STUDY OF NON-PERFORMING ASSETS IN BANKS WITH SPECIAL REFERENCE TO NABIL BANK LIMITED, NEPAL

Transcription

1 STUDY OF NON-PERFORMING ASSETS IN BANKS WITH SPECIAL REFERENCE TO NABIL BANK LIMITED, NEPAL Mahesh Abale 1 Devyani Ingale 2 ABSTRACT Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in country, sending distressing signals on the sustainability and en-durability of the affected 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 also erodes the value of the asset. The problem of NPAs is not only affecting the banks but also the whole economy. This paper deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing and also strategies for reducing NPAs. This research attempts to analyze the level of Nonperforming assets in context of Nabil Bank Limited. Researcher examines the trend of nonperforming assets level of Nabil Bank Limited and other banking business of Nepal. Several prudential and provisioning norms have been introduced, and these are pressurizing banks to improve efficiency and trim down NPAs to improve the financial health in the banking system. In the background of these developments, this study strives to examine the state of affair of the Non Performing Assets (NPAs) of the NABIL Bank Limited. The study is based on the secondary data retrieved from Report on Trend and Progress of Banking in Nepal. The scope of the study is limited to the analysis of NPAs of the Nabil Bank Limited, Nepal for the period seven (6) years i.e. from The study based on financial data obtained from the Bank in the form of the annual reports for 6 financial years under consideration ( to ). KEYWORDS Non Performing Assets, Nabil Bank, Nepal, Profitability, Performance etc. INTRODUCTION NPAs are one of the key indicators that gauge the financial strength of any bank or financial institution. NPAs for banks are nothing but loans gone sour. It is a loan that cannot be recovered from the customer within stipulated time, especially those exceeding 90 days of the predetermined period. The NPA does not yield any income to the banks in the form of principal and interest payments. NPAs eat into the income of the financial institutions as the primary sources of income of financial institutions are the interest payments by borrowers. NPA could wreck Banks' profitability both through a loss of interest income and write off the principal loan amount. To start with performance in terms of profitability is a benchmark for any business enterprises including the banking industry. Performing assets are those that repay principal and interest to the banks. These assets constitute the primary sources of income to banks. Banks are willing to lend as much as possible. But they have to be careful about the safety of such loans. Loans are risky assets, even though bank interest most of its resources in granting loans. Asset Classification Nepal Rastra Bank (NRB) has directed all the commercial banks to classify their loans and advances into four categories based on aging. The four categories being: Figure-1: Assets Category in NPA Sources: Author Compilation Pass / Good: 0.25% provisions are made. Substandard: Over due by more than 3 months up to 6 months. 25% provisions made. Doubtful: Over due by more than 6 month to 1 year.50% provisions is made. Bad / Loss: Over due by more than 1 year.100% provisions is made. 1 Director, MIT School of Management, Maharashtra, India, mahesh.abale@gmail.com 2 Assistant Professor, Sinhgad Institute of Management, Maharastra, India, devyani_ingale@rediffmail.com 191 P a g e

2 Standard/Pass Asset: These are Assets that do not disclose any problems or which do not carry any risk other than normal business risk. 1. Sub-standard Assets: Assets that are non-performing for a period not exceeding two years or that have been renegotiated or rescheduled after the project to which they relate has commenced production are classified as sub-standard assets. E.g. A term loan should be treated as substandard, if the installments of principal are Overdue for two quarters but not exceeding two years. 2. Doubtful Assets: Assets that are non-performing for more than two years or where there are potential threats to recoveries on account of erosion in the value of security and other factors such as fraud are classified as doubtful assets. 3. Loss Assets: Assets: (i) the losses on which are crystallized, or (ii) that are considered uncollectible are classified as loss assets. Payments on renegotiated or rescheduled loans should have no past due amounts for one year after renegotiations or rescheduling, as the case may be, in order for the loan to be upgraded. Further, if interest or installments of principal is in arrears for any two quarters out of four quarters during the year, the credit facility should be treated as NPAs, although the default may not be continuously for two quarters during the year. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans, this is due to mounting nonperforming assets (NPAs). Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and loss account, but their carrying cost is also increased which results in excess & avoidable management attention. Apart from this, a high level of NPA also puts strain on a bank s net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level; banks eventually look towards their internal financial strength to fulfill the norms thereby slowly eroding the net worth. Considering all the above facts banking industry has to give more importance to NPA and to structure proper remedial solutions. Evolution of Banking Sector in Nepal During the Prime-minister ship of Ranoddip Singh Tejarath Adda came into existence. The main rational behind its establishment was to provide money for the lending opportunity to the government employees and general public. However, deposit facility was not offered in Tejarath Adda. Nepal's first commercial bank, the Nepal Bank Limited, was established in Rastriya Banijya Bank (National Commercial Bank), a state-owned commercial bank, was established in The Cooperative Bank, which became the Agricultural Development Bank in 1967, was the main source of financing for small agribusinesses and cooperatives. The Agricultural Development Bank also served as the government's implementing Regency for small farmers' group development projects assisted by the Asian Development Bank and financed by the United Nations Development Program. Since the 1960s, both commercial and specialized banks have expanded. Nepal Rastra Bank was created in 1956 as the central bank. Its function was to supervise commercial banks and to guide the basic monetary policy of the nation, develop the banking system in the country, thereby ensuring the existence of banking facilities and maintain the economic interests of the general public. Nepal Rastra Bank also was to oversee foreign exchange rates and foreign exchange reserves. Nepal Industrial Development Corporation (earlier established as Industrial Development Centre in 2013 was later converted into NIDC in 2016) and Agriculture Development Bank (2024 BS) was established to facilitate development activities. Nepal has adhered the doctrine of globalization, liberation, privatization and free market economic policy by opening the avenues of investment private sector and FDI. Due to this reasons, the momentum of growth of banking sector mainly picked up substantially. Currently in Nepal, there are 29 Commercial Banks, 78 Development Banks, 79 Finance Companies and 18 Micro Credit Development Banks, 16 saving and Credit cooperative and 45 NGOs licensed by NRB. 1. Public Sector Banks Public sector banks have substantial shares in the total assets of the industry and have huge branch networks around the country. Rastriya Banijya Bank (RBBL), Nepal Bank Limited (NBL) and Agriculture Development Bank (ADBL) are government owned banks. These banks have significant contribution on improving banking habit among the people at large and encourage entrepreneurship in both the urban as well as rural area. The public sector banks are still the largest banks in all aspects from deposit and credit mobilization to the number of branches in operation. 192 P a g e

3 2. Joint Venture Banks The joint venture banks have very few branch networks and are concentrated in urban centers. JVBs started to establish since mid-1980s (Poudel, 2005) and there are seven in Nepal (NRB, 2010) including; Nabil Bank Limited (NABIL), Standard Charter Bank Limited (SCBL), Himalayan Bank Limited (HBL), Nepal SBI Bank Limited (NSBI), Nepal Bangladesh Bank Limited (NBBL) and Everest Bank Limited (EBL). They have foreign equity participation (along with domestic) and management with good name with international reputation, conducting banking business professionally. They are well mechanized and supervised by their respective home country supervisory authorities. The share of total assets of the joint venture banks has been increased to about 50% of total commercial bank assets. The introduction of joint venture banks infused modern banking and financial technology and new financial instrument in the financial system. However, the spillover effect of their efficient management and modern banking skills was less in the domestic banks, as per expectation. 3. Domestic Private Banks Domestic private banks came in operation by late 1990s and early 2000s. There are seventeen domestic private banks including; Nepal Investment Bank Limited (NIBL), Bank of Kathmandu Limited (BOK), Nepal Credit and Commerce Bank Limited (NCCBL), Lumbini Bank Limited (LBL), Nepal Industrial and Commercial Bank Limited (NIC), Machhapuchhre Bank Limited (MPBL), Kumari Bank Limited (KBL), Laxmi Bank Limited (LXBL) and Siddhartha Bank Limited (SBL). They are managed and owned by private sector without foreign equity participation. Since they are relatively new banks, they have the opportunity to start as fresh banks without bad loans in their portfolios and with the possibility of adopting recent banking technologies during their inception. Most of them are relatively small in asset size as well as their networks. Nabil Bank Limited (NABIL) The arrival of Nabil Bank in Nepal on the 12th of July 1984 through a joint venture with Dubai Bank Limited under a Technical Service Agreement (TSA) marks a new dawn in the Nepalese banking industry. The bank commenced with a team of about 50 staff members and Rs. 28 million as capital. Today Nabil entering the 28th year of operation has proved that it has through its past progressions and through different phases in the banking industry achieved two things we can take pride in: first it has a large clientele base and supportive stakeholders, secondly, it has succeeded in positioning itself robustly in the market for which the credit goes to Team Nabil, today the Bank has established itself as the Bank of 1 st Choice. Nabil Bank is largest bank in terms of the network and number of branches amongst the commercial banks with a wide network of ATMs and offerings including a range of diversified service products. In this span of 28 years of banking operation Nabil has already distributed rich cash dividends, spectacular returns on asset and equity even during the most trying times. Nabil Bank Limited have diversified their realm of business in the interests of customers and are also being inspired by the noble cause of adding value to economic development. Nabil Bank Limited have packaged service products into well a diversified range consisting of corporate banking, trade finance, along with consumer and retail banking services specifically, card products, Micro - finance and like to reach out to the masses. Graph-1 Ownership Structure 6.15% 9.67% 0.33% 3.85% 30% 50% Promoters, Others Nepal Stock Exchange Rastriya Beema Sanstha NIDC General Public NB (International) Ltd. Sources: Compiled Based on Information Published in Annual Report by Nabil Bank, Nepal Nabil fosters corporate governance, realizing the values our regulators always cherish through financial disciplines. Besides, Bank has set C.R.I.S.P. as its values, which it lives by in day to day operation of the bank s business. 193 P a g e

4 NABIL ALWAYS SURGES WITH FIVE BASIC VALUES Figure-2 Customer Focused Profession al C.R.I.S.P. Result Oriented Synergetic Innovative Sources: Author Compilation LIMITATIONS OF STUDY The research on management of non-performing assets is largely limited to the NABIL bank Limited Nepal. Since nonperforming assets are a critical issue, bank officials are not willing to part with all the information on them. Non-performing assets is a vast topic and to do full justice to all the aspects of non-performing assets is an impossible task. Research is based on the secondary data, the practical operations as related to the NPA are adopted by the banks are not learned. REVIEWOF LITERATURE The trend of commercial banking is changing rapidly. Competition is getting stiffer and, therefore, banks need to enhance their competitiveness and efficiency by improving performance. Normally, the financial performance of commercial banks and other financial institutions has been measured using a combination of financial ratios analysis, benchmarking, measuring performance against budget or a mix of these methodologies (Avkiran, 1995).Gopinathan (2009) has presented that the financial ratios analysis can spot better investment options for investors as the ratio analysis measures various aspects of the performance and analyzes fundamentals of a company or an institution. Furthermore, Ho and Zhu (2004) have reported that the evaluation of a company s performance has been focusing the operational effectiveness and efficiency, which might influence the company s survival directly. The empirical results of the researches (Raza et al., 2011; Tarawneh, 2006) explained that a company, which has better efficiency, it does not mean that always it will show the better effectiveness. Alam et al. (2011) study concludes that ranking of banks differ as the financial ratio changes. Bakar and Tahir (2009) in their paper used multiple linear regression technique and simulated neural network techniques for predicting bank performance. ROA was used as dependent variable of bank performance and seven variables including liquidity, credit risk, cost to income ratio, size and concentration ratio, were used as independent variables. They concluded that neural network method outperforms the multiple linear regression method however it need clarification on the factor used and they noted that multiple linear regressions, not withstanding its limitations, can be used as a simple tool to study the linear relationship between the dependent variable and independent variables. Neceur (2003) using a sample of ten Tunisian banks from 1980 to 2000 and a panel linear regression model, reported a strong positive impact of capitalization to ROA. There are number of studies, which examine the bank performance using CAMEL framework, which is the latest model of financial analysis. Elyor (2009) and Uzhegova (2010) have used CAMEL model to examine factors affecting bank profitability with success. The CAMEL Framework is the most widely used model (Baral, 2005). The Central bank of Nepal (NRB) has also implemented CAMEL Framework for performance evaluation of the banks and other financial institutions. CAMEL stands for capital adequacy, asset quality, management efficiency, earnings performance and liquidity. The capital adequacy ratio is a key measure to determine the health of banks and financial institutions. Capital adequacy refers to the sufficiency of the amount of equity to absorb any shocks that the bank may experience (Kosmidou, 2008). Nepalese commercial banks need to maintain at least 6% Tier-1 capital and 10% total capital (Tier 1 and Tier 2), that is, core capital and supplementary capital respectively. Tier 1 capital consists of paid-up capital, share premium, non-redeemable preference share, general reserve fund, accumulated profit, capital redemption reserve, capital adjustment fund, and other free reserves. The Tier 2 capital comprises of capital comprises of general loan loss provision, assets revaluation reserve, hybrid capital instruments, subordinated term loan, exchange equalization reserve, excess loan loss provision, and investment adjustment reserve. These minimum capital adequacy requirements are based on the risk-weighted exposures of the banks (NRB, 2010). Credit risk is one of the factors that affect the health of an individual bank while asset quality analysis involves taking account of the likelihood of borrowers paying back loans. The extent of the credit risk depends on the quality of assets held by an individual bank. The quality of assets held by a bank depends on exposure to specific risks, trends in non-performing loans, and the health and profitability of bank borrowers (Baral, 2005). Poor asset quality and low levels of liquidity are the two major causes of bank failures. Poor asset quality led to many bank failures in Kenya in the early 1980s (Olweny and Shipo, 2011). NRB uses composition of assets, nonperforming loan to total loan ratio, net nonperforming loan to total loan ratio as the indicators of the 194 P a g e

5 quality of assets of the commercial banks (NRB, 2010). The maximum NPL allows for a healthy bank is 5%. Management quality plays a big role in determining the future of the bank. The management has an overview of a bank s operations, manages the quality of loans and has to ensure that the bank is profitable. Rahman et al. (2004) and Elyor (2009) noted that interest expenses divided to total loans can be measured as the bank management quality. Ability to support the present and future operations of a bank depends on the quality of its earnings and profitability profile (Share et al., 2011). NRB uses return on total assets as an indicator of profitability of a commercial bank. In addition, it uses the absolute measures such as interest income, net interest income, non-interest income, net non-interest income, non-operating income, net non operating income and net profit, to evaluate the profitability of a commercial bank (NRB, 2010). Liquidity management is one of the most important functions of a bank. If funds tapped are not properly utilized, the institution will suffer loss (Sangmi and Nazir, 2010). OBJECTIVES OF STUDY To analyze the Non-performing Assets of NABIL Bank Limited. To study the overall impact of loss provision on the profitability of NABIL Bank Limited. To analyze the impact of non-performing assets of commercial banks. RESEARCH METHODOLOGY The data was collected through the secondary sources like: Annual Reports of the company, Office manuals of the department, Magazines. The analysis conducted for the period 2006 to This research attempts to analyze the level of Nonperforming assets in context of NABIL bank Limited. The researcher examines the trend of nonperforming assets level of NABIL bank Limited and other banking business of Nepal. Methods of Data Analysis The relevant data collected was compiled, tabulated, processed and analyzed. Different methods like Percentage analysis, and Tabular analysis and Ratio analysis were used for the purpose of data analysis and interpretation. Before analyzing the data, information has been presented systematically in the formats of tables, graphs and charts, which explain a lot about the data and information collected. Ratio analysis is used as a benchmark for evaluating the financial position and performance of a firm. In the research process the various ratio are used to test the strength of the Bank for example: GNPA Ratio, Net NPA Ratio, Provision Ratio, Pass/Standard Assets Ratio, Sub-Standard Assets Ratio, Doubtful Assets Ratio, Loss Assets Ratio etc. DATA ANALYSIS AND INTERPRETATION Loans of Nabil Bank Limited for Year 2010 / 2011 Chart-1 Table-1 Assets Category Percentage Performing 99.94% NPA Substandard 0.44% Doubtful 0.07% Loss 0.27% Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. The above pie chart shows the assets and their category for the financial year 2010/2011. From the above chart it is evident that the bank has 99.94% performing assets which show good health of the bank. The bank incurred 0.27% loss assets for the year 2010/2011. Classification of Loans, Advances and Bills Purchased & Provisions (Amount in Millions) Table-2 Particulars Performing Loans Pass Restructured / Rescheduled Non Performing Loans Sub Standard Doubtful Loss A)Total Loans (1+2) Loan Loss Provisions 195 P a g e

6 3.1 Pass Restructured / Rescheduled Sub Standard Doubtful Loss B Total Provisioning Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited The above table is the representation of the loans and advances / assets for the past six year. The chart includes the Performing loans, which include pass assets and restructured assets. The tables also explain the Non Performing loan that includes Substandard Doubtful and loss assets of NABIL bank for the past six year. The table is also represents the provisions for loan loss for the past six year. Hence the detail analysis is given below: Pass Assets Ratio Table-3 Year Pass Assets Ratio 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. Chart-2 The chart is representation of Pass asset ratio for the last six year. We can see for the first three year i.e to 2007 the trend is positive. In FY 2008 and 2009 this trend turned into flat and small downturn respectively but besides that bank seems very proactive in terms of recovering their loan from customer. This also adds value to position to remain on top position in the private sector bank of Nepal. Substandard Asset Ratio Table-4 Chart-3 Year Substandard Ratio 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. The above bar chart is the representation of past 6 year data regarding substandard assent in FY 2005/06 bank has 0.471% substandard ratio which shows the positive health of the bank; but again in financial year 2006/07 it increases up to 0.47% which indicates that in that FY the bank have incurred highest level of NPA. This trend continued and now banks substandard ratio is ruling at 0.438%. Doubtful Asset Ratio Table-5 Year Doubtful Ratio 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. Chart P a g e

7 For the first two year banks doubtful asset ratio were 0.22% and 0.09%. But in FY 2008/09 it increases up to 0.63% which indicates that in that FY the bank have incurred highest level of NPA. This trend continued and now banks substandard ratio is ruling at 0.269%. Gross NPA Ratio Gross NPA Gross NPA Ratio = Gross Advances X 100% Table-6 (Amount in Millions) Year Gross NPA Gross Advances Ratio 2005/ , / , / , / , / , / , Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. Chart-5 The chart above indicates the quality of credit portfolio of the banks. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa. The above chart is the evidence of the Non-Performing loan ratio to the total loan. Up to financial year 2007/08, Nabil bank had decreasing trend in Gross NPA which shows good health of the bank. But in the financial year 2008/09 the Gross NPA of the bank again started moving upward which remain 1.47 % in the year 2009/10 and 1.77% in FY 2010/11. Compare to last year Gross NPA has increase so there is a possibility on the part of the bankers of little carelessness for recovery of loans and hence the existing controls on the recovery of the loans should be tightened. Afford should be made to establish a bench mark for the minimum possible Gross NPA. Net NPA Ratio Net NPA Net NPA Ratio = Net Advances X 100% Here, Net NPA = Gross NPA Provisions for NPA (Amount in Millions) Table-7 Gross Gross Net NPA Year NPA Advance Provisions Ratio 2005/ , / , / , / , / , / , Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. Chart-6 High NPA ratio indicates the high quantity of risky assets in the Banks for which no provision are made. The trend shows that the net NPA is 0.31% in the F/Y 2005/06 which increases in the year 2006/07 up to 0.48%. The F/Y 2007/08 the Net NPA came down to 0.28% which increased in 2008/09 by 0.07%. In the year 2009/10 bank is had only 0.18% of Net NPA which shows good health of the bank. Currently net NPA is ruling at 0.34% which shows the good health of bank. 197 P a g e

8 PROVISION AGAINST NPA Chart-7 Chart-8 Above both charts is representation of provision against loan. Ratio indicates the degree of safety measures adopted by the Banks. It has direct bearing on the profitability, Dividend and safety of shareholder s fund. If the provision ratio is less, it indicates that the Banks has made under provision. Through the analysis of above chart it is clear that the bank is having 87.86% provision against the Gross NPA which is the highest provisioning in last five year. Although the above provision leads to reduce the level of NPA it also affect the profitability leads to decrease the EPS and safety to shareholder. Loss Asset Ratio Table-8 Chart-9 Loss Asset Year Ratio (%) 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. The above chart is the representation of the loss assets ratio of the past six year of the NABIL bank Limited above chart shows the increasing trend of loss assets. Financial year 2005/06 it was observed that bank has only 0.68% of loss assets which became 1.224% in the year 2009/10 this level has small bad impact on the overall profitability of the bank, currently its ruling at 1.01% Earnings per Share Table-9 Graph-2 Year EPS 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. The above chart is the representation of earning per share for the past five years. The EPS is declined from last four years which shows that the bank decreases its profit earning for equity share holder. The EPS of the bank were Rs in F/Y 2005/06. In 198 P a g e

9 the F/Y 2006/07 the EPS were Rs which decline to Rs in 2007/08 and Rs for F/Y 2008/09 which is minimal decrease although world were facing financial crisis at that time but in F/Y 2009/10 the EPS goes down to Rs78.61 which is the lowest EPS in comparisons with last four year EPS currently its ruling at NPR Price to Earnings Ratio Table-10 Year PE Ratio 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. Chart-10 PE ratio is used to determine how much investors are willing to pay for a stock relative to the company earnings. Calculated as follow: PE = [Current Price of stock / Company Earnings Per share] Now as per trend shows the PE ratio of the bank is declining trend since last five year which is positive sign for investor. A low PE is good for investor as they will pay less amount of investment for the same return. The bank is in this situation because of their sound recovery and restructuring process which results into low NPA. Net Profit to Total Loans Table-11 Chart-11 Year NP/Loans (%) 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. From the above diagram it is evident that the net profit to the loan and advances ratio seems to be decreasing trend. In the financial year 2005/06 the net profit ratio to loan and advances were 5.24% which decrease to 3.47% in the financial year 2009/10 now as this year NPA level is down hence Net profit also ruling upward currently at 3.73%. Net Profit to Total Asset Table-12 Chart-12 Year NP/Total Asset 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. 199 P a g e

10 The above chart is the evidence of net Profit to total assets ratio for the past six year in F/Y 2005/06. There is slight volatility in Net profit in different FY. In FY 05/06 bank s NP to Total Asset were 3.23% and now it is ruling at 2.43%. The higher provisioning leads to lower overall profit. Credit to Deposit Ratio Table-13 Year CD ratio 2005/ / / / / / Sources: Calculated & Compiled from Annual Report of Nabil Bank Limited. Chart-13 The proportion of loan-assets created by banks from the deposits received. COMPARATIVE ANALYSIS OF NPA WITH OTHER COMMERCIAL BANK Table-14 (In Percentage) Name of the Banks NABIL NIBL SCB HBL NB bank EBL BOK NCC Lumbini Bank Table-15: Comparative Analysis of NPA of NABIL BANK with other Commercial Bank Sources: Compiled based on Information Published by Various Commercial Banks in Nepal (Annual Report of FY 2011/12) The above chart is the evidence of comparison of NPA of NABIL Bank with other Private Bank. The data was taken from related bank through the direct contact, interview and from published Annual Report of the bank. The above chart is the comparative study of NPA of different Private. Bank along with NABIL bank for the last Four year. From the chart it is clear that Everest bank Limited. (EBL) have very less amount of NPA for last four year which implies good health of the bank. The above chart also depicts that the NB bank is having highest level of NPA in the year 2008/09 i.e. 19.3%. 200 P a g e

11 FINDINGS From the analysis the following findings are came in existence: Bank has 98.53% performing assets which show good health of the bank. The bank incurred 1.22% loss assets for the year 2009/2010. Substandard Ratio has been decrease in comparison to other financial year. Although there were increasing trend of loss assets of NABIL bank in comparison with the past six year the NABIL bank seems to be in better position in terms of loss assets. 2005/06 it was observed that bank has only 0.68% of loss assets which became 1.224% in the year 2009/10 this level has small bad impact on the overall profitability of the bank In financial year 2007/08, Nabil bank has decreasing trend in Gross NPA which shows good health of the bank. But in the financial year 2008/09 the Gross NPA of the bank again started moving upward which remain 1.47 % in the year 2009/10. Bank is having 87.86% provision against the Gross NPA which is the highest provisioning in last five year. Although the above provision leads to reduce the level of NPA it also affect the profitability leads to decrease the DPS and safety to shareholder High NPA ratio indicates the high quantity of risky assets in the Banks for which no provision are made In the year 2009/10 bank is had only 0.18% of Net NPA which shows good health of the bank Last few years the net profit to total assets was higher than this year (2005/06 and 2006/07) that means the assets are not producing enough profit nor are they maintaining consistency in the results. From the analysis it was found that there is decreasing trend in Net profit to total assets ratio. The EPS of the bank were in good position up to 2009 but in the year 2010 the EPS goes down by 28% approx. There is positive correlation between NPA and Problematic assets higher is the problematic assets higher will be the level of NPA and vice versa. CONCLUSIONS The bank seems to be very proactive in the selection of clients and customer while giving the loan. The operation of the bank is wide enough to cater to the needs of broad spectrum of the society and economy of Nepal at large. They are actively participating in the economic development of the country. The banks also seems to be following all the norms and directives given by the Nepal Rastra Bank (central bank of the Nepal) Banks need to have better credit appraisal systems so as to reduce NPAs from. However, once NPAs come into existence, the problem can be solved only if there is good legal structure, since recovery of NPAs often requires litigation and court orders to recover stock loans. With long-winded litigations in Nepal, debt recovery takes a very long time. Banks are now working on developing debt recovery tribunals to solve this problem. As the global slowdown has crept into the economy, bankers feel that in more loans are going to turn bad in the coming quarters and therefore they want NRB to relax the deadline for loan reconstruction. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of funds in the nation. This would help the nation to develop more banking branches and developing the economy by providing the better financial services to the nation. A Man without money is like a bird without wings, the Rumanian proverb insists the importance of the money. A bank is an establishment, which deals with money. The basic functions of Commercial banks are the accepting of all kinds of deposits and lending of money. In general there are several challenges confronting the commercial banks in its day to day operations. The main challenge facing the commercial banks is the disbursement of funds in quality assets (Loans and Advances) or otherwise it leads to Non-performing assets. REFERENCES 1. Alam, H. M., Raza, A., & Akram, M. (2011). A financial performance comparison of public vs private banks: The case of commercial banking sector of Pakistan. Int. J. Bus. Soc. Sci., 2(11), Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Int. Finan. Mark. Inst. Money, 18, Avkiran, N. K. (1995). Developing an instrument to measure customer service quality in branch banking. Int. J. Banks Mark., 12(6), Bakar, N., & Tahir, I. M. (2009). Applying multiple linear regression and neural network to predict bank performance. Int. Bus. Res., 2(4), P a g e

