the previous section. In fact, this paper hovers around the second objective, i.e., to develop a risk appetite scores for retail investors of different background, of the macro project and it reveals the findings of the pilot study completed for 10 retail investors of Ranchi. Methodology: The questionnaire has been administered on 10 retail investors of Ranchi in Indian Stock Market the way it has been revealed in the previous section, i.e., the methodology of the macro project. The questions used for this pilot study have been presented below: 1772 P a g e

115 Table-3: Questionnaire for Risk Appetite Score Questions with Options to Tick Q1. You take a job at a fast-growing company and are offered the following choices. Which one would you pick? A conventional form of employment contract of working until the retirement age with normal course of prospects. A five-year employment contract with an option with a potential to earn a bonus of 50% depending on company performance. A five year employment contract with the option to use your 50% bonus accrued to buy the company s shares at a set price. A one-year contract with a potential to earn a bonus depending on company performance. A one-year contract with the option to use your bonus to buy the company s shares at a set price. Q2. If you have invested in a share and on the next trading day, it declines by 10%, what will be your reaction? You will wait and watch the stock since you have chosen fundamentally strong stock. You will go for averaging by taking more shares at lower rate. You will book losses and exit from the stock to avoid any further deceleration. You will retain the stock and at the same time buy some other stocks in speculation. You will book losses, exit from the stock and will not be ready to make investment in future on any stock. Q3. You need to cross a big Canal near your residence in order to catch the Bus on the other side of the Canal to face an interview. You are not a very good swimmer. Which of the following you would like to do? Cross the canal through the wooden Bridge located at a distance of 0.5 km from your residence, which has been bit unsafe since last couple of months. Cross the canal through the concrete Bridge located at around 5 km away from your residence. Cross through two ropes strongly tied with iron poles across the canal very close to your residence. Cross the canal swimming across and then dress up on the other side to get ready for interview. Cross the canal through the concrete Bridge located at around 5 km away from your residence one day before the interview day in order to avoid failure in reaching interview spot on time. Q4. Your only 5-year old child got affected by common influenza. Near your residence, there is a medicine shop, the owner of which has been successfully giving medicines since its inception for such type of minor diseases without having Doctor s prescription. Which of the following will be your action? Will consult the medicine shopkeeper and give the medicine as per his advice. Will go for govt. hospital located 5 km away from your residence. Will go for a reputed private clinic, which is 15 km away from your residence. Will not go for medicine with the impression that the common influenza will get cured automatically within a couple of days. Will call the doctor to your residence immediately and on his prescription you will go for specialty hospital. Risk Tolerance Score (was not shown to the Respondents but was used in Analysis) Weight of the Question (was not shown to the Respondents but was used in Analysis) P a g e

116 Q5. You are on probation in your service. No leave is credited to your account. However, you have an urgency to attend the marriage ceremony of your best friend. What will you do? Will go for attending the marriage without caring the consequence of absence in the Office. Will silently drop the idea of attending the marriage function without caring for strain on friendship. Will go to the Office, sign on the attendance register and move out to attend the function without informing anybody. Will approach the Boss for a special leave and if the Boss does not allow, will convey the same to the friend. Will beg excuses from the friend for not attending the function without requesting your Boss for the leave. Q6. You have a surplus income of Rs /- in your hand. Which of the following you would prefer to do? Will put your money in fixed deposit for 9% rate of interest per annum Will lend to one of your friends who is ready to pay 60% rate of interest per annum but without any mortgage Will lend to one of your neighbors who will give you 36% rate of interest with a mortgage of an asset valuing Rs /- Will prefer to put in stock market through one of your friends as you are not aware of the functioning of stock market Will start a small seasonal business like cracker shop, Rakshi shop, etc. Q7. If you have, a choice to invest in Real Estate what would be your preference. Metros, A-Grade Cities, B-Grade Cities, Sub-Urban Areas, Rural Areas (Farm Houses). Q8. Considering money is not a factor you would like to go for: Primary Education Business, Senior Secondary Education Business, General Graduation Courses, Specialized Courses, Super Specialized Courses. Q9. Would you like to invest in small cap penny stock where chances of getting double are fair within a year or it may be vanished? 100% of your investment you would like to invest in the same. 75% of your investment you would like to invest in the same. 50% of your investment you would like to invest in the same. 25% of your investment you would like to invest in the same. 0% of your investment you would like to invest in the same. Q10. If you are going to do the business, what it could be among given options? Perishable goods. Semi-perishable goods. Non-perishable goods. Wooden Products. Metal Products. Sources: Authors Compilation The options of each question have been assigned with a score based on the degree of risk inherent to each option. It has been developed in a 5-point scale (100, 75, 50, 25, 0), i.e., the most risky option with 100 score and the least risky option with 0 score. Again, since all the questions are not at par as regards to the level of risk involved in them, they have been weighted in a descending order, i.e., the most risky question has been weighted as 10 (out of 10 questions) and the least risky question has been weighted as 1. However, the questionnaire used for survey was not containing the risk score and weights. ANALYSIS & INTERPRETATION The analysis is done separately for each investor to develop a risk appetite score. One case is presented below: 1774 P a g e

117 Table-4: Respondent (Investor) No. 1 Question No. Risk Appetite Score (Rs) Weight (W) Weighted Score (Rsw) W = 55 Rsw = 2000 Weighted Average Score Sources: Primary Data The consolidated score sheet developed by the analysis done as above of all 10 investors are presented below: FINDINGS Table-5: Consolidated Risk Appetite Score Respondent Sl. No. Weighted Average Score (i.e., Risk Appetite Score) Sources: Primary Data From the analysis done above, it is clear that the risk appetite score of 10 investors studied varies between to In absolute sense, although the risk appetite scores holistically is not that appreciable, the spread in the present context is bit scientific. However, with the available scores, if we cluster them based on their risk appetite score, we may have the following three clusters; 1) Cluster-A (High Risk Appetite): Score Range; 30-38, 2) Cluster-B (Moderate Risk Appetite): Score Range; and 3) Cluster-C (Low Risk Appetite): Score Range; The spread of cases on different clusters is present in the table given below. Cluster-wise findings are presented below: Table-6: Cauterization of Investors based on Risk Appetite Cluster Number of Investors Cluster-A (Investors with High Risk Appetite) 01 Cluster-B (Investors with Moderate Risk Appetite) 04 Cluster-C (Investors with Low Risk Appetite) 05 Sources: Primary Data Cluster-A: Although the investor in this cluster belongs to relatively lower income-group, his investment pattern matches to his holistic risk appetite as ascertained in this paper. It is found that he used to put around 25% of his investible surplus in Indian stock market, that too, in long-term investment. It seems investors with higher holistic risk appetite score can be channelized for more investment in stock market devising effective customized strategies for them based on technical support P a g e

118 Cluster-B: All four investors in this cluster are well educated and better off as regards to their earnings, but lack of awareness and influence of negative word of mouth leading to a false impression on investing in the stock market, i.e., equivalent to getting involved in gambling, has insisted them to go for conventional modes of investment like bank fixed deposits instead of going for investing in stock market. It seems, they do have capability to invest in stocks but their mediocre holistic risk appetite followed by judgmental approach land them into this cluster. Cluster-C: Out of five investors in this cluster, two are retired persons whose income level is good devoid of any considerable liability. However, owing to their conservative outlook, although they have Demat Account in the bank, they do not trade in stock market. In fact, most of their investment goes to conventional mode and a small fraction put into Mutual Fund. Two more investors from this cluster belong to well-to-do community and the fact reveals that nearly 20% of their investible surplus goes to stocks. However, their holistic risk appetite score is low owing to their high concern for the questions related to risk involved in life. Thus, it is inferred that these two can be tapped for investing more in stocks. In fact, this type of investors may demand life insurance for the investors investing in stocks, which may be the trump card for the success of the stock market in future. The remaining one investor in this category belongs to lower income group but he has more than required level of aggression depending upon the mood. This type of investors can be capitalized for short-term investment. CONCLUSION After the detailed survey on the behavior of retail investors belongs to different age group, profession, gender and annual income, we arrived at the fact that the retail investors of Ranchi are very keen to maximize their return but more or less at the cost of moderate risk only. It is also very interesting to know that retail investors are really least interested to invest in stock market and the reason behind this peculiar behaviour is, more or less, the lack of their exposure to stock market.they don t let their money to be played through others hand without any promise and commitment on return. Moreover, it seems that the word of mouth about the individual losses in stock market has created an impression of investing in stock market means putting money in gambling. On the other hand, they are very much confused to get positive inflation adjusted return. It reflects that they are aware of actual rate of return (Rate of Return less Inflation) but they are highly disappointed for the fact that their actual rate of return is negative. While giving open comment related to their feelings on functioning of stock market, they revealed that the initiatives to be undertaken by SEBI on the awareness programme of investors at Ranchi should be intense and far-reaching. Moreover, they feel that there should be Certified Financial Planner with a proven record of accomplishment at Ranchi to safeguard the interest of the investors. Although the investors are ready to bear the consultancy fees and portfolio management fees, it is very much painful for them as they are deprived of having the support as required, owing to absence of anybody to fill the gap. As a result, most of the retail investors are forced to stick to conventional modes of investment like investing in bank Fixed Deposits. The most excruciating fact uncovered from the pilot study that the investors invested in ULIP finally ended with negative return as a contradiction to the IRDA guidelines. Amidst all these disappointing facts, the fact that gives a ray of hope for retail of investors at Ranchi is the SIPs as claimed by the investors. Some cautious investors who had gone for SIPs of leading Mutual Fund Houses had appropriated unexpected higher return. Owing to this, they have developed a thumb rule for themselves, i.e., to get the inflation adjusted positive return in today s market, one has to go through the route of SIPs in leading Mutual Fund Houses in the long run. It s felt that in order to stretch the incidence and depth of retail investment in Ranchi concerning Indian Stock Market, the investors are to be informed about their risk tolerating capacity and they are to be trained adequately about the functioning of the Indian Stock Market. REFERENCES 1. Anbar, A., & Ekker, M. (2010). An Empirical Investigation for Determining of the Relation between Personal Financial Risk Tolerance and Demographic Characteristic. Ege Akademik Bakis/ Ege Academic Review, 10(2), Chandra, A., & Kumar, R. (2012, December). Factors Influencing Indian Individual Investor Behaviour: Survey Evidence. Decision, 39(3). 3. Das, S. K. (2012). Factors Influencing the Mutual Fund Scheme Selection by Retail Investors in Assam: An Empirical Analysis. Indian Journal of Commerce and Management Studies, IV (3). ISSN: EISSN: September Faff, R. W., Hallahan, T., & McKenzie, M. D. (2004). An Empirical Investigation of Personal Financial Risk Tolerance. Financial Services Review, 13, Kamiru, J., & Carl, B. Mc Gowan. (2013, September). The Relationship between Stock Market Development and the Opacity Index. International Business &Economic Research Journal P a g e

119 6. Kumar, R., & Dhankar, R. S (2011). Distribution of Risk and Return: A test of Normality in Indian Stock Market. South Asian Journal of Management, 18(1). 7. Ray, K. K. (2009). Investment Behavior and the Indian Stock Market Crash 2008: An Empirical Study of Student Investors. 8. Rozeff, M. S. (1975, September-October). The Money Supply and the Stock Market. Financial Analysts Journal. 9. Shah, M., & Verma, A. (2014). Analysis of Investment Behavior during Recovery Phase among Youth Investor of Indian Stock Market. Retrieved on January 1, 2014 from Sindhu, K. P., & Kumar, S. R. (2013). A Study on Influence of Investment Specific Attitudes of Investors on Investment Decisions. Indian Journal of Commerce & Management Studies, ISSN: EISSN: Sultana, S. T., & Pardhasaradhi, S. (2011, October). An Empirical Investigation of the Relation between Risk Tolerance and Socioeconomic Characteristics of Individual Investors. Advances in Management, 4(10). 12. NCFM (NSE s Certification in Financial Markets). Capital Market (Dealers) Module [Handbook]. 13. Retrieved from _THE_R... ***** CALL TO JOIN AS MEMBER OF EDITORIAL ADVISORY BOARD We present you an opportunity to join Pezzottaite Journals as member of Editorial Advisory Board and Reviewers Board. The emphasis will be on publishing quality articles rapidly and making them available to researchers worldwide. Pezzottaite Journals is dedicated to publish peer-reviewed significant research work and delivering quality content through information sharing. Pezzottaite Journals seek academicians and corporate people from around the world who are interested in serving our voluntarily Editorial Advisory Board and Reviewers Board. Your professional involvement will greatly benefit the success of Pezzottaite Journals. You have privilege to nominate yourself for any /all of our journals after going through the Aims & Scope of Journals. Qualifying Norms: For member of Editorial Advisory Board & Reviewers Board, you must be one of the following: Vice Chancellors / Deans / Directors / Principals / Head of Departments / Professors / Associate Professors with D.Sc. / D.Litt. / Ph.D. only; Government Department Heads; Senior Professionals from Corporate; Retired Senior Professionals from Government / Corporate / Academia are also welcome. Please forward below stated details at contactus@pezzottaitejournals.net. Updated Resume, A Scanned Photograph, and Academic Area of Interest. If you have any query, write to us. We will respond to you inquiry, shortly. (sd/-) (Editor-In-Chief) 1777 P a g e