12 5. Baral, J. K. (2005). Health check-up of commercial banks in the framework of CAMEL: A case study of joint venture banks in Nepal. J. Nepalese Bus. Stud., 2(1), Buyuksalvarci, A., & Hasan, A. (2011). Determinants of capital dequacy ratio in Turkish Banks: A panel data analysis. Afr. J. Bus. Manag., 5(27), Elyor, S. (2009). Factors affecting the performance of foreign banks in Malaysia (Master s Thesis). Economic Survey (2008). Ministry of Finance, Government of Nepal. Univ. Utara Malaysia. 8. Gopinathan, T. (2009). Financial ratio analysis for performance check. Retrieved from 9. Ho., C., & Zhu, D. (2004). Performance measurement of Taiwan commercial banks. Int. J. Product. Perform. Manag., 53(5), Koasmidou, K. (2008). The determinants of banks profits in Greece during the period of EU financial integration. Manag. Financ., 34(3), Levine, R. (1997). Financial development and economic growth: views and agenda. Retrieved from Lin, W. C., Li, C. F., & Chu, C. W. (2005). Performance efficiency evaluation of the Taiwan s shipping industry: an application of data envelopment analysis. In Proceedings of the Eastern Asia Society for Transportation Studies, 5, McKinnon, R. I. (1973). Money and capital in economic development. Washington, DC: The Brookings Institution. 14. Northcott, C. (2004). Competition in banking: Areview of the literature (Working Papers). Bank of Canada, NRB (2010). Banking supervision (Annual report). Bank Supervision Department, Nepal Rastra Bank, Central Bank of Nepal. 16. Olweny, T., & Shipho, T. M. (2011). Effects of banking sectrol factors on the profitability of commercial banks in Kenya. Econ. Financ. Rev., 1(5), Paudel, N. P. (2005). Financial system and economic development. Kathamndu: Nepal Rastra Bank, Nepal Rastra bank in 50 years. 18. Raza, A., Farhan, M., & Akram, M. (2011). A comparison of financial performance in investment banking sector in Pakistan. Int. J. Bus. Soc. Sci., 2(11), Rose, P. S., & Hudgins, S. C. (2006). Bank Management & Financial Services (6 th ed.). New York: McGraw-Hill. 20. Sangmi, M. D., & Nazir, T. (2010). Analyzing financial performance of commercial banks in India: Application of CAMEL model. Pak. J. Commer. Soc. Sci., 4(1), Retrieved from Retrieved from ***** FOR ANY CLARIFICATION OR SUGGESTION, WRITE US: Editor-In-Chief Pezzottaite Journals, 24, Saraswati Lane, Bohri, Near Modern Dewan Beverages, Jammu Tawi , Jammu and Kashmir, India. (Mobile): editorinchief@pezzottaitejournals.net contactus@pezzottaitejournals.net 202 P a g e

13 FOREIGN DIRECT INVESTMENT: AN EMPIRICAL ANALYSIS ON TREND, DISTRIBUTION AND SECTORAL PENETRATION FROM PERIOD OF Kanwal D. P. Singh 3 ABSTRACT Background The historical background of Foreign Direct Investment in India can be traced back with the establishment of East India Company. British capital came to India during the colonial era of British. Further, after independence issues relating to foreign capital, operations of MNCs gained attention of the policy makers. Keeping in mind the national interest the policy makers designed the FDI policy which aims as a medium for acquiring advancements and to mobilize foreign exchange resources. The industrial policy of 1965 allowed MNCs to venture through technical collaboration. However, country faced two severe crises in form of foreign exchange and financial resources mobilization during second five year plan ( ). Government adopted a liberal attitude by allowing more frequent equity participation to foreign enterprises and to accept capital in collaborations. The government also provided many incentives like simplification of licensing procedures and de-reserving many industries in order to further boost the FDI inflow. By 1970 government had adopted a stringent policy as due to outflow of foreign reserves in form of dividends, royalties etc. During this time government adopted selective and restrictive foreign policies. Later government established Foreign Investment Board and also enacted Foreign Exchange Regulation Act. In 1980 again foreign policy changed to encourage FDI to operate in India. Thus, resulting in the partial liberalization of Indian Economy. Reforms led to pragmatic growth of market. By the early nineties, Indian economy faced severe balance of payment crises. Exports faced difficulties; the external debts were debilitating the economy. As, a result, India s credit rating fell in the international market for both short and long term borrowings. In this phase of hurdle, the then finance minister of India Dr. Man Mohan Singh with the help of World Bank and IMF introduced the macro - economic stabilization and structural adjustment programme. As a result of these reforms, the country could again open its doors to FDI inflow and adopted a more liberal policy in order to restore confidence of foreign investors. Objectives of Study Considering the above aspects the study of my research covers the following objectives: 1. To study the trend and pattern of flow of Foreign Direct Investment in the country. 2. To assess the determinants of Foreign Direct Investment inflow. 3. To evaluate the distribution and sectoral penetration of Foreign Direct Investment. 4. To study the impact of Foreign Direct Investment on the Indian Economy. Research Methodology In order to study the impact of foreign direct investment on economic growth, two models were framed and fitted. The foreign direct investment model shows the factors influencing the foreign direct investment in India. The economic growth model depicts the contribution of foreign direct investment to economic growth. Selection of Variables The analysis of theoretical rationale and existing facts provides base in choosing the right combination of explanatory variables that explains the variations in flows of FDI in the country. In order to have the best combination of explanatory variables for the determinants of FDI inflows into India, different alternatives combination of variables were identified and estimated. Hypothesis of Study The study has been taken up with regard to the following hypothesis: 1. Flow of Foreign Direct Investment shows a positive trend over the period of Foreign Direct Investment has a positive impact on economic growth of the country. 3. Foreign Direct Investment has led to growth and increased the potential for performance in all sectors. Findings / Results The results of the study have been analyzed under the following three headings: 1. Major obstacles to larger flow of FDI to India. 2. Policy interventions to attract FDI. 3. Beneficial effects and suggestions. KEYWORDS Foreign Direct Investment, Economy, Growth, Inflow, Outflow, Equity, Foreign Exchange Regulation Act etc. INTRODUCTION Foreign direct investment (FDI) is considered to be an important contributor to economic development of a country because of its two-fold attractiveness in the form of capital flow and technology transfer along with the subsidiary benefits. It is well known that 3 Deputy Director, Amity Law School, Noida, Uttar Pradesh, India, kdpsingh@amity.edu 203 P a g e

14 the developing countries have the characteristics of being capital poor and deficient in technology, two elements crucial for accelerated economic growth. Domestic savings in these countries also cannot be enhanced sufficiently due to their inherent characteristics which has an impact on investment. This results in less expenditure on R&D facilities as well as slow rate of growth in economic development. In order to overcome such a situation, infusion of foreign investment (both direct and portfolio) is necessary. Although there are a number of other forms of external finance, foreign direct investment flows are usually preferred over others because they are non-debt creating, non-volatile and the returns depend on the performances of the projects financed. FDI also facilitates international trade and transfer of knowledge, skills and technology. It can also play a complimentary and catalytic role in a world of increased competition and rapid technological change. By facilitating crowding-in effect FDI can significantly enhance industrial activities in a country. However, if sufficient measures are not adopted crowding-out impact of FDI may adversely affect the domestic firms. In view of this, developing countries have been imposing some regulations with regard to local content, export commitment, technology transfer, dividend balancing and foreign exchange neutrality, etc. India being a developing country is characterized by low capital formation. With less investment, the economic growth process was quite slow till new economic policy was announced in However, changes were noticed in the rate of growth of the economy after it was opened up thereby allowing private players to take part more freely than before. India s approach to foreign investment in the eighties was governed by several national objectives of economic growth like self-reliance, protection of home industries and entrepreneurs, import of select technology which is locally adaptable, export promotion, etc. This selective and regulatory approach gave way to opening up of the economy in several ways including in the field of foreign investment since To attract foreign investment, a number of policy measures have been adopted namely, de-reservation of many areas initially reserved for public sectors, de-licensing, abolition of registration under the MRTP Act (Maximum Retail Price Act), removal of the general ceiling of 40 percent foreign equity under FERA ( Foreign Exchange Regulation Act), etc. These changes brought about more foreign investment in different sectors of Indian economy as evident from the fact that from a low of US $133 million foreign investment in it has shot up by about 43 times to US $ 5925 million in FDI always have made a winwin situation for the countries, in simple ways it has always given benefits. The economic reform policies of India since 1991 laid major emphasis on attracting foreign investment to the country. Further, the integration of global financial market paves way to this explosive growth of Foreign Direct Investment around the globe. TREND OF FDI INFLOW FDI inflow grew steadily through the first half of the 90 s but stagnated between and The year on year fluctuations makes it hard to observe the trend, however inflow have been increasing continuously since. As and when government has taken initiatives to open up and liberalize the economy the investors have welcomed the initiative and reciprocated by infusing investments to India. It can be observed as the FDI inflow in year was to 20.3 billion. Table-1 Amount of FDI Mid 1948 Mid 1964 Mid 1974 Mid 1980 Mid 1990 Mid 2000 Mid 2011 In crore ,8486 1,23,378 Sources: Economic and Political Weekly 10 India emerged as a strong economic player on the global front after its first generation of economic reforms. Today, India is receiving FDI inflow from many sources but large percentage of FDI inflow is vested with countries like United States and United Kingdom, Japan. Today FDI inflow is welcomed in more than sixty three sectors. If we observe today from Table 1.1, the figures mentioned on the table clearly put a picture that there has been a steady flow of FDI in India. FDI INFLOW IN INDIA IN POST REFORM ERA Way back economic reforms in 1991 has generated strong interest in foreign investors and turning India into one of the favorite destinations for global FDI flows. According to A.T Keaney 11, India ranks second in the world in terms of attractiveness for FDI. Global Services Location Index 2007 ranks India as the most preferred destination in terms of financial attractiveness, people and skills availability and business environment. The positive perception among investors as a result of strong economic fundamentals driven by eighteen years of reform has helped FDI inflows grow significantly in India. The FDI inflow grows at about twenty times since the opening up of the economy to foreign investors. Net FDI flow in India per year is increasing, but it is observed that the disbursements have been quite slow. The reason of this slow realization may be the nature and type of investment, projects involved. Beside this increase FDI has stimulated both exports and imports, contributing to rising level of international trade. Further, the explosion growth of FDI gives opportunities to Indian industry for technological up gradation, gaining access to global managerial skills and practices, optimizing utilization of human and natural resources and competing internationally with higher efficiency. Most importantly FDI is central for India s integration into global production chain, which involves production by MNC s spread across location all over world. The most striking feature of today s global world is the growth of FDI in all nations developing and developed. Looking to the conditions FDI flows are raising faster than any other indicators of economic activity of the world. Developing countries find FDI 204 P a g e

15 safest type of external finance as it acts as supplement but also promotes growth in all fields. Today FDI has become an instrument of international economic integration. The second most populated country in the world, India has been known for its diversity which includes its culture, its people and the geography. Today it has come to a forefront as global resource for many industries as of manufacturing and services. Presently, India with an increase speed has emerged as a viable partner to many global industries. The investment opportunities in India are at peak. TREND AND PATTERN OF FDI INFLOW IN WORLD The liberalization of capital market, removing of business barriers, advancements in all fields and the growth of the term internationalization in the past two decades, make all economies the globalised one. There has been a rapid increase in the FDI inflow globally since 1995 till 2000 when it reached a peak of US $ billion. The developed countries taken together accounted for 79.1 per cent share of FDI flows. The global trend of FDI inflows has been presented in table. Table-2 Region World Developed Countries Developing Countries Share of developing countries Sources: Planning Commission, Government of India, 2002 It is evident from the table that share of FDI to the developing countries has been low and declining over the years. From 34.2 percent in 1995 it increased to 39.2 percent in 1996 after which it started declining and reached a low of 18.9 per cent in Though absolute FDI flow declined in 2001, the share of developing countries increased to 29.6 percent. Many conditions like of low cost labour, skilled and cheap labour, high returns have made the developing countries make a significant impact on the global economy, especially on the industrialized states. The developing countries clearly show the presence felt to the world FDI flows. 11 ATTRACTIVE LOCATIONS OF GLOBAL FDI Many facts like facilities of infrastructure, business environment and many other grounds make suitable a country for inflow. At present moment China tops the list with other destinations like India, Mexico and Brazil. The annual growth rates of these countries always have been increasing. During the span from , the compound annual growth rate registered by countries like China 20%, Brazil 24% and India 41%. India s FDI need is stood at US $ 15 billion per year in order to make the country on a 9% growth as projected by Finance Minister in the union budget of finance in year A huge FDI is necessary in order to achieve the objectives of its second generation economic reforms and to maintain the present growth rate of the economy. India shares in the world economy have increased gradually. As in the chart made below put forward that from time of and from The FDI inflow of India at present cannot be compared with other economies as India shows a steady pattern. Table-3 Years World FDI India s share in world FDI Sources: Compiled from Issues of World Bank. TREND AND PATTERN OF FDI INFLOW IN ASIA In the group of Asian countries, India is at 3 rd rank after China and Singapore. The Asian block annual growth rate has always been increasing. India s share has always been increasing. India share has increased from 1.5% in to 7.8% in 2011 (put by CIA World Fact Book). It is evident that share of developing Asian countries in FDI inflow has increased in the last decade but at present situation FDI inflow certainly has taken a steady speed as high trade and transaction cost and lack of quality infrastructure makes a reason. There can be many other reasons for low level of FDI inflow to Asian countries. Situations improve, looking overall the FDI inflow are receiving higher volume since nineties. According to World Investment Report, India has emerged as major recipient of FDI in South Asia. Its share is nearly 75% of total FDI flow to South East Asia. However, many attributed have not been considered to be at per international best practices. 205 P a g e

16 Many elements of FDI included at world level have not been taken into account in FDI calculation of Asian countries; this simply results in apparent underreporting of FDI. However, countries have taken initiatives to include as many components of FDI to make it capable with international best practices. TREND AND PATTERN OF FDI FLOW IN INDIA Table-4 Countries China Singapore India South Korea Malaysia Philippines Sources: Compiled from Issues of UNCTAD Figures in US $ (Billions) Economic reform in 1991 by the government has made the country today as one of the prominent performer of global economics by placing the country as second fastest growing economy of the world. India ranks 11 th largest economy in terms of industrial output and has 3 rd largest pool of scientific and technical manpower. The economy has gone through a phase of extensive regulation, protectionism, and public ownership. Today while the cumulative FDI approval in the country since 1991 have been Rs 2, Cr., the actual inflow is Rs 1,29, (US $ billion). The FDI approval in years has increased. India s economy has been growing at a rate if more than 9% and has seen a decade of seven plus percent growth. On the other hand India s export has been constantly rising. The Indian Foreign Exchange Reserve shot up, to a great height. Results of it are positive like domestic savings ratio to GDP shot up. For the first time India s GDP crossed one trillion dollars mark in Graph-1 The data on FDI inflows into the country (as shown in the above chart) shows that foreign investors have shown a keen interest in the Indian economy ever since it has been liberalized. An increasing trend of flows can be observed since 1991 with the peak of FDI flows being reached in Therefore the trend gives support to the fact that as and when the government has taken initiatives to open up and liberalize the economy further, the investors have welcomed the initiative and reciprocated by infusing investments into India. Policy measures taken back in 1991, FDI in India has increased manifold since irrespective of politics, liberal foreign investment policy that invite steady flow of FDI in India so that sustained economic growth can be achieved. At present scenario to study the impact of reforms and FDI policy on magnitude of inflow, quantitative information is needed on broad dimension of FDI and its distribution across sectors and areas. The actual FDI inflows in India is welcomed under five broad heads: (i) Foreign Investment Promotion Board s (FIPB) discretionary approval route for larger projects, (ii) Reserve Bank of India s (RBI) automatic approval route, (iii) acquisition of shares route (since 1996), (iv) RBI s nonresident Indian (NRI s) scheme, and (v) external commercial borrowings (ADR / GDR) route. FIPB route represents large projects which require bulk of inflow and account for government discretionary approval. Although the share of FIPB route is declining compared to Reserve Bank of India automatic route and acquisition of existing shares route, automatic approval route via Reserve Bank of India shows an upward trend of FDI inflow since This route is 206 P a g e

17 meant for smaller sized investment project. Acquisition of existing shares route and external commercial borrowing route gained prominence (in 1999 and 2003) and shows upward increasing trend. FDI through NRI s route shows sharp declining trend. Present time sectors like energy, telecommunication, electrical equipments, transportation industry and services sector taken together have accounted for 71 percent of the FDI approvals and 56.3 percent of the FDI inflows. Sector-wise, although energy got approval of highest percentage (27.4), electrical equipments including computers and electronics receive highest percentage of inflows (13.9). It is also noticed that traditional industrial sectors like food processing industries, textiles, etc. have become less attractive for FDI in comparison to modern industrial sectors like electronics and electrical equipments, etc. Thus, the inflow of FDI can be easily observed in the country. SOURCES OF FDI IN INDIA India has broadened the sources of FDI in the period of reforms. There are about 140 countries investing in India at present time as compared to 15 countries in Thus the number of countries investing in India has increased after reforms. After liberalization of economy Mauritius, South Korea, Malaysia, Singapore and many more countries predominantly appears on the list of major investors apart from U.S., U.K., Germany, Japan, Italy, and France which are not only the major investor now but during pre- liberalizations era also. Table-5 Countries Mauritius United Singapore United Netherlands Japan Germany Cyprus France States Kingdom Total Inflow in % 42% 9.1% % 4.4% 3.4% 2.9% 4% 1.5% Sources: Compiled & computed from various issues of Economic Survey, RBI Bulletin and Ministry of Commerce From the above mentioned table it can be observed that FDI inflow from Mauritius is highest as due to Double Taxation Treaty i.e. DTAA - Double Taxation Avoidance Agreement between the two countries, which favors routing of investment through this country. The DTAA policy has also been now taken up with many other countries also like of Singapore and Malaysia. The United States is the second largest investing country to India. FDI AND INDIAN ECONOMY A nation s progress and upliftment is reflected by sustained economic growth and development. Apart from countries reserve government revenue, financial position, available supply of domestic savings, quality of investment is necessary for well being of country. Investment provides base and pre-requisite. FDI is today the safest international capital flow out available in form of external finance. In 1990 s, FDI inflow rose faster than almost other all indicators of economic activity worldwide. According to World Trade Organization, the total world FDI outflow has increased nine times during From 1990 s FDI was sought to facilitate development process. Thus, a nation can improve its economic conditions by adopting liberal policies and by creating proper conditions, which attract investment as particulars which positively influence the inputs and determinants of investment process. The alternative combinations of variables included in the study are in tune with the famous specifications given by United Nations Conference on Trade and Development, (UNCTAD 2007) 13. The study applies the simple and multiple regression method to find out the explanatory variables of the FDI inflows in the country. The regression analysis has been carried out in two steps. In the first step, all variables are taken into consideration in the estimable model. In the second stage, the insignificant variables are dropped to avoid the problem of multi-co linearity and thus the variables are selected. However, after thorough analysis of the different combination of the explanatory variables, the present study includes the following macroeconomic indicators: total trade (TRADEGDP), research and development expenditure (R&DGDP), financial position (FIN. Position), exchange rate (EXR), foreign exchange reserves (RESERVESGDP), and foreign direct investment (FDI), foreign direct investment growth rate (FDIG) and level of economic growth (GDPG). These macroeconomic indicators are considered as the pull factors of FDI inflows in the country. As mentioned the macroeconomic indicators can be placed as: 1. FDIt = a + b1tradegdpt + b2resgdpt + b3r&dgdpt + b4fin. Positiontt + b5exrt + e.. 2. GDPGt = a + bfdigt + e Where: FDI= Foreign Direct Investment, GDP = Gross Domestic Product, FIN. Position = Financial Position, TRADEGDP= Total Trade as percentage of GDP, RESGDP= Foreign Exchange Reserves as percentage of GDP, 207 P a g e

18 R&DGDP= Research & development expenditure as percentage of GDP, FIN. Position = Ratio of external debts to exports, EXR= Exchange rate, GDPG = level of Economic Growth, FDIG = Foreign Direct Investment Growth. FOREIGN DIRECT INVESTMENT (FDI) Economic growth has a profound effect on the domestic market as countries with expanding domestic markets should attract higher levels of FDI inflows. FDI plays a significant and contributory role in economic development. Table-6: FDI Inflow in India (Figure in Cr.) Years FDI Inflow Years FDI Inflow , , ,520 Sources: Issues of SIA Bulletin FDI plays a significant and contributory role in economic growth of country. In , India s FDI touched Rs. 1,23,025 Cr. up 56% against Rs. 98,664 Cr. in and the country s foreign exchange reserves touched a new high of Rs.12,83,865 Cr. in As a result of India s economic reforms, the country s annual growth rate has averaged 5.9% during to While in the inflow has reduced to 88,520 Cr. Notwithstanding some concerns about large fiscal deficit, India represents a promising macroeconomic story, with potential to sustain high economic growth rates. GROSS DOMESTIC PRODUCT (GDP) Gross Domestic Product is used as one of the independent variable. The tremendous growth in GDP since 1991 put the economy in the elite group of 12 countries with trillion dollar economy. India makes its presence felt by making remarkable progress in information technology, high end services and knowledge process services. By achieving a growth rate of 9% the country opens new avenues to foreign investors from India s GDP growth was 8.37 percent reaching an historical high of percent in Table-7: Gross Domestic Products (Figure in Cr.) Years GDP at Factor Cost Years GDP at Factor Cost Sources: Various Issues of RBI Bulletin India s diverse economy attracts high FDI inflows due to its huge market size, low wage rate, large human capital (which has benefited immensely from outsourcing of work from developed countries). In the present decade India has witnessed unprecedented levels of economic expansion and also seen healthy growth of trade. GDP reflects the potential market size of Indian economy. Infact, in a dynamic economy, prices are quite sensitive due to the fluctuations in the domestic as well as international market. In order to isolate the fluctuations, the estimates of domestic product at current prices need to be converted into the domestic product at constant prices. Any increase in domestic product that takes place on account of increase in prices cannot be called as 208 P a g e

19 the real increase in GDP. Real GDP is estimated by converting the GDP at current prices into GDP at constant prices, with a fixed base year. In this context, a GDP deflator is used to convert the GDP at current prices to GDP at constant prices. The present study uses GDP at factor cost (GDPFC) with constant prices as one of the explanatory variable to the FDI inflows into India for the aggregate analysis. TOTAL TRADE (TRADEGDP) It refers to the total trade as percentage of GDP. Total trade implies sum of total exports and total imports. Trade, another explanatory variable in the study also affects the economic growth of the country. The values of exports and imports are taken at constant prices. The relationship between trade, FDI and growth is well known. FDI and trade are engines of growth as technological diffusion through international trade and inward FDI stimulates economic growth. Knowledge and technological spillovers (between firms, within industries and between industries etc.) contributes to growth via increasing productivity level. Economic growth, whether in the form of export promoting or import substituting strategy, can significantly affect trade flows. Export led growth leads to expansion of exports which in turn promote economic growth by expanding the market size for developing countries. India prefers export stimulating FDI inflows, that is, FDI inflows which boost the demand of export in the international market are preferred by the country as it nullifies the gap between exports an economic growth and FDI are closely linked with international trade. Countries that are more open are more likely to attract FDI inflows in many ways: Foreign investor brings machines and equipment from outside the host country in order to reduce their cost of production. This can increase exports of the host country. Growth and trade are mutually dependent on one another. Trade is a complement to FDI, such that countries tending to be more open to trade attract higher levels of FDI. 14 FOREIGN EXCHANGE RESERVES (RESGDP) RESGDP represents Foreign Exchange Reserves as percentage of GDP. India s foreign exchange reserves comprise foreign currency assets (FCA), gold, special drawing rights (SDR) and Reserve Tranche Position (RTP) in the International Monetary Fund. The emerging economic giants, the BRIC (Brazil, Russian Federation, India, and China) countries, hold the largest foreign exchange reserves globally and India is among the top 10 nations in the world in terms of foreign exchange reserves. India is also the world s 10th largest gold holding country (Economic Survey ) 15. Stock of foreign exchange reserves shows a country s financial strength. Further, an adequate FDI inflow adds foreign reserves by exchange reserves which put the economy in better position in international market. Table-8: Foreign Exchange Reserves (Figure in Cr.) Years Foreign Exchange Reserve Years Foreign Exchange Reserve Sources: Various Issues of RBI Bulletin Infact, adequate foreign reserves are an important parameter of Indian economy in gauging its ability to absorb external shocks. FDI helps in filling the gap between targeted foreign exchange requirements and those derived from net export earnings plus net public foreign aid. The basic argument behind this gap is that most developing countries face either a shortage of domestic savings to match investment opportunities or a shortage of foreign exchange reserves to finance needed imports of capital and intermediate goods. FINANCIAL POSITION FIN. Position stands for Financial Position. It is the ratio of external debts to exports. It is a strong indicator of the soundness of any economy. It shows that external debts are covered from the exports earning of a country. External debt of India refers to the total amount of external debts taken by India in a particular year, its repayments as well as the outstanding debts amounts, if any. In 2007 India was rated the 5th most indebted country according to an international comparison of external debt of the twenty most indebted countries. Exchange Rates (EXR) It refers to the exchange rate variable. Exchange rate is a key determinant of international finance as the world economies are globalised ones. There are a number of factor which affect the exchange rate viz. government policy, competitive advantages, 209 P a g e

20 market size, international trade, domestic financial market, rate of inflation, interest rate etc. Since 1991 Indian economy has gone through a sea change and that changes are reflected on the Indian Industry too. Gross Domestic Product Growth (GDPG) It refers to the growth rate of gross domestic product. Economic growth rate have an effect on the domestic market, such that countries with expanding domestic markets should attract higher levels of FDI. India is the 2nd fastest growing economy among the emerging nations of the world. It has the third largest GDP in the continent of Asia. Since 1991 India has emerged as one of the wealthiest economies in the developing world. During this period, the economy has grown constantly and this has been accompanied by increase in life expectancy, literacy rates, and food security. It is also the world most populous democracy. There are various factors also that pull the investors as skilled workers in many fields and also providing support. Therefore, there is a huge inflow in various sectors in the country. EFFECT OF FDI ON ECONOMIC GROWTH The role of FDI in an economy goes beyond simply easing financial constraint. FDI inflows are associated with multiple benefits such as technology transfer, market access and organizational skills. Consequently there is an increasing and intense competition between countries to maximize the quantity of FDI inflow. Any successful policy for attracting FDI keep competitive scenario in mind. There are benefits of FDI inflow as it bridges the financial gap between quantum of funds needed to sustain a level of growth and domestic availability of funds. Secondly technology transfer coupled with knowledge diffusion that leads to improvement in productivity. It thus fastens the rate of progress and provides contagion effect. It also creates a link between organizations and improves management practices. In the context of a country like India, the role of FDI in easing financial constraint becomes critical. At current level according to Finance Commission the increase in investment needed to achieve a percentage prevent rise in the overall addition to investment cannot come entirely from domestic sources, a substantial portion will have to be funded from FDI. It can be observed that there are various determinants of FDI inflow to the country. In other terms the macro economic variables have profound impact on FDI inflow. These variables play a significant role at their won levels and helps in economic growth of India. It also helps the future aspirants of research scholars to identify the main determinants of FDI at sectoral level because FDI is also a sector specific activity of foreign firms, an aggregate activity at national level. Finally, the study observes that FDI is a significant factor influencing the level of economic growth in India. It provides a sound base for economic growth and development by enhancing the financial position of the country. It also contributes to the GDP and foreign exchange reserves of the country. DISTRIBUTION OF FDI WITHIN INDIA (SECTORAL DISPERSION) Sector wise analysis of FDI has maximum taken in service sector including telecommunication, information technology. The rapid development in telecommunication is due to inflow of FDI in form of foreign players. Then it is followed by computer hardware and software. FDI inflow in real estate has also shown growth. Many other sectors have also shown improvement. FDI approvals and actual inflow to different sectors of the economy during 1991 and 2011 are presented in table. Industry / Sector Table-9 Amount of FDI Approved Percentage of total FDI approved* Amount of Percentage FDI Inflows of Total FDI Inflows Energy (Power & Oil Refinery) (20915) (1813) 10.4 Telecommunications (Radio Paging, Cellular Mobiles, (15197) (2259) 12.9 Basic Telephone Services) Electrical Equipments (Including Computer Software and (7027) (2488) 13.9 Electronics) Transportation Industry (5512) (1984) 10.8 Services Sector (Financial and Non-Financial) (4932) (1573) 8.3 Metallurgical Industries (4253) (252) 1.4 Chemicals (Other Than Fertilizers) (3677) (1316) 6.7 Food Processing Industries 9379 (2715) (788) 4.0 Hotel and Tourism 4902 (1385) (138) 0.8 Textiles 3466 (1006) (290) 1.5 Sources: Economic Survey, Government of India *Percentage figures do not take into account the amount of FDI inflows for ADRs/GDRs/FCCBs, RBIs-NRIs schemes, acquisition of existing shares and advance pending for allotment of shares, as these are not categorized sector wise. 210 P a g e

21 LOCATIONAL ASPECT The performance of Indian states in terms of attracting FDI varies greatly. This difference may be due to the variation in the availability of infrastructural facilities, difference in state policies like industrial policy, fiscal policy, difference in political will, variation in factor endowments. The state wise distribution of FDI approval in India during 1991to 2011 is presented in table. Total Number of Approval Amount of FDI Approved Percentage to Total Table-10 Total Number of Approval Amount of FDI Approved Percentage to Total State State Andhra Pradesh Rajasthan Assam Tamilnadu Bihar Tripura Chhattisgarh Uttaranchal Gujarat Uttar Pradesh Haryana West Bengal Himachal Pradesh Andaman & Nicobar Jammu & Kashmir Arunachal Pradesh Jharkhand Chandigarh Karnataka Dadra & Nagar Haveli Kerala Delhi Madhya Pradesh Goa Maharashtra Lakshadweep Manipur Mizoram Meghalaya Pondicherry Nagaland Daman & Diu Orissa Punjab Sources: India s Investment Climate, Indian Investment Centre Others (State Not Indicated) Grand Total The table shows that Maharashtra attracted the highest FDI approval (17.35 per cent) followed by Delhi (12.01 per cent), Tamil Nadu (8.29 percent), Karnataka (7.70 per cent), Gujarat (6.58 per cent) and Andhra Pradesh (4.66 per cent). These six states taken together account for 56.59% of FDI. The governments of these states are more reform oriented under the dynamic political leadership at the state level compared to other states which are unable to attract foreign investors sufficiently to their states. Besides, the above states are some of the developed states in India having better infrastructural facilities in the form of transport and communications, power, stable political and economic environment, etc. The percentage of FDI approved in others (states not indicated) seems to be quite high at per cent. This may be due to the fact that at the time of approval location was not indicated in some projects. SECTORAL ANALYSIS Infrastructure Sector It constitutes power, non conventional energy, petroleum, real estate, telecommunication and many more. The infrastructure sector has accounted highest inflow from Infrastructure received 2528 number of foreign collaboration with an equity participation of US $ 1110; % of total investment. Out of 2528 foreign collaboration 638 were technical and 2795 a financial collaboration from India has encouraged FDI in infrastructure from initial stages of reform, but demand is not yet fulfilled. Investment is heavily concentrated however; insufficient condition is a major factor to the slowdown in growth which reduces trust of investors to invest in FDI. Service Sector This sector puts economy to a glide. It helps to get sustained economic growth and development by contributing 55% to GDP. There is always increasing trend to this sector. There are sub sectors which are added to like financial service which attracts 10.25% of total FDI followed by banking services 2.22%, insurance 1.60%. Many big countries feel safe to invest on to this sector. There is much collaboration also present in this sector. Trading Sector It also shows a fine flow. Till 2011, FDI inflow of sector has been Cr. Investment in India is being fine always. There have been a number of technology transfers also as approved by countries like United States of America, Japan and many more. 211 P a g e

22 Consultancy Sector This particular sector received amount Cr. which is about 1.2% of total inflow from Management services have got a new boost. Even in this field the number of technology transfer has increased. Education Sector FDI up to 100% is allowed in this sector. Education sector has received Cr. inflow from , as it is around 0.13%. Investment has come from countries like Mauritius with 87.95%. India endowed with pool of skilled people also puts this sector to benefit. There are many other sectors as not mentioned but are equally of great importance as regard to inflow of FDI. Some of the sectors are chemical, petroleum and natural gas, tourism. Table-11: Sector-Wise FDI Inflows from April 2000 to January 2012 Sl. No Sector Amount of Percentage FDI Inflows with total (In Rs (In US$ FDI Inflows (+) Crore) millions) 1 Services Sector Telecommunications Computer Software & Hardware Housing & Real Estate (Including Cineplex, Multiplex, Integrated Townships & Commercial Complexes Etc.) Construction Activities Drugs & Pharmaceuticals Power Automobile Industry Metallurgical Industries Petroleum & Natural Gas Chemicals (Other Than Fertilizers) Hotel & Tourism Trading Electrical Equipments Information & Broadcasting (Including Print Media) Cement and Gypsum Products Miscellaneous Mechanical & Engineering Industries Consultancy Services Industrial Machinery Ports Agriculture Services Food Processing Industries Non-Conventional Energy Hospital & Diagnostic Centers Electronics Textiles (Including Dyed, Printed) Sea Transport Fermentation Industries Mining Paper and Pulp (Including Paper Products) Prime Mover (Other Than Electrical Generators) Medical and Surgical Appliances Ceramics Education Rubber Goods Air Transport (Including Air Freight) Machine Tools Soaps, Cosmetics & Toilet Preparations Diamond, Gold Ornaments Vegetable Oils and Vanaspati Fertilizers Printing of Books (Including Litho Printing Industry) Railway Related Components P a g e

23 44 Commercial, Office & Household Equipments Agricultural Machinery Glass Earth-Moving Machinery Tea and Coffee (Processing & Warehousing Coffee & Rubber) Photographic Raw Film And Paper Industrial Instruments Leather, Leather Goods and Pickers Retail Trading (Single Brand) Boilers and Steam Generating Plants Sugar Timber Products Coal Production Scientific Instruments Dye-Stuffs Glue And Gelatin Defence Industries Coir Mathematical, Surveying and Drawing Instruments Miscellaneous Industries Sub Total RBI- NRI Schemes ( ) Grand Total Sources: MAJOR OBSTACLES TO LARGER FLOW OF FDI TO INDIA FDI inflow to India has been increasing over the years since the economic reform policies were adopted in Still it is quite low in comparison to some of the developing countries like China although India has the potential to attract foreign investors in different sectors of the economy. The ranking of India (rank 53 out of 80 countries in 2003 as against rank 54 in 2002) in terms of global competitiveness index has also not gone up considerably in recent years. A multiple of factors are responsible for relatively lower inflow of FDI to country during the period. Some of the major obstacles for relatively lower inflow of FDI to the country are discussed below: 1. India s image in respect of policies, quality of product, etc. with the outside world is not properly focused. It seems that mostly negative sides in the development process get highlighted which affect foreign investors decision-making process. 2. Multiplicity of agencies at the central and state level delays decision-making process. The bureaucratic mindset and plethora of rules and regulations also obstructs FDI inflow to India. It is observed that approval of FDI is faster in India but the clearances necessary to implement the projects get delayed with lack of coordination between different government departments and central and state governments. 3. Complicated tax and tariff structure in India is another bottleneck. Although over the years central government is simplifying the tax procedure, much simplification in tax structure and procedure have not been carried out in some states. 4. Indian labour laws are stringent which restricts retrenchment of workers. To attract FDI especially in labour intensive manufacturing sectors, flexible labour laws are required so that hire and fire policy according to changes in market demand and changes in technology can be implemented. 5. Infrastructure is a basic requirement for any economic activity. Conditions of India s communication and transport, power supply, roads, airport facilities, etc. are poor. This is one of the important obstacles to attract FDI as it not only affects business operation in the country but also tarnishes the image of the country for potential investors. 6. To attract FDI, setting up of export processing zones (EPZ) was started in India in 1965, much before China started setting up EPZ. However, these efforts have not yielded desired results due to a number of factors, viz., their relatively limited scale, unclear and changing incentive packages attached to the zones, the power of the central government in the regulation of the zones, etc. (Bajpai and Sachs, 2000). The EPZs in India are not at par with the export zones of China. POLICY INTERVENTIONS TO ATTRACT FDI In view of the above, following recommendations can be put forward to make FDI inflow to the country more attractive. 213 P a g e

24 1. Presently, FDI policy and procedure are incorporated under Foreign Exchange Management Act (FEMA) regulations. This act also covers all issues related to foreign exchange management. At present, FDI policy and procedures are administered by the Department of Industrial Policy and Promotion and FEMA by the Directorate of Enforcement. It may be suggested to have a Foreign Investment Promotion Law to be administered by the Department of Industrial Policy and Promotion which will give a signal in change in attitude of the government from regulation to promotion as attracting FDI is basically a promotional activity. 2. Emphasis should be given to have better infrastructural facilities like better transport and communication, better airport and port facilities, power, etc. In this sphere, necessary law should be enacted by the states so as to allow foreign investors also in creating infrastructural facilities in the country. 3. An attitudinal change to FDI is necessary for which well-designed publicity campaign may be taken up to point out the advantages of FDI for a country with examples of countries which have benefited. Also, government leaders should focus the advantages and that message should trickle down to the different government organs. The FDI policy and procedures, etc. for different sectors of the economy need to be publicized abroad and a proper marketing strategy with an individual approach to prospective investors will help to attract foreign investors to India. 4. The complicated tax and tariff structure need to be rationalized. Simple and harmonized tax regime will help foreign investors in doing business in India. Although central government, over the years, has taken necessary steps to simplify the tax procedures, a lot is to be done at the state level. 5. There is a necessity to have flexible labour laws so that hiring and firing policy, if at all necessary, may be implemented but a suitable social security provision have to be incorporated. This is required because of the existence of unemployment problem, socio-cultural diversity, etc. Without such norms, flexible labour laws may not be acceptable to the society. 6. Export Processing Zones (EPZ) should be made more viable and competitive with other developing countries like China. There may be separate laws applicable in these zones so as to attract FDI. Regulations and restrictions which obstruct free flow of FDI into these zones may be relaxed. The zones should be established in places having better infrastructural facilities or where these facilities can be created within a short period of time. CONCLUSIONS Foreign direct investment has a number of beneficial effects like capital flow, technology transfer, generating positive work culture, transfer of management ethos, affecting the economic environment of the country. Since economic reforms were started in India in 1991, the flow of FDI has started increasing. Still, compared to some of the developing countries India is far behind. India, having a large domestic market, appreciable economic growth at present times, and a large pool of educated and skilled workers and having a comparative advantage especially in labour intensive manufacturing sector and software industry has high potential to attract foreign direct investment. Indian economy just ended a decade of reform in several key sectors like industry, finance, etc. and now has entered the next decade with second-generation reform focusing the real sectors of the economy. With these changes, it is hoped that India will be in a better position to attract more foreign investment and will be able to compete equally with other developing nations in the coming years. It may be concluded that developing countries has make their presence felt in the world economy by receiving a descent amount of FDI in the last three decades. Although India is not the most preferred destination of global FDI, but there has been a tremendous flow of FDI in India since It has become the 2nd fastest growing economy of the world. India has substantially increased its list of source countries in the post - liberalization era. India has signed a number of bilateral and multilateral trade agreements with developed and developing nations. India as the founding member of GATT, WTO, a signatory member of SAFTA and a member of MIGA is making its presence felt in the economic landscape of globalised economies. The economic reform process started in 1991 helps in creating a conducive and healthy atmosphere for foreign investors and thus, resulting in substantial amount of FDI inflows in the country. No doubt, FDI plays a crucial role in enhancing the economic growth and development of the country. Moreover, FDI as a strategic component of investment is needed by India for achieving the objectives of its second generation of economic reforms and maintaining this pace of growth and development of the economy. In a couch, despite leap and bounces in the economy, India continues to attract huge stake of FDI inflow, due to its flexible policies. Even the foreign investors find great opportunities in the country to invest. SUGGESTIONS FDI as a strategic component of investment is needed by India for its sustained economic growth and development. FDI is necessary for creation of jobs, expansion of existing manufacturing industries and development of the new one. Indeed, it is also 214 P a g e

25 needed in the healthcare, education, R&D, infrastructure, retailing and in long-term financial projects. So, the study recommends the following suggestions: 1. The study urges the policy makers to focus more on attracting diverse types of FDI. 2. It is suggested that the government should push for the speedy improvement of infrastructure sector s requirements which are important for diversification of business activities. 3. FDI should be guided so as to establish deeper linkages with the economy, which would stabilize the economy. 4. Continuous implementation in the policies. The created business field should be further strengthened by proper planning system. Investors look for benefits and the country can achieve growth when reforms are respective and acceptable. REFERENCES 1. Industrialization, Liberalization and two way flow of FDI. Economic and Political Weekly, 48, Kearney s, T. A. (2007). Global Services Location Index. 3. ( ). Industrial Policy and Statistics (Handbook). Government of India. 4. (2007). United Nations Conference on Trade and Development (World Investment Report). 5. Economic Survey ( ). Ministry of Finance, Government of India 6. Basu, P., Nayak, N. C, & Archana. (2007). Foreign direct investment in India: Emerging horizon. Indian Economic Review, XXXXII(2), ***** 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, editorinchief@pezzottaitejournals.net, contactus@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) 215 P a g e

26 HERD MENTALITY IN INDIAN FUND MANAGERS: A REALITY OR A MYTH? A BEHAVIOURAL FINANCE PERSPECTIVE Lokanath Mishra 4 ABSTRACT Behavioural Finance, as a subject matter, deals with how a behavioural approach to financial decision making can add value to our knowledge and understanding of finance per se. Greek Philosopher Aristotle had described man as a rational being. Financial market participants are primarily rational "wealth maximizers". However, there are many instances where emotion and psychology influence their decisions, causing them to behave in unpredictable or irrational ways. Herd mentality represents an irrational group behaviour, which is found even with institutional investors, including fund managers. KEYWORDS Behavioral Finance, Herding, Herd Behaviour, Herd Mentality, Mob Mentality, Degree of Herding, Degree of Herding Matrix etc. BEHAVIORAL FINANCE Public opinion only exists where there are no ideas Wilde 1894 Behavioural Finance, as a subject matter, deals with how a behavioural approach to financial decision making can add value to our understanding of finance per se. The famous Greek Philosopher Aristotle had described man as a rational being. Aristotle had observed that, Man s function is that which sets him apart from all other beings - implying purposeful conduct, which is possible only for a rational being. According to conventional theory, the financial market participants are primarily rational "wealth maximizers". However, there are many instances where emotion and psychology influence their decisions, causing them to behave in unpredictable or irrational ways. Behavioral Finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations to why people, at times, make irrational financial decisions. HERDING, HERD BEHAVIOUR AND HERD MENTALITY The term herd means group of animals and herd behaviour implies their functioning or operating in groups. Herd mentality, however, specifically applies to human beings and depicts a form of group mindset. Sometimes the word herd mentality is described as mob mentality, which creates situations where the independent rational thinking of individuals looses importance in group functioning. Herding behaviour is observed in many species, a large number of animals and even in human beings. Birds fly miles and miles together away from Siberia to safe places to escape from severe winter. Sea tortoise flocks together to lay eggs and give birth to their progenies on safe sea shores. Wild dogs herd together to attack animals bigger and stronger to them as their prey. Bisons and deers herd together to save them from a predator. Herding behaviour is also not uncommon to fishes. Even larger fishes like shirks and whales are found in groups on some sea shores during particular seasons. Herding among ants is a common phenomenon witnessed almost everywhere. They get together for food and move together after collecting food. Nomadic tribes move in groups from place to place in search of greener pastures guided primarily by a survival instinct. The instincts which make animals herd are more or less applicable to human beings. The causes of herd mentality in human beings can be traced either to (i) fear, (ii) greed, (iii) conformity, (iv) compliance, or to (v) garner strength in unity. Fear has two dimensions; one for real survival and the second for fear of lagging behind. It has been observed that, when panicked individuals are confined to a room with two equal and equidistant exits, a majority will favor one exit while the minority will favor the other. Fear psychosis gives rise to rumors and subsequent panic reactions. If a few ATMs in a given locality at a given point of time do not deliver cash on demand, it can as well lead to a run on the bank deposits on the very next day. Greed is another instinct which often guides human emotions. If a couple of investors for some reasons start investing big in a particular scrip, every other investor starts buying the same scrip without knowing why he should do that, which leads to a frenzied buying situation. These types of irrational herd mentality / group behaviors lead to market crashes and market bubbles. The fear of lagging behind in a group also creates a reaction in the mind of a human being. If my neighbor reads news paper in the morning, I must do so. Many goods are really only of value if other people that I know use them. There is always a psychological tendency for individuals to mimic the actions (rational or irrational) of a larger group. Individually, however, left to themselves, most people may not necessarily make the same choice. 4 Professor, Bharatiya Vidya Bhavan s, Usha & Lakshmi Mittal Institute of Management, New Delhi, India, mishra.lokanath@gmail.com 216 P a g e

27 Social pressure of conformity is another powerful force for herding, to be reckoned with. Large gatherings in Maha Kumbh Melas to take holy bath in a river, is an example of this nature. This is because people are mostly sociable and have a natural desire to be accepted by a group, rather than be branded as an outcast. Therefore, following the group is an ideal way of becoming a member. Some sort of legal or procedural compliance sometimes lead to herding behaviour. People keep to their left, while driving on the road as this compliance is required of them for safe driving. People also herd to protest (Anna s Lokpal Agitation and Nirvaya Anti-rape agitations at Delhi) against some social injustice, as a show of strength. Education and Rationality Rationality is defined as the self-reflective, intentional, and appropriate coordination and use of genuine reasons in generating and justifying beliefs and behaviour. One of the prime goals of education is therefore to inculcate thinking skill and rationality in behaviour. Rationality involves an appeal to reasons. One is rational to the extent that one chooses what to believe or do and has reasons for those choices. Rationality is a means to positive ends. Market regulators are usually insisting that the financial market intermediaries have appropriate knowledge (education), skill and expertise to handle their jobs effectively. In this context, it can be presumed that the market intermediaries in India, including fund managers, are sufficiently educated and thus are expected to behave quite rationally. REVIEW OF LITERATURE Often many forms of stock market anomalies are seen as a consequence of the participation of ignorant, poorly capitalized, individual investors. Strangely, Nofsinger and Sias (1999) present evidence that the herding in equity markets may be primarily driven by the trading of institutional investors. Nofsinger and Sias (1999) found that institutions consistently pile into a fairly narrow set of stocks driving their price and returns to holding them up; leaving securities in the deciles they have left to perform poorly. To some extent this reflects the fact that institutions follow the market and seek out shares that are already rising. One reason why investors may tend to agree is because of the nature of the evidence they receive from stock brokers and market commentators. Welch (2000) studied the clustering of analysts recommendations to buy, sell or hold a stock in a client s portfolio. Importantly, he found the strength of herding towards consensus is not affected by whether the consensus recommendation is a good predictor of future stock price performance or not. Welch (2000) also has reported the tendency to herd is stronger during market booms than busts. This implies market rises are more fragile and ill considered than subsequent declines. He has further stressed that the buy or sell recommendations of security analysts have a significant positive influence on the recommendations of the next two analysts. Analysts seem to be willing to sacrifice some prediction accuracy in order to protect their reputation. Banerjee (1992) analyzed a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking his own decision. This is rational for him because these other decision makers may have some information that is important for him. He then showed that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. Thus the resulting equilibrium is inefficient. William Forbes (2011), one of the pioneering authors in the field of behavioral finance has provided evidence that, Herding occurs in financial markets even among professionals. Bruke et al (2010) have observed, Like other species, humans are sensitive to the decisions and actions of con-specifics, which can lead to herd behavior and undesirable outcomes such as stock market bubbles and bank runs. Their study lend weight to the notion that the ventral striatum is involved in the processing of complex social aspects of decision making and identify a possible neural basis for herd behavior. Griffin et al (2003) have made three prominent observations in their research study, viz., (i) Institutions are momentum investors and tend to follow past prices. (ii) Mutual funds sometimes tend to move together or engage in herding. (iii) The contemporaneous relation between changes in institutional ownership and stock returns is much stronger than the trend chasing effect. Froot et al (1992) have observed that, Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the assets for ever. By contrast, if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibriums, and herding speculators may even choose to study information that is completely unrelated to fundamentals. Nofsinger et al (1999) have documented strong positive correlation between changes in institutional ownership and returns measured over the same period. The results suggested that either institutional investor s positive feedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. 217 P a g e

28 Beach et al (2005) have examined three common behavioral issues affecting investing viz., herd mentality, regret aversion, and mental accounting. According to them, these behaviors often result in investors "chasing" performance. Investing decisions driven by normal human behavior can have a devastating impact upon long-term wealth accumulation. Individual investors, and sometimes even professional fund managers, allow their emotions to get in the way of rational investment decision-making. They have further observed that, The herd mentality reflects the natural tendency for individuals to do what is currently popular. The herd mentality feeds the penchant for investors to buy securities after the market has risen and sell securities when the market is down. Individuals tend to place more money into the stock market as fashion dictates that stock market investing is the "in" thing to do. Herding is defined as a group of investors following each other into (or out of) the same securities over a period of time" (Sias 2004). The result is that investors who follow the crowd can miss opportunities to realize major gains. Individual investors are not alone in following the crowd. The herd mentality of institutional investors is also clearly documented (Nofsinger and Sias 1999). Raddatz et al (2011) in their research paper have shown that pension funds tend to herd. This is consistent with pension funds copying each other in their investment strategies as a way to extract information, boost returns, and reduce risk. The authors have computed measures of herding across asset classes (equities, government bonds, and private sector bonds) and at different pension fund industry levels. The results have shown that pension funds herd more in assets for which they have less market information and when risk increases. Moreover, herding is more prevalent across funds that narrowly compete with each other, that is, when comparing funds of the same type across pension fund administrators. There is much less herding within pension fund administrators and across pension fund administrators as a whole. This herding pattern is consistent with incentives for managers to be close to industry benchmarks, which might be driven by both market forces and regulation. Leech (2012), in a seminal paper published by Risk Oversight has observed that, The root of risk management failures is flawed risk and control management frameworks, methods and tools. These are referenced by him as Enterprise Risk Management (ERM) herd mentality wrong turns. ERM herd mentality, as used in this article, refers to the adoption of specific and sub-optimal ERM methods and tools promoted, or at least not challenged or empirically critiqued and validated, by authoritative bodies that influence the actions of hundreds of thousands of public and private sector organizations around the world. Many skeptical senior executives and members of boards of directors have sensed the dangers of following the ERM herd and been reluctant to fully support ERM, often as a direct result of previous exposure to failed ERM attempts. Herd Mentality, according to Leech, was a key factor in the 2008 global financial crisis. OBJECTIVES OF STUDY India has a vibrant mutual fund industry with about 47 fund houses managing more than 500 schemes through their respective Asset Management Companies (AMCs). One of the major advantages of mutual fund investment in India is that these AMCs are managed by professional fund managers educated from reputed institutions in India and abroad. Return of mutual funds is, to a large extent, dependant on the expertise of fund manager(s). The objective of this research study is to examine whether the professional fund managers who manage top ranking mutual fund schemes in India do their portfolio selection and management rationally or not, keeping the best interest of the investors in mind. Research Design: The performance of mutual funds in India are regularly being tracked by various research agencies such as etc., as well as by the broking community / firms and investment advisors. To plan this research study, all these sources were considered but apparently it was observed that there could be a conflict of interest for some of these agencies between their R&D / advisory function and other functions. Broking outfits have their trading business in mind and some others like may have to also pay attention to their promoter s other business interests like running a business media channel. In this context, was found to represent a well established purely independent research house dedicated primarily for the mutual fund sector in India, and was considered as most appropriate to source the data for this research work. Research agencies, as expected, were found to be using various techniques, taking a number of parameters into consideration, for ranking the performance of mutual fund schemes in India. It is not within the scope of this research work, however, either to evaluate or comment on the effectiveness of using such techniques. Some agencies were found to be identifying star performers and assigning them, 1, 2, 3, 4 or 5 stars etc. Some others like have been found to assign same rank to more than one scheme, leaving the choice to the investors to select either/ any one of them. This leaves some amount of ambiguity in the ranking system being followed at present. Considering this, it was decided to go purely by a credible objective assessment of ranking based on the percentage of 3 year return of the scheme calculated on a recent specified date. For this study the cut-off date chosen was 1 st February, Consciously the return for a three year period was considered more appropriate as this can provide an idea about stability and sustainability of the pattern of return for the scheme and can be a real proxy of their performance. It was decided to study the herding sentiments of top ranking mutual fund schemes based on their current portfolio selection pattern. As per the regulatory guidelines of SEBI, each mutual fund scheme, inter alia, has to declare the details of top 5 sectors and top 5 holdings in its investment portfolio from time to time. These details, which are available on data cards / data sheets of the respective schemes were considered for the research work. It was decided to study the herding behavior / sentiment in investment across sectors as well as across corporate holdings. 218 P a g e

29 It was further decided to study the herding behaviors / sentiments for fund investments in (i) Large & Mid-cap schemes as well as for (ii) Mid & Small-cap schemes. This was done to capture two different types of investment objectives and time horizons for investment. Usually investments in Large and Mid-cap funds are held for a comparably longer period (less portfolio churning) and selected primarily based on fundamentals. The number of shares (choices) for investment available under Mid and Small-cap category / space is also much larger. One can get a complete picture for assessment by taking both these types of schemes. While designing the research work, it was considered desirable to conceptualize a relatively simple quantitative framework for evaluating the herding sentiment of Indian Fund Managers across sectors and corporate holdings. Accordingly two quantitative measures were considered to be defined and introduced as follows: DATA ANALYSIS (Degree of Herding) sector = (DOH) sector = {Number of Schemes Invested in a particular sector / Total Number of Schemes}*100% (Degree of Herding) corporate holdings = (DOH) corporate holdings = {Number of Schemes Invested in a corporate holding / Total Number of Schemes}*100% Table-1: Large & Mid Cap Segment: Top 10 Performing Schemes as on February 1, 2013 Scheme Name Launch Return 3 Rank As on Date Years (%) 3 Year Quantum Long-term Equity Feb 25, Feb 01,2003 UTI Opportunities Jul 20, Feb 01,2003 Mirae Asset India Opportunities Regular Mar 11, Feb 01,2003 Canara Robeco Equity Diversified Regular Sept 12, Feb 01,2003 UTI Equity May 18, Feb 01,2003 ICICI Prudential Dynamic Mar 27, Feb 01,2003 HDFC Growth Aug 10, Feb 01,2003 Franklin India Prima Plus Sept 28, Feb 01,2003 Reliance NRI Equity Nov 01, Feb 01,2003 HDFC Equity Dec 24, Feb 01,2003 Sources: Table-2: Sectoral Investment Pattern of Top 10 Performing Large & Mid Cap Schemes Name of Scheme Top 5 Sectors chosen for Investment by Fund Managers (As revealed in Data Sheets of individual schemes) Quantum Long-term Equity Financial, Services, Energy, Automobile & Technology UTI Opportunities Financial, FMCG, Energy, Construction & Technology Mirae Asset India Opportunities Regular Financial, FMCG, Energy, Technology & Healthcare Canara Robeco Equity Diversified Regular Financial, Energy, Technology FMCG and Diversified UTI Equity Financial, Energy, FMCG, Healthcare & Automobiles ICICI Prudential Dynamic Energy, Technology, Communications, Metal, Healthcare HDFC Growth Financial, Energy, Technology, Healthcare, FMCG Franklin India Prima Plus Financial, Energy, Healthcare, Automobile, Services Reliance NRI Equity Financial, Automobile, Healthcare, Technology & Engineering HDFC Equity Financial, Energy, Technology, Automobiles & FMCG Sources: Individual Data Cards of different Schemes Table-3: Top (Corporate) Holdings of Top Ten Performing Large and Mid Cap Schemes Name of Scheme Top Holdings Quantum Long-term Equity Bajaj Auto, HDFC, HDFC Bank, Gee Entertainment, TCS UTI Opportunities ITC, ICICI Bank, HDFC Bank, L&T, Crisil Mirae Asset India Opportunities Regular ICICI Bank, Infosys, HDFC Bank, ITC, SBI Canara Robeco Equity Diversified Regular ICICI Bank, L&T, ITC, Reliance Industries, HDFC Bank UTI Equity ITC, ICICI Bank, HDFC Bank, Sun Pharma, Reliance Industries ICICI Prudential Dynamic Cairn India, Bharti Airtel, Infosys, NDMC & United Phosphorus HDFC Growth ICICI Bank, SBI, ITC, BPCL & Infosys Franklin India Prima Plus ICICI Bank, HDFC Bank, Bharti Airtel, Infosys & Grasim Industries Reliance NRI Equity ICICI Bank, HDFC Bank, Tata Motors, Cummins India & Maruti Suzuki HDFC Equity SBI, ICICI Bank, ITC, Infosys, Tata Motors DVR Sources: Individual Data Cards of Different Schemes 219 P a g e