120 IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON EMPLOYEES ORGANIZATION IDENTIFICATION AND EMPLOYEE RETENTION: A STUDY ON INDIAN PRIVATE MULTINATIONAL COMPANIES Buddha Anuradha 29 Dr. M. M. Bagali 30 ABSTRACT The present study is an attempt to know the relationship between CSR & Employees organization identification & Employee Retention. Corporate Social Responsibility (CSR) is often defined as corporate responsibility, corporate citizenship, social enterprise, sustainable development, triple-bottom line, corporate ethics, and in some cases, corporate governance. What binds these terms together is the expectation that corporates (private and public enterprises alike) behave ethically vis-à-vis a broad group of stakeholders - workers and their families, communities and the wider society. This study examines the employees responses to Corporate Social Responsibility performance. It emphasizes on fact that CSR can become business strategy. CSR is coming out of the purview of Doing Social Good and is becoming a Business Necessity. This paper brings forward the view that what is good for community, Society and Environment is good for business. The author finds that the employees identify with the organization if the CSR performance is high. The author envisages in this paper that CSR activities can become driver to retain employees. The research finds that the employees perceive that CSR activities enhance the employee identification with the organization. KEYWORDS Corporate Social Responsibility, Organizational identification & Employee Retention etc. INTRODUCTION India is a developing economy, here Corporate Social Responsibility (CSR) play important role in organizations. In Indian industry, one can easily notice a paradigm shift from corporate philanthropist to being socially responsible. The importance of CSR is increasing in Indian corporate scenario because organization have realized that ultimate goal is not profit making beside this trust building is viable and assert able with societal relationship. The compulsion of CSR has emerged in last two decades when Indian organizations realize the importance of sustaining in this cutthroat competition era. Before this, Indian industries had materialistic culture. In the clamor of LPG (Liberalization, Privatization and Globalization), companies were only focused toward profit maximization which led social backwash. To overcome this fashion CSR play an important role in sustainable development, which is only possible when there, is a balance between profit and lowering social backwash or eradicating it. 1 Companies have become more transparent in accounting and display public reporting due to pressures from various stakeholders. It is possible for companies to behave in the desired ethical and responsible manner towards consumers, employees, communities, stakeholders and environment. They have started incorporating their CSR initiative in their annual reports. CSR is an entry point for understanding a number of firm-related and societal issues and responding to them in a firms business strategy. However, there is a universal and prominent view on protecting the environment and stakeholders interests. Emerging economies like India have also witnessed a number of firms actively engaged in CSR activities, and the Ministry of Corporate Affairs has come up with voluntary guidelines for firms to follow. Companies in India have quite been proactive in taking up CSR initiatives and integrating them in their business processes. It is possible for companies to behave in the desired ethical and responsible manner towards consumers, employees, communities, stakeholders and environment. They have started incorporating their CSR initiative in their annual reports. 2 1 Rajiv Prabhakar & Sonam Mishra,2013. A study of corporate social responsibility in Indian Organization: An introspection. Proceedings of 21st International Business Research conference 10-11th June 2013, Ryerson University, Toronto, Canada, ISBN: Sources: 29 Research Scholar, Management Science, JAIN University, Karnataka, India, anuradha.buddha@gmail.com 30 Professor (HR & Research Guide), Head (Research in Management), JAIN University, Karnataka, India, mm.bagali@jainuniversity.ac.in 1778 P a g e

121 India has a long tradition in the field of corporate social responsibility and industrial welfare has been put to practice since late 1800s. Historically, the philanthropy of business people in India has resembled western philanthropy in being rooted in religious belief. Business practices in the 1900s that could be termed socially responsible took different forms: philanthropic donations to charity, service to the community, enhancing employee welfare and promoting religious conduct. The concept of CSR has evolved from being regarded as detrimental to a company s profitability, to being considered as somehow benefiting the company as a whole, at least in the long run. 3 Definitions of the Concept Despite numerous efforts to bring about a clear and unbiased definition of CSR, there is still some confusion as to how CSR should be defined (Dahlsrud, 2008). In both corporate and academic world there is an uncertainly and conflicting views about how CSR should be defined. Unfortunately, any attempt to develop an unbiased definition is challenging. One school of thought includes ethical practices of the firm, employee welfare, human right, customer satisfactory and adherence to principles of fair competitions and the other extreme school of thought considers CSR as philanthropy. Corporate Social Responsibility Definition Sources Hopkins, 1998 Commission of the European communities, 2003 IndianNgos.com, 2003 LEE, 2002 Definition CSR is concerned with treating the stakeholders of the firm ethically of in a social responsible manner. Stakeholders exist both within a firm and outside. CSR is the concept that an enterprise is accountable for its impace on all relevant stakeholders. It is continuing commitment by business to behave fairly and responsibly and contribute to economic development while improving the quality of life of the work force, their families and the community. CSR is a business process wherein the institution and the individuals within are sensitive and careful about the direct and indirect effect of their work on internal and external communities and nature. CSR is about businesses and other organizations going beyond legal obligations to manage the impact they have on the environment and society. In particular, this could include how organizations interact with their employees, suppliers, customers and their community LITERATURE REVIEW Mason and Simmons (2011) mention in their study that the rise of ethical consumerism and the recruitment, retention and employee commitment benefits that accrue to socially responsible employers They are also of the opinion that recruitment and retention are the key CSR drivers. Kotler and Lee (2005) found that CSR increased the ability to attract, motivate and retain employees. The attention for CSR results from the need to get a license to operate from the society. In accordance with firms have to meet the triple P bottom line expressing the expectations to stakeholders with respect to the company s contribution to profit, planet and people(graafland). Firms that do not meet these expectations may see their market shares and profitability go down. Companies only succeed in convincing the stakeholders by investing enough in CSR. Indeed, CSR is very much a way of building up a good reputation. This is seen by many cases in various parts of world, in which companies started to pay attention to CSR after an incident that damaged their reputation. Patil & Sharma (2009) state that CSR programme can be seen as an aid to recruitment and retention, particularly within the competitive graduate student market. Korschun et.al (2014) quote the practioners such as Diane Melley, Vice-President of citizenship at IBM argue that, CSR is a new and different way to motivate employees to deliver superior client service. They also suggest that CSR communicates the underlying values of the company, which can lead people to form a strong psychological bond with it (i.e. organizational identification) and thereby trigger company-benefiting behavior. Agrawal (2008) high lightens the fact that CSR creates a dedicated workforce with high levels of self-accomplishment-people who take pride in themselves and their company. It encourages a spirit of volunteerism amongst colleagues and boosts morale, builds self-worth, and fosters team spirit, says a senior director of an MNC working in India. 3 Nitin Kumar, 2014, Corporate Social Responsibility: an Analysis of Impact and Challenges in India, International journal of research in management & Technology, Vol 3, No.5, ISSN: P a g e

122 Stancu et.al (2011) cites that CSR activities have an impact on current employee s commitment towards their employers. The role of Corporate Social Responsibility on employees is becoming present in the business world, one of the reasons being that successful companies should attract, retain the best work force. By creating a good working environment and developing internal marketing strategies, companies can stimulate productivity and satisfaction among employees. Shrivastava et.al (2012) conclude that social involvement may create a better public image and goodwill for the company which further becomes instrumental in attracting customers, efficient personnel and investors. Mishra and Suar (2010) opine that higher CSR towards employees in terms of employee sensitive policies and practices by firms enhances employee productivity, reduces absenteeism, and facilitates recruitment and retention of better quality employees (Turban and Greening, 1997). Ali and Ali (2011) found significant influence of Corporate Social Responsibility on Corporate Reputation and building higher level of employee engagement. This study suggests that employees conceptualize CSR on different perspectives, such as how well it communicates with its environment and how ethically it provides benefit to its stakeholders through its products and services. Arora and Garg (2013) suggest creation of awareness about CSR amongst the public to make CSR initiative more effective. They further recommend an accreditation mechanism be put in place for companies through an independent agency for mainstreaming and institutionalizing CSR in the main business framework of the companies. Pandya and Marvadi (2014) conclude that CSR is at the primitive stage in India and hence they justify the need of the new mandatory CSR norm. Gupta (2012) found that three themes that emerged from the data help to elucidate the benefits of CSR: a) Employee Retention, b) Employee Commitment, and c) Company image. OBJECTIVES OF STUDY To study the various models of CSR. To study the policies governing CSR in India. To make suggestions for accelerating CSR initiatives. CSR in India: Present Scenario The companies Act 2013 provides a clear mandate regarding CSR in India. According to Clause 135: Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee. The Corporate Social Responsibility Committee shall (a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII; (b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and (c) monitor the Corporate Social Responsibility Policy of the company from time to time. The Board of every company referred to in sub-section (1) shall (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company. The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy: Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities: Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount. Explanation. for the purposes of this section average net profit shall be calculated in accordance with the provisions of section P a g e

123 DATA COLLECTION & ANALYSIS Selection of Organization Eight Indian private Multinational companies are selected based on top 50 Indian companies in Forbes Global lists of various years between These companies are also selected based on top 100 companies ranked by CSR identity.com together with Forbes India 5. Sampling Population As many as 246 samples were included as part of data for the study. These samples were collected from middle management executives. Data Collection An exhaustive questionnaire was prepared and data was collected with regard to employee retention and loyalty. Stages of Data Collection Figure-1: Stages of Data Collection followed by Author Hypothesis Sources: Authors Compilation H1 - A positive relationship exists between CSR activities of companies and employee retention H2 - CSR will help improve the reputation of the company. H3 - CSR initiatives and its effective communication to employees help improve the employee Motivation and his organizational identification Conceptual Framework Figure-2: CSR, Employee Retention, and Organizational Identification Sources: Authors Compilation In this model, CSR is conceptualizing as development of organization moral reasoning. This model elucidates interdisciplinary relationship between the levels of moral concern of employees, employer s i.e. Ethical practices & Human Resource Management. If the employees perceive the management is concerned about overall welfare of community & environment & this concern effectively communicated to all the stakeholders, then the employees not even feel motivated, but also perceive that high employee retention can be a result of CSR activities P a g e

124 Results The following Tables & Figures show the opinion of the participants. SPSS software package is used for statistical analysis. There are no missing values in the data collected. Table-1: Mean & Standard Deviation for Few Questions N Mean Std. Deviation Our firm is a socially responsible firm I want to work in this organization because it is socially responsible company I joined this company because it has a reputation of socially responsible organization CSR activities motivate employees CSR helps employee retention Valid N (listwise) 246 Sources: Authors Compilation Table-2: Results for Q: Our firm is a Socially Responsible Firm Valid Frequency Percent Valid Percent Cumulative Percent Strongly Disagree Disagree Neither Agree nor Disagree Agree Strongly Agree Total Sources: Authors Compilation Table-3: Results For Q: I Want to Work in this Organization because it is Socially Responsible Company Valid Frequency Percent Valid Percent Cumulative Percent Strongly Disagree Disagree Neither Agree nor Disagree Agree Strongly Agree Total Sources: Authors Compilation Figure-3: Results for Q: I Want to Work in this Organization because it is Socially Responsible Company Sources: Authors Compilation It can be observed from Figure 3 that 177 out of 246 participants agree to work in an organization because of its CSR activities P a g e

125 Table-4: My Firm s Reputation is Enhanced Because It Pays Significant Attention to their Environmental Causes Valid Frequency Percent Valid Percent Cumulative Percent Strongly Disagree Disagree Neither Agree nor Disagree Agree Strongly Agree Total Sources: Authors Compilation Figure-4: My Firm s Reputation is Enhanced Because It Pays Significant Attention to their Environmental Causes Sources: Authors Compilation 182 out of 246 participants agree to the above question that their firm s reputation is enhanced as it plays significant attention to environment. Table-5: My Firm s Reputation is Enhanced Because It Pays Significant Attention to their Social Responsibilities Valid Frequency Percent Valid Percent Cumulative Percent Strongly Disagree Disagree Neither Agree nor Disagree Agree Strongly Agree Total Sources: Authors Compilation Figure-5: My Firm s Reputation is Enhanced Because It Pays Significant Attention to their Social Responsibilities Sources: Authors Compilation 1783 P a g e

126 170 out of 246 respondents agree that their firm s reputation is enhanced as it plays significant attention to their social responsibilities. Table-6: Results for Q: CSR Activities Motivate Employees Valid Frequency Percent Valid Percent Cumulative Percent Strongly Disagree Disagree Neither Agree nor Disagree Agree Strongly Agree Total Sources: Authors Compilation Figure-6: Results for Q: CSR Activities Motivate Employees Sources: Authors Compilation It can be observed from Figure-7, 184 out of 246 Respondents agree to the fact that CSR motivates employees, it can be also concluded that Employees are getting motivated because of CSR. Table-7: Results for Q: The Impact of CSR Activities of the Firm on Employee Retention is very high Valid Frequency Percent Valid % Cumulative % Strongly Disagree Disagree Neither Agree nor Disagree Agree Strongly Agree Total Sources: Authors Compilation Figure-7: Results for Q: The Impact of CSR Activities of the Firm on Employee Retention is very high Sources: Authors Compilation 1784 P a g e

127 The actual rates of retention are not reported here but during discussion with participants, a high correlation was found between the CSR activities and reflections on retention of employees. ANALYSIS & INTERPRETATION The Data collected has been primarily tabulated & Master table was prepared, Sample was tested for reliability using Cronbach s alpha, Percentage analysis is the basic tool for analysis, Regression analysis a statistical process for estimating the relationships among variables is used. Regression Analysis Table-8 Model Summary-1 Model R R Square Adjusted R Square Std. Error of the Estimate a Sources: Authors Compilation Note: a. Predictors: (Constant), Our firm is a socially responsible firm Dependent Variable(X): The impact of CSR activities of the firm on employee retention is very high. Independent Variable(Y): Our firm is a socially responsible firm. In Model Summary 1 R 2, the Coefficient of Determination, tells how many points fall on the regression line. In Model Summary means that 55% of the variation of y-values around the mean is explained by the x-values. In other words, 55% of the values fit the model. H0: A positive relationship does not exist between CSR activities of companies and employee retention. H1: A positive relationship exists between CSR activities of companies and employee retention. Alternate Hypothesis is accepted. Table-9 Model Summary- 2 Model R R Square Adjusted R Square Std. Error of the Estimate a Sources: Authors Compilation Note: a. Predictors: (Constant), Our firm is a socially responsible firm Dependent Variable(X): My firm s reputation is enhanced because it pays significant attention to their environmental. Independent Variable(Y): Our firm is a socially responsible firm. In Model Summary 2 R 2, the Coefficient of Determination, tells how many points fall on the regression line. In Model Summary means that 65% of the variation of y-values around the mean is explained by the x-values. In other words, 65% of the values fit the model. H0: CSR will not improve the reputation of the company. H2: CSR will help improve the reputation of the company. Alternate Hypothesis is accepted. Table-10 Model Summary -3 Model R R Square Adjusted R Square Std. Error of the Estimate a Sources: Authors Compilation Note: a. Predictors: (Constant), Our firm is a socially responsible firm 1785 P a g e

128 Dependent Variable(X): My firm s reputation is enhanced because it pays significant attention to their social responsibilities. Independent Variable(Y): Our firm is a socially responsible firm. H0: CSR will not improve the reputation of the company. H2: CSR will help improve the reputation of the company. Alternate Hypothesis is accepted. In Model Summary 3- R 2, the Coefficient of Determination, tells how many points fall on the regression line. In Model Summary means that 70% of the variation of y-values around the mean is explained by the x-values. In other words, 70% of the values fit the model. Table-11 Model Summary-4 Model R R Square Adjusted R Square Std. Error of the Estimate a Sources: Authors Compilation Note: a. Predictors: (Constant), Our firm is a socially responsible firm Dependent Variable (Y): CSR activities motivate employees. Independent Variable (X): Our firm is a socially responsible firm. In Model Summary 4 R 2, the Coefficient of Determination, tells how many points fall on the regression line. In Model Summary means that 79% of the variation of y-values around the mean is explained by the x-values. In other words, 79% of the values fit the model. H0: CSR initiatives and its effective communication to employees will not help improve the employee Motivation and his organizational identification. H3: CSR initiatives and its effective communication to employees help improve the employee Motivation and his organizational identification. Alternate Hypothesis is accepted. Table-12 Model Summary -5 Model R R Square Adjusted R Square Std. Error of the Estimate a Sources: Authors Compilation Note: a. Predictors: (Constant), Our firm is a socially responsible firm Dependent Variable (X): I want to work in this organization because it is socially responsible company Independent Variable(Y): Our firm is a socially responsible firm R 2, the Coefficient of Determination, tells how many points fall on the regression line. In Model Summary means that 62% of the variation of y-values around the mean is explained by the x-values. In other words, 62% of the values fit the model. H0: CSR initiatives and its effective communication to employees will not help improve the employee Motivation and his organizational identification H4: CSR initiatives and its effective communication to employees help improve the employee Motivation and his organizational identification Alternate Hypothesis is accepted. LIMITATION OF STUDY When the Research work started, CSR in India was voluntary and respondents were very open minded in answering questions during pilot study. CSR became mandatory in 2013 & respondents were hesitant to fill the questionnaire. Thus the sample size is only 246 respondents, Much more elaborate study is required. There may be some positive & negative biases of the respondent P a g e

129 CONCLUSION CSR produced direct or indirect links to firm s performance. If CSR, whether mandatory or voluntary is imbibed in the business as an important activity, it changes the employee perspective. To make CSR effective what is needed is the effective communication of CSR activities. Further, it is observed that employees show keen interest in involving and understanding CSR activities. Every individual has that humane angle to his personality. CSR activities makes one feel proud about the organization, one is working for. Many corporates have repeatedly proven that indirect connection between employee loyalty and the organisations commitment to social and community upliftment. This study further indicates that there is a positive relationship between employees' perception about CSR activities of their company and willingness to work in such organisations. ACTION PLAN: THE BENCHMARK The conceptual framework (Figure 2) suggested by author would help Multinational companies to assist that CSR activities not only bring overall growth & development of the community but also the organization itself. CSR activities can be best utilized as a business strategy. REFERENCES 1. Chris, Mason, & John, Simmons. (2011). Forward looking or looking unaffordable? Utilizing academic perspectives on Corporate Social Responsibility to access the factors influencing its adoption by Business. Business Ethics, a European Review, 20(2), Philip, Kotler, & Nancy, Lee. (2005). Corporate Social Responsibility. John Wiley and Sons Inc. 3. Patil, V. K., & Sharma, Sarabjeet. (2009). Corporate Social Responsibility & Human Rights. Authors press. 4. Daniel, Korschun, Bhattacharya, C. B., & Scott, D. Swain. (2011). Corporate Social Responsibility, Customer Orientation & the job performance of frontline employees. Journal of Marketing, 78, ISSN: Agarwal, Sanjay K. (2008). Corporate Social Responsibility in India. Response Business book. Sage. 6. Alin, Stancu, Georgiana, Florentia Grigore, & Milhai, Ioan Rosla. (2011). The impact of Corporate Social Responsibility on employees. IPEDR, 21. Singapore: IACSIT Press. 7. Shrivastava, Amit Kumar, Negi, Gayatri, Sharma, Vipul, & Pandey, Shardha. (2012). Corporate Social Responsibility: A case study of TATA group. 8. Mishra, Sipriti, & Suar, Damodar. (2010). Does Corporate Social Responsibility influence Firm & Performance of Indian Companies. Journal of Business Ethics, 95, Ali, Imran, & Ali, Jawaria Fatima. (2011). Corporate Social Responsibility, Corporate reputation & employee engagement (MPRA Paper no ). Retrieved from muenchen.de/33891/ 10. Gupta, Megha. (2012). Corporate Social Responsibility in the Global Apparel (Doctoral Thesis). The University of North Carolina. 11. Chin, M. K., Donald, C. Hambrick, & Linda, K. Trevino. (2013). Political Ideologies of CEOs; The influence of Executives values on Corporate Social Responsibility. Administrative Science Quarterly, 58(2), Sage Publications. 12. Gautham, Richa, & Singh, Anju. (2010). Corporate Social Responsibility Practices in India: A study of Top 500 companies. Global Business & Management Research: An International Journal, 2(1), Tobias, Hahn, Lutz, Prauss, Jonathan, Pinkse, & Frank, Figgie. (2014). Cognitive frames in Corporate Sustainability: Managerial sense making with paradoxical & business case frames. Academy of Management Review, 39(4), Christopher, W. Bauman, & Linda, J. Skitka. (2012). Corporate Social Responsibility as a source of employee satisfaction. Research in organizational Behaviour, R10B, 54. Retrieved from Abagail, Mc Williams, Donald, S. Siegel, & Patrick, M. Wright. (2005). Corporate Social Responsibility: Strategic implications (Rensselaer working papers in Economics) P a g e

130 16. Line, Schmeltz. (2011). Identical or Just Compatible? The utility of Corporate Identity Values in communicating Corporate Social Responsibility. International Journal of Business Communication, 51(3), Gosh, Anupam, & Chakraborti, Chhanda. (2010) Corporate Social Responsibility: A Developmental Tool for India. The I U P Journal of Corporate Governance, IX (4). 18. Nath, Rahul. (2013). Impact of CSR initiatives on brand value: An overview. The Management Accountant: The Journal of CMAs, 48(6), Rao, G. S. (2014). New rules of Corporate Social Responsibility. Retrieved from Corporate-Social-Responsibility.Html. 20. Gupta, S. K. (2013). Corporate Social Responsibility: A business imperative. The Management Accountant: The Journal of CMAs, 48(6), Retrieved from Retrieved from Retrieved from ***** CALL TO JOIN AS MEMBER OF EDITORIAL ADVISORY BOARD We present you an opportunity to join Pezzottaite Journals as member of Editorial Advisory Board and Reviewers Board. Pezzottaite Journals seek academicians and corporate people from around the world who are interested in serving our voluntarily Editorial Advisory Board and Reviewers Board. Your professional involvement will greatly benefit the success of Pezzottaite Journals. Please forward below stated details at contactus@pezzottaitejournals.net. Updated Resume, Scanned Photograph, and Academic Area of Interest. For Paper Submission & Clarification or Suggestion, callandinvitation@pezzottaitejournals.net, callandinvitations@pezzottaitejournals.net callforpapers@pezzottaitejournals.net, editorinchief@pezzottaitejournals.net Editor-In-Chief Pezzottaite Journals, 64/2, Trikuta Nagar, K. K. Gupta Lane, Jammu Tawi, Jammu & Kashmir , India. (Mobile): INFORMATION FOR AUTHORS Pezzottaite Journals invite research to go for publication in other titles listed with us. The contributions should be original and insightful, unpublished, indicating an understanding of the context, resources, structures, systems, processes, and performance of organizations. Invitations are for: International Journal of Applied Services Marketing Perspectives. International Journal of Entrepreneurship & Business Environment Perspectives. International Journal of Organizational Behaviour & Management Perspectives. International Journal of Retailing & Rural Business Perspectives. International Journal of Applied Financial Management Perspectives. International Journal of Information Technology & Computer Sciences Perspectives. International Journal of Logistics & Supply Chain Management Perspectives. International Journal of Trade & Global Business Perspectives. All the titles are available in Print & Online Formats P a g e