30 Table-4: Investment Pattern Analysis (Sectoral Herding) Sector Number of Schemes Investing out of top 10 considered Degree of Herding in Percentages (%) Financial 9 90 Energy 9 90 Technology 8 80 FMCG 6 60 Healthcare 6 60 Automobiles 5 50 Services 2 20 Engineering, Diversified, Construction, 1 10 Metal & Communications (Each) Table-5: Investment Pattern Analysis (Corporate Holding Herding) Corporate Holding Number of Schemes Investing out of top 10 Considered Degree of Herding in Percentages (%) ICICI Bank 8 80 HDFC Bank 7 70 ITC 6 60 Infosys 5 50 SBI 3 30 L&T 2 20 Tata Motors 2 20 Reliance Industries 2 20 Bharti Airtel 2 20 HDFC, TCS, Crisil, Gee Entertainment, 1 10 Sun Pharma, Cairn India, Cummins India, Maruti Suzuki, Grasim Industries, NDMC, United Phosphorus, BPCL, Bajaj Auto (Each) Table-6: Herding (Sectoral) in Mutual Fund Investments within Large & Mid-cap Segment Sectors where major herding was observed Financial (90%), Energy (90%), Technology (80%), FMCG (60%), Healthcare (60%) Average Degree of Herding for these sectors in percentage terms 76% Table-7: Herding (Corporate Holding) in Mutual Fund Investments in Large & Mid-cap Segment Corporate Holdings where major herding was observed ICICI Bank (80%), HDFC Bank (70%), ITC (60%), Infosys (50%), SBI (30%) Average Degree of Herding for these Holdings in percentage terms 58% Table-8: Mid & Small Cap Segment Top 10 Performing Schemes as on Feb 1, 2013 Scheme Name Launch Date Return 3 Rank As on Years (%) 3 Year SBI Emerging Business Sept 17, Feb 01,2003 Reliance Equity Opportunity Inst Aug 08, Feb 01,2003 Religare Mid N Small Cap Feb 19, Feb 01,2003 Reliance Equity Opportunity Mar 07, Feb 01,2003 BNP Paribas Midcap Apr 12, Feb 01,2003 HDFC Midcap Opportunities June 08, Feb 01,2003 Religare Midcap Mar 15, Feb 01,2003 IDFC Premier Equity Sep 26, Feb 01,2003 Canara Robeco Emerging Equities Regular Feb 24, Feb 01,2003 ICICI Prudential Discovery Inst I Mar 02, Feb 01,2003 Sources: P a g e

31 Table-9: Sectoral Investment Pattern of Top 10 performing Mid & Small Cap Schemes Name of Scheme Top 5 Sectors chosen for Investment (As revealed in Data Sheets of individual schemes) by Fund Managers SBI Emerging Business Financial, Automobile, FMCG, Energy & Technology Reliance Equity Opportunity Inst Financial, Services, Healthcare, Technology & Automobile Religare Mid N Small Cap Financial, Services, Chemicals, FMCG & Healthcare Reliance Equity Opportunity Financial, Services, Technology, Healthcare & Automobiles BNP Paribas Midcap Financial, Construction, Services, Chemicals, Engineering HDFC Midcap Opportunities Financial, Healthcare, Chemicals, Engineering & FMCG Religare Midcap Financial, Services, FMCG, Chemical & Construction IDFC Premier Equity FMCG, Services, Chemicals, Financial & Energy Canara Robeco Emerging Equities Regular Financial, Construction, Engineering, FMCG & Technology ICICI Prudential Discovery Inst I Financial, Energy, Healthcare, Services & Metals Sources: Individual Data Cards of different Schemes Table-10: Top (Corporate) Holdings of Top Ten Performing Mid and Small Cap Schemes Name of Scheme Top Holdings SBI Emerging Business Spice jet, Goodyear India, Moothoot Finance, Kansai Nerolac Paints & Balakrishna Industries Reliance Equity Opportunity Inst SBI, ICICI Bank, Divi s Lab, Infosys, & Trent Religare Mid N Small Cap Britania Ind, Karur Vysya Bank, Maruti Suzuki India, ING Vysya Bank & J & K Bank Reliance Equity Opportunity SBI, ICICI Bank, Divi s Lab, Infosys, & Trent BNP Paribas Midcap Indusind Bank, Federal Bank, Shriram City Union Finance, Balkrishna Industries & Spicejet HDFC Midcap Opportunities Ipca Laboratories, Supreme Industries, Carborundam Universal, Union Bank of India & Allahabad Bank Religare Midcap Britania Ind, Karur Vysya Bank, ING Vysya Bank, J & K Bank & D B Corporation IDFC Premier Equity United Spirits, Asian Spirits, SBI, Page Industries, Kaveri Seeds Company Canara Robeco Emerging Equities Regular ING Vysya Bank, J & K Bank, Hathway Cable Datacom, Orient Paper & Ind & Century Textiles and Ind ICICI Prudential Discovery Inst I Bharti Airtel, Allahabad Bank, Sterlite Ind, Amar Raja Batteries & Reliance Industries Sources: Individual Data Cards of different Schemes Table-11: Investment Pattern Analysis (Sectoral Herding) Sector Number of Schemes investing out of top 10 considered Degree of Herding in Percentages (%) Financial Services 7 70 FMCG 6 60 Healthcare 5 50 Chemicals 5 50 Technology 4 40 Engineering 3 30 Construction 3 30 Energy 3 30 Automobiles 3 30 Metals 1 10 Table-12: Investment Pattern Analysis (Corporate Holding Herding) Corporate Holding Number of Schemes Investing out of top 10 considered Degree of Herding In Percentages (%) ING Vysya Bank 3 30 J & K Bank 3 30 ICICI Bank 2 20 Balakrisna Ind P a g e

32 Allahabad Bank 2 20 Infosys 2 20 SBI 2 20 Trent 2 20 Divy s Lab 2 20 Spice jet 2 20 Britania Ind 2 20 Karur Vysya Bank 2 20 Goodyear India, Moothoot Finance, Kansai Nerolac Paints, Maruti Suzuki 1 10 India, Indusind Bank, Federal Bank, Shriram City Union Finance, Ipca Laboratories, Supreme Industries, Carborundam Universal, Union Bank of India, D. B. Corporation, United Spirits, Asian Spirits, Page Industries, Kaveri Seeds Company, Hathway Cable Datacom, Orient Paper & Ind, Century Textiles and Ind, Sterlite Ind, Amar Raja Batteries & Reliance Industries, Bharti Airtel & Sterlite Ind. (Each one) Table-13: Herding (Sectoral) in Mutual Fund Investments in Mid & Small cap Sector Sectors where major herding was observed Financial (100%), Services (70%), FMCG (60%), Healthcare (50%), Chemicals (50%) Average Degree of Herding for these sectors in percentage terms 66% Table-14: Herding (Corporate Holding) in Mutual Fund Investments in Mid & Small cap Sector Corporate Holdings where major herding was observed ING Vysya Bank (30%), J & K Bank (30%), ICICI Bank (20%), Balakrishna Ind. (20%), Allahabad Bank (20%) Average Degree of Herding for these Holdings in percentage terms 24% FINDINGS Findings of this research study have been summarized in the Degree of Herding Matrix provided below. Herding observed for fund investments in mid & small-cap segment was found to be lower compared to that for large & mid-cap segment. For both the segments, sectoral herding was found to be higher compared to corporate holding herding. Table-15: Degree of Herding Matrix Large & Mid Cap Mid & Small cap Sectoral Herding (DOH) sector 76% 66% Corporate Holding Herding (DOH) corporate holdings 58% 24% ANALYSES AND INTERPRETATIONS 1. Not much research has been done on this topic in India. Close scrutiny of research studies done abroad does not throw any light on how much herding for fund managers investment is acceptable and what should be the threshold limit beyond which herding is undesirable. Herding is considered to be an irrational behavior. It not only adversely affects the overall performance of mutual fund schemes, but also affects the performance of the small investors in the market. Beach et al (2005) have rightly observed, The herd mentality feeds the penchant for investors to buy securities after the market has risen and sell securities when the market is down. Individuals tend to place more money into the stock market as fashion dictates that stock market investing is the "in" thing to do. The result is that investors who follow the crowd can miss opportunities to realize major gains. Thus herding does not help anybody. 2. An analysis of sectoral herding of investment for the two segments reveals the following: Table-16: Major Sectors where Herding was Detected Large & Mid-cap Segment Investment Financial (90%), Energy (90%), Technology (80%), FMCG (60%), Healthcare (60%) Mid & Small-cap Segment Investment Financial (100%), Services (70%), FMCG (60%), Healthcare (50%), Chemicals (50%) 222 P a g e

33 It may be observed from the above that the sectoral herding in case of (i) Financial (ii) FMCG and (iii) Healthcare is common to both the segments. Financial sector investment is the most preferred choice for fund managers in both the segments. Energy and Technology sectors are usually considered to have long term prospects and therefore could have been the preferred choice of fund managers investing in Large & Mid-cap schemes. In case of investments of fund managers in schemes for mid & small-cap segment, herding has also been found in Services and Healthcare sectors, besides Chemicals. 3. Corporate Holding herding analysis leads to the following interesting revelations: Table-17: Major Corporate Holdings where Herding was Detected Large & Mid-cap Segment Investment ICICI Bank (80%), HDFC Bank (70%), ITC (60%), Infosys (50%), SBI (30%) Mid & Small-cap Segment Investment ING Vysya Bank (30%), J & K Bank (30%), ICICI Bank (20%), Balakrishna Ind. (20%), Allahabad Bank (20%) In case of Large & Mid-cap segment, the Corporate Holding Herding is quite noticeable. The herding behavior observed in case of Mid & Small-cap segment investment is much lower compared to that of Large & Mid-cap segment, which could be due to plenty of choices for investment available in case of the former. In case of Large & Mid-cap schemes, it is interesting to observe that while 8 out of the top 10 schemes have chosen to invest in ICICI Bank, ICICI Prudential Dynamic, a scheme being run by the Fund House ICICI Mutual Fund has not chosen to invest in ICICI Bank. Is this a sign of herding? Or ICICI Prudential Dynamic has unknowingly lost this opportunity? In case of Mid & Small-cap segment, SBI Emerging Business Fund has been able to register superlative return (22.68%), which is about 7% higher than the return of the second ranked fund. It has perhaps consciously remained away from the herding sentiments to achieve superior returns. It has been further observed that if two schemes belong to same fund house they tend to invest in same sectors and same corporate holdings, as they may be sharing the findings of one and only one research team. This may appear like herding but can be accepted as reasonable. 4. What might be causing herding sentiments in fund managers? This is a question which needs analysis. It has been observed earlier that SBI Emerging Business has been able to register superlative returns (3 years). Fund houses which do not have enough R & D backing may be tempted to follow SBI Emerging Business moves in future blindly, resulting in herding. In the process, the fund, which follows SBI Emerging Business moves, can save on R&D cost. Each year, based on rankings provided, fund houses, schemes and fund managers receive awards for their performance. Others who do not get these awards may develop a feeling that they are being left behind because they are not following the leader or the successful group. They may develop a feeling that to be successful one has to have better access to information which they do not have and to bridge this gap they should follow performance leaders. 5. There could be a counter argument, which would justify herding behavior observed as the only possible rational behavior on the part of the fund managers. Stock market has remained sluggish for quite some time. Manufacturing sector is performing badly. Economy is struggling with high inflation and interest rates as well as slowing down of GDP growth rate. In such a situation, it can be argued that fund managers would be tempted to select financial, services and FMCG sectors. While financial and services sectors are key tertiary sectors, demand for FMCG goods are considered to be relatively price inelastic. Healthcare, Technology and Energy sectors are considered evergreen sectors and known to have long term perspectives. Within Financial sector, ICICI Bank might have been an obvious choice as it represents the largest private sector bank in India run by a professional team. HDFC and SBI are the two other stocks in BFSI segment which are known for their price stability and sustainable growth. ITC and Infosys are two important stocks in FMCG and Technology sectors. The obvious argument, that can be put forth, therefore, is that, the number of choices available is limited under the given situation and the research of various fund houses may be converging on same sectors and same stocks, which looks like herding. 6. Education, experience and wisdom may not help in avoiding herding sentiments. According to Robert R Prechter Jr (2001), Human herding behavior results from impulsive mental activity in individuals responding to signals from the behavior of others. Impulsive thought originates in the basal ganglia and limbic system. In emotionally charged situations, the limbic system s impulses are typically faster than rational reflection performed by the neocortex Mirre Stallen et al (2012) have talked of a Herding Hormone Oxytocin which stimulates in-group conformity. Researchers, around the world, in the field of neuro-science, social psychology and sociology, even today, are constantly endeavoring to decipher the exact reasons of human herding sentiments. 7. The above research study, has no doubt, shown some amount of herding in investment decisions of Indian fund managers, though it is not known whether it is natural or out of compulsion to deal with the current situation of the market and the economy. India has about 47 fund houses running more than 500 different schemes. Lack of proper research and development efforts on the part of some of the small newly established fund houses could be one of the reasons for herding. Large established fund houses often found to employ best fund managers luring them with higher salary and performance linked bonuses. These fund houses also spend more on research and development efforts. Smaller fund houses that cannot compete with them, might prefer to blindly follow them. This sentiment could be leading to observed herding sentiment in Indian fund managers. Further research on the topic at a different point of time, may be after a year or so, when market situation improves, can only lead to a conclusive point of view in the matter. 223 P a g e

34 REFERENCES 1. Altshuler, E., Ramos, O., Nuñez, Y., & Fernández, J. (2011). Panic-induced symmetry breaking in escaping ants. Cuba, Havana: University of Havana. 2. Banerjee, A. V. (1992). A simple model of herd behavior. The Quarterly Journal of Economics, 107(3), Beach, S. L. & Rose, C. C. (2005). Does Portfolio Rebalancing help Investors avoid common mistakes? Journal of Financial Planning. 4. Burke, C. J., Tobler, P. N., Schultz, W., & Baddeley, M. (2010). Striatal BOLD response reflects the impact of herd information on financial decisions. Frontiers in Human Neuroscience, 4, Forbes, W. (2011). Behavioural Finance. Wiley India Student Edition. 6. Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1992). Herd on the Street: Informational inefficiencies in a market with short term speculation. The Journal of Finance, XLVII(4). 7. Futures Markets. The Finance Review, 43, Griffin, J. M., Harris, J. H. & Topaloglu, S. (2003). The dynamics of institutional and individual trading. The Journal of Finance, LVIII(6). 9. Hamilton, W. D. (1971). Geometry for the Selfish Herd. Journal of Theoretical Biology, 31(2), Hirshleifer, D., & Hong, T. S. (2003). Herd behaviour and cascading in capital markets: A review and synthesis. European Financial Management, 9(1), Kurov, A. (2008). Investor Sentiment, Trading Behavior and Informational Efficiency in Index. 12. Leech, T. J. (2012). The high cost of ERM herd mentality, White Paper, Risk Oversight. 13. Markus K. Brunnermeier. (2001). Asset Pricing under Asymmetric Information: Bubbles, Crashes. Oxford University Press: Technical Analysis, and Herding. 14. Nofsinger, J. S., & Sias, R. W. (1999). Herding and feedback trading by institutional and individual investors. The Journal of Finance, LIV(6). 15. Prechter, R. R. Jr. (2001). Unconscious Herding Behavior as the Psychological basis of Financial Market Trends and Patterns. The Journal of Psychology and Financial Markets, 2(3), Raafat, R. M., Chater, N., & Frith, C. (2009). Herding in Humans. Trends in Cognitive Sciences, 13(10), Raddatz, C., & Schmukler, S. L. (2011). Deconstructing Herding: Evidence from Pension Fund Investment Behaviour (Policy Research Working Paper 5700). World Bank. 18. Rohlfs, J. (2001). Bandwagon effects in High Technology Industries. Cambridge, MA: MIT Press. 19. Shiller, R. (1995). Conversation, information and herd behaviour. American Academic Review, 54, Sias, R.W., Starks, L. T., & Titman, S. (2006). Changes in institutional ownership and stock returns: Assessment and methodology. Journal of Business, 79(6). 21. Stallen, M., Drew, C. K. W. D., Shalvi, S., Smidts, A., & Stanfey, A. G. (2012, September 18). The Herding Hormone Oxytocin stimulates. In-group Conformity, Psychological Science. 22. Welch, I. (2000). Herding among security analysts. Journal of Financial Economics, 58, Yan, X., & Zhang, Z. (2009). Institutional Investors and Equity Returns: Are short-term institutions better informed?. The review of financial studies, 22(2). ***** 224 P a g e

35 RELEVENCE OF DUAL EXTERNAL AUDIT AND CURRENT AUDIT SYSTEM IN INDIA K. V. Bhanu Murthy 5 Renu Gupta 6 ABSTRACT The rising number of scandals at alarming rate has put a question mark on the relevance and significance of prevailing auditing practices. Moreover, alternatives to current auditing practices are also being sought. The present paper makes an attempt to critically examine whether it has actually become the need of the hour to dual the audit effort that is getting the book of accounts of the client audited by two independent auditors separately without having whiff of one another s work or strengthening the present auditing system by improving the statutory audit, internal audit and peer review. KEYWORDS Dual Audit, Statutory Audit, Internal Control, Internal Audit, Joint Audit, Peer Review etc. INTRODUCTION The existing auditing system involves the critical scrutiny of books of accounts, data, statements and records etc of an enterprise by a competent and independent chartered accountant known as statutory or external auditor for the production of an annual audit report depicting the truth and fairness of the statements and records examined by him. The statutory auditor has to take help of the work done by internal auditor to accomplish his task; but, significant increase in the number of auditing scandals has made the present system of auditing questionable. Hence, one of the alternatives under consideration is dual audit. Dual audit is called as where two sets of auditors examine the accounts simultaneously. Every listed company s accounts would be examined by two sets of auditors simultaneously culminating in two separate reports for the benefit of shareholders and other stakeholders interested in accounts. Dual statutory audit that is two sets of auditors simultaneously bestowing their attention and energy on the annual accounts of a company to be placed before the annual general meeting (AGM) in a spirit of healthy competition that is admittedly being considered an antidote to laxity. In this article, the issue examined is the relative effectiveness of dual audit in terms of current auditing system prevailing in the country constituting external audit and internal audit along with joint audit and peer review carried out in accordance with the demand of the particular enterprise as governed by the statute. Murlidharan reflects the weaknesses in the present system of audit including internal audit and it has to be supported by an efficient system of external audit that is dual audit in accordance with him. However, this paper emphasizes on the need to overcome these limitations rather to look for alternatives like dual audit as it can also face the same limitations. After this introductory Section, Section II states the research methodology. Section III discusses the need and relevance of system of internal control while need of strengthening internal audit has been mentioned in Section IV. Section V examines the weaknesses in the current statutory audit practices. Section VI depicts the concept of joint audit. The requirement to make peer review more effective has been assessed in Section VII. Section VIII evaluates whether the concept of dual audit is the possible solution. Finally, Section IX provides the conclusions and recommendations. RESEARCH METHODOLOGY This paper is based upon the study titled Perceptions of Auditors on Various Aspects of Statutory Audit carried out with th e help of structured questionnaire. Questionnaire was served to two-hundred members of Institute of Chartered Accountants of India (ICAI) in all. Out of two-hundred questionnaires, one hundred and sixty-eight questionnaires are returned and three questionnaires have not been included in the analysis because of incomplete responses. Thus, analysis has been made on the basis of views of one hundred and sixty-five participant auditors that constitute 82.5 percent response. The study considers responses of chartered accountants who are practicing auditors only or may have experience of both auditing profession and industry. All of the respondents are experienced in statutory audit along with other forms of audit. They belong to different age groups and have audited several forms of organizations. Information has been collected personally, through internet and by post. Analysis of the responses has been made on the basis of simple aggregative and percentages with the help of Microsoft excel worksheet. 5 Professor & Head, Department of Commerce, Delhi School of Economics, University of Delhi, Delhi, India, bhanumurthykv@yahoo.com 6 Assistant Professor, Commerce Department, Sri Guru Gobind Singh College of Commerce, University of Delhi, Delhi, India, renuguptadu@gmail.com 225 P a g e

36 NEED AND RELEVANCE OF SYSTEM OF INTERNAL CONTROL Spicer and Pegler, a famous authority on auditing literature defines system of internal control as: Internal control is best regarded as a whole system of controls, financial or otherwise, established by management in conduct of a business including internal check and internal audit and other forms of controls. Existence of internal control system in any entity provides good evidence that aims of internal control system like adherence to policies, safeguarding of assets, prevention of error and fraud, reliability and completeness of financial information might be achieved but they provide satisfaction and not assurance of fulfillment of control objectives. There are some possible limitations of the internal control system. For example, not all areas may be covered by system of internal control because of cost considerations, it is not applicable for transactions of unusual nature, it cannot stand against deliberate circumvention of control process installed by management, false manipulation of transactions by entity, breach of control by staff collusion or controls may become obsolete in change scenario. Recognizing this vital fact, statutory auditor should proceed to evaluate internal control system, as he cannot escape his liability accusing weaknesses in internal control afterwards if some error or fraud is detected. In spite of the previously mentioned limitations of the system of internal control, the role and importance of system of internal control cannot be neglected. Gupta and Murthy (2012) have made an attempt to know how far sound system of internal control is relevant in present context and possibility of improvement in law is required if any. The analysis indicates that nearly, nine-tenths (89.11 percent) of the auditors participated in the study were of the opinion that sound internal control system plays a vital role in minimizing the work of an auditor. Further, an attempt has been made by Gupta and Murthy (2012) to check the satisfaction level of participant auditors with regard to internal control system maintained by the entities visited by them. The analysis reveals that more than seven-tenths (72.12 percent) of the respondents found internal control system maintained by the entities visited by them as moderately satisfactory only. Thus, aforesaid discussion reveals that maintaining sound internal control system in a business entity is a necessity though it has not been found very satisfactory in Indian enterprises. Therefore, efforts are inevitable on the part of authorities to compel specific enterprises at least, to install sound system of internal control. NEED TO STRENGTHEN INTERNAL AUDIT Internal audit constitutes an important element of internal control system. The Preface to the Standard and Guidance Notes on audit has defined internal audit as: An independent management system which involves a critical appraisal of the entity. The objective of the internal audit is to suggest improvement to the functions of entity, strengthen the overall governance mechanism of the entity, strategic risk management and internal control system. Thus, internal audit not only encompasses checking matters relating to finance but also reviews or undertakes the critical appraisal of the policies of the company. It helps in improving organizational effectiveness. Audit of accounts by internal auditor is not compulsory in India. However, complexity and increasing size of corporations has drastically increased the role of internal auditor. Now, internal audit has assumed special significance in India with the introduction of Manufacturing and Other Companies (Auditor s Report) Order. It has been superceded by Company s (Auditor s Report) Order, According to this Order, in case of specific companies, statutory auditor is required to report whether internal audit system commensurate with nature and size of the business of the company or not. Views of respondents have been analyzed by Gupta and Murthy (2012) to know whether audit of systems and control by an internal auditor should be made compulsory in India at least for large organizations like in other countries. Around three-fourths (73.33 percent) of the participants strongly support that audit of systems and control by an internal auditor should be made compulsory in India at least for large organizations. On aggregate basis, nearly five-sixths (95.76 percent) of the respondents are in favour of making internal audit of systems and control compulsory in our country as well. This strong opinion is formed due to significance of system of internal control of which internal audit is an integral part and no statutory audit can be completed successfully without relying on internal audit especially in large business houses. EXTERNAL / STATUTORY AUDIT AND ITS LOOPHOLES An audit that is compulsory for an entity to be conducted due to statute or law is termed as statutory audit. Statutory audit can be characterized as independent financial audit or external audit also. As auditor engaged to conduct audit is required to be independent of management, this type of audit must be complete in all respects, and scope of his work cannot be curtailed or determined by management. Specific law governs rules regarding his competence and professional qualification, appointment and removal, rights and duties, liabilities, presentation of audit report and standards of audit performance. The object of statutory audit is to protect the interest of owners and other parties related to the enterprise. Statutory auditor is an outsider and independent person appointed mostly by owners and in some cases by government. Statutory audit may be either periodical or continuous in nature depends upon its need and suitability. The statutory auditor has to rely on the work performed by other auditors in certain circumstances. Cases of joint audit, branch audit and internal audit provide examples where the auditor has to liaise with other auditors. 226 P a g e