131 FINANCIAL INCLUSION AND ITS POLICY INITIATIVES ALL OVER THE WORLD: A CROSS COUNTRY REVIEW Amritha Thomas 31 ABSTRACT For developing nations the era is of inclusive growth and the key for inclusive growth is financial inclusion. So financial inclusion is considered to be the core objective of these developing nations. Financial inclusion or inclusive financing is the delivery of financial services, at affordable costs, to vast sections of disadvantaged and low income segments of society. There have been many formidable challenges in financial inclusion area such as bringing the gap between the sections of society that are financially excluded within the ambit of the formal financial system, providing financial literacy and strengthening credit delivery mechanisms so as to improvised the financial economic growth. A nation can grow economically and socially if its weaker section can turn out to be financial independent. KEYWORDS Financial Inclusion, Financial Exclusion, Financial Stability etc. INTRODUCTION Financial Inclusion is a process or concept formulated with an objective of providing financial products and services to every constituent of our society, especially economically backward people. This concept has been developed and implemented keeping in mind the mainstream banking service providers. This is because it was felt that burden of financial services to downtrodden and poor people has been made a prerogative of rural banks and cooperative banks, who are not the mainstream players. And if mainstream players are not involved in this initiative it would be the traditional quasi-banking establishments, who would again take undue benefit of this situation. Financial inclusion refers to a process that ensures the ease of access, availability and usage of the formal financial system for all members of an economy. It facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital. An inclusive financial system can help reduce the role of informal sources of credit (such as money lenders) which are often found to be exploitative. The importance of an inclusive financial system is widely recognized in the policy circle and become a policy priority in many countries including India. The essence of financial inclusion is to ensure delivery of financial services which include - bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, insurance facilities (life and non-life) etc. DEFINITION OF FINANCIAL INCLUSION Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost (The Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan). Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products (The Committee on Financial Sector Reforms, Chairman: Dr. Raghuram G. Rajan). Household access to financial services is depicted in Figure I. Figure-1: Household Access to Financial Services Sources: Reserve Bank of India, 31 M. Phil Scholar, DiST, Kerala, India, amritha.thomas@gmail.com 1789 P a g e

132 IMPORTANT FEATURES OF FINANCIAL INCLUSION Financial inclusion means the process of availing a minimum set of financial and banking services to the people residing in the lowest ladder of social paradigm. Financial inclusion presses upon including the mainstream banking and financial initiatives in this initiative. Opening a bank account is the most popular and simple tool of attaining objectives of financial inclusion. Financial inclusion is being promoted as an important tool to achieve the target of sustainable growth. PROMOTING FINANCIAL INCLUSION POLICY INITIATIVES ALL OVER THE WORLD To expand the reach and scope of financial services it s a collective responsibility for the promotion of financial inclusion. It is a task for both the government and the private sector. Each has a role to play, the private sector in harnessing technology and adapting to consumer needs, the government in creating an enabling environment for greater financial inclusion. Technological Innovation is the most promising way to advance financial inclusion. Because it lowers the costs of serving lowincome clients. It makes the provision of financial services viable to suppliers and affordable for users. Some of the technology solutions being implemented today are Smart Cards, Biometric ATMs, Point of Service Devices and Mobile Phone Applications. Leading banking and financial institutions are engaged in providing banking services to the financially underserved through pilots or limited commercial rollouts using either one or multiple technologies cited above. Mobile banking is one innovation with dramatic potential for expanding financial inclusion. Mobile phone diffusion often exceeds bank network distribution. Kenya s mobile payment services, M-PESA are a well-known example. It is operated through a private telecommunications provider and has nationwide coverage independent of traditional banks. Today, more than 75 percent of the Kenyan population has access to financial services - the highest in Sub-Saharan Africa. Similar schemes are also popular in Latin America, with M-PESA-style service in Paraguay and in Mexico, although here it operates through the formal banking sector. Governments as well can harness the power of mobile banking, by disbursing transfer payments using formal bank accounts. Mexico s Oportunidades offers a good example of how government-to-person (G2P) payments helped draw previously unbanked beneficiaries into the formal financial network. By the same token, products and services that are tailored to meet consumer needs are also important in expanding use of financial services. In countries such as Brazil, India, and Mexico, the use of banking correspondents (who rely on a combination of card- and mobile-based technologies) extended the reach of financial services to previously unbanked customers and locations. In Chile, supermarket chains are gradually building credit histories for their unbanked clients. They start by extending small store credit, and expand that credit based on repayment record. These payment histories can translate into broader access to credit. This is financial empowerment in action - especially when combined with measures to protect consumers and financial education to prevent over-indebtedness. The United Nations Capital Development Fund (UNCDF), which is present in 33 of the identified 50 Least Developed Countries (LDC), invests in local development and inclusive finance with a total program portfolio amounting to US$130 million. UNCDF s vision of inclusive finance is to offer appropriate financial services to all segments of the population to be supported by sound government policies, legal and regulatory frameworks and infrastructure. UNCDF has been instrumental in taking innovative approaches to build inclusive financial sectors to help them reduce poverty and achieve inclusive growth. Similarly, the International Financial Corporation (IFC), a member of the World Bank, supports numerous causes designed to support the proliferation of financial inclusion. In recent years financial inclusion is seen as a policy priority in many countries. The other major initiatives are: Legal and regulatory initiatives: In Sweden and France, banks are legally bound to open an account for anybody who approach them, Emphasis on right to have a bank account by Law on exclusion (1998) in France, Community Reinvestment Act (1997) in US Banking sector initiatives, No frills accounts in India (2006) and SHG led bank linkage programme, Everyman account in Germany (1996), Mzansi account in South Africa (2004). At a national level, significant steps have been taken to achieve financial inclusion by a number of governments. Some of these initiatives are shared below: 1790 P a g e

133 United Kingdom According to the Public Management and Policy Association, one out of every eight adults in the UK is financially underserved. In the 2004 pre-budget report, the British government announced its strategy to tackle financial exclusion by promoting financial inclusion. The three priority areas set out in the report were: Access to banking Access to affordable credit Access to free face to-face money advice. The government established a Financial Inclusion Fund worth 120 mn for three years. The framework for delivering this ambitious plan also includes a Financial Inclusion Taskforce to monitor progress and give further recommendations. Brazil Brazil s government has urged state banks to better serve poor people and reach out to the rural population. To support this aim, the government has relaxed account opening conditions and the rules for assigning banking correspondents (BCs) to deliver financial services. In Brazil, banks need to place 45 percent of sight deposits in reserve at the central bank at 0 percent rate of interest. To promote micro finance, central bank permits banks to take 2 percent of the allocated 45 percent deposit and deliver micro loans at between 24 and 48 percent interest rate. This acts as an incentive to reach out to low income population. Now, as a result of favourable government policy, there are more than 27,000 BCs in Brazil and four banks have acquired a total of eight million new customers in less than three-and-a-half years. Kenya In 2006, the Kenyan government passed The Microfinance Act, allowing Micro Finance Institutions (MFIs) to take deposits from May The Association of Microfinance Institutions of Kenya (AMFI) considers this act as a platform for MFIs to retain clients and provide better financial services. The Act addresses licensing provisions, minimum capital requirements, minimum liquid assets, submission of accounts to the Central Bank, supervision by the Central Bank, and limits on loan and credit facilities. It also seeks to protect depositors by mandating deposit-taking MFIs to contribute to the deposit protection fund. China China s central bank, the People s Bank of China, launched a pilot in 2006 to stimulate micro-lending to individuals and companies by township and village banks. Seven domestic micro-credit corporations were established in five provinces and two micro-credit corporations were created with assistance from the International Finance Corp (IFC), a member of the World Bank. After the success of the pilot, in October 2007 the China Banking Regulatory Commission's program was expanded nationwide. The program now covers 25 village banks. India The government of India s National Rural Financial Inclusion Plan (NRFIP) has set a target to achieve complete financial inclusion by The plan aims to serve fifty percent of the financially excluded (280 mn) population by 2012 through regional and semi-urban branches of commercial and regional rural banks. To help achieve these goals, two funds of about US$125 million each have been allocated - the Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund (FITF). The objectives of the FIF is to support "developmental and promotional activities" with a view of securing greater financial inclusion, particularly among weaker sections, low-income groups and in under developed regions and hitherto un-banked areas. Current banking infrastructure in rural India relies on the manual delivery of services. This presents a massive hurdle in reaching out to the sheer number and geographical spread of the financially underserved population. In matching the FIF with the Financial Inclusion Technology Fund (FITF), the government has given equal importance to the development of technology that can provide scalable and sustainable solutions for inclusive growth. Specifically, the objectives of FITF are to enhance investment in Information and Communications Technology (ICT) aimed at stimulating research and technology innovation in the area of financial inclusion, increase the adoption of technology among financial services providers and users, and encourage an environment of innovation and cooperation among stakeholders. The government has also set up a Committee on Financial Inclusion under the chairmanship of the ex-governor of the Reserve Bank of India (RBI), Dr. C Rangarajan, to study the pattern of exclusion, identify barriers, review international experience and provide recommendations for achieving the objectives of financial inclusion P a g e

134 CONCLUSION A nation can grow economically and socially if its weaker section can turn out to be financial independent. Financial inclusion or inclusive financing is the delivery of financial services, at affordable costs, to vast sections of disadvantaged and low income segments of society. There have been many formidable challenges in financial inclusion area such as bringing the gap between the sections of society that are financially excluded within the ambit of the formal financial system, providing financial literacy and strengthening credit delivery mechanisms so as to improvised the financial economic growth. Depending on the stage of development, the degree of Financial Inclusion differs among countries. The paper highlights the basic features of financial inclusion, and its policy initiatives of various countries that.it can be concluded that undoubtedly financial inclusion is playing a catalytic role for the economic and social development of nations but still there is a long road ahead to achieve the desired outcomes. REFERENCES 1. (2010). Banking for Billions: Increasing Access to Financial Services. Barclays Economist Intelligence Unit-The Economist. 2. Demirguc-Kunt, A., & Klapper, L. (2012). Measuring Financial Inclusion: The Global Findex Database. Washington, DC: World Bank Policy Research Working Paper 6025, World Bank. 3. (2011). The Mobile Financial Services Development Report New York: World Economic Forum. 4. Chakrabarty, K. C., DG, RBI. Keynote address on Furthering Financial Inclusion through Financial Literacy and Credit Counselling. 5. Christine, Lagarde. (2014, June 26). Empowerment through Financial Inclusion, Address to the International Forum for Financial Inclusion. International Monetary Fund Mexico. 6. (2011). Anti-money Laundering and Terrorist Financing Measures and Financial Inclusion. Paris: Financial Action Task Force (FATF)/OECD: 7. Karlan, Dean, Margaret, McConnell, Sendhil, Mullainathan, & Jonathan, Zinman. (2010). Getting to the Top of Mind: How Reminders Increase Saving. mimeo, Yale. 8. (2012). General Guidelines for the Development of Government Payment Programs. Washington, DC: World Bank. 9. Asli, Demirguc Kunt, & Klapper, L. (2012, April). Measuring Financial Inclusion (Policy Research Working Paper, 6025). World Bank. 10. Financial Inclusion - The Indian Experience - Text of Speech by Smt. Usha Thorat, Reserve Bank of India at the HMT-DFID Financial Inclusion Conference 2007, WHitehall Place, London, UK on June 19, Rangarajan, C. Report of the Committee on Informal Financial Sector Statistics (Summary). 12. Inaugural address by Smt. Usha Thorat, Dy. Governor, Reserve Bank of India at the Financial Planning Congress 2006 on "Establishing Consumer Centric Financial Services Delivery Infrastructure" organized by the Financial Planning Standards Boards of India on May 29, 2006 at New Delhi. 13. Retrieved from Retrieved from Retrieved from Retrieved from ***** 1792 P a g e

135 STOCK MARKET LINKAGES OF INDIA, UNITED KINGDOM AND JAPAN WITH UNITED STATES Ammar Hafeez 32 ABSTRACT Over the last decade, academics documented the benefits of international portfolio diversification and portfolio managers transformed the message into practice. The common theme is the benefits of diversification into the markets for global investors. With the soaring returns and sanguine prospects for economic growth having fuelled a recent surge of interest in investing in international markets, the opportunities arising in that part of the world cannot be underestimated. The basic purpose of the study is to analyze the diversification prospects arising over the international boundaries and to determine the short term and long-term linkages or interdependencies and thus quantify their extent. To broaden the study contours and gain an insight, three economies have been taken into consideration. These include India (Asia), United Kingdom (Europe) and Japan (Asia). Use of descriptive statistics, correlation test, co integration test, regression test, granger causality test, etc. equips the study with supportive data. The information shall assist the investors and portfolio managers who look to invest in the global markets and thus tradeoff between risk and return. This work provides evidence on the above issues and examines some corollary concerns. Global Portfolio, Diversification, Financial Integration etc. INTRODUCTION KEYWORDS The interdependence between stock markets has been an issue of increasing interest over the last two decades. The amount of research work done in this filed has been phenomenal. International stocks markets have become more integrated in recent years. Several factors contributed to the linkages or interdependencies of stock markets. The progressive removal of restrictions and relaxation of control on capital movements, among others has increased the flow of funds across countries. Hence, national stock exchanges are becoming more integrated and moving towards increasing relationship with other international stock exchanges. Risk reduction through the construction of diversified portfolios is the foundation of modern portfolio theory. The theory of portfolio selection developed by Harry Markowitz and James Tobin (1952) states that diversification could eliminate risk if returns are not correlated. If the correlation between the returns of the equity markets under consideration increases, the risk exposure of the portfolio (all else being constant) will start to increase and, at a certain point, international diversification will no longer beneficial. Based on portfolio selection theory, the increasing relationship among national stock markets has created more opportunities for global international investment as investors have begun including assets of foreign countries into their portfolio to reduce risk and diversify effectively. Thus, knowing the correlations or relationship between the returns of various national financial markets is important for the process of allocating investments among these markets to reduce risk. Recognizing the benefits of international diversification, numerous studies in finance literature have concentrated on measuring the international linkages of national stock markets across several developed and emerging markets. The World Bank (1997) argues that the world s financial markets are rapidly integrating into a single global marketplace as investors are driven to developing countries in the search for higher returns. However, history has shown that some once-emerging economies, such as the United States and Japan have been successful. This has serve as motivation for investors to allocate their investment in emerging market in order to enhance portfolio return and reducing risk through diversification. The risk and return in investing in emerging markets are significantly linked to the ability of these markets to develop economically. Therefore, this study focuses specifically on the relationship and linkage of U.S. market with other markets namely India, United Kingdom (U.K), and Japan. PROBLEM STATEMENT In the light of globalization, the national stock markets are moving towards increasing linkages to other international stock markets. The question whether there is a relationship among stock markets is difficult to answer without doing the research to investigate the problem. The relationships among international stock markets have received a great deal of attention. 32 Student (Management), Jamia Millia Islamia, Delhi, India, ammarhafeez@gmail.com 1793 P a g e

136 The question of whether Indian, U.K. and Japanese markets, are integrated with other stock markets so that investing in them will provide the benefit of diversification is the major concern raised by investors. Thus, this study aims at providing some insight to the question above by investigating the linkage of U.S. market with other markets. In this study, we use three markets namely India, United Kingdom (U.K.) and Japan. OBJECTIVES OF STUDY The objectives of this study are as follows: Bridge the gap between the theoretical knowledge and practical functioning of the interdependencies between various markets. To explore the future prospects of the markets so undertaken in the study. To examine the relationships of U.S. markets with three other markets namely India, United Kingdom and Japan. SIGNIFICANCE OF STUDY This study will provide some useful information to investment practitioners, policy makers, academicians and other researches where: It provides knowledge on the relationship of U.S. market with other markets. Understanding the linkages and correlation between these stock markets are important for policy makers and fund managers in their investment decision and risk management. It provides knowledge to investors who are considering investing in stock markets other than U.S. to take advantage of its rapid growth in order to enhance portfolio return. By knowing the relationship between the markets, it can help investors to hedge some risk in their international portfolio. It contributes to the literature on the topic of stock market linkages focusing on US market with other major markets. REVIEW OF LITERATURE Numerous studies have been done to investigate stock market linkages, integration or interdependence. Stock market is said to be integrated when correlation exists between markets. Although the results of these studies are mixed, inconsistent and sometimes contradict with each other, the ultimate motivation behind the studies is the benefit of diversification. If evidence of stock market linkage were found, it would imply that there is a common force that brings these markets together. Hence, the benefit of diversification would be limited. Apart from analyzing only the interdependencies of stock markets, many researchers have also focused on the impact of major events such as market crisis, market liberalization, etc., on the stock market linkages. Since the early 1990s, most of the research on international stock market linkages has been concentrated on the mature and emerging markets. Jeon and Furstenburg (1990) performed a study on the inter-relationship among major markets. They examine the relationships among stock prices in the major world stock exchanges of Tokyo, Frankfurt, London and New York, using the vector auto regression (VAR) approach to daily stock price indices of those markets for the period between January 1986 and November Arshanapalli and Doukas (1993) focused their analysis on the capital markets of the U.K., France, Germany and U.S. and they performed statistical tests for the existence of bi-variate co-integration between the U.S. stock market with each of the other major markets. They found out that there exists co-integration for all potential pairs and therefore there are small benefits from the international portfolio diversification of the American investors. Studies by Hilliard (1997) and Ioannis Asimakopouus, John Goddard and Cost as Siripoulos (2002) have investigated interrelationship between daily returns generated by major stock exchanges. Evidence is found that strong interdependence exists between the daily returns generated by United States and other selected major world indices. Aggarwal, Lucey and Muckley (2003) in their paper have examine time-varying integration of European equity markets over the 1985 to 2002 period using daily data for the main EU countries. They use estimates of traditional co-integration, the Haldane and Hall Kalman filter technique, and dynamic Eigen value analysis in their study. In the paper by Canarella, Miller and Pollard (2008), they explore the dynamic linkages between stocks market returns in NAFTA (i.e., Canada, Mexico and the12u.s.). Tan and Tse (2002) use daily data in local currencies over to examine the linkages among U.S., Japan, and seven Asian stock markets including Malaysia, Philippines, Singapore, and Thailand. Cheung and Ho (1989) conduct a study on the causal relationship between the US market and four Asian Pacific markets, i.e., Australia, Hong Kong, Singapore and Malaysia 1794 P a g e

137 and find that a bi-directional relationship exist between the US and Singapore. However, a unidirectional relationship running from the US market to the Hong Kong market and to the Malaysian market is found. Muhammad Naeem (2002) conducted a study on the interdependence of the major stock markets in South Asia and the linkages between the markets with U.S and U.K stock markets using monthly data from January 1994 to December Using both bivariate and multivariate co integration analysis, he found no co integration between the South Asian stock markets indices for the entire period but found co integration for the pronuclear test period i.e. from January 1994 to April Another studies done by Click and Plummer (2005) who examine whether the ASEAN-5 stock markets are integrated or segmented using co-integration technique using daily and weekly stock index quotes in local currency data from July 1998 to December The empirical result suggests that the ASEAN-5 stock markets are co-integrated. However, only one co integrating vector is found, leaving four common trends among the five variables. Hence, the ASEAN-5 stock markets are integrated, but the integration is still far from complete. Royfaizal, R. C, Lee, C and Mohamed, Azali (2007) analyses the stock markets interdependencies between the Asean-5+3 and U.S. stock markets before, during and after Asian financial crisis by using weekly stock indices expressed in local currencies from July1997 to June They employ Granger causality test based on VECM to test the long run relationship among the stock markets. The study shows that the long run relationships between ASEAN 5+3 stock markets occur only for during- and post crisis period. They also found that US become dominant compare to other countries after the crisis. Lim L.K. (2007) conducts a study to examine the dynamic interdependencies of five ASEAN stock markets i.e. Indonesia, Malaysia, Philippines, Singapore and Thailand with US stock market over the period of April 1990 to July 1997 using daily total market-return indices for each stock market. The result indicates higher average returns and correlations over the post crisis period. The result also indicates an increase in the integration between the ASEAN-5 markets after the financial crisis and US market returns have significant influence on the returns of all ASEAN-5 markets. METHODOLOGY OF RESEARCH Data Data used in this study are the stock market indices for every stock market. These indices are the most representative indices that reflect each market s performance. This study uses daily closing price for each index from January 2004 to January2014, a total of 2,493 observations each. The data is considered only for those days where markets were open as per the working days of NSE. The indices used are as follows: United States: Dow Jones Industrial Average (DJIA) India: NSE S&P CNX Nifty Index (Nifty) United Kingdom: FTSE 100 (FTSE) Japan: Nikkei 225 Stock Average (Nikkei) All of the indices are expressed in terms of local currencies to avoid problems associated with transformation due to fluctuations in exchange rates and also to avoid the restrictive assumption the relative purchasing power parity holds. In addition, the preference for local currencies is focused on the domestic causes of stock market interdependence. The data will be analyzed using EVIEWS 7 and IBM SPSS STATISTICS 20, which provides sophisticated data analysis, regression and forecasting tools. Methodology Used In order to analyze the linkages of U.S. market with other markets, the data needs to be statistically analyzed. This study adopts the following methods: Descriptive Statistics Unit Root Test The Correlation Test Regression Test Co-Integration Test Granger Causality Test To sum up, six econometric methodologies are adopted to analyze the linkages of U.S. market with three other markets namely India, United Kingdom (U.K), and Japan P a g e

138 ANALYSIS AND FINDINGS Analysis of Descriptive Statistics Table-1 DJIA NIFTY NIKKEI FTSE Valid Mean Median Mode a a 5313 a Std. Deviation Skewness Std. Error of Skewness Kurtosis Std. Error of Kurtosis Minimum Maximum Note: a. Multiple modes exist. The smallest value is shown Sources: Authors Compilation Descriptive statistics include the distribution of mean, standard deviation, skewness and kurtosis. In term of absolute value, the mean of NIKKEI 225 is greater than other indices. Meanwhile, in the same observation period, NIKKEI 225 index is the most volatile and the FTSE index is least volatile as the standard deviation of returns show. It also shows that all the indices have Kurtosis values smaller than 3, which indicates no fat-tails. India and UK both have negative skewness which shows that data is skewed left i.e. left tail is long relative to the right tail. Analysis of Unit Root Test Table-2 Stock Index Probability of Unit Root at Level Probability of Unit Root at 1st Difference DJIA NIFTY NIKKEI_ FTSE_ Sources: Authors Compilation Augmented Dickey-Fuller (ADF) test is used to test whether the stock price indices data are stationary or not. The results of ADF unit root test indicate that all stock indices are non-stationary series. However, since the t-statistics is smaller (more negative) than the critical value in the first difference form, there is no evidence to support that the presence of unit in the series. Hence, all the stock price indices are stationary, and integrated of order one, I (1) which is consistent with results in the finance literature. ANALYSIS OF CORRELATION TEST Table-3 DOW_JONES FTSE_100 NIFTY NIKKEI_225 DOW_JONES FTSE_ NIFTY NIKKEI_ Sources: Authors Compilation While the numerical values of correlation coefficients may range from 1.0 to -1.0, the majority of the correlation exceeds 0.5. From the result, we can see that DJIA is highly correlated with FTSE with correlation coefficient of 0.88 i.e. very high degree of positive correlation. This may be due to the close proximity between the markets resulting in increased money flows as investors can easily switch investments between the two markets. Thus, investing in UK is not an attractive risk reduction opportunity. Correlation between DJIA and NIFTY is also higher than correlation between DJIA and NIKKEI. This suggests that both FTSE and NIFTY are more correlated with U.S. as compared to NIKKEI in the period under study P a g e

139 The correlation of US market with Japanese market suggest that there exists a very low degree of positive correlation between them which provides evidence for the belief that U.S investors can gain by diversifying their portfolios in Japanese stock markets. Since U.S and Japanese stock indices are less likely to move in same direction, thus including Japanese stocks can reduce risk of U.S portfolios to a considerable level. Analysis of Regression Test Table-4 Index Standardized Coefficient (Beta) FTSE NIKKEI NIFTY Sources: Authors Compilation The result shows that stock exchange of United Kingdom has the strongest linkage with the U.S. stock market. The stock market of India follow suit in close proximity to each other. The weakest linkage is that of Japan with the U.S. stock market. Analysis of Co-Integration Test The trace test and Max Eigen value indicates presence of at least 1 co-integration equation at 5% significance level. Similarly, the results also indicate that DJIA is co-integrated with NIFTY, FTSE and Nikkei. In other words, U.S. is also co-integrated with India, U.K. and Japan stock market. The finding that stock market indices are co-integrated means that there is one linear combination between the indices that forces these indices to have a long-term equilibrium relationship even though the indices may wander away from each other in the short run. Analysis of Granger Causality Test The Granger Causality test is conducted to investigate short term relationship between two indices. According to the test conducted, there exists both unidirectional causality and bidirectional causality. Following are the indices which granger causes the other indices. FTSE Granger causes DOW JONES DOW JONES Granger causes FTSE DOW JONES Granger causes NIKKEI FTSE Granger causes NIKKEI CONCLUSION This study has tried to investigate the linkage of U.S. market with other markets namely India, United Kingdom (U.K.) and Japan. Extending related empirical studies, we used correlation test as preliminary phase of examining the linkages between the markets. The correlation test is succeeded by regression analysis that provides us the extent of linkages between the markets. We have also conducted tests of unit root and granger causality in our understudy. We further used co-integration test to comprehensively investigate the direction of relationship. The descriptive statistics show us that Japan has the highest mean of its observations and seems to be the most volatile as according to its standard deviation while the stock prices of UK market are the least volatile or stable. According to the Unit Root test conducted all the indices data is validated for further tests once it is taken at 1 st Difference after taking it at level. Another important aspect of the analysis is that there is positive correlation between U.S. and the other economies i.e. the stock prices of both the markets moves in the same direction. Thus, if stock prices in one-market increases, the other shall also increase and vice versa.. This is not surprising as U.S is the world s foremost stock market and has large influence on other stock markets. We also found that U.S. is highly correlated with India. As it is the main trading partner of India, thus stock price indices between U.S. and India tend to correlate. The benefits of Diversification are highest when funds are invested in markets, which have an inverse relationship between them. To explain this on a broader view, if the stock markets have a negative relationship between them, then the loss arising from investment in one economy can be offset by the profit arising from other economy. As far as our results are there is a profitable opportunity to invest in Japan followed by India but not in UK as markets are highly positively correlated. This result of correlation guides the investors and portfolio managers in diversifying in the understudied markets. However, there is a strong need for vigorous portfolio revision to optimize risk and maximize return P a g e