37 Is statutory Auditor Really Independent? The Institute of Chartered Accountants of India in its publication of Statements on Auditing and Assurance Standards: Basic Principles Governing an Audit (AAS 1) 1 or SA 200 describes audit as The independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such examination is conducted with a view to expressing an opinion thereon. Gupta (2011) tested the opinions of the respondents on the basis of this definition given in AAS 1 by ICAI in terms of their satisfaction level with reasons and adjustments if any. Results showed that discontentment amongst the auditors with regard to definition of audit as per AAS 1 is because of two reasons mainly: (i) examination of non-financial information has not been given place in it, and (ii) independent examination has lost its significance in present time. Independent examination for a statutory or external auditor has become difficult is reflected in the following views of the respondents as found in their responses: 1. Our appointment should not be assigned by the company in which we are doing audit. Moreover, fee for audit should also not be paid by the client as it affects the independence of the auditor. 2. Nowadays, in this commercial world, auditors have lost their independence. Nobody wants to lose their client, they have to find mid-way to retain the client and remain with the law. 3. Major share of assesses is in unorganized sector where independence of auditor hardly exists. 4. In most of the cases, independence of the auditor does not exist. Therefore, effective steps are inevitable to check the independence of auditor while conducting audit. It is, of course, essential that an auditor preserve his objectivity and integrity from his own viewpoint, commonly called independence in fact, it is also important that auditor appear independent to all users of the information he provides. This latter concept is key ingredient to the value of audit function, since users of audit reports must be able to rely on the independent auditor. CONCEPT OF JOINT AUDIT In case of joint audit, more than one statutory auditor is appointed by an entity as it may be difficult for one auditor to complete the audit in prescribed time due to large size and voluminous transactions. In such a case, the statutory auditors have to plan division of work amongst themselves. The work may be divided according to units of operation or areas of checking. As per Auditing and Assurance Standard twelve (AAS 12) 2, Responsibility of Joint Auditors, work may be divided branch or regional office wise, plant wise, assets / liabilities wise or income/expenditure wise. Every auditor has to be responsible for the work done by him and it is the professional obligation for each of the joint auditors to bring to the notice of other auditors any matter significant to the truth and fairness of the financial information. Thus, joint auditors enjoy similar status in the statutory audit only their workload is divided because of voluminous transactions. As joint audit has become a necessity in large business houses, views of respondents have been checked to determine best criterion of division of work amongst joint auditors. It is found that division of work amongst joint auditors should be done branch or regional office wise in accordance with nearly three-fourths (71.51 percent) of the respondents. Joint audits are used internationally, including in India, Denmark, Germany, Switzerland and the UK. Joint Audit addresses two underlying principles of audit quality: Auditor s independence and competence. It enables a benchmarking of audit approaches and affords audit committees the opportunity to choose the best local firms from within two global networks. Audit committees and investors have additional assurance that the audit opinion with which they are presented is complete. A joint audit allows rotation of audit firms, and retains knowledge and understanding of group operations in a way that minimizes the disruptions caused when single audit firm is changed. The rotation of audit firms is equally likely to mitigate the risk of over familiarity. Two firms can also stand stronger together against aggressive accounting treatments. In this way, joint audit effectively becomes guardian for audit quality. The benchmarking which takes place between the two firms raises the level of service quality. PEER REVIEW: SHOULD ADOPT SOME DISCIPLINARY MECHANISM? Peer review means when one chartered accountant (reviewer) examines the other chartered accountant (audit firm) to judge quality of attestation work performed by them. The main objective of peer review is to insure that in carrying out professional attestation services like audit, the members of Institute of Chartered Accountants of India comply with the technical standards laid down by the institution. Peer review is not done for services other than attestation services rendered by the audit firm like management consultancy and others. Reviewer engaged by PRB carries out the peer review of practicing audit firm would be concentrating on adequacy of laid down procedures and not on the opinion arrived at by the practice unit (audit firm under review). On the basis of report of the reviewer or any submission or representation attached with the report, PRB can recommend to any or more or all the partners of the audit firm reviewed for compliance of specific technical standard. After a specific period of time if PRB is satisfied with the performance of audit firm reviewed with regard to recommendation earlier made to it, it may issue the peer review certificate to the audit firm. 227 P a g e

38 The ultimate objective of peer review is to enhance the quality of professional work and it has no relationship with disciplinary mechanism of members of ICAI/chartered accountants. As peer review is a self-regulatory mechanism and is the answer of the profession to the society and stakeholders at large that profession is conscious of its responsibility and shall strive its best to insure that the practicing chartered accountants observe highest standards. An attempt has been made to determine how far PRB has been successful in assuring society and stakeholders at large that auditing profession is conscious of its responsibilities and highest standards are observed by practicing chartered accountants from the point of view of auditors participated in the study. Table 1 indicates the responses of participants on aforesaid aspect as under: 1. Strongly Agree 2. Agree 3. Undecided 4. Disagree 5. Strongly Disagree Table-1: Peer Review Board Responses Number of Respondents Percent Total Table 1 reveals that nearly, two-thirds (64.24 percent) of the participants admit that PRB has been successful in assuring society and stakeholders at large that auditing profession is conscious of its responsibility and highest standards are observed by practicing chartered accountants. Even, around one-fifth (18.79 percent) of the respondents strongly acknowledge this. However, more than one-eighth (13.34 percent) of participants disagree that PRB has been successful in achieving its objective. In accordance with majority of respondents, PRB has succeeded because review is done in prescribed and standardized manner and if some audit firm is not able to prove itself, specific instructions are made to improve. After a specific period of time if PRB is satisfied with the performance of audit firm reviewed with regard to recommendation earlier made to it, it may issue the peer review certificate to the audit firm that helps in attaining its goal. Views of respondents have further been evaluated to judge whether objective of PRB to enhance quality of professional work will be better obtained if it adopts some disciplinary mechanism. Table 2 presents the responses of participant auditors in this regard as follows: 1. Strongly Agree 2. Agree 3. Undecided 4. Disagree 5. Strongly Disagree Table 2: Disciplinary Mechanism and PRB Responses Number of Respondents Percent Total It is shown by Table 2 that exactly four-fifths of the chartered accountants participated in this analysis are of the opinion that objective of PRB to enhance quality of professional work will be better obtained if it adopts some disciplinary mechanism. Even, nearly, one-third (30.91 percent) of the participants strongly acknowledge this opinion. And none of the respondent strongly opposes the view that PRB should adopt some disciplinary mechanism or regulatory action to achieve its objective of quality enhancement of professional work more effectively. Thus, adoption of disciplinary mechanism by PRB is highly welcomed by majority of respondents. It is because when a sort of fear will be there in the minds of the auditors; compliance of technical standards, quality of reporting and other important matters would be strictly taken care of from the very beginning by the audit firms. Hence, objective of PRB will be better achieved. COULD DUAL AUDIT BE THE POSSIBLE SOLUTION The best solution would be to delink appointment of auditors from the management of the auditee which indeed is incestuous to put it mildly. The system of appointment of auditors by a dispassionate agency a la the RBI in the case of public sector banks and the CAG in the case of public sector companies would be the ideal, but till this issue is hammered out, Murlidharan argued that dual audit may be a second solution. Rotation of auditors coupled with decoupling the auditors from the management of the companies whose accounts are audited then appears to be the more pragmatic solution to the problem of auditors credibility. S. Murlidharan: highlights the positive as well as negative aspects of dual audit and still favours dual audit in the end. He compares dual audit or simultaneous audit with joint audit, peer review and rotation of auditors as follows: 228 P a g e

39 Dual audit or Simultaneous audit vs. Joint Audit In joint audit, the two auditors work in tandem and submit either a separate or joint report as deemed necessary. But what is being proposed is simultaneous audit by two sets of auditors not working in tandem but in splendid isolation from each other in a spirit of healthy competition to give the best to the shareholders. If this would increase the expenses on audit, so be it; and if the presence of two sets of auditors could make life more difficult for accounting staff of a company and its management, once again so be it because at the end of the day the shareholders would be better equipped to take a call on the quality of the accounts. As with users of credit rating, the users of accounts would be doubly reassured if both are in complete or substantial agreement on vital issues. And if they are at loggerheads on substantive issues, they would be put on alert. Either way they stand to benefit. Dual Audit vs. Peer Review Dual audit, any day, would be much better than the much vaunted peer review which is nothing but an ex post facto examination of the auditor's work with the benefit of hindsight. Peer review has always invited sneers except when one reads Arthur Hailey's hugely appreciated and widely read fiction The Final Diagnosis. The peer review mechanism worked by the ICAI has turned out to be more a review of the auditor's infrastructure and capabilities rather than of his work. In any case, aggressive and intrusive peer review should not be expected when one is restrained by the sobering realization that at the end of the day we all live in glass houses and should not throw stone at each other. In the event, dual audit, where two sets of auditors examine the accounts simultaneously without having a whiff of each other's conclusions, is the best in the circumstances. Dual audit is much better than the ex-post facto peer review, which too many people appears to be an inane exercise given the fact that the reviewing auditor normally does not like to step on the toes of his more active rival. When two auditors examine the accounts simultaneously, there is nothing perfunctory or even remotely farcical about the duplication. On the contrary, the duplication would make for a healthy duel between the two with both being conscious of the possibility of being projected in a bad light should the other s work turn out to be more reliable and conscientious. As Mr. Salman Khurshid, puts it, dual audit involves a fine-toothcomb approach that would be brought to bear on their work for the fear of being hauled over the coals for being remiss even while the other auditor was more painstaking. Dual Audit vs. Rotation of Auditors Rotation of auditors is doing the rounds and is being trotted as a panacea now that L affaire Satyam has raised a big question mark over the effectiveness of the extant system of audit. Rotation coupled with appointment by a dispassionate agency with no axe to grind, a la the C&AG in the context of audit of public sector companies, would be what the doctor has ordered. More ideal but less realistic would be what the research publications do - blind referencing of the papers submitted to the reviewers lest they get influenced and biased, which would be the case if they come to know the identity of the paper writers. But then it is simply not possible to hide the identity of the company whose accounts are in front of the auditor. Minuses of Dual Audit The criticism against dual audit is that it would be a costly duplication of time, efforts and money with the audit enterprise subjected to audit overkill what with so many auditors snooping around if one also reckons the looming presence of the internal auditor, especially when he is an outsider rather than a pliable insider. But this is an objection more on grounds of inconvenience and cost as per supporters of dual audit. A deeper reflection would show that both can be taken in stride given the innate merit of the scheme that is bound to goad the two auditors into a healthy dual if not range them as raving adversaries a la gladiators in a ring. Experience shows that it is competition that brings out the best in human beings whatever the field is. One may be tempted to ask that if competition is so good why not more than two auditors. But given the nature of audit work and its disruption potential that can throw the normal functioning of the audit enterprise pell-mell, two would do. Possibility of Colusion in Dual Audit Collusion is anti-competition. Collusion in the matter of price fixation or cartelization is the bane of competition. As eluded earlier, professionals too collude with each other chastened by the sobering thought that tomorrow I might be at the receiving end so much so that peer review becomes just a farcical sideshow with results as predictable as in a match-fixing. Dual audit too could come to a naught if the two auditors exchange notes away from the public glare and produce independent reports sans independence. Collusion amongst Goliaths cannot be ruled out. How about pitting a David against Goliath? In other words, let us start with dual audit with one auditor being big and the other small. Not Clear How It Will Help when big influences the small. Of course, there would always be a fear of the two auditors working together surreptitiously and putting on the façade of submitting independent reports. Incidentally, such duality would double the audit work coming their way and hence could be the primary reason why they may support this move though some of them might be distinctly uncomfortable at the prospect of a rival snapping at their heels. Incidentally too, those concerned with the world of accounting could be supportive of dual audit at a more 229 P a g e

40 philosophical level - the core of accounting is duality with every debit entry having a matching credit entry and vice-versa - may be with a wry smile. Dual audit may not be the best solution to the problem of crisis of confidence in the institution of audit and in the auditors what with auditors increasingly coming to be perceived as enjoying a cozy relationship with the promoters of the companies they are the auditors of, engendering a further cynical perception as a corollary that in such a milieu audit is bound to be done in a hand washing spirit, glossing over even serious mistakes. Murlidharan argues that dual audit far from being a duplication of efforts; energy and expenses would be a sort of unconscious and unobtrusive internal check - a concept whose benefits a student of audit is asked to imbibe as his first lesson. When the work is divided in such a way that there is automatic overseeing of work of one by another, the possibilities of fraud and errors diminish. So would when two auditors are simultaneously at work with each displaying a heightened sense of responsibility lest he is projected in a bad light if not for anything else. Experience reveals that it is necessary to associate at least two reputed firms in the audit work, supported by highly interactive deliberations by all concerned. Overall, it is the company management and the associated directors who should imbibe this spirit of making auditing an integral part of successful corporate governance. Critical Examination of the Views in Favour of Dual Audit Of course, dual audit will strengthen the checking of the client s accounts; the views of the supporters of dual audit have been critically examined on the following grounds: Firstly, concept of dual audit is not very clear if checked in the light of the definition of dual audit as defined in Encyclopedia a dual audit is performed by two independent auditors issuing their own separate reports, which are then used by another auditor that ultimately reports on the entity as a whole. So, it is needed to be predetermined that it should be called dual audit or triple audit. Secondly, dual audit of course be an expensive exercise in terms of cost, time and effort. Thirdly, possibility of collusion between so called two independent auditors performing dual audit is not denied even by supporters of dual audit. Fourthly, dual audit is not going to precise the existing system of auditing, e.g., system of internal control will still be required. Fifthly, dual audit is not comparable with internal check as internal checking is the simultaneous checking of a transaction as soon as it takes place with the help of division of work but not by duplication of effort. Rather, internal check is better reflected by joint audit. Furthermore, if the size of the firm is too big to be handled by one single auditor, in dual audit, would not the two independent auditors require the joint auditors separately? Sixthly, dual audit should not be associated with double entry system of accounting. Double entry system is based on the fact that in every transaction, two parties or accounts are involved, one is receiver, another is giver, and hence, their accounts are credited or debited accordingly. However, dual audit is like debiting or crediting a similar entry twice. Seventhly, if so-called independent, statutory auditors involve in the dual audit are of contradictory views, then, would it be easy or difficult to handle the situation? Eighthly, concept of dual audit will increase the demand of qualified chartered accountants that would almost be doubled, how to fulfill that all of the sudden? Ninthly, auditors involved in dual audit will not become independent of the company for which they would be working, so, how the problem is going to be solved? Lastly, making existing audit system involving system of internal control, statutory audit and peer review more strengthened and effective appears to be a better solution in light of the views of the respondents instead of doubling the audit effort by making the external audit dual. Therefore, need of the hour is to identify the problem and that is of independent status of the statutory auditor. As long as auditors are appointed and remunerated by the enterprises directly, it is not going to be solved either the audit is doubled or tripled. CONCLUSIONS AND RECOMMENDATIONS Rising number of scandals have made the authorities to find out alternatives for better corporate governance. Dual audit is one amongst such alternatives where two separate independent statutory auditors are appointed to facilitate the audit task and produce two separate audit reports without having knowledge of one another s work. Though, it is the fact that dual audit will increase the creditability of the financial statements; and S. Murlidharan has made a very good attempt to prove that dual audit is a better option to be made applicable until the best option of appointing the auditors with the help of a dispassionate agency is hammered 230 P a g e

41 out; but, the main problem is of independent status of the auditor and that is not going to be achieved unless and until the appointment and payment of remuneration of the auditors is made independent of the company for which he is working. Therefore, if dual audit is made applicable and enterprise remains the appointing and remunerating authority in case of both the so called independent auditors, no improvement in the situation can be contemplated. As they would be independent of one another but not from the company who is appointing and remunerating them. Furthermore, possibility of collusion between two of them is not even denied by supporters of dual audit. On the other hand, the dual audit is expensive in terms of time, cost and effort is also accepted by its supporters. Hence, the need of the hour is to improve the existing audit environment where it is said auditors are appointed by the shareholders of the company in its AGM but they are subservient of the company s management actually. Furthermore, the comparison between joint audit and dual audit is baseless from the very beginning as joint audit is needed in case of large companies where number of transactions is too large to be handled by one single auditor. When two auditors would be working separately for a similar enterprise, wouldn t they be requiring help of joint auditors in the audit of big companies especially and moreover separately? It would also lead to increase in the demand of auditors, which would virtually be doubled. The number of public companies to be audited by a statutory auditor is fixed. Therefore, ICAI will be required to change the present law or to decline the standards for an individual to become a qualified chartered accountant. Similarly, will dual audit eliminate the need of peer review? As independent status of the auditor is an essential for this profession, peer review is also an essential. Though, it can be made more effective by introducing some disciplinary mechanism as acknowledged by the participant auditors themselves in majority. Sound system of internal control in an enterprise is the backbone of statutory audit. Henceforth, steps are inevitable to make installation of system of internal control not only a necessity but also efficacy of internal control should be insured as a result of the views obtained from the participant auditors. Therefore, number of plans being prepared to strengthen the internal audit in the Indian enterprises should not remain in black and white rather immediate course of action is desirable. Thus, instead of making external audit dual, need of the hour is to remove the weaknesses in the present audit system. Some of the operational suggestions are enlisted in this regard as follows: Appointment procedure of auditors should be adopted that can facilitate better independence. For example, government that makes the appointments of auditors itself on behalf of entities in various organizations where audit is a legal requirement can establish such an independent private agency. Standards may also be required to be prescribed in such appointment. Remuneration of statutory auditors should also be fixed by an independent private agency created by government and payment should be made in such a manner that enterprise is involved indirectly only. It would help in preventing any possibility of collusion between client and auditor. Immediate steps to make internal audit strengthen in Indian enterprises are inevitable, i.e., making internal audit independent of management; identifying it as a distinct profession; compulsion of internal audit in defined size and type of organizations and other options can be given a serious thought and decisions can be taken accordingly. Peer review should be made more effective by including some disciplinary mechanism in it. Rotation of statutory auditors after a specific period of time is also a plausible solution, i.e., in New Company Bill, 2011, a provision for rotation of auditors after every five years is already there. Efforts should be made to check the assesse in unorganized sector. Liabilities of auditors who do not present a fair and true picture must be made more stringent. REFERENCES 1. Agrawal, Anup, & Chadha Sahiba. (2004). Corporate Governance and Accounting Scandals. Retrieved from 2. Aurelia, Stefanescu. (2008). Tridimensional Approaches of the Internal Audit: Private, Public and Banking System. Retrieved from 3. Bhayani, Rajesh. (2009, January 16). Satyam Scam: Banks, Internal auditors under SEBI s Scan. Mumbai. 4. Classification of the Auditing and Assurance Standards in Accordance With Preface to the Standards on Quality Control. Retrieved from 5. Desai, Vikram. (2006). An Analytical Model for External Auditor Evaluation of the Internal Audit Function Using Belief Functions. Retrieved from P a g e

42 6. Ghosh, Aloke, & Kallapur, Sanjay. (2004). Audit and Non-Audit Fees and Capital Market Perceptions of Auditor Independence. Retrieved from 7. Gupta, Renu, & Bhanu, Murthy K. V., (2012, Dec-Feb). Internal control System in Indian Enterprises: An Assessment. KKIMRC International Journals-Human Resources Management, 01(02). 8. Gupta, Renu. (2008). Perceptions of Auditors on Various Aspects of Statutory Audit (Unpublished M. Phil. Thesis). University of Delhi. 9. Gupta, Renu. (2011). A Critical Review of the Definition of Audit with Special Reference to AAS 1 (SA 200). Retrieved from Hoitash, Rani, & Hoitash, Udi. (2007). Internal Control Quality and Audit Pricing. Retrieved from Jha, Aruna. (2009) Auditing. New Delhi: Taxmann Allied Services Private Limited. 12. Jha, Aruna. (2005). Students Guide to Auditing (4 th ed.). New Delhi: Taxmann Allied Services Private Limited. 13. Krishnamoorthy, Ganesh, Cohen, Jeffrey R., & Wright, Arnold. (2008). Waste is our Business, inc: The importance of non-financial information in the audit planning process. Retrieved from Mada, K. U. (2010, March 28). Dual Audit. The Hindu Business Line. 15. Murlidharan, S. (2009, February 12). Internal Auditor from Within and Without. Business Line. Retrieved from Murlidharan, S. (2009, February 5). Dual audit could make for a Healthy Duel. Business Line. Retrieved from Murlidharan, S. (2010, April 1). Dual Audit is a Healthy Solution. Business Line. Retrieved from Pagare, Dinker, & Gupta, Naresh. (2004). Principles and Practice of Auditing( 9 th & 10 th ed.). New Delhi: Sultan Chand and Sons. 19. Rawat, D. S. (2005). Students Guide to Auditing Standards (4 th ed.). New Delhi: Taxmann Allied Services Private Limited. 20. Spicer, & Pegler. (1985). Practical Auditing. UK: Butter Worth London. 21. Tandon, B. N. (2002). Practical Auditing (Handbook) (13 th ed.). New Delhi: S. Chand & Company Limited. ***** 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. 232 P a g e

43 INTEGRATED REPORTING: A TOOL FOR SUSTAINABLE BUSINESS GROWTH S. B. Akash 7 H. Y. Kamble 8 ABSTRACT Integrated accounting is a process of communicating information about economic and non economic activities of organization to its stakeholders and it is a source through which organization able to discovering the causes of success and failure of business. Integrating accounting plays vital role in business and it provides economic and non economic information to interested groups to satisfy their needs and it also a tool in the hand of the management to take rational and appropriate decision about organization activities. Here an attempt is made to study the strength, weaknesses, opportunities and threats of integrated reporting accounting. Integrated Accounting, Business, Integrated Reporting etc. INTRODUCTION KEYWORDS Integrated accounting is a process of communicating information about economic and non economic activities of organization to its stakeholders and it is a source through which organization able to discovering the causes of success and failure of business. In order to achieve this, every business organization needed adequate and acceptable accounting system. Proper accounting system provides fair and acceptable rules for record, measure, valuation and disclosures. In addition to that good accounting system have different role viz., to improve the credibility and performance of organization, guidelines to attain the requirements of different parties like investors, management, auditors, creditors, government, accountants and other parties those who directly or indirectly get the benefits of organization, it helps management to take rational decisions about economic and non economic activities of organization etc. However, due to globalization many changes has taken place in corporate sectors like rapid growth of international trade, internationalization of firms, the developments of new communication technologies, the emergence of international competitive forces, capital movements between countries, international investment etc. However, integrated accounting system helps communicating how the organization creates value and its impact on the environment and the community in which it operates, and in turn, how the environment and the community impact on its business, embedding sustainability in its operations and strategy. It helps communication of information to the stakeholders, to enable them to assess the organization s ability to create and sustain value in the short-term, mid-term and long-term. CONCEPT OF INTEGRATED REPORTING The current business accounting system largely on financial in nature and its aim is to; create information to investors and stakeholders. Non-financial information, viz., environmental, social and corporate governance measures, is important to know the clear picture of organization as well as to facilitate a holistic understanding of the organization. However, the main objectives of integrated reporting is to bring together all material information about an organization s viz., strategy, governance, performance and prospects etc. The integrated reporting is a systematic process, which deals with record and delivered to stakeholders about economic and non economic results of organization. In other words integrated report deals with to speak about overall picture of organization like strategy, performance and activities of the organization in order to assist stakeholders to assess the capability of the organization to create and sustain value over the short, medium and long term. Thus it is clear that from the above, integrated reporting refers to the integrated representation of a company s performance in terms of both financial and non-financial results and it ensures greater context for performance data, clarifies how sustainability fits into operations or a business, and may help embed sustainability into organization decision making. However, an effective integrated report reveals information about organization s ability to create and sustain value is based on financial, social, economic and environmental systems and by the quality of its relationships with its stakeholders. The integrated report should be written in clear and understandable language in order for it to be a useful resource for stakeholders. ELEMENTS OF INTEGRATING REPORTING Integrated reporting is systematic and new approach to accounting which ensures the linkages between an organization s strategy, governance and financial performance and the social, environmental and economic context within which it operates. However, the following are the important elements covered the integrated reporting: Overall view of organization and business strategies: It provides what is organization, what does the organization do how does it create and sustain value in the short, medium and long term etc. Strategic purpose and objectives: The strategic purpose and objectives reveals clear cut information about what are the long term objectives and goals, it reveals why the organization is exists and where does the organization want to go etc. 7 Associate Professor, Department of Commerce, Rani Channamma University, Karnataka, India, akash_pgc06@rediffmail.com 8 Professor and Chairman, Department of Commerce, Rani Channamma University, Karnataka, India, hykamble@gmail.com 233 P a g e

44 Challenges and opportunities of business: It reveals information about aspects like what environment good for business, in which circumstances the organization operates, what are the opportunities and threats of controllable business environment and what the possible ways the organization have to get the competitive advantages over competitors. Governance and ethics: It plays dominant role in business survival and success, because, it provide set of rules and norms for conducting business, however, It reveals organization s governance structure, and how does governance and ethical support the strategic objectives of the organization. Prospects of Organization: It provides information about opportunities, challenges and uncertainties in future likely to encounter in achieving its strategic objectives and goals of organization. NEED FOR INTEGRATED REPORTING Integrative reporting is a comprehensive in nature which represents company s performance in terms of both financial and nonfinancial results. The following are the important reasons responsible for integrating reporting: 1. The main intension of integrated reporting is to develop a single report which considered financial and non-financial performance information in one document. 2. The present reporting model focuses largely on financial information, creating an information asymmetry for investors and stakeholders. 3. The current model of reporting not ensures adequate information about non-financial information, including environmental, social and corporate governance etc. 4. To ensure a broader framework to assess organizational performance compared to traditional reporting. 5. To ensures organization to understanding their activities and its relevance and its impact. 6. To provide adequate performance data, clarifies how sustainability fits into operations or a business, and may help embed sustainability into company decision making. 7. It needed to describe the alignment of business reporting with sustainability performance and business value. 8. It needed to disclose information about corporate responsibility of organization before stakeholders. 9. To disclose information about environmental, social and governance issues are having an increasing impact on companies' ability to operate with long-term viability and generate a profit. 10. To provide information to investors, shareholders and other stakeholders of the organization about how the organization link to strategy and the future value of the business. 11. To identifies and disclose the information that all industries and companies share in common viz., market overview, strategy and structure, managing for value, and performance etc. 12. It needed to provide information about workplace, community, environment and marketplace for external reporting purposes. 13. It needed to ensure dynamic management process for social, economic & environmental sustainability, mutually beneficial to the organization and its stakeholders. OBJECTIVES AND METHODOLOGY OF STUDY The brief objective of the study is to study the integrated accounting system pros and cons in different angle by adopting secondary method of research and primary method research. For primary method of research is concern the study collected information from the accounting professors, accountant and auditors in order to know the relevance of integrated accounting. For this purpose the study adopted convenient sampling method and selected 75 sample respondents. The secondary method of research is concern the study referred professional journals, reports, websites and books. Integrated Reporting: A SWOT Analysis Integrating accounting plays vital role in business and it provide economic and non information to interest groups to satisfy their needs and it also a tool in the hand of the management to take rational and appropriate decision about organization activities. However, here an attempt is made to study the strength, weaknesses, opportunities and threats of integrated reporting accounting. Strength of Integrated Reporting 1. It provides detail financial and non financial information about business organization that helps to know the overall picture of organization. 2. Integrated reporting combines the different strands of reporting into a coherent whole that explains about organization s ability to create and sustain value. 3. It shows the direction of business organization in respect of different activities of business and also determines the right direction for business. 4. It provides an opportunity to improve the interactions with internal and external- stakeholders of organization. 5. It provides information about social, economic and environmental related aspects of organization. 6. It gives information about company s sustainability vision and way for activities. 7. It helps to describing the social and environmental accounting policies and its role in protecting the interest of society. 8. It provides an opportunity to business to identifying material risks associated with social or environmental change. 9. It ensures that articulates the links between financial performance and sustainability of business. 234 P a g e