140 According to Correlation and Regression test, the UK stock market shows high linkage with the U.S. stock market. As both the countries are in close proximity with each other, thus the close relationship is bounded. Furthermore, both the test shows a similar result with respect to the countries understudy. The co-integration test indicates the presence of at least 1 co-integration equations at 5% significance level. The Granger Causality test reports that there is 98.28% probability that DJIA granger causes NIKKEI. There is bidirectional causality in case of UK stock market. In addition, the US market does not granger cause Nifty market. To conclude, the U.S. market is positively correlated with all the markets under study namely India, Japan and UK. However, there still could be a much better scope for investment in such markets in the near future. RECOMMENDATIONS This study has certainly raised several issues for further investigation. In order to get substantial and better results, there are several recommendations that should be considered in the future research. It would be of great interest for researcher to extend the study to generate further analysis on the topics using methodology that is more comprehensive. The use of GARCH technique in uncovering the short-run relationship between the stock markets shall generate analysis that is more meaningful. Diversification benefit has not been eroded away if closer integration i.e. long term relationship between two stock markets can be matched by reduction in volatility. Thus, it would be interesting if this study can be extended to look into the volatility of each stock market. Studies on how to reap regional benefits i.e. arising within the same continent will prove to be beneficial to investors looking for diversification within close proximity. Considering structural break in further study would be interesting to address the issue of how the crisis altered stock markets linkages or interdependencies. Increasing economic or financial integration should lead to the dominance of global factors over local factors. Tests of whether the country and industry effects are constant over time could be very revealing because in many emerging markets there have been important changes in recent years like on-going processes of liberalization of capital markets. However, it is not possible to pinpoint exactly when these markets will become integrated into global capital markets. Finally, not that we examine the linkages among stock markets using only index data, we can also bear in mind the importance of macroeconomic variables that may affect the linkages between markets such as foreign exchange, economic policy, etc. Thus, incorporating that into the study of market linkages would give insightful results. Portes and Rey (2002) found that the most important determinant of global equity transactions between two countries is distance. We cannot help but wonder whether a world blessed with a vast pool of private, internationally active, speculative capital would have faced the kind of liquidity crises we have seen in recent years and in their wake the many proposals to limit capital flows that have been made. There remain a number of important caveats however. REFERENCES 1. Arshanapalli, B., Doukas, J., & Lang, L. (1995). Pre and post-october1987 Stock Market Linkages between U.S and Asian markets. Pacific-Basin Finance Journal, 3(1), Chan, K.C., Gup, B. E., & Pan, M. (1992). An Empirical Analysis of Stock Prices in Major Asian Markets and the United States. Financial Review, 27(2), Choudhry T, Lu, L., & Peng, Ke. (2007). Common Stochastic Trends among Far East Stock Prices: Effects of the Asian Financial Crisis. International Review of Financial Analysis, 16, Click, R. W., & Plummer, M., G. (2005). Stock Market Integration in ASEAN after the Asian Financial Crisis. Journal of Asian Economics, 16, Dimaranan, B., Ianchovichina, E., & Martin, W. (2007). Competing with Giants: Who Wins, Who Loses? Chapter 3 in Winters, L. Alan and Yusuf, S. (eds.), Dancing with Giants: China, India, and the Global Economy. World Bank, Washington DC. 6. Engle, R. F., & Granger, C. W. J. (1987). Co-Integration, error correction: Representation, estimation and testing. Econometrica, 55, Eun, C. S., & Shim, S. (1989). International Transmission of Stock Market Movements. Journal of Financial and Quantitative Analysis, 24, P a g e

141 8. Hamao, Y., R. Masulis, & Ng, V. (1990). Correlation price changes and volatility across international stock markets, Review of Financial Studies, 3, Hilliard, J. E. (1979). Relationship between Equity Indices on World Exchanges. Journal of Finance, 34, Koch, T. W., & Koch, P. D. (1993). Dynamic Relationship among the Daily level of National Stock Indexes in International Financial Market Integration. Stansell, S.R. (ed.), Blackwells, Mass. 11. Lee, I., R. Pettit, & Swankoski, M. (1990), Daily Return Relationships Among Asian Stock Markets. Journal of Business Finance and Accounting, Masih, A. M. M., & Masih, R. (1999). Are Asian Stock Markets Fluctuations Due to Mainly to Intra-regional Contagion Effects? Evidence Based on Asian Emerging Markets. Pacific-Basin Finance Journal, 7(3), Masih, R., & Masih, A. M. M. (2001). Long and Short-term Dynamic Causal Transmission amongst International Stock Markets. Journal of International Money and Finance, 20, Rashid, Sabri Nidal. (2002). Increasing linkages of Stock Markets and Price Volatility. Journal of Financial Risk and Financial Risk Management, 16, Sharma, J. L., & Kennedy, R. E. (1977, September). Comparative Analysis of Stock Price Behaviour on the Bombay, London & New York Stock Exchanges. JFQA, Siklos, P. L, & Ng, P. (2001), Integration among Asia Pacific and International Stock Markets: Common Stochastic Trends and Regime Shifts. Pacific Economic Review, 6, Solnik, B., Boucrelle, C., & Fur, Y. Le. (1996). International market correlation and volatility. Financial Analysts Journal, 52(5), ***** PEZZOTTAITE JOURNALS MESSAGE TO AUTHORS We require that, prior to publication; authors make warranties to these effects when signing their Agreements. An author must not submit a manuscript to more than one journal simultaneously, nor should an author submit previously published work, nor work which is based in substance on previously published work. An author should present an accurate account of research performed and an objective discussion of its significance, and present sufficient detail and reference to public sources of information so to permit the author's peers to repeat the work. An author must cite all relevant publications. Information obtained privately, as in conversation, correspondence, or discussion with third parties, should not be used or reported in the author's work unless fully cited, and with the permission of that third party. An author must make available all requisite formal and documented ethical approval from an appropriate research ethics committee using humans or human tissue, including evidence of anonymisation and informed consent from the client (s) or patient (s) studied. An author must follow national and international procedures that govern the ethics of work done on animals; An author must avoid making defamatory statements in submitted articles which could be construed as impugning any person's reputation, for example, making allegations of dishonesty or sharp practice, plagiarism, or misrepresentation; or in any way attacking a person's integrity or competence. An author must ensure all named co-authors consent to publication and being named as a co-author, and, equally, that all those persons who have made significant scientific or literary contributions to the work reported are named as co-authors. Additionally, the author understands that co-authors are bound by these same principles. (sd/-) (Editor-In-Chief) 1799 P a g e

142 IMPACT OF PREFERENCE SHARE CAPITAL ON EQUITY NETWORTH: AN EMPIRICAL CASE OF DUNLOP INDIA LIMITED Gurnam Singh Rasoolpur 33 ABSTRACT In this study, an empirical attempt has been made to show the impact of preference share capital on the equity networth of Dunlop India Ltd. from the tyres & tubes industry of the Indian corporate sector. The study covers a time of ten years (effective nine years) extending from the year 1983 to The company is lying in top ten companies of tyres & tubes industry of the Indian corporate sector based on sales for the year for the purpose of this study. The study reveals that leverage ratio2 of the company has declining trend during the period under study, whereas, aggregate leverage ratio2 of the company is worked out percent during the period under study. It is found that preference share capital to equity networth ratio2 is around 1 percent during the period under study, which shows that amount of preference share capital in the equity networth is very small during the period under study. However, aggregate preference share capital to equity networth ratio2 of the company is worked out 0.48 percent during the period under study. It is also observed that cost of preference share capital (Kpat) is varying from 6.57 percent in the year 1983 to percent in the year during the period under study, whereas, aggregate cost of preference share capital (Kpat) of the company is worked out 7.27 percent during the period under study. It is also found that rate of return on total networth on after tax basis (RONat) and rate of return on equity networth (ROENat) are declining over the period under study excepting for the years 1985 and Aggregate rate of return on total networth on after tax basis (RONat) and aggregate rate of return on equity networth (ROENat) have been worked out 5.44 percent and 5.43 percent, respectively, during the period under study. In nut shell, it is concluded that the company is enjoying favourable leverage with regard to use of preference share capital during four out of nine years under study, however, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital over the period under study. It means that use of preference share capital in the capital structure of the company has positive impact on the profitability of the company during four out of nine years under study which consequently contributing to the equity networth of the company which is ultimately benefitting to the equity share holders of the company, whereas, on aggregate basis, it has negative impact on the profitability of the company during the study period. It is also found that the amount of preference share capital in the equity networth is very small during the period under study. KEYWORDS Return on Networth, Return on Equity Networth, Cost of Preference Share Capital etc. INTRODUCTION Capital structure has significant bearing on the profitability of a concern. Among the different sources of finance, debt is the cheapest source of finance followed by preference share capital. Cost of debt is lower than cost of preference share capital as well as equity share capital because the debt holders are the first claimants on the firm s assets at time of its liquidation. Similarly, they are the first to be paid their interest before any dividend is paid to preference and equity shareholders. Interest paid to the debt holders is an item chargeable to profits of a firm. However, the interest and principal repayment on debt are definite obligations that are payable irrespective of the financial situation of a firm. Therefore, debt is riskier. It enhances the financial risk. Also, if interest and principal payments on debt are not promptly met when due, bankruptcy, loss of control for the owners may occur. It will turn out that use of some debt by the firm is desirable and a strong case can be made for the existence of an optimal capital structure, or debt/equity mix. A firm should make a judicious mix of both debt and equity to achieve a capital structure, which may be the optimal capital structure. Modigiliani and Miller (1959) gave logically consistent behavioral justification for this relationship and denied the existence of an optimum capital structure. Barges (1963) tested the M-M hypothesis and found that the cost of capital comes down with leverage. Singh (1998) observed that cost of capital is a significant factor in case of large-size companies, while it is not a significant factor affecting capital structure of companies in case of medium and small-size companies. The primary aim of corporate management is to maximize shareholders value and the value of a firm in a legal and ethical manner. So, a financial manager should consider a number of factors to set an optimal capital structure for a firm giving considerable weight to earning rate, collateral value of assets, age, cash flow coverage ratio, cost of borrowing, size (net sales), dividend payout ratio, debt service ratio, cost of borrowing, corporate tax rate, current ratio, growth rate, operating leverage and uniqueness (selling cost/sales) etc. The choice between debt and equity to finance a firm s assets involves a trade-off between risk and return (Pandey, Chotigeat & Ranjit, 2000). The excessive use of debt may endanger the survival of a firm, while a conservative use of debt may deprive the firm in leveraging return to equity owners. Therefore, for taking more benefits of debt capital also by keeping away firms from risks, a desirable debt equity combination must be used in the total capital structure. 33 Associate Professor (Commerce), P.G. Department of Commerce & Business Management, Guru Nanak College, Punjab, India, gsrasoolpur@gmail.com 1800 P a g e