45 Weaknesses of Integrated Reporting 1. Inadequate accounting policies and rules for systematic integrated reporting. 2. Lack of senior management support, to ensure comprehensive integrated reporting because due to effective integrated reporting significant change in respect of communications, investor relations, finance, sustainability etc. 3. Lack of required skills and knowledge among accounting authority to integrate both financial and non financial aspects of organization. 4. Inadequate knowledge among accounting and management authority for application of integrated accounting information in business decision making. 5. Lack of research on integrated accounting practices hence, still most of the business community not yet realize the importance of integrated reporting. 6. Lack awareness among business communities about significance of integrated reporting. 7. There is no acceptable format for presentation of integrated reporting. 8. It is not compulsory to business communities to prepare and present before the stakeholders of organization. Opportunities of Integrated Reporting 1. It ensures meaningful assessment of the long-term viability of the organization s business model and strategy. 2. It provides required information to stakeholders to meeting the requirements of investors and other stakeholders. 3. It facilitates effective allocation of organizational resources in order to perform organizational activities properly. 4. It ensures an opportunity to improve risk management and cost efficiency of organization. 5. It provides more readily apparent linkage between environmental, social and governance performance and financial performance. 6. It provides competitive advantage through cost savings, operational efficiencies, brand differentiation and innovation. 7. It provides an opportunity to improve stakeholder relations by better addressing their needs and managing their expectations. 8. It helps to improve credibility with key stakeholders through transparent and independently assured integrated reporting. 9. It ensures an appreciation the organization s ability to create and sustain value is based on financial, social, economic and environmental systems and by the quality of its relationships with its stakeholders. 10. It provides a clear and concise representation of how an organization demonstrates stewardship and how it creates value, now and in the future. 11. It brings together the material information about an organization s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. Threats of Integrated Reporting 1. Resistance to change, mostly accompanied by the complaint that integrated reporting is an additional burden on existing reporting requirements. 2. Ensuring the governance structures and individuals involved in reporting understand what integrated reporting is, what their roles are and how it differs from traditional reporting etc. 3. Lack of adequate regulation for effective presentation of integrated reporting. 4. Additional work load to accounting authority like accounting department, audit committee etc. 5. There is no guarantee of integrated reporting helpful to ensure right and proper business decisions. 6. Lack interest of business communities to change the existing system of accounting practices. 7. Lack of mechanisms for revising legislation, regulation and lack of leadership, political will, coordination, time, resources, for develops effective integrated accounting system. 8. Integrated reporting will cover new and evolving subjects and will have a more strategic focus. The resulting concerns of management, those charged with governance and assurance providers about liability, fiduciary duties. MAJOR FINDINGS OF STUDY 1. Amongst the sample respondents more than 80% of the respondents opined that integrated reporting is good for business development, because it facilitates manage the customer, provide justice to owners, society and also those who have directly or indirectly get the benefits of organization. 2. Most of the respondents stated that integrated reporting will display their stewardship not only of financial capital, but also of human, natural, social and other capitals, which is likely to align with the interests of many civil society and other interest groups. 3. Out of 75 sample respondents 55 argue that integrated reporting increases the ability of management to take right business decision as compared to traditional accounting, which turns to get competitive advantages over competitors. 4. Most of the sample respondents felt that stakeholders will obtain more value from the integrated report than the traditional report. 5. Nearly 85% of sample respondents opined that, there is a more internal benefit to organization to manage the organization according to changing business environment and also it allows them to relook at their business as usual. 6. About 75 % of the respondents opined that there are no adequate laws and norms for integrating accounting and no pattern for the same. 7. More than 83% of sample respondents opined that integrated reporting facilitates greater emphasis on information about the future. This will assist investors in assessing the organization s ability to generate future cash flows. 235 P a g e

46 8. Amongst sample respondents 80% opined that integrated reporting will support more effective capital allocation across the economy generally and, to the extent that integrated reporting supports capital flowing to those organizations that are responding most effectively to future challenges, can encourage the investment necessary to respond to issues such as energy security, food scarcity and climate change. 9. Majority of the sample respondents felt that integrated reporting helps to business communities to identify risks and manage the risk through effective decision. 10. Among sample respondents most of them argue that integrated reporting provide variety of information relating to business can support effective action by policy-makers and regulators as users of that information. 11. Most of the sample respondents opined that effective integrated reporting help to current and prospective employees will be able to gain an integrated perspective on the future prospects of their employer. They will also be better able to discern whether their employer s values are consistent with organization or not. 12. Majority of the respondents felt that proper integrating reporting allows employees to gain a better understanding of how their performance links to the objectives of the organization and to identify how they contribute to the ability of the organization to create and sustain value over time. 13. Most of the sample respondents argue that integrated reporting makes more effective investment decisions, better longterm investment returns and more effective capital allocation etc. CONCLUSIONS Globalization modified the scenario of international business due to this reasons the international business getting better position over a period of time. In order to get the benefits of globalization and to ensure transparency in all activities of business the organization needed integrated accounting, because integrated reporting plays different role under changing business environment viz., it provide more and best information about organization to stakeholders, adequate and accurate non-financial information, higher levels of trust with key stakeholders through integrated reporting, better resource allocation decisions, including cost reductions, enhanced risk management, better identification of opportunities, greater engagement with investors and other stakeholders, including current and prospective employees which improves attraction and retention of skills, lower reputational risk, lower cost of, and better access to, capital because of improved disclosure and development of a common language and greater collaboration across different functions within the organization. However, the adoption and preparations of integrated reporting not an easy task it have challenges like an additional burden on existing reporting requirements, lack of clear cut format of integrated reporting, inadequate evidence for validity of integrated reporting in business decision making, lack of accounting norms for preparation of integrated reporting, additional burden to accounting authority, inadequate knowledge about uses of information for decision making, lack of research to tell about role of integrated reporting and how it differ from traditional report, inadequate senior management support, to ensure comprehensive integrated reporting and insufficient skills and knowledge among accounting authority to integrate both financial and non financial aspects of organization for effective decision making. However, the business communities have big opportunity to prepare proper integrated reporting through by keeping in mind various aspects viz., organizational function, who are the stakeholders, expectations of the stakeholders, governance of the organization, organization s strategic objectives and how they relate to other components of its business, the report should highlight the relationship between the components of an organization s business activities,, management s expectations about the future, and the prospects and uncertainties it faces, disclosure about the nature and quality of the organization s relationships with key stakeholders, and how their issues are handled and addressed and the report should provide concise, reliable, and relevant information to help assess the organization s ability to create and sustain value in the short and long-term. REFERENCES 1. Eccles, R. G., & Krzus, M. (2010). Integrated Reporting for a effective strategy (Report). USA, New Jersey: Wiley. 2. Kneal, C. (2002). Corporate Governance 2002: Summary of code of corporate practices and conduct (King II Report). 3. Anderson, A., Herring, P., & Pawlicki, A. (2005, June). EBR: The Next Step. Journal of Accountancy, USA: New Jersey. 4. Ibid, Wilis, A. (2007, November). Transforming Corporate Reporting in 2007 Summit on the Future of the Corporation (Paper Series on Corporate Design) ***** 236 P a g e

47 A STUDY OF MARKET DRIVEN VERSUS NON-MARKET DRIVEN MERGERS: AN EMPIRICAL ANALYSIS OF BANK MERGERS IN INDIA Anam Charan Raul 9 ABSTRACT Mergers are important corporate strategy actions that, among other things, aid the firm in external growth and provide it competitive advantage. After the adoption of liberalization, privatization, and globalization in 1991, the banking Industry in India has been in the process of transformation and consolidation. In this study we empirically evaluate the synergistic gains from bank mergers by dividing them into two categories of forced mergers (Non-market Driven) and market driven mergers. The empirical results indicate that markets have reacted negatively to the announcement of forced mergers (non-market driven), while the reaction has been positive to that of market driven mergers. In line with the market expectation, forced mergers have not added any value to profitability variables of merged banks in the post merger period. Although market driven mergers have not immediately improved the profitability of merged banks, but they have improved the balance sheet variables of merging banks and have provided these banks an edge over the competitors in terms of geographic dispersion, influence in new regions where the merging entity lacked presence and extended product portfolios and thus have provided a better vehicle for growth. KEYWORDS Forced Mergers, Mergers & Acquisitions, Banks, Market Driven etc. INTRODUCTION The banking Industry in India has been in the process of transformation and consolidation since the adoption of liberalization, privatization, and globalization in Keeping in view the technological changes and the inefficiency of banks in India, Narsimaham Committee-II recommended mergers and acquisitions as the only viable route to strengthen banks in the emerging scenario. Since then mergers and acquisitions have become important for the Indian banking system and the banks are in a race to increase their sizes in order to enhance their asset bases and profits, which also help them to match the global benchmarks. Thus, the key motivations behind mergers and acquisitions in India are to have enhanced size to enjoy economies of scale and scope, access to large amount of funds, wider penetration, and global presence. While putting forward the rationale for bank mergers in India, the Finance Minister Mr. P. Chidambaram has often said that there is a need for the banks to think big and act globally because size also matters along with efficiency and each bank should become a big powerhouse by itself. With different authorities advocating merger of banks, a question arises whether any value has been added in the past as a result of these or not. REVIEW OF LITERATURE Neely (1987), found that merging banks were able to enjoy abnormal returns due to the anticipated improvements in the operations of merged bank. Rhoades (1993) reviewed the earlier literature on bank mergers and suggested that the main source of value creation was the increased efficiency achieved through significant cost cutting. But due to the non-availability of proper benchmark these efficiency gains were not empirically visible. Berger and Humphery (1994) examined the impact of consolidation of European banks. They concluded that there were no significant cost efficiency gains from mergers and acquisitions that took place in Europe. The reason was that larger banks that underwent mergers and acquisitions in Europe did not have lower average costs and experienced very insignificant scale and scope economies as they grew further. Moreover, potential to reduce overall cost by improving X-efficiency (managerial ability) was not realized. They also found that merger/concentration resulted in slightly less favorable prices for customers, but had little effect on the overall profitability of the European banks that undertook mergers and acquisitions. Becher (2000) studied a large sample of 558 bank mergers over to determine the wealth effect of bank mergers on merging banks shareholders. He found that the shareholders of merging banks had gained significant positive returns on the announcement of bank merger. Schenk (2000) found that main reason behind value destruction in bank mergers was not the result of failed implementation technique; rather the existence of strategic interdependence under uncertainty that compelled management teams to undertake mergers even when it was known that it was very unlikely that these would increase real performance. These mergers were intended to create strategic comfort rather than economic wealth of shareholders. Gugler et al. (2001) examined the effect of mergers on profitability and sales of merged bank around the world over fifteen years. They found that across different countries bank mergers have resulted in significant increase in profits either by increasing 9 Assistant Professor, RIMS, Odisha, India, anam_roul@rediffmail.com 237 P a g e

48 market power or by improving efficiency of merging banks as compared to non-merging control group of banks (on the basis of sales and assets). Gjirja (2003) examined the efficiency effect of bank mergers in Sweden. He concluded that although, bank mergers generate substantial efficiency gains in the form of reduced operating costs, enhanced diversification of risks, and better management quality, but majority of the merged banks failed to realize these efficiency gains due to the fact that very often the acquirers underestimate the post acquisition challenges such as the task of integrating systems, closing branches and retraining staff. Moreover, the difficulties and the costs associated with merging different corporate cultures hamper the management of the new organization and lead to disappointing results. RESEARCH METHODOLOGY In order to evaluate the market reaction towards the announcement of bank mergers, firstly, the standard event study methodology as pronounced by Fama (1976) and Fama and MacBeth (1973) has been applied. Thereafter the paired sample technique has been applied to measure the post merger financial performance of these banks to find out whether the market has correctly assessed the worth of the merger at the time of its announcement or not. Moreover, in order to get better insight into the impact of mergers on the shareholders wealth and on the performance of merging banks in the post merger period entire sample set of bank mergers were divided into two categories, namely 1) the banks whose mergers were not market driven or where the mergers were forced by Reserve Bank of India on the merging banks in order to rehabilitate a sick bank; and 2) banks whose mergers were market driven, that is, the mergers that were initiated by the merging parties on their own on the basis of potential synergies that were to be realized by combining both the banks. Sample Selection for Event Study For assessing the impact of merger announcement on the shareholders wealth of acquiring banks, all the mergers between the banks announced during 1st April, 1997 till 31st March, 2007 were considered. Out of the total 15 bank mergers announced during the study period, 8 bank mergers formed the sample set after applying the following restrictions. Firstly, we eliminated those acquiring banks whose merger announcement dates and the share returns were not available for the study period. Also, in order to obtain a clean data set, in case the acquiring bank acquired two banks consecutively within a period of one year, only the larger merger (in size) was included in the sample set. Finally, the sample was divided into market and non-market driven mergers, which resulted in a final sample of 4 market driven mergers and 4 non-market driven mergers. Table-1: List of Acquiring and Target Banks For Market and Non-Market Driven Mergers for Event Study Acquiring Banks Acquired Banks Announcement Date of merger Market driven/ Non-Market driven Oriental Bank of Commerce Global Trust Bank Non-Market Driven Bank of Baroda Bareilly Corp. Bank Non-Market Driven Limited. HDFC Bank Times Bank Market Driven ICICI Bank ICICI Limited Market Driven Standard Chartered Bank Grindlays Bank Market Driven Centurion Bank Bank of Punjab Market Driven Federal Bank Ganesh Bank Non-Market Driven IDBI Bank Limited United Western Bank Non-Market Driven Sample Selection for Post Merger Financial Performance For evaluating the long-term impact of mergers and acquisitions upon the performance of merging banks, all mergers between banks in India during were considered for the selection of final sample. Some of the bank mergers have been excluded due to the non-availability of financial data. Furthermore, in order to obtain a clean data set only those banks have been taken which did not engage in any other merger or acquisition within a period of 3 years (including the year of merger). Moreover, if a bank has taken over more than one bank in a year, only the first merger has been taken. Finally, out of the final sample of 10 mergers, 3 are market driven mergers, namely the merger of Times Bank with HDFC Bank, the merger of ICICI Limited. with ICICI Bank and the merger of Grindlays Bank with Standard Chartered Bank whereas others are forced mergers. Database Used Financial data as well as data regarding daily returns of individual stock of banks has been obtained from PROWESS, the database software developed by Centre for Monitoring Indian Economy. Moreover the official web site of Reserve Bank of India has been consulted to obtain the list of mergers and acquisitions. Also, the information regarding the first public announcement date (event date) and final outcome date of all the mergers has been obtained by scanning the two leading financial dailies namely, The Economic Times and The Financial Express/World for the years P a g e

49 Method of Analysis Event Study In order to capture the systematic abnormal price movements that are interpreted as prima facie evidence of market s reaction to announcement of an event (bank merger in this case), the risk and market adjusted variant of standard event study methodology which is better known as the market model has been employed, and it is depicted as follows: Rjt= áj + âj Rmt + åjt t = -250 to -51 (estimation window/period) Where, Rjt= the return of the particular stock j on the day t; áj,= the intercept term which measures the return over a particular period not explained by market. âj= measures the risk of the security or the sensitivity of firm j s return to that of market. Rmt = the return on the BSE (30 scripts) index on the day t; åjt= the unsystematic component of firm j s return; t = -250 to -51 (The estimation period used in the study is from -250 to -51 days, yielding a total of 200 observations). For applying the model first of all event date has been selected which is the date on which the information regarding the bank merger first appeared in the newspapers that is, the first public announcement date. Then a clean period has been chosen to estimate the parameters (á and â) of the market model. The estimation period used in the study is from -250 to -51 days, yielding a total of 200 observations). After this, the estimated parameters have been used to calculate, predicted returns (R^jt = á j + âj Rmt + åjt) of the individual securities of various banks that have undergone mergers during the event period (-50 days to +50 days) that is, 50 days before the merger and 50 days after the merger. Then the residuals (excess returns) have been calculated for each security by deducting actual return on a particular day during study period from the predicted returns. Thus residuals have been calculated as follows: R= Rjt- Ř jt Furthermore, the residuals have been averaged across the banks to obtain average residuals (average excess returns) for each day in the event period. The average residuals are as follows: AR = ÓR n, where n is the number of securities of the banks in the sample set. Finally average residuals have been cumulated over the entire event period to obtain CAR. For example the CAR from the day 0 to +5 is as follows: 5 CAR = t0 AR In order to comment upon the significance of CARs the following test statistics have been employed: Test of significance of cumulative average residuals= CARt/äArt where ARt is average residuals of all securities on day t. äart is the ä of AR over the estimation period (-250 to -51) and is given as: AR t ( AR t AR ) n 1 t 2 Where n is the number of days of estimation period (here 200 days); and average: ARt = t / 200. ANALYSIS AND INTERPRETATION Event Study The results of event study have been summarized in Table 2 along with Figure 1, 2 and P a g e

50 Table-2: Cumulative Average Residuals (CAR), Measuring the Announcement Effect for Different Event Periods for Acquiring Banks Total Samples Non-Market Driven Mergers Market Driven Mergers Period Change in CAR t-test Change in CAR t-test Change in CAR t-test -50 to to to to to to to to to to to to Figure-1: Cumulative Average Residuals (CAR) for Non-Market Driven Mergers Number of Days Table 1 and Figure 1 shows the results of market reaction towards the acquiring banks stocks associated with the announcement of bank mergers. It can be seen the CAR for the non-market driven mergers have declined from the 10th day before merger to 5th day after merger. CAR for day -10 to 0 day is 1.08 and that for day 5 to day 0 is On the day of merger announcement and 1 day after, that is, for day 0 to day +1 the CAR is 0.19 while for day 0 to day +5 is Thus from successively declining trend of CAR, from 10th day before merger to 5th day after merger, it is clear that the market reaction has been negative in case of forced mergers. But this negative response of the market is not statistically significant. Table 1 and Figure 2 illustrate that in case of the market driven mergers, the CAR has shown the rising trend from 10th day before merger that has sustained till 10th day after the announcement of a bank merger. CAR for day -10 to day 0 is 3.88 which have increased to 5.21 for the day -5 to day 0. On the day of the announcement of bank merger and one day after the CAR has further enhanced significantly to Similarly for the day 0 to +5 day (12.39) and day 0 to +10 day (14.14), CAR has shown a consistent rising trend and the rise is statistically significant. Hence, it shows that the market reaction to the announcement of the market driven mergers has been positive. Figure-2: Cumulative Average Residuals (CAR) for Market Driven Mergers 240 P a g e

51 Figure-3: Cumulative Average Residuals (CAR) for Total Sample of Mergers As regard the total sample set, as shown by Table 1 and Figure 3, it is evident that CAR has shown the rising trend from 10th day before merger till 10th day after merger announcements. The CAR for the day -10 to day 0 is 2.55 which have increased to 3.62 for 0 to +1 day. CAR for the day 0 to day +5 (6.80) and of day 0 to +10 day (8.54) has further shown the rising trend which is statistically significant. OBSERVATIONS Table 1 and Figure 1 shows that the market reaction has been negative in case of forced mergers. But this negative response of the market is not statistically significant. Table 1 and Figure 2 illustrate that in case of the market driven mergers, the CAR has shown the rising trend and the rise is statistically significant. Hence, it shows that the market reaction to the announcement of the market driven mergers has been positive. As regard the total sample set, as shown by Table1 and Figure3, it is evident that CAR has shown the rising trend from 10th day before merger till 10th day after merger announcements and the rising trend which is statistically significant. From the above discussion it can be concluded that the market reaction has been positive to the announcement of the market driven mergers, while it is sparsely negative for the non-market driven mergers. The total sample has shown a positive market reaction to the announcement of bank merger. If the trend of CAR for the market driven mergers is compared with that of the total sample, the trend is almost similar. The reason is that in the total sample a significant positive market reaction of the market driven mergers has overshadowed an insignificant negative market reaction towards the non market driven mergers. Another reason for an insignificant negative market reaction to these forced mergers can be that the target banks that were merged were of very small size and the market accounted for the fact that they would not destroy the profitability and financial performances of the acquiring banks to a large extent. CONCLUSIONS From the above analysis it can be concluded that mergers are favorable for banks, in terms of improving shareholders wealth and financial positions, only when they are market driven. This is the reason why markets have reacted positively to the stocks of these acquiring banks and have attributed statistically significant returns to the shareholders as depicted earlier by positive and highly significant CARs. On the other hand, when mergers are forced by regulatory agencies, they have weakened not only the financial performance of merging banks as compared to the non-merging control group of banks, but have also deteriorated the wealth of shareholders during announcement period. Hence, it is suggested that the government instead of forcing mergers on banks, should encourage them to initiate the moves on their own on the basis of expected synergies so that the merging entities and the society at large may derive its benefits. REFERENCES 1. Bagchi, A. K., & Banerjee, S. (2005). How strong are the arguments for bank mergers? Economic and Political Weekly, 40(12), Becher, D. A. (2000). The valuation effect of bank mergers. Journal of Corporate Finance, 6, Berger, A. N., & Humphrey, David B. (1994). Bank scale economies, mergers, concentration and efficiency: The U.S. experience (Working Paper No ). University of Pennsylvania: Wharton Financial Institution Center. Retrieved on April 26, 2006 from P a g e

52 4. (2001, Octber 25). Boards to Consider ICICI merger with ICICI Bank. Business Line. Retrieved on September 10, 2007 from 5. (2002, September 3). Standard Chart, Grindlays Merger Completed. Business Line. Retrieved on June 17, 2006 from 6. Fama, E. F. (1976). Foundations of Finance. New York: Basic Books. 7. Fama, E. F., & MacBeth, J. D. (1973, May-June). Risk, Return and Equilibrium: Empirical test. Journal of Political Economy, 71, Gjirja, M. (2003). Assessing the efficiency effects of bank mergers in Sweden- A panel based stochastic frontier analysis (Paper Presented at Second North American Productivity Workshop). Sweden, Goteborg University: Department of Economics. Retrieved on June 13, 2006 from 9. Gugler, K., Muller, D. C., Yurtoglu, B. B., & Zulehner, C. (2001). The effects of mergers: An international comparison. (Discussion Paper No. FS IV 01-21), University of Vienna, Berlin. Retrieved on June 14, Houston, J. F., James, C. M., & Ryngaert, M. D. (2001). Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders. Journal of Financial Economics, 60 (2-3), Lakshminarayanan, P., Agarwal, S., & Shroff, F. T. (2005). Consolidation in the banking industry through mergers and acquisitions. IBA Bulletin (pp, ). Retrieved on June 17, 2006 from Neely, W. P. (1987). Banking acquisitions: Acquirer and target shareholder returns. Financial Management, Rhoades, S. A. (1997). An overview of case studies of nine mergers. Journal of Banking and Finance, 22, Schenk, H. (2000). On the performance of banking mergers: Some propositions and policy implications. (Paper Presented at UNI Conference on Mergers and Takeovers: Implication on employment, consumers and shareholders). London. ***** 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

53 AN EMPIRICAL STUDY ON INDIAN PHARMACEUTICAL INDUSTRY: LIQUIDITY, PROFITABILITY AND MANAGEMENT EFFICIENCY Jaykumar R. Joshi 10 ABSTRACT Liquidity & profitability are very important components of the financial management. It s directly related to the efficiency of the management. It is also concern with the financial managerial decision. Usually it is found that liquid assets are the most integral part of the business, while profitability is connected with trustworthiness of the outsiders. Management compulsorily deals with those two factors for the smooth operation of the business. Thus the study focus to the make item wise analysis of liquidity and profitability for Indian pharmaceutical sector using the percentage and examines the impact of liquidity & profitability on management efficiency by using statistical tools such as correlation analysis for the study period of 2008 to In the analysis liquidity ratio such as current ratio, quick ratio, inventory turnover ratio, debtor s turnover ratio, investment turn over, return of net worth and return on capital employed has been used. The study found that inventory turnover ratio showed a high degree of negatively correlated with return on net worth & return on capital employed, where the investment turnover ratio are negatively correlated with return on net worth. Other variables are positively correlated but not connected properly. Hence the study of the impact of liquidity ratios & profitability ratios on management efficiency shows negative impact. KEYWORDS Current Assets, Capital, Management Efficiency, Liquidity, Profitability, Net Worth, Pharmaceutical etc. INTRODUCTION The funds required for the fulfilling the obligation for the goods or services purchased or produced by the organization are considered as a liquidity of the business, where the needs of the share holder are concern with the matter of profitability. All together combined with these two factors are called as management efficiency. Generally a class of financial metrics that used into determines a company's ability to pay off its short-terms debts obligations. According to I. M. Pandey: Liquidity and Profitability depicts efficiency of Management. This result indicates that there is certain level of liquidity & profitability are the essential part for the management to run the business operations efficiently. It is a possible to increase organizations profitability through more efficiency in liquidity management. PHARMACEUTICAL INDUSTRY IN INDIA The Indian pharmaceutical Industry has witnessed a robust growth of around 14% since the beginning of the11 th plan in 2007 from about Rs Cr. to over Rs1 lac Cr. in comprising some Rs 62,055 Cr. of domestic market and exports of over Rs 42,154 Cr. This also amounts to around 20% of total volume of global generics. However, the Industry is quite fragmented and comprises of nearly 10,500 units with majority of them in unorganized sector. Of these, about 300 to 400 units are categorized as belonging to medium to large organized sector with the top 10 manufacturers accounting for 36.5% of the market share. As regards the Bulk drugs component of the industry, the market is around Rs 42,000 Cr. giving it a share of around 50% of the total domestic market. This gives the Indian Bulk Drug industry a share of about 9% of the global bulk drug market. India is among the top 20 pharmaceutical exporting countries and the exports have grown very significantly at a CAGR (Compounded annual growth rate) of around 19% in the 11 th plan period. Indian drugs are exported to around 200 countries in the world with highly regulated markets of USA, UK etc. The major therapeutic categories of export are anti infective, anti asthmatic and anti hypertensive. The Indian pharmaceutical industry has acquired 3 rd position in terms of volume & stands 14 th position in terms of value worldwide. As per statistics of the pharmaceuticals, Ministry of Chemical & Fertilizer; the total turnover of India pharmaceutical industry from 2008 to 2009 was US $ billion, while in domestic market was worth US$12.26 billion. Sale of all types of medicines in the country is expected to reach around US $ billion by The major seven market players (like Sun Pharma, Ranbaxy, Aurobindo Pharma, Dr. Readdy s, Lupin, Cadila & Glanmark) in Indian pharmaceutical industry have acquired 72% of the market share. It means these are the main participant Kof the industry. OBJECTIVES OF STUDY Liquidity management is essential part of financial management. Usually it is found that as compared short term liquidity requirement to maintain the long term liquidity is a difficult task for the management. 1. To make item wise analysis of each component of Liquidity & Profitability using percentage. 2. To examine the impact of Liquidity & Profitability on Management efficiency by using statistical tool such as correlation analysis. 10 Assistant Professor, Anand Institute of Management, Gujarat, India, joshi_jaykumar1@gtu.edu.in 243 P a g e

54 RESEARCH METHODOLOGY In this paper an efforts has been made to make an empirical study of Indian pharmaceuticals industry. This study based on the selected companies from the Indian pharmaceuticals & these companies has been defined with collative market share of the whole industry. The define companies for this study are Sun Pharma, Ranbaxy, Aurobindo Pharma, Dr. Readdy s, Lupin, Cadila & Glanmark. The study has limited for the period of 2008 to The following are the methods and techniques adopted for collection of data and their analysis in this study. Data collection The data of Indian pharmaceuticals industry has been collected from the secondary source of information such as annual reports of the company and financial software (prowess & capital market line software) data base for the period of 2008 to Variables In the study, liquidity ratio such as current ratio, quick ratio, inventory turnover ratio, investment turnover ratio, debtors turnover ratio, return on NW & return on capital employed has been used. The statistical test such as simple correlation analysis has been applied to explain the relationship between liquidity & profitability ratio. The ratio can be explained below: Current ratio: Current Ratio/ Current liabilities, Quick ratio: Current assets Inventory / Current liabilities, Inventory turnover ratio: COGS/ Avg. inventory, Debtors turnover ratio: Total Sales / Avg. Receivable, Investment turnover ratio: Total sales/ Net worth + long term liabilities, Return on Capital employed: Net Income / Capital employed, Return on net worth: PAT/ Equity + retained earnings. DATA ANALYSIS AND INTERPRETATION The variable wise analysis of liquidity, profitability & management efficiency has compared with each other s & find out the result where of individual ratio shows some specific pattern during the 2008 to Table-1: Current Ratio Years Companies Sun Pharma Ranbaxy Aurobindo Pharma Dr. Readdy s Lupin Pharma Cadila Glanmark Total Mean Sources: Primary Research Work The above table1 indicates about the current ratio that shows increasing trend from 2008 to 2010 and from 2011 to 2012 its slightly decrease, but all the figures are grater then one that means most of the pharmaceutical companies maintain reasonable level of current assets for their regular requirement. Table-2: Quick Ratio Years Companies Sun Pharma Ranbaxy Aurobindo Pharma Dr. Readdy s Lupin Pharma Cadila Glanmark Total Mean Sources: Primary Research Work 244 P a g e

55 Hear from the above table -2 quick ratios also shows fluctuating pattern during the specified period (2008 to 2012) that clearly focuses on the matter of major pharmaceutical companies has concern with current assets other than the inventory. Again quick ratio is higher than 1.5 in each & every year so as compare to other sector it is a good sign in the pharmaceutical business. Table-3: Inventory Turnover Ratio (Times) Years Companies Sun Pharma Ranbaxy Aurobindo Pharma Dr. Readdy s Lupin Pharma Cadila Glanmark Total Mean Sources: Primary Research Work The inventory turnover ratio (table -3) has shows fluctuating trend from 2008 to 2012 still most of the pharmaceutical companies maintain reasonable level of inventory for the purpose of smooth operation. Table-4: Debtors Turn Over Ratio (Times) Years Companies Sun Pharma Ranbaxy Aurobindo Pharma Dr. Readdy s Lupin Pharma Cadila Glanmark Total Mean Sources: Primary Research Work During the period of 2008 to 2012 debtors turn over ratio (table-4) shows fluctuating trend for the selected companies from the pharmaceutical sector. The main reason behind for this pattern has been concern with different companies has adopted various types of credit policies for their working capital management. Table-5: Investment Turnover Ratio (Times) Years Companies Sun Pharma Ranbaxy Aurobindo Pharma Dr. Readdy s Lupin Pharma Cadila Glanmark Total Mean Sources: Primary Research Work The investment turnover ratio (Table-5) indicates the constant pattern during the specified time period, on an average major pharmaceutical companies are able to convert their net worth & long term liabilities five times higher total sales. It s a healthy sign for pharmaceutical business. 245 P a g e

56 Table-6: Return on Net Worth (%) Years Companies Sun Pharma Ranbaxy Aurobindo Pharma Dr. Readdy s Lupin Pharma Cadila Glanmark Total Mean Sources: Primary Research Work The basic trend shows in case of return on Net worth its continuous decreased during the period of 2008 to In 2012 Ranbaxy has making huge loss that s why overall returns on net worth has shows negative figure, remaining major market players are generated reasonable level of returns for their share holders through the properly utilization of funds. Table-7: Return on Capital Employed (%) Years Companies Sun Pharma Ranbaxy Aurobindo Pharma Dr.Readdy s Lupin Pharma Cadila Glanmark TOTAL Mean Sources: Primary Research Work Return on capital employed (table-7) indicate fluctuating pattern from the 2008 to 2012, overall average return % for the specified period. The judgment from the above calculation depicts major companies has generated higher return on their capital employed as compare to other sectors that means higher level of trustworthiness of their investors. IMPACT OF LIQUIDITY, PROFITABILITY ON MANAGEMENT EFFICIENCY The co-efficient of correlation between selected ratios relating to liquidity, profitability & management efficiency of selected companies of pharmaceutical sector is presented in Table 8. The initial ratios described from the above table 1 to 7. Most of the ratios are shows significant pattern in their movement during the study period. Hear in most of the cases there are significant positive relationships between different variables associated with the liquidity, profitability & management efficiency. The relationship between current ratio & return on net worth are positively correlated with R: (+) , while current ratio & return on capital employed are indicates high degree of association with R: (+) , that means both variables are significantly behave in a positive manner. Quick ratio is also positively correlated with the return on net worth & return on capital as demonstrated R: (+) & R: (+) respectively. Turnover ratio measures management efficiency with respect to the profitability. Inventory turnover ratio shows high degree of negative connection with return on net worth & low degree of negative connection with return on capital employed as demonstrated R: (-) & R: (-) respectively. Debtor s turnover ratio indicates negative relationship with return on net worth R: (-) due to liberal credit policies. Vice a versa at the same time debtor s turnover ratio shows positive relationship with return on capital employed R: (+) The high degree of negative correlation between investment turnover ratio and return on net worth R: (-) On the other hand it is also moderately associated with return on capital employed R: (+) The below (Table-8) result indicates that the liquidity, profitability & management efficiency are correlated (except inventory turnover, debtors turn over & investment turn over with net worth) among the major market participant of Indian pharmaceutical sector. 246 P a g e

57 Years Table-8: Co-efficient of Correlation (Value of R) Current Ratio Quick Ratio Inventory Turn Over Ratio Debtors Turn Over Ratio Investment Turn Over Ratio Return on NW Return on CE Total Mean SD R: Correlation of coefficient (+) (+) (-) (-) with return on NW (-) R: Correlation of coefficient with return on CE (+) (+) (-) (+) (+) Sources: Primary Research Work CONCLUSIONS The conclusion has been drawn from the present study shows positive and negative relationship between selected ratios in the area of liquidity & profitability used as proxy of management efficiency. High degree of positive correlation indicates the core competency of management while high degree of negative correlation shows inefficiency of the management. Hear the powerful contribution given in the area of current ratio & quick ratio indicates management efficiency in liquidity for the selected companies from the Indian pharmaceutical industry. On the other side some of the constraints faced by management in case of inventory management (inventory turnover), credit policies (debtors turn over) and effective management of their financial resources (investment turn over) due to price fluctuation in imported raw materials, high rotation of the business cycle and highly volatile financial market (stock market).overall conclusion drawn from the above statistics that management of pharmaceutical companies are not very efficient & effective. REFERENCES 1. Pandey, M. I. (2005). Financial statement analysis & cash flow analysis. Financial Management (9 th ed.). Vikas Publishing House, Prasanna, Chandra. Financial management Theory and practice ( ). Tata McGraw-Hill publishing company Limited. 3. Siddiqui, A. S. (2010). Financial analysis & accounting ratios (pp ). Comprehensive Accountancy, Laxmi Publications Private. Limited. 4. Syed, Azhar, & Ramesh, B. (2011, December). Working capital management and profitability-a case study of Andhra Pradesh Power Generation Corporation. International Journal of Research in Commerce & Management, 2(12), Retrieved from 6. Retrieved from 7. Retrieved from 8. Retrieved from ***** Editor-In-Chief Pezzottaite Journals, 24, Saraswati Lane, Bohri, Near Modern Dewan Beverages, Jammu Tawi , Jammu and Kashmir, India. (Mobile): P a g e

58 FUNDAMENTAL ANALYSIS AND STOCK RETURNS: INDIAN EVIDENCES Venkatesh C. K. 11 Ganesh L. 12 ABSTRACT This paper investigates the relationship between accounting information and stock returns of selected Indian stocks pertaining to Information Technology, Banking and Pharmacy sectors over the past ten years starting from 2001 to In this research work a simple financial score is designed to capture short term changes in firm s operating efficiency, Profitability and Financial policy. Investigating accounting information and stock returns is a method adopted in Fundamental analysis, which is helpful in predicting future stock returns and for explaining the momentum phenomenon in stock prices. For the purpose of this research work were chosen from Banking, Pharmacy and Information Technology. For a period of ten years the data pertaining to operating efficiency, profitability and financial policy was ascertained. All this data is then put into F SCORE as developed by Piotroski in the year The score values and market returns as provided by the companies were correlated to investigate the relationship between the score and the market adjusted returns. The goal of this paper is to show that investors can create a stronger value portfolio by using simple historical financial performance. KEYWORDS Fundamental Analysis, Portfolio, Banking, Information Technology, Pharmacy, Financial Statements, Return on Assets, Book to Market Ratio etc. INTRODUCTION The mobility and usage of assets determine the Economic development of a nation. Conducive Economic environment attracts investments, which in turn influences the development of the Economy. One of the essential criteria for the assessment of the Economic development is the quality and quantity of assets in a nation at a specific time. Real assets comprise the Physical and Intangible items available to a society. Physical assets are used to generate activity and result in positive or negative contribution to the owner of the asset. Intangible assets also result in a positive or negative contribution to the owner, but are different in that they do not have a physical shape or form. In fact, intangible assets help physical assets in generating activity. Intangible assets can be said to be behind the scene with respect to productive activities. Besides real assets, the Economy is supported by another group of assets called Financial Assets. The major component of the Financial Assets is cash; also some other examples of financial assets are Deposits, Debt Instruments, Shares and Foreign Currency Reserves. Assets in any Economy can thus be broadly grouped into Physical, Financial and Intangible assets, based on their distinct characteristics. Physical assets can be classified into fixed assets and working capital assets. Intangible assets are Goodwill, Patents, Copyrights, and royalties. In a Macro sense, financial assets are regulated by the Government of an Economy. Financial assets smoothens the trade and transactions of an Economy and give the society a standard measure of valuation. At the Macro level, financial assets represent the Currency/Future value of physical and intangible assets. The Current/Future value of financial assets on the Current/ Future return expectations from these financial instruments. The important component of such financial asset is Shares, which worldwide is accepted as a major financial asset to speculate and earn higher returns by the market participants. While doing such speculation one has to be more prudent by forecasting the future market developments. FUNDAMENTAL ANALYSIS Fundamental analysis is a method of finding out the future price of a stock which an investor wishes to buy. It relates to the examination of the intrinsic worth of a company to find out whether the current market price is fair or not, whether it is overpriced or under priced. It believes that analyzing the economy, strategy, management, product, financial status and other related information will help to choose shares that will outperform the market and provide consistent gains to the investor. It is the examination of the underlying forces that affect the interest of the economy, industrial sectors and companies. It tries to forecast the future movement of the capital market using signals from the Economy, Industry and Company. It requires an examination of the market from a broader perspective. The presumption behind fundamental analysis is that a thriving economy fosters industrial 11 Research Scholar (IGNOU, Maidan Ghari, New Delhi) & Assistant Professor, Government First Grade College, Karnataka, India, ckv_krishna@yahoo.co.in 12 Associate Professor, Institute of Management, Christ University, Karnataka, India, ganesh.l@chirstuniversity.in 248 P a g e

59 growth which leads to development of companies. Estimate of real worth of a stock is made by considering the earning potential of the company which depends on investment environment and factors relating to specific industry, competitiveness, quality of management, operational efficiency, profitability, capital structure and dividend policy. REVIEW OF LITERATURE The origin of Fundamental analysis for the share price valuation can be dated back to Graham and Dodd (1934) in which the authors have argued the importance of the fundamental factors in share price valuation. Theoretically, the value of a company, hence its share price, is the sum of the present value of future cash flows discounted by the risk adjusted discount rate. This conceptual valuation frame work is the spirit of the renowned dividend discount model developed by Gordon (1962). However, the dividend discount model valuation involves the forecast of future dividend payment which is difficult due to the changes in firm s dividend policy. Thus, the subsequent studies along this line of literature searched for the cash flow that is unaffected by the dividend policy and can be obtained from the financial statements. Ou and Penman (1989) use financial statement analysis of income statement and balance sheet ratios to forecast future earnings. The primary motivation for this research is to identify mispriced securities. However, these authors demonstrate that the information in the earnings prediction signals is helpful in generating abnormal stock returns. Fama and French (1992) show that value stocks (high book/market) significantly outperform growth stocks (low book/market). The average return of the highest book/market decline is reported to be one percent per month higher than the average return for the lowest book/market decline. Jagadeesh and Titman (1993) document that over a horizon of three to twelve months, past winners on an average continue to outperform past losers by about one percent per month. Lev and Thiagarajan (1993) use conceptual arguments to study their ratios. They demonstrate that the earnings prediction signals in variables like growth in accounts receivables relative to sales growth and gross margin rate are incrementally associated with contemporaneous stock returns and are significant in predicting future earnings. Joseph. D. Piotroski (2000) examines whether a simple accounting based Fundamental Analysis strategy, when applied to a broad portfolio of high Book to Market firms, can shift the distribution of returns earned by an investor. The research shows that the mean returns earned by a high Book to Market investor can be increased by at least 7.5% annually through the selection of financially strong high Book to Market firms. Pascal Nguyen, (2003) constructs a simple financial score designed to capture short term changes in firm operating efficiency, profitability and financial policy. The scores exhibit a strong correlation with market adjusted returns in the Current fiscal period and the same continues in the following period also. STATEMENT OF PROBLEM Analyzing the stock returns is a matter to contemplate among the equity researchers. To analyze the predictability of stock returns the researchers use various tools and techniques which might not give assured results. Therefore, to facilitate such prediction Academicians as well as the Equity Researchers have developed several innovative techniques and one such technique is F-Score as developed by Piotroski (2000). The current research work emphasizes on the work of Piotroski in the Indian context. The technique of F-score is applied to the Indian Banking, Pharmacy and Information Technology stocks and the process is evaluated as suggested by Piotroski. The current research work concentrates on eight fundamental signals to measure financial efficiency, Profitability and Operating efficiency of the said firms in the Indian context. OBJECTIVES OF STUDY Constructing F-Score to evaluate Information Technology, Pharmacy and Banking firms in the Indian context. Specific Objectives: The objectives of study can be concluded by: Usage of Eight fundamental signals to measure three areas of firm s financial condition: Profitability, Operating Efficiency and Financing Decision. Classification of companies as Good or Bad depending on the signal s implications for future prices and profitability. Constructing aggregate signal to measure the overall strength of the firm s financial position. 249 P a g e

60 RESEARCH METHDOLOGY The current research work is contemplated after thoroughly reviewing the above mentioned literature. For the purpose of this work firms are broadly categorized as Information Technology, Pharmacy and Banking. At the first instance Book-to-Market ratio is calculated to identify firm s having high Book-to-Market ratio. After this calculation a comprehensive FSCORE was constructed for those firms having high book-to-market ratio. Firms having highest FSCORE were given the first rank followed by those having lower FSCORE. For these firms Stock returns, Earnings per Share and Price Earning were ascertained for ten years. The present work considers eight fundamental signals to measure three areas of the firm s financial condition; that is, Profitability, Operating efficiency and Financing decisions. The firm s signal realization is classified as either good or bad depending on the signal s implication for future prices and profitability. An indicator variable for the signal is equal to one is assigned if the signal s realization is good otherwise; zero is assigned if it is bad. The aggregate measure is the sum of eight signals; portfolios examined are based on the strength of the aggregate signal. AN INSIGHT INTO FSCORE FSCORE is a composite indicator which incorporates various fundamental aspects of the firm and it is constructed to examine the future performance of the firm. The concept of FSCORE was developed JOSEPH.D.PIOTROSKI, Professor, The University of Chicago, Graduate School of Business, in the year The goal of this research work is to show that investors can create stronger value portfolios by using simple historical financial performance. Professor Piotroski identifies three broad heads to measure the financial performance of a company which are identified as Financial Performance Signals. They are: Profitability Signals Under this category four variables are identified to measure the Profitability related factors. These include, Return on Assets (ROA), Cash Flow from Operations (CFO) and Change in Return on Assets (AROA) and Accrual which is the difference between ROA and CFO. Return on Assets (ROA) and Cash Flow from Operations are assigned a value equal to one if they are positive, Zero otherwise. Cash flow from operation is considered because it is a better indicator for profitability than earnings for early stage firms. If firms experience positive change in return on assets that is when the firms are improving its ability to generate profits. Then the variable AROA is assigned a value of one and zero otherwise. Operating Efficiency The second group of fundamental variables used to measure firm s overall health are operating efficiency related, which includes, DMARGIN (Change in Gross Margin) and DTURN (Change in Asset Turnover). Firms experience positive change in gross margin when they employ better cost reduction or have better pricing power for their products. A higher gross margin represents improvement in generating profits and should be considered a good signal about future operations. The variable DMARGIN is assigned a value of one if it is positive and zero otherwise. The firms with positive DTURN are expected to have better future performance and financial soundness. Therefore, the variable DTURN is assigned a value of one and zero otherwise. Solvency and Liquidity Solvency and Liquidity are the two measures which indicate the Long term and Short term obligations of the business. Solvency is the ability of a firm in repaying its Long-term obligations whereas; Liquidity is the ability of a firm in repaying its current obligations. These variables are identified as DLEVER (Change in Leverage), DLIQUID (Change in Current ratio) and EQOFFER (equity issuance). As the pecking order theory (Myers and Majluf 1984) argued, firms issue debt when the internally generated funds are not available. The increase in use of financial leverage indicates firm s difficulty in generating capital internally and could be a bad signal for future operations. Therefore, the variable DLEVER is assigned a value of one if the firm decreases its use of financial leverages from last year and zero otherwise. Similarly, the variable DLIQUID is assigned a value of one if the firm decreases its current ratio from last year and zero otherwise. The last signal related to firm s Solvency and Liquidity is EQOFFER which is indicator variable equal to one if the firm had not equity issuance in the previous year and zero otherwise. This indicator variable is again is based on the pecking order theory in which equity issuance is the last resort of raising capital for a firm because of its large degree of asymmetric information. Equity issuance by a firm suggests its difficulty in raising capital from its own operations or long term debt. Therefore, it is a bad signal for the overall financial strength and future prospects of a firm if it used equity financing. Given these nine signals discussed above, Piotroski (2000) constructed a composite score to assess the financial soundness of a firm and the author named it as FSCORE. Sum of these 9 variables ranges from 0-9 ; where 9 indicates a firm with more good signals and 0 indicates a firm having less good signals. Thus, the final score is represented as follows: FSCORE= ROA+AROA+CFO+ACCRUAL+DMARGIN+DTURN+DLEVER+DLIQUID+EQOFF. 250 P a g e

61 ANALYSIS AND INTEPRETATION OF STATISTICAL RESULTS Table-1: Correlation Among Fundamental Variables and TOP F Score ROA AROA CFO ACCRUAL DMARGIN DTURN DLEVER DLIQ EQOFFER FSCORE ROA Pearson Correlation ** * ** **.218** Sig. (2-tailed) N AROA Pearson Correlation ** * Sig. (2-tailed) N CFO Pearson Correlation ** * Sig. (2-tailed) N ACCURAL Pearson Correlation.535 ** ** * Sig. (2-tailed) N DMARGIN Pearson Correlation * **.692 ** * Sig. (2-tailed) N DTURN Pearson Correlation ** Sig. (2-tailed) N DLEVER Pearson Correlation ** ** * Sig. (2-tailed) N DLIQ Pearson Correlation ** Sig. (2-tailed) N EQOFFER Pearson Correlation.558 ** * Sig. (2-tailed) N FSCORE Pearson Correlation.218**.041*.174* * * Sig. (2-tailed) N **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Above table presents the Correlation results of Fundamental Variables and Top F_Score firms. It is very apparent that all the variables are achieving a positive correlation indicating the relationship of financial variables and health of a business. The table above investigates the relationship between Financial Statement Analysis and firm s financial health. Nine variables as suggested by Piotroski (2000) are considered for Top 30 (thirty) F_Score companies comprising of Banking, Pharmacy and Information Technology. Although all the variables are not statistically significant at 1% and 5% significance levels, the positive correlation implies that firm s future returns are dependent upon historical financial data. In addition to this, the positive correlation also denotes that the fundamental factors inform the investors about the future return performance. This result is in consistent with the evidence presented by Jaouida Elleuch is that all the variables are not achieving significance at 1% and 5% level of significance. But, the results show that fundamental signals have a positive and significant correlation with future earnings performance and the winner portfolio have future earnings realization that out performs loser portfolio. Following sequence presents the results of correlation between individual signals the results are measured at 1% and 5% level of significance. Return on Assets ROA is an important profitability variable and as such it is having a strong correlation coefficient with variables such as Accrual, De Lever, Equity offer and D Margin. ROA is calculated by dividing Profit after Tax with Total Assets, the variables which have achieved strong correlation majorly contribute towards the augmentation of profits. Hence, it can be concluded that the variables identified are having larger influence on ability of the company in maximizing its profits. Accrual as a variable taken as the difference between Return on Assets and Cash Flow from Operations, according to the quoted research works Accrual should be negatively related to firm s future expected returns. High negative accrual indicates effective 251 P a g e

62 usage of fixed assets and hence, good return on assets. The current research work founds that all the high score firms are achieving negative accrual and because of this toper firms are having healthy Return on Assets. Accrual is significant at 1% level. De Lever as a variable taken as Financial Leverage, which is widely recognized as Trading on Equity. The Debt Equity combination provides leverage for a business in terms of maximizing its profits and various other returns. In the current analysis, it aptly correlates with Return on Assets and this correlation is significant at 1% level. Equity Offer is another variable having significance at 1% level, and as interpreted above the combination of debt and equity mix augments future returns and increases the quality of earnings of the business. D Margin is another variable achieving significance at 5% level with Return on Assets. Gross Margin is an indicator of overall efficient performance of a business. The variable aptly correlates with Return on Assets indicating the contribution of Assets towards the augmentation of the Gross Margin. High score firms Assets are contributing towards the growth of the Gross Margin and over a period of 10 years all high score firms Gross Margin is monotonously increasing. The above results are in consistent with the evidence as shown by Piotroski (2000). AROA and D LIQUID AROA as a variable is correlating with D LIQUID and the result is significant at 1%. D LIQUID as a variable establishes the relationship between Current Assets and Current Liabilities. Change in Return on Assets correlating with current ratio indicates that current assets are contributing towards the positive change in Return on Assets. Accrual, ROA and CFO As quoted by Sloan (1996) Accrual is negatively related to firms future expected returns and firms having positive Accrual will have a tedious task in maximizing returns in future. The current research endorses this fact by finding positive correlation between ROA and CFO which is significant at 1% level, indicating the close relationship between the variables. This further strengthens the view that Accrual is negatively related to firm s future returns. Therefore, all top score firms will have capability in maximizing returns in future. Hence, this builds up the confidence of investors to choose those firms having negative accrual, anticipating good future returns. This result is in consistent with the evidence shown by Sloan (1996). D Margin, D Turn, De Lever and ROA Gross profit margin finds itself correlated with D Turn and De Lever which has significance at 1% level and ROA at 5% level of significance. This clearly endorses the fact that change in assets turn over, debt equity mix along with positive return on assets achieves higher gross margin. D Turn is an operating efficiency variable which exactly correlates with another operating efficiency variable that is, D Margin. De Lever is a solvency variable, solvency and operating efficiency are also positively correlated which establishes the fact that operating efficiency assures solvency. D Turn and D Margin As it is evident from the above interpretation that D Margin and D Turn are correlating, in the next part of analysis D Turn is compared with the rest of the variables, interestingly D Turn is correlating with D Margin indicating the relevance two variables for measuring Operating Efficiency. Both the variables together measure the Operating Efficiency of a firm. D Lever, ROA, D Margin and Equity Offer D Lever as a variable is compared with rest of the variables in the score, results exhibit that ROA, D Margin are closely related to this variable as it is having a significance at 1% level and Equity offer is significant at 5 % level. All the mentioned variables have correlated at the said significance levels when the same was compared with the respective variables as per the sequence in the F_Score. This clearly indicates that the variables are correlating at the corresponding levels in the composite score and therefore, it will have positive impact on performance of the business. F_Score and corresponding variables F_Score as a measure combines various indicators such as Profitability, Liquidity and Operating Efficiency. Above information concludes the fact that all variables included in the score are getting a positive correlation with the score and variables such as ROA, AROA, CFO, D Margin and D Lever are having significance at 1% and 5% significance levels. Return on Assets and the composite F_Score are closely related. Any improvement in ROA improves the score and vice-versa. The other variables which have close relationship with the score are related to Profitability and Operating efficiency. This clearly indicates that together Profitability and Operating efficiency improves the performance of any given business and such improvement reflects in the stock prices. 252 P a g e

63 Table-2: Correlation among Fundamental Variables and Bottom F_Score ROA AROA CFO ACCURAL DMARGIN DTURN DLEVER DLIQ EQOFFER FSCORE ROA Pearson Correlation **.518 ** ** Sig. (2-tailed) N AROA Pearson Correlation ** Sig. (2-tailed) N CFO Pearson Correlation.548 ** * Sig. (2-tailed) N ACCURAL Pearson Correlation.518 ** * * * ** Sig. (2-tailed) N DMARGIN Pearson Correlation Sig. (2-tailed) N DTURN Pearson Correlation ** Sig. (2-tailed) N DLEVER Pearson Correlation * ** Sig. (2-tailed) N DLIQ Pearson Correlation ** Sig. (2-tailed) N EQOFFER Pearson Correlation ** * Sig. (2-tailed) N FSCORE Pearson Correlation ** Sig. (2-tailed) N **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). ANALYSIS OF STATISTICAL RESULTS OF BOTTOM F_SCORE FIRMS The first variable to interpret is Return on assets which is correlating with CFO and Accrual and has significance at 1% level. This indicates the relevance of these two variables in augmenting the return on assets. The next variable in the sequence is AROA and incidentally it is correlating with D Liquid, with which top firm s AROA was also been matched with. This clearly indicates the relevance of Current ratio in influencing changes in return on assets. Again in the analysis of bottom score firms Accrual is having a positive significance at 1% with ROA and CFO. Accrual is the Derivative of ROA and CFO. Accrual is negatively related to firm s future expected returns. All low score firms are achieving high positive Accrual which clearly endorses the fact as laid down by Piotroski (2000) that low score firms with high Book to Market ratio fail to achieve future expected returns and their future is bleak when it comes to earning expected returns in future. This result is in consistent with the evidence as shown by Piotroski (2000). D Margin does not achieve any correlation among the different variables, as the average D Margin of low score firms is showing negative growth. On an average all the low score firms are achieving negative gross margin therefore, none of the variable are correlating with this variable. D Turn and D Lever correlate with each other by having significance at 1% level. These are operating efficiency variables having matched themselves while analyzing top score firms also. The final variable in the sequence is Equity offer which is apparently correlating with ROA by having significance at 1% level. This variable also has correlated with the same while analyzing top score firms. This signifies the relevance of equity issue on ROA. As equity is a long term capital and any amount of equity issuance will be deviated towards the investment of fixed assets. Therefore, the variables are achieving positive correlation. CONCLUSIONS The above analysis has investigated the relationship between financial statement information and stock returns. The score is based on set of accounting information as formulated by Piotroski (2000). This is considered as a composite score which combines 253 P a g e