143 Thus, the decision regarding debt equity mix in the capital structure of a firm is of critical one and has to be approached with a great care. OBJECTIVES OF STUDY The present study has been undertaken with the following objectives: To measure the extent of leverage of Dunlop India Ltd. from the tyres & tubes industry of the Indian corporate sector. To study the impact of use and cost of preference share capital on the equity networth of Dunlop India Ltd. of tyres & tubes industry from the Indian corporate sector. RESEARCH METHODOLOGY Data Source, Sample Size & Methodology The research study is confined to Dunlop India Ltd. from the tyres & tubes industry of the Indian corporate sector. The company is lying in top ten companies of tyres & tubes industry of the Indian corporate sector based on sales for the year for the purpose of this study. The study covers a time of ten years (effective nine years) extending from the year 1983 to for the purpose of our research study. For conducting the present study, data has been compiled from the different volumes of the Bombay Stock Exchange Official Directory. A number of studies have been conducted so far for highlighting the impact of debt on profitability of concerns in different industries. However, hardly any study has been carried out to study the impact of preference share capital on the equity networth of concerns in the Indian corporate sector. So, in the present study, a maiden attempt has been made to make an in-depth analysis of the impact of preference share capital on the equity networth through a case of Dunlop India Ltd from tyres & tubes industry of the Indian corporate sector. To analyze the data, the following ratios along with simple statistical tools like tables, percentages, etc. have been used for achieving the objectives of present study. Preference Share Capital to Equity Networth Ratio: It can be calculated in the following manner: Pref Share Capital to Equity Networth Ratio1 = Preference Share Capital Equity Networth Pref Sh Cap to Equity NetworthRatio2 = Pref. Share Capital Pref. Share Capital + Equity Networth 100 Leverage Ratio: It can be calculated in the following manner: Leverage Ratio1 = Term Debt + Short Term Loans and Advances + Pref. Share Capital Equity Networth Leverage Ratio2 = Term Debt + Short Term Loans and Advances +Pref. Share Capital 100 Term Debt + Short Term Loans and Advances + Pref. Share Capital + Equity Networth Return on Total Networth on Before Tax Basis (RONbt): It can be calculated in the following manner: Return on Total Networth (RONbt) = Pre Tax Profits Total Networth x100 Return on Total Networth on After Tax Basis (RONat): It can be calculated in the following manner: Return on Total Networth (RONat) = Profits after Intt. & Taxes x100 Total Networth Return on Equity Networth (ROENat): It is calculated in the following manner: 1801 P a g e

144 Return on Equity Networth (ROENat) = Profits after Intt & Taxes Pref Dividend Total Networth Pref Share Capital Cost of Preference Share Capital (Kpat): The following formula is used to calculate the cost of preference share capital: Cost of Preference Share Capital (Kpat) = Preference Dividend x100 Preference Share Capital Net Gain: The following is the formula for calculating the Net Gain: x100 Net Gain = Return on Equity Networth (ROENat) - Return on Total Networth (RONat) Spread: The following is the formula for calculating the Spread: Spread = Return on Total Networth (RONat) - Cost of Preference Share Capital (Kpat) Here Term Debt plus Short Term Loans & Advances comprise of debentures, long-term loans and short-term loans & advances. Total Networth includes equity share capital, preference share capital, capital reserves including share premium and other reserves & surplus less intangible assets. Intangible Assets include preliminary expenses, expenses on issue of shares and debentures, goodwill, technical expertise charges, drawings & designs, patents, trademarks and copyright. While computing total networth usually accumulated losses are deducted from the aggregate of paid up share capital plus reserves & surplus. However, in the present study in addition to accumulated losses, goodwill, trademark, patents, & copyright have also been deducted. It is so because separate amount of accumulated losses is not available in the Bombay Stock Exchange Official Directory. Total networth has been also adjusted for the accounting year due to the change in the length of accounting year from 1 st of April to 31 st of March in the next year. Depreciation, interest charges and profits and/or losses have been changed proportionately. ANALYSIS OF EMPIRICAL RESULTS Preference Share Capital to Equity Networth Ratio As revealed by table 1, preference share capital to equity networth ratio2 is varying from 1.13 percent in the year 1983 to 0.27 percent in the year during the period under study. It is around 1 percent during the period under study, which shows that amount of preference share capital in the equity networth is very small during the period under study. Overall, it has a declining trend during the period under study. It is highest, i.e percent, in the year 1983 and lowest, i.e percent in the year over the period under study. On aggregate basis, aggregate preference share capital to equity networth ratio2 of the company is worked out 0.48 percent during the period under study. Table-1: Preference Share Capital to Equity Networth Ratio of Dunlop India Ltd Year Preference Share Capital to Equity Networth Ratio1 = Pref. Share Capital Equity Networth Preference Share Capital to Equity Networth Ratio2 = Pref. Share Capital Pref. Share Capital + Equity Networth 100 (In Times) (Percentage) Dec Dec Dec Dunlop India Ltd. (Aggregate Basis) (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 36(iii), p P a g e

145 Leverage Ratio As revealed by table 2, leverage ratio2 is varying from percent in the year 1985 to percent in the year during the period under study. For five out of nine years under study, leverage ratio2 is below 33 percent. Overall, leverage ratio2 has declining trend during the period under study excepting for the years 1984 and 1985 when it is percent and percent respectively. It is highest, i.e percent, in the year 1985 because of rising of interest bearing debt by company. It is lowest, i.e percent, in the year over the period under study. On aggregate basis, aggregate leverage ratio2 of the company is worked out percent during the period under study. Table-2: Leverage Ratio of Dunlop India Ltd Year Leverage Ratio 1 = Term Debt + Short Term Loans and Advances + Pref. Share Capital Equity Networth Leverage Ratio 2 = Term Debt + Short Term Loans and Advances + Pref. Share Capital 100 Term Debt + Short Term Loans and Advances + Pref. Share Capital + Equity Networth (In Times) (Percentage) Dec Dec Dec Dunlop India Ltd. (Aggregate Basis) (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 36(iii), p Cost of Preference Share Capital (Kpat) As revealed by table 3, cost of preference share capital (Kpat) is varying from 5.71 in the year to percent in the year during the period under study. During seven out of nine years under study, cost of preference share capital (Kpat) is below 7.14 percent. Overall, it has rising trend over the period under study excepting for the years and when it is 5.71 percent each respectively. On aggregate basis, aggregate cost of preference share capital (Kpat) of the company is worked out 7.27 percent during the period under study. Return on Total Networth on After Tax Basis (RONat) As revealed by table 3, rate of return total networth (RONat) on after tax basis is varying from percent in the year to 0.99 percent in the year during the period under study. During six out of nine years under study, rate of return on total networth on after tax basis (RONat) has been below 8 percent. Overall, it has been declining over the period under study excepting for the years 1985 and when it is percent and percent respectively. It is highest, i.e percent, in the year due to the lower effective tax rate, highest rate of return on net total assets (ROIat1) as well as net assets (ROIat2) on after tax basis and highest excess gap of rate of return on net assets (ROIat2) over cost of debt (Kdat) on after tax basis. It is lowest, i.e percent, in the year caused by highest effective tax rate, lowest rate of return on net total assets (ROIat1) as well as net assets (ROIat2) on after tax basis and highest excess gap of cost of debt (Kdat) over rate of return on net assets (ROIat2) on after tax basis. On aggregate basis, aggregate rate of return on total networth (RONat) on after tax basis of the company is worked out 5.44 percent during the period under study. Return on Equity Networth (ROENat) As revealed by table 3, rate of return on equity networth (ROENat) is varying from percent in the year to 0.97 percent in the year during the period under study. During six out of nine years under study, rate of return on equity networth (ROENat) is below 8 percent. Overall, it has declining trend over the period under study excepting for the years 1985 and when it is percent and percent respectively. It is highest, i.e percent, in the year due to the highest rate of return on net total assets (ROIat1) as well as netassets (ROIat2) on after tax basis and highest excess gap of rate of return on total networth (RONat) over cost of preference share capital (Kpat). It is lowest, i.e..97 percent in the year due to the lowest rate of return on net total assets (ROIat1) as well as net assets (ROIat2) on after tax basis and highest excess gap of 1803 P a g e

146 cost of preference share capital (Kpat) over rate of return on total networth (RONat). On aggregate basis, rate of return on equity networth (ROENat) of the company is worked out 5.43 percent during the period under study. Table-3: Impact of Preference Share Capital on Return on Equity Networth in Dunlop India Ltd Year Return on Total Networth Cost of Preference Share Return on Equity Networth RONat= Capital Kpat= ROENat= Profit after Intt & Taxes Pre. Dividend x100 Profits after Intt & Taxes Pref Dividend x100 Total Networth Pref Share Capital Total Networth Pref Share Capital (Percentage) (Percentage) (Percentage) Dec Dec Dec Dunlop India Ltd. (Aggregate Basis) (Aggregate Basis) (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 36 (iii), pp Table-4: Analysis of Spread and Net Gain in Dunlop India Ltd Spread between Leverage Impact Net Gain Leverage Ratio2 Year RONat & Kpat (RONat - Kpat) ROENat-RONat (Percentage) (Percentage) (Percentage) Dec Favourable Dec Unfavourable Dec Favourable Favourable Favourable Unfavourable Unfavourable Unfavourable Unfavourable Dunlop India Ltd (Aggregate Basis) Unfavourable (Aggregate Basis) Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol.36 (iii), p Impact of Preference Share Capital on Return on Equity Networth -.01 (Aggregate Basis) (Aggregate Basis) Table 4 shows the effects of use and cost of preference share capital (Kpat) on rate of return on equity networth (ROENat) for a period of nine years from the year 1983 to over the period under study. Comparison of cost of preference share capital (Kpat) with rate of return on total networth (RONat) shows that latter is higher than former for all the years excepting for the years 1984, , , and over the period under study. This leads to conclude that company is enjoying favourable leverage with regard to use of preference share capital for four out of nine years under study. Consequently, rate of return on equity networth (ROENat) is higher than cost of preference share capital (Kpat) as well as rate of return on total networth (RONat) in the above said four years over the period under study. As revealed by tables 3 & 4, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital during the period under study. It means that use of preference share capital in the capital structure of the company has positive impact on the profitability of the company during four out of nine years under study which consequently contributing to the equity networth of the company which is ultimately benefitting to the equity share holders of the company, whereas, on aggregate basis, it has negative impact on the profitability of the company during the study period. Further detail regarding spread and net gain has also been given in table 3. In this company, spread and net gain have been highest, i.e percent and 0.06 percent, respectively in the year during the period under study. Spread and net gain of the company are negative for five years out of the nine years under study. On aggregate basis, spread and net gain of the company are percent and percent respectively during the period under study P a g e

147 SUMMARY AND CONCLUSIONS Capital structure has significant bearing on the profitability of a concern. Among the different sources of finance, debt is the cheapest source of finance followed by preference share capital. A number of studies have been conducted so far for highlighting the impact of debt on profitability of concerns in different industries. However, hardly any study has been carried out to study the impact of preference share capital on equity networth in the Indian corporate sector. So, in the present study, a maiden attempt has been made to make an in-depth analysis of the impact of preference share capital on equity networth through a case of Dunlop India Ltd in tyres & tubes industry. So, the study is confined to Dunlop India Ltd., from the tyres & tubes industry of the Indian corporate sector. The study covers a time of ten years (effective nine years) extending from the year 1983 to The company is lying in top ten companies of tyres & tubes industry of the Indian corporate sector based on sales for the year for the purpose of this study. The following are the conclusion and findings of the present study. It is observed that leverage ratio2 is declining during the period under study, whereas, aggregate leverage ratio2 of the company is worked out percent during the period under study. It is found that preference share capital to equity networth ratio2 is around 1 percent during the period under study, which shows that amount of preference share capital in the equity networth is very small during the period under study. However, on aggregate basis, aggregate preference share capital to equity networth ratio2 of the company is worked out 0.48 percent during the period under study. It is observed that cost of preference share capital (Kpat) is varying from 5.71 percent in the year to percent in the year during the period under study, whereas, aggregate cost of preference share capital (Kpat) of the company is worked out 7.27 percent during the period under study. It is also found that rate of return on total networth on after tax basis (RONat) is declining over the period under study excepting for the years 1985 and when it is percent and percent respectively, whereas, rate of return on equity networth (ROENat) is also having declining trend over the period under study excepting for the years 1985 and when it is percent and percent respectively. Aggregate rate of return on total networth on after tax basis (RONat) and aggregate rate of return on equity networth (ROENat) have been worked out 5.44 percent and 5.43 percent respectively during the period under study. It is also observed that company is enjoying favourable leverage with regard to use of preference share capital during four out of nine years under study. Consequently, rate of return on equity networth (ROENat) is higher than cost of preference share capital (Kpat) as well as rate of return on total networth (RONat) in the above said four years over the period under study. However, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital over the period under study. It is also found that spread between rate of return on total networth on after tax basis (RONat) & cost of preference share capital (Kpat), and net gain {i.e. rate of return on equity networth (ROENat) minus rate of return on total networth on after tax basis (RONat)}are highest, i.e percent, 0.06 percent, during the year over the period under study. Spread and net gain of the company are negative for five years out of the nine years under study. In nutshell, it is concluded that the company is enjoying favourable leverage with regard to use of preference share capital during four out of nine years under study. Consequently, rate of return on equity networth (ROENat) is higher than cost of preference share capital (Kpat) as well as rate of return on total networth (RONat) in the above said four years over the period under study. However, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital over the period under study. It means that use of preference share capital in the capital structure of the company has positive impact on the profitability of the company during four out of nine years under study which consequently contributing to the equity networth of the company which is ultimately benefitting to the equity share holders of the company, whereas, on aggregate basis, it has negative impact on the profitability of the company during the study period. It is also found that the amount of preference share capital in the equity networth is very small during the period under study. REFERENCES 1. Allen, D. E., & Mizuno, H. (1989, May). The Determinants of Corporate Capital Structure: Japanese Evidence. Applied Economics, 21(5), Anthony, Robert N., & Reece, James S. (1982). Management Accounting Principles. New Delhi: D.S. Taraporewala and Sons. 3. Chandra, Prasanna. (1984). Financial Management Theory and Practice. New Delhi: Tata McGraw Hill Publishing Company Limited P a g e

148 4. Chandra, Prasanna. (1985). Management s Guide to Finance and Accounting. New Delhi: Tata McGraw Hill Publishing Company Limited. 5. Guthman, Harry G. Analysis of Financial Statements (4 th Edition). New Delhi: Prentice Hall of India. 6. Gangadhar, V., & Begum, Arifa. (October 2002-March 2003). Impact of Leverage on Profitability. Journal of Accounting & Finance, 17(1), Garg, Mahesh Chand, & Shekhar, Chander. (2002, February). Determents of Capital Structure in India. The Management Accountant, 37(2), Khan, M. V., & Jain, P. K. (1983). Financial Management. New Delhi: Tata McGraw Hill. 9. Kraus, Alan, & Litzenberger, Robert H. (1973, September). A State Preference Model of Optimal Financial Leverage. The Journal of Finance, 28, Kulkarni, P. V. Business Finance-Principles & Problems. Bombay: Himalaya Publishing House. 11. Narender, & Sharma. (2006). Determinants of Capital Structure in Public Enterprises. Finance, 12(7), Narang, & Kaushal. (2006). Business Ethics. Ludhiana: Kalyani Publishers. 13. Pandey, Indra Mohan. (1978, March). Leverage, Risk and the Choice of Capital Structure. The Management Accountant, 13(3), Pandey, Indra Mohan. (1978, July). Impact of Corporate Debt on the Cost of Equity. The Chartered Accountant, 27(I), Pandey, I. M. (2003). Financial Management. New Delhi: Vikas Publishing House. 16. Pandey, I. M. (1985, March). The Financial Leverage in India: A Study. Indian Management, Rasoolpur, G. S. (2012, September). An Empirical Analysis of Capital Structure Determinants: Evidence from the Indian Corporate Sector. International Journal of Management & Information Technology, 1(3), Rasoolpur, G. S. (2012, December). Composition of Capital Structure Decisions: Comparative Empirical Evidence from India. International Journal of Research in Business and Technology, 1(1), Rasoolpur, G. S. (2013, May). Leverage Decisions: A Case of Textile & Readymade Garments Industry of the Indian Corporate Sector. International Journal of Research in Business and Technology, 2(2), Rasoolpur, G. S. (2014, August). Impact of Cash Flow Coverage, Debt Service, & Current Ratio on Capital Structure Decisions: Empirical Evidence from the Indian Corporate Sector. Journal of Research in Marketing, 3(1), Titman, S., & Wessells, R. (1988, March). The Determinants of Capital Structure Choice. The Journal of Finance, XLIII(1), Venkatesan, S. (1983, January). Determinants of Financial Leverage an Empirical Extension. The Chartered Account, 32, Vashishth, Neeru, & Rajput, Namita. (2010). Corporate Governance Value & Ethics. New Delhi: Taxmann Publications (P) Limited. 24. Retrieved from Retrieved from Retrieved from ***** 1806 P a g e

149 THE FINANCIAL AND OPERATING PERFORMANCE OF REGIONAL RURAL BANKS: A CASE STUDY OF PARVATIYA GRAMIN BANK: CHAMBA Dr. Kishori Lal Sharma 34 ABSTRACT The main objectives of the bank at the time of establishment were to provide banking facilities in remote and unbanked areas and to provide credit facilities especially to the target group of the society, which includes small and marginal farmers, landless labourers, and rural artisans etc. In this paper an attempt has been made to evaluate its financial & operating performance for the period of 10 years from to KEYWORDS Regional Rural Banks, Parvatiya Gramin Bank, Financial and Operating Performance etc. INTRODUCTION The Regional Rural Banks have been assigned an important role in the economic development of the rural areas. In order to free the rural people from the clutches of indigenous moneylenders, the regional rural banks have been created on the recommendation of the M. Narasimham committee in the year Thus, they are the youngest member of the family of rural credit institutions. As per the guidelines of the Central Government, first regional rural bank in Himachal Pradesh was established on 23 rd December 1976 known as Himachal Gramin Bank at Mandi a prominent town of Himachal Pradesh under the Regional Rural Banks Act, The Himachal Gramin Bank is sponsored by the Punjab National Bank, which is the lead bank of the district. The main objectives of the bank at the time of establishment were to provide banking facilities in remote and unbanked areas and to provide credit facilities especially to the target group of the society, which includes small and marginal farmers, landless labourers, and rural artisans etc. The second regional rural bank named Parvatiya Gramin Bank was established on 2 November 1985 under the Regional Rural Banks Act 1976 in Chamba district with its Head Office at Chamba. This bank is sponsored by State Bank of India i.e. the lead bank of the Chamba district. The area of operation of this bank is limited to only one district of Himachal Pradesh i.e. Chamba in its seven blocks. Its main objectives are to cater to the credit needs of small and marginal farmers, landless labourers, rural artisans and weaker sections of society as to help them to raise their socio-economic status. The success or failure of any organization, be in the banking depends on the efficiency with which it works and achieves its objectives. These banks are doing their business in their operational areas for a long period. There is a need to evaluate the performance of these banks. This paper is devoted to evaluate the performance of Parvatiya Gramin Bank with reference to branch expansion, staffing pattern, deposit mobilization, credit expansion, credit-deposit ratio, total business of the bank advances to priority sectors etc., nonperforming assets and profitability. The Parvatiya Gramin Bank has been functioning in the state from the last 29 years. It has been performing various banking functions in Chamba district of the state to achieve its objectives. In this paper an attempt has been made to evaluate its financial & operating performance for the period of 10 years from to Every organization requires resources sufficient to undertake its activities smoothly. The resources should be adequate to carry on the operations successfully without any hindrance. Lack of sufficient resources means difficulty in carrying out its work. This is also true to an organization, which is performing banking functions. The bank has to generate funds from different sources such as mobilization of deposits, borrowings, and by earning sufficient income to meet its lending and investment requirements and to maintain minimum level of cash balance to meet its day-to-day cash requirements. The volume of its business can be increased and geographically diversified by expanding the network of branches. OBJECTIVE OF STUDY The main objective of this paper is to study the overall financial performance of Parvatiya Gramin Bank Chamba in Himachal Pradesh. RESEARCH METHODOLOGY This study is based on secondary data and the secondary data has been collected from the annual reports of Himachal Gramin Bank, library research, circulars and notifications of management of these banks. The percentage method and Index Number have been used to analyze the collected data. 34 Lecturer, Government Sr. Secondary School, Himachal Pradesh, India, kishorilalsharma@ymail.com 1807 P a g e

150 SCOPE OF STUDY Scope of present study is confined to regional rural bank in Himachal Pradesh namely Parvatiya Gramin Bank. This Bank is operating in only Chamba district of the state. It has 27 branches spread over the district in its seven blocks. The financial and operating performance of this bank covers a period of ten tears from to Branch Offices and Staff Strength The number of employees and branch offices of the Parvatiya Gramin Bank from to has been presented in Table-1. The management of Parvatiya Gramin Bank has not done new recruitments during the study period of ten years. The number of employees in Parvatiya Gramin Bank remained constant up to and thereafter declined marginally. The total number of employees by the end was 98. Table-1: Position of Staff and Branches of Parvatiya Gramin Bank Years Number of Employees Index Number Rural Branches Semi-urban Branches Total Branches Growth Rate 0.003% 25 (92.60%) 2 (7.40%) 27 (100.0) Sources: Compiled from Annual Reports of Parvatiya Gramin Bank H.O. Chamba This bank is operating in a remote, backward and sparsely populated district of Himachal Pradesh. This bank has not opened any new branch office in Chamba district during the study period. It has not made any proposal for opening of new branches with RBI / NABARD except one proposal for Chowari centre in Bhattiyat block. Out of the total branches of Parvatiya Gramin Bank almost percent, branches are established in rural or remote areas whereas only 7.40 percent of the total branches are situated in semi-urban area of this district. It is clear that Parvatiya Gramin Bank has restricted its operation in Chamba district and it is not expanding its network of branches even in Chamba district. Block-Wise Position of Staff and Branches of Parvatiya Gramin Bank The operation of Parvatiya Gramin Bank is spread in all seven blocks of Chamba district. The break up its branches and staff in these seven blocks as on is presented in the Table-2 Table-2: Position of Staff and Branches of PGB as on Blocks Number of Number of All %of PGB Number of % of Total PGB Branches Commercial Banks Employees Chamba Mehla Tissa Salooni Bharmour Bhattiyat Pangi Total Sources: Compiled from Annual Reports of Parvatiya Gramin Bank H.O. Chamba The branch offices are not evenly spread in these seven blocks of Chamba district. There is maximum concentration of its branches in the four blocks of the district. These blocks are Chamba, Bhatiyat, Bharmour and Salooni and they together account for about 78 percent of its total branches. In the remaining three blocks the numbers of branches are very low. The average number of employees per branch office comes out to be However, the average number of employees per branch in different blocks very significantly from 5.5 in Chamba block to 1.75 in Bharmour block. The variation in the average number of employees 1808 P a g e

151 Deposits Volume 4, Number 2, April June 2015 in on account of different volume of business in these blocks. This bank is playing significant role in the economic development of the rural areas of Chamba district as it accounts 37.5 percent of total branches of all commercial banks in the district. The proportion of its branches as compared to total branches of all commercial banks very significantly in each block and the proportion of its branches ranged from 57 percent to 40 percent in all blocks except Bhattiyat block. Deposit Mobilization by Parvatiya Gramin Bank The aggregate amount of deposit mobilization by Parvatiya Gramin Bank from to has been shown in Table-3 Table-3: Deposit Mobilization of Parvatiya Gramin Bank (Amount in Lakh) Years Deposits Index No Growth Rate 18.26% Sources: Compiled from Annual Reports of Parvatiya Gramin Bank H.O. Chamba There has been continuous and significant increase in the deposits of this bank during this period. The aggregate amount of deposits has been increased from Rs lakh in to Rs lakh in , representing an increase of 405 percent. It has achieved an impressive annual exponential growth rate of percent in deposit mobilization. Parvatiya Gramin Bank has made significant success in deposit mobilization in the rural and remote areas of Chamba district. It has channelized the saving of the rural people for productive purposes and in there; they are earning income on their savings. Figure-1: Deposit Mobilization of Parvatiya Gramin Bank Years Sources: Compiled from Annual Reports of Parvatiya Gramin Bank H.O. Chamba The management of Parvatiya Gramin Bank has pointed out the main reasons for constant increase for deposit as the popularity of bank among rural people, good dealing by bank employees with their customers and better customer services. The tremendous rise in deposits of the Parvatiya Gramin Bank has reduced the dependence of Parvatiya Gramin Bank on the sponsor bank or the government and it has achieved self-sufficiency in its financing operations. As a result, the credit flow to the weaker sections of the people in rural areas would be smooth and the amount of deposit mobilized will be sufficient to fill the gap between credit demand and credit supply. Loans and Advances of Parvatiya Gramin Bank The aggregate amount of loans and advances provided by Parvatiya Gramin Bank from to has been shown in Table-4 There has been continuous and significant increase in the amount of loans and advances of the bank during this period. It has been increased from Rs lakh in to Rs lakh in , representing an increase of 446 percent 1809 P a g e