64 information related to Profitability, Liquidity and Operating efficiency of any given firm. One striking observation is that, taken on an average, market adjusted returns are monotonously increasing with the score in the contemporaneous accounting period. This is in consistent with the view that markets are rapidly integrating information into stock prices. Finally it is concluded that all individual accounting signals have a positive correlation with future stock returns and for most of the signals, correlation is significant at 1% and 5% significance levels. This necessitates identifying those individual signals contributing in defining successful fundamental strategies. The positive correlation between aggregate fundamental signals and high score firms identifies it as a winner portfolio having an earning realization of close to 300%. REFERENCES 1. Gordon, M. J. (1962). The Investment, Financing and Valuation of the Corporation. Irwin: Homewood Illinois. 2. Graham, B., & Dodd, D. (1996). Security Analysis: The Classic 1934 Edition. New York, NY: McGraw-Hill. 3. Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance, 48, Piotroski, J. (2000). Value investing: The use of Historical financial statement information to separate winners from losers. Journal of Accounting Research. 5. Ou, J., & Penman, S. (1989). Financial statement analysis and Prediction of stock returns. Journal of Accounting and Economics, 11, Lev, B., & Thiagarajan, R. (1993). Fundamental information analysis. Journal of Accounting research, 31, Fama, E., & Frenck, K. (1992). The cross section of expected returns. Journal of Finance, 47, Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings?. The Accounting Review, 71, Jaouida, Elleuch. (2009). Fundamental analysis strategy and the prediction of stock returns. International Research Journal of Finance and Economics, 30, Tunisia, University of Sfax: Faculty of Economics and Management Sciences. Retrieved from Datar, V. T., Naik, N. Y., & Radcliffe, R. (1998). Liquidity and stock returns: An alternative test. Journal of Financial Markets, 1(2), Ababanell, J. S., & Bushee, B. J. (1997). Fundamental analysis, future earnings, and stock prices. Journal of Accounting Research, 35(1), Fama,.E. F., & French, K. R. (1992). The Cross Section of expected returns. Journal of Finance, 47(2), ***** 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. 254 P a g e

65 A STUDY OF FINANCING SELF HELP GROUPS BY ANDHRA BANK UNDER THE CONCEPT OF MICRO FINANCE IN BIJAPUR REGION OF KARNATAKA STATE Dakshayani G. N. 13 ABSTRACT Economic independence and empowerment of rural poor are major challenges faced by the Indian government. Since 1991, the government has intensified its efforts with the help of banks and financial institutions for inclusive growth for its outreach programs. Due to inadequate financial credibility the rural poor community people has found extremely difficult to locate alternate source of income and employment opportunities. Due to the recent development in the economy the micro finance is the one method which is helpful in empowering the rural community rural women in particular. It is the Self Help Group-Bank linkage programme, where banks provide finance to the groups for undertaking economic activities. Thus the programme provides access to associations of rural women find themselves eligible for bank finance. It is expected that the access of such institutional credit would bring in social, personal and financial empowerment of rural women. In this regard, the study is conducted mainly to know the financing assistance provided to the SHGs by the Andhra Bank in Bijapur region under the concept of microfinance. The study is conducted during Feb-May 2012 in Bijapur region of Karnataka state. The data are collected with the help of questionnaires from the SHGs and also Andhra Bank Manager of Bijapur Branch. The study was undertaken keeping in mind the population of SHGs located in villages covered by the Andhra Bank office Bijapur and the SHGs linked with Andhra Bank directly or through NGOs in Bijapur region and also manager of Andhra Bank branch, Bijapur. KEYWORDS Micro Finance, Self Help Group, Andhra Bank, Bijapur, Rural Women etc. INTRODUCTION Micro finance is often defined as financial services for poor and low-income clients. Micro-Finance has, in recent period participation in credit delivery, recovery and linking of formal credit institutions to borrowers through the intermediation of Self Help Groups (SHGs) have been recognized as a supplementary mechanism for providing credit support to the rural poor. In the development paradigm, micro finance has evolved as need-base policy and program to cater to the so far neglected target groups (women, poor, rural, deprived, etc.). Its evolution is based on the concern of all developing countries for empowerment of the poor and the alleviation of poverty. Micro finance programs have, in the recent past, become one of the more promising ways to use scarce development funds to achieve the objectives of poverty alleviation. The basic idea of micro finance is simple that if poor people are provided access to financial services, including credit, they may very well be able to start or expand a micro enterprise that will allow them to break out of poverty. For the development practitioners, the success of micro-finance programmes is encouraging. Too often in the past, costly large-scale development initiatives have failed to achieve any sustainable benefits, especially after funds have dried up. Thus, micro-finance has become one of the most effective interventions for economic empowerment of the poor. GENESIS OF MICROFINANCE The major demonstration of this kind of lending came from Bangladesh which was virtually synonymous with poverty. During 1976, Muhammad Yunus, a professor of economics at Chittagong University experimented this SHG by helping villagers. Defying the usual rules, he lent them unsecured money to start small enterprises, such as rice processing, rickshaw-driving and weaving. Instead of collateral, the borrowers were to form small groups and agree to a fact of mutual liability. In other words, the liability of the members will be both joint and several-viz, if one defaults the others will have to pay. The participants in the fact knew each other, which created peer pressure for successful repayment and along with the compelling need for a source of income in a place with few other opportunities, it produced surprising results. After first two years, Prof. Muhammad Yunus found that he was getting an outstanding payback of 99%. The experiment officially known as the Grameena Bank was expanded and has become legendry in the world of development banking. MICRO FINANCE IN INDIA: AN OVERVIEW Micro-Finance refers to small savings, credit and insurance services extended to socially and economically disadvantage segments of society, for enabling them to raise their income levels and improve living standards. The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of financial services. 13 Assistant Professor in Commerce, Government First Grade College, Karnataka, India, dakshayanisuresh@rediffmail.com 255 P a g e

66 Some important features of micro finance are as follows: Micro finance is a tool for empowerment of the poorest women. Micro finance is essentially for promoting self-employment; the opportunity of wage employment is limited in developing countries not increases the productivity of employment in the informal sector of the economy. Micro finance is not just a financing system, but a tool for social change, especially for women. Micro credit is aimed at the poorest, micro finance lending technology needs to mimic the informal lenders rather than formal sector lending. PROFILE OF MICRO FINANCE IN INDIA The profile of micro finance in India at present can be traced out in terms of poverty it is estimated that 350 million people live Below Poverty Line. The following are some components of micro finance: This translates to approximately 75 million households. Annual credit demand by the poor in the country is estimated to be about Rs 60,000 Cr. A cumulative disbursement under all micro finance programmes is only about Rs Cr. Total outstanding of all micro finance initiative in India estimated to be Rs Cr. Only about 5% of rural poor have access to micro finance. Though a cumulative of about 20 million families have accepted accessed. While 10% lending to weaker sections is required for commercial banks, they neither have the network for lending and supervision on a larger scale or the confidence to offer term loan to big micro finance institutions. The non poor comprise of 29% of the outreach. CHALLENGES OR OBSTACLES TO MICRO FINANCE The obstacles or challenges to building a sound commercial microfinance industry include: Inappropriate donor subsides, Poor regulation and supervision of deposit-taking MFIs, Few MFIs that meet the needs for savings, remittances or insurance, Limited management capacity in MFIs, Institutional inefficiencies, Need for more dissemination and adoption of rural, agricultural microfinance, Methodologies. INSIGHT OF SELF HELP GROUP (SHG) A SHG is a group of about 20 people from a homogeneous class, who come together for addressing their common problems. They are encouraged to make voluntary thrift on a regular basis. They use this pooled resource to make small interest bearing loans to their members. The process helps them imbibe the essentials of financial intermediation including prioritization of needs, setting terms and conditions and accounts keeping. This gradually builds financial discipline & credit history for themselves, as the money involved in the lending operations is their own hard earned money saved over time with great difficulty. This is warm money. They also learn to handle resources of a size that is much beyond their individual capacities. Some of the characteristic features of SHGs currently engaged in MF are given below: An SHG is generally an economically homogeneous group formed through a process of self-selection based upon the affinity1 of its members. Most SHGs are women s groups with membership ranging between 10 and 20. SHGs have well-defined rules and by-laws, hold regular meetings and maintain records and savings and credit discipline. SHGs are self-managed institutions characterized by participatory and collective decision making. OBJECTIVES OF SHG S To evolve a supplementary credit strategy for reaching the rural area. To build mutual trust and confidence between banks and rural poor. To encourage banking activities in rural areas. To create group feeling among members. To enhance the confidence and capabilities of members. T o develop collective decision making among members. To encourage habit of saving among members. To motivate members taking up social responsibilities particularly related to development. 256 P a g e

67 MODELS OF LINKAGE BETWEEN SHGS AND BANKS Banks deal directly with individuals SHGs. SHGs formed by the NGOs and linked to Bank. NGOs form SHGs SUPPORTIVE POLICIES OF NABARD As per operational guidelines of NABARD, SHGs are sanctioned savings linked loans by the banks. NABARD would continue to provide refinance support to the banks under the linkage project. The present interest rate structure stipulated by NABARD at different levels under the SHG-Bank linkage programme is as under: o NABARD to Banks 6.5%.p.a, o Banks to SHG 12%p.a, o SHG to members as decided by SHG. ADVANTAGES OF SHGS LINKAGE Advantages to Bank It leads to increase in social base and also deposit base of the bank. It leads to expansion of loan portfolio. It enables simultaneous undertaking of social development. It leads to portfolio diversification. Advantages to Government Rural poor not to dependent upon and not to look upon government t tackle their poverty. It effects of various government sponsored and poverty alleviation programs are checked. Provide viable alternative to any credit program. Encourage NGOs to involve themselves in rural development activity. Routine social programs through SHGs. Voluntary participated of the people in the upliftment process. Advantages to SHG Helps in resource mobilization of the group. Helps in sharing of information with members. Helps in capacity building of members. It enhances the sustainability of the group. It is mutually beneficial program for SHG and the bank. OBJECTIVES OF STUDY To study the micro finance helps the Andhra bank to increase of social base and deposit base in Bijapur region. To study diversification of portfolio with micro finance by giving loans to SHGs. To know the impact and role of SHGs in improving banking habit of the rural poor and their social empowerment. To know whether SHGs has generated economic growth of the members and society as whole. To know the repayment habit of the people has increase because of SHGs. REVIEW OF LITERATURE Access to savings and credit can initiate or strengthen a series of interlinked and mutually reinforcing virtuous spirals of empowerment- (Mayoux, 2000). SHGs showed a positive impact in respect of building of self-confidence, social development, skill formation and social empowerment- Rao (2000) A.P. Self-help groups have facilitated the formation of social capital, where people learn to work together for a common purpose in a group or organization - (Putnam 2000). 2002As Mayoux (2000) puts it, these virtuous spirals are potentially mutually reinforcing in that both improved well being and change in women s position may further increase their ability to increase incomes and so on. This process of empowerment may be further reinforced by group formation focusing on savings and credit delivery as women can access wider information and support networks for economic activity; groups can support women in disputes within the household and community and groups can link to wider movements for change in women s position. Group approach has brought many operative values like group support, thrift, group action and sustainability of women SHG - Kallur (2001). 257 P a g e

68 The IFAD gender mainstreaming review has reported gains in self-confidence and self-esteem amongst the women, enhanced capacity to articulate their needs and an increased respect in the household - (FAO, 2002). Women s groups have emerged as a dynamic, articulate constituency enabling women to work together in collective agency (Krishnaraj and Kay Kabeer, quoted in Mosedale (2003, p.2) states that women need empowerment as they are constrained by the norms, beliefs, customs and values through which societies differentiate between women and men. She also states that empowerment refers to the process by which those who have been denied the ability to make strategic life choices acquire such an ability, where strategic choices are critical for people to live the lives they want (such as choice of livelihood, whether and who to marry, whether to have children, etc). Micro credit borrowers utilized micro credit to graduate from wage work into self employment and concluded that micro credit intervention has benefited the group members in acquisition of productive assets - Purushotham (2004)A.P. The study has revealed that landless and marginal farm households and socially backward households participated more in the SHG-led microfinance programme - Anjugam and Ramasamy (2007). Experience of SHGs in Orissa reveals that most of the groups are not able to do so purposively or compulsively. This aspect of the linkage programme has received little attention- Jyotirmayee (2008). SHGs have ushered a silent revolution of poverty alleviation and women empowerment - Subramaniam (2010). 76 per cent of the women members were able to interact with officials and 28 per cent of the members were able to save in banks; the result were seen in decision making in household matter, sending children to school, changing undesirable habits of their spouse, participating in Gram Panchayat election. Access to bank credit after joining SHG (98 per cent) as compared to mere two per cent before joining, increase in income by undertaking income generating activities, etc. - NABARD (2011). Observed that SHGs has a positive impact on women member and in many cases it is proved that SHG promotes empowerment SHGs have positive impact on decision making pattern Das (2012). The amount of loans provided to members of SHGs was so small that it can t help the members to fight against poverty. There is the failure of SHGs, but not the failure of self-help - Barua, (2012). PROFILE OF ANDHRA BANK Andhra Bank was founded by the eminent freedom fighter and a multifaceted genius, Dr. Bhogaraju Pattabhi Sitaramayya. The bank was registered on 20 th November 1923 and commenced business on 28 th November 1923 with a paid up capital of Rs.1.lakh and an authorized capital of Rs.10 lakhs. The bank is rendering services through 2046 business delivery channels consisting of 1343 branches. 73 Extension Counters, 592 ATMs and 38 Satellite offices spread over 21 states and 2 Union territories as at the end of December The bank opened its Representative office in Dubai in May, 2006 and has received permission from RBI for opening Representative offices at New Jerssy (U.S.A). Andhra Bank being a major public sector banks in India, it well known for its banking operation that is, it provides various services and products to the customers by means of ATM, Debit Card, Credit Card, Internet Banking as the services and retail Credit Schemes, personal Banking Loan Scheme, Deposit Schemes at CBS Branches and Term Deposit Schemes as its product. Other than the banking it also provides foreign Business, Mercantile Banking, Insurance Banking, General Banking and Social Banking to the various customers in India as well as in abroad. NATURE OF BUSINESS CARRIED Andhra Bank being a major public sector banks in India, is well known for its banking operations that is, it provides various services and products to the customers by means of ATM, Debit Card, Credit Card, Internet Banking as the services and Retail Credit Scheme, Personal Banking Loan scheme, Deposit Scheme at CBS Branches and Term Deposit Schemes as its products. Other than the banking operation it also provides Foreign Business, Mercantile Banking, Insurance Banking, General Banking and Social Banking to the various customers in India as well as in abroad. SCOPE OF STUDY This study is conducted under Andhra Bank Branch office, Bijapur in between the month of February-may 2012 in Bijapur District. The data are collected with the help of questionnaires from the SHGs and also Andhra Bank Manager of Bijapur Branch. RESEARCH METHODOLOGY The study has been based on both the primary and secondary data. Primary data are collected with the help of questionnaires from the SHGs and also Andhra Bank Manager Bijapur Branch. The secondary data is collected from the statistical statements and reports, annual reports of the bank, bank circulars, broachers, company website and various journals and articles. Sample Plan and Unit The study was undertaken keeping in mind the population of SHGs located in villages covered by the Andhra Bank office Bijapur and the SHGs linked with Andhra Bank directly or through NGOs in Bijapur region and also manager of Andhra Bank branch, Bijapur. 258 P a g e

69 Sampling Method and Sample Size For this study non-probability method of sampling is used and sample size consists of 50 respondents of SHGs along with one Andhra Bank branch Manager of Bijapur region. Data Analysis: The study was mainly concentrate on the field work and the face to face interaction was done with the SHGs and with the branch manager with the help of questionnaire. The collected data was analyzed with the help of statistical tools and presented in the form of tables. ANALYSIS AND INTERPRETATION Table-1: Responses from SHG Representatives Analyzed Factors Responses Frequency Percent Cumulative Percent Literacy Level Yes No Total Occupation of Members Self Employed Due To Homogeneity Occupation of SHG Members Homogenous Non -Homogenous Total Yes No Total Agriculture Self Employed Home Makers Other Specify Total Prime Motive of Member For Obtaining Credit Behind Joining SHG For Improve Saving Habits For Achieving Economic Self Reliance To Form Social Bond Total Age of Group Less than 1 year to 3 years More than 3 years Frequency of Group Meeting Attendance in Meeting Style of Functioning and Group Discussion Change in Response of Bank towards SHG Member s than as an Individuals Total Weekly Fortnightly Monthly Total Less than 60% Between 60%to 85% Above 85% Total Democratic and Transparent Autocratic Total Yes No Total Frequency of Bank Managers Attending Monthly SHGs Meeting Never Total Leadership Opportunity In Group Yes Percentage of Respondents Who Attended Training Program Sources: Primary Data No Yes P a g e

70 Table-2: Shows Response from Bank Manager of Andhra Bank, Bijapur region Analyzed Factors Responses Percent Cumulative Percent Training Program for SHGs Yes No Total 100 Impact of SHG on Banking Habits Yes Percentage of Default Rate by SHG s 00 to Probability that Members of SHG s Have Opened Saving Bank a/c in their Individual Name Banks Motivation to SHG s to Utilize Fund for Productive Purpose Sources: Primary Data Yes No Total 100 Yes MAJOR FINDINGS 1. Around 80% of the SHG s members in Bijapur region are literate. This is one of the good sign of development of SHG s and its members. 2. Only 40% of the SHG s members in Bijapur region are homogeneous in nature and remaining 60% are nonhomogeneous in nature. 3. The prime motive of the members in Bijapur region to join SHG s is to form social bond. 4. In Bijapur region 86% of the SHG s conduct their meeting once in a week and every member save a certain predetermined amount. 5. The groups are following democratic type of functioning and each and every member of the group has an equal opportunity for decision making and becoming a leader. 6. Almost all the SHG members in Bijapur region have the opinion that they are getting better responses from the banks as member than as individuals. 7. The branch manager or Andhra Bank has the opinion that the banking habit of the members has been improved than that from the individuals. 8. The branch manager of Andhra Bank has the opinion that the formulation of the SHG has increased the deposit base of the bank. SUGGESTIONS 1. From the survey it has been found that the formulation of SHG has been drastically come down. It is necessary for Andhra Bank Bijapur region to create awareness among rural people about. 2. From this survey it has been found that only 70% of the bank managers don t attain the SHG meeting. By attaining the group meeting the bank managers get access to the difficulties faced by the group and also the other opportunities by lending to the group. 3. From this survey it has been found that the formation of SHG leads to improvement in the banking habit of the people in that region. At this movement banks should motivate and educate people to improve saving habit by opening different accounts with bank. 4. The bank should provide liberal policies for credit leading to SHG as the default rate is negligible. 5. The bank should change their view about micro finance (loans for SHG) from a social responsibility to a business opportunity and this can be done by increasing a lending rate. 6. The Andhra Bank Bijapur region should try to increase its credit base and use the refinance facility provided by the NABARD. REFERENCES 1. Ansari, Saghir Ahmad. (2007, August). Micro finance in India. Asian Economic Review, 49(2), P a g e

71 2. APMAS. (2001). The Study of SHG movement in Cuddapah District. Retrieved from 3. Bosch, Ellie. (2001). SHG development in India: Some issues relating to quality and sustainability. The Netherlands, The Hague: I/C Consult. 4. Chavan, Pallavi. (2007, August). Access to bank credit: Implications for Dalit rural households. Economic and Political Weekly, XLII(31), Harper, Malcolm. (2002). Indian' Self-Help Groups and Bangladesh Grameen Bank Groups: A Comparative Analysis (Discussion Paper). Ahmedabad: Friends of Women's World Banking India. 6. (2011, June). Banking Information (25th ed.) (Hand book). 7. Kallur, M. S. (2001). Empowerment of Women through NGOs: A Case Study of MYRADA Self-Help Groups of Chincholi Project, Gulbarga District, Karnataka State. Indian Journal of Agriculture Economics, 56(3), (1998, October). Micro-Credit-Impact, targeting and sustainability. IDS Bulletin, 29(4). 9. Myrada. (1998). Guidelines for Working with Self-Help Groups, Rural Management Systems Series Paper - 30 (30A, 30B, 30C). 10. Nanda, Y. C. (2000, February 15-17). Marketing Microfinance in India - the NABARD Way (Paper presented at the Workshop on Best Practices in Group Dynamics and Micro Credit). Gurgaon: Manesar. 11. Outreach. (2001). SHG-Bank Linkage Programme (Handbook on Self Help Group). Bangalore: Outreach. 12. Self Help Group Programme of PRADAN (Strategy Paper). New Delhi: PRADAN. 13. Satish, P. (2000, March). Self Help Group Promotion-The Institutional Framework (Working Paper No. 17). Banker's Institute of Rural Development. 14. Suguna, B. (2006). Empowerment of rural women through Self Hep Groups (pp. 37). New Delhi: Discovery Publishing House. 15. Subramaniam, S. (2010). Empowerment of women through SHGs in Tirunelveli District, Tamil Nadu-A SWOT analysis. Prabandhan: Indian Journal of Management, 3(3), Verma, B. S. (ed.) Rural Management. (pp ). New Delhi: Deep & Deep Publications Private Limited. 17. Retrieved from Retrieved from Retrieved from Retrieved from Retrieved from pdf ***** FOR ANY CLARIFICATION OR SUGGESTION, WRITE US: Editor-In-Chief Pezzottaite Journals, 24, Saraswati Lane, Bohri, Near Modern Dewan Beverages, Jammu Tawi , Jammu and Kashmir, India. (Mobile): editorinchief@pezzottaitejournals.net contactus@pezzottaitejournals.net 261 P a g e

72 CONSUMER PREFERENCES PERTAINING TO INVESTMENT AVENUES ACCESSIBLE IN MUTUAL FUNDS IN JAMMU AND KASHMIR Sandeep Singh Chib 14 ABSTRACT The Indian economy has experienced a paramount transformation in the last two decades especially, when it comes to the investment avenues in India. Before independence, in order to multiply their financial assets the Indian customers first preference was the purchase of precious metals like gold and silver. However, with the passage of time and inclusion of contemporary technology which confers facilities like live trading, internet security, simultaneous information accessibility and prompt after sale services have influenced and altered the preferences of the Indian customers by shifting their investment paradigms from precious metals to Mutual funds. Taking this into consideration the researcher has attempted to analyze the consumer preferences related to the avenues of investment in mutual funds in the vibrant Indian market. The study also throws light on the risk taking behaviour of the Indian customers in addition to delve weather the Indian customers are willing to invest in the present marker conditions or not. If, they are interested, then which product of mutual fund allures them the most of time? In order to achieve the research objectives the researcher has devised a self administered questionnaire comprising of 17 statements. 550 questionnaires were distributed among businessman, professionals and individual investor out of which only 486 questionnaires were found fit to be subjected to the statistical tests. The researcher has applied descriptive statistics with the help of Statistical Package for Social Sciences (SPSS) Version 17. The study reveals that customers consider mutual funds as a good investment option and actively participate in the purchase and sale of the same. Additionally, this research work insinuates certain suggestions which can elevate the customer satisfaction level in this regards. The future scope of the study can be to analyze the effect of other elements like demographics, ergonomics and economics on customer satisfaction pertaining to the proportion of mutual fund investments. Limitations of the study like the number of mutual fund companies, study area, cost and time limitations and sample size have generalized the findings of the research. KEYWORDS Consumers Preferences, Mutual Funds, Investment Avenues, Jammu etc. INTRODUCTION The banking business is not a new concept to the human race and this business is as old as the human civilization itself. The evidence of which is prevalent in 2,000 B.C., when the Babylonians used their temples as a center for lending money at higher rates of interest against security deposit of gold and silver by the lenders. In ancient times the main functions of the banks were confined to the conferring of loans to individuals or the state in times of crisis and earn monetary gains in exchange of this service. Banking institutions during pre-independence period primarily consisted of Indigenous banks, Sahukars, Nidhis, loan offices etc. It was only by 1850, when a Joint Stock Company Act was passed by the British Government in India, which greatly assisted in establishment of many commercial banks. Consequently, in order to level out the operational constraints comforted by the budding banking sector the British Government introduced the Imperial Bank of India in 1921 and Reserve Bank of India (RBI) in Since then the Banking business has evolved many folds and incorporated new technologies to acquire the present techno savvy form. In the present scenario the banks provide a variety of services ranging from opening a savings account, internet banking, granting loans, selling insurance, providing locker facilities and transferring money nationally or abroad. The customers of the banks have vivid demographic backgrounds ranging from a salaried group to a Multi National Corporation having its business activities all around the world. In order to satisfy the complex customer base, the operations of the bank have also become complicated and require specialized human skills. Employees working in the banks act as a bridge between the bank and the customer. They are the people who face customers directly and are the first ones to know what customer actually needs. Moreover, as a service provider their role becomes even more imperative in shaping bank s perception in the customer s mind. As services can make or break a customer, much emphasis is laid upon service delivery by most of the banks. The link between service quality and customer satisfaction has been subjected to intense scrutiny by a few service quality researchers (Bolton and Drew, 1994; Bitner and Hubbert, 1994). As survival of the fittest has become the order of today s business, every bank is trying to entice maximum customers. Additionally, retaining the existing customers and attracting new ones has become more difficult especially, for public sector banks (Bhatt, 1990). Therefore, banks started providing more financial products to the prospective customer. There are a lot of investment avenues available today in the financial market for an investor with an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return. Moreover, the investor may invest in Stock of the companies where the risk is high and the returns are also proportionately high. Share market has also evolved with the passage of time and dexterously adjusted itself with the dynamics of the vibrant banking sector. Presently, enormous customers are simultaneously logging on the e- share trading sites in the pursuit of earning an extra 14 Assistant Professor, Institute of Management Studies, Jammu & Kashmir, India, nsgcommando@gmail.com 262 P a g e

73 nickel. However, due to some constraints a huge percentage of this customer base cannot actively participate in the share market activities. Additionally, the recent trends in the Stock Market have shown that an average retail investor always lost with periodic bearish tends. Investors began to opt for portfolio managers with expertise in stock markets who would invest on their behalf and take due care of their investment in exchange of some remuneration. Taking this into consideration the banking sector devised a new financial product known as Mutual Fund. Mutual funds are for the customers who cannot afford continuous vigil over the stock exchange and feel wretched as they cannot sell or buy the concerned stock at the perceived appropriate time and price. CONCEPT OF MUTUAL FUND A mutual fund comprises of money which is commonly pooled into the investor s jurisdiction which the investors invest in accordance with a stated objective. Thus, the ownership of the fund is collective and the fund belongs to all the investors. A single investor s ownership of the fund is in the same proportion as the amount of the contribution made by him or her towards to the total amount of the fund. Additionally, mutual funds are trusts which accept savings from investors and invest the same in diversified financial instruments in terms of objectives set out in the trusts deed with the view to reduce the risk and maximize the income and capital appreciation for distribution for the members. A mutual fund is a corporation and the fund manager s interest is to professionally manage the funds provided by the investors and provide a return on them after deducting reasonable management fees. The objective sought to be achieved by mutual fund is to provide an opportunity for lower income groups to acquire financial assets without much difficulty. They cater mainly to the needs of the individual investor whose means are small and to manage investors portfolio in a manner that provides a regular income, growth, safety, liquidity and diversification opportunities to the investor. HISTORY OF MUTUAL FUNDS IN INDIA The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases: First Phase ( ) Unit Trust of India (UTI) was established by an Act of Parliament in It was set up by the Reserve Bank of India (RBI) and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme At the end of 1988, UTI had Rs.6,700 Cr. of assets under management. Second Phase ( ) (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (December 87), Punjab National Bank Mutual Fund (August 89), Indian Bank Mutual Fund (November 89), Bank of India (June 90), Bank of Baroda Mutual Fund (October 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 Cr. Third Phase ( ) (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in The industry now functions under the SEBI (Mutual Fund) Regulations The number of mutual fund houses went on increasing, with m any foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 Cr. The Unit Trust of India with Rs.44,541 Cr. of assets under management was way ahead of other mutual funds. Fourth Phase (Since February 2003) In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 Cr. as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Limited, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 Cr. of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September 2004, there were 29 funds, which manage assets of Rs Cr. under 421schemes. 263 P a g e

74 REVIEW OF LITERATURE Singh and Jha (2009) conducted a study on awareness & acceptability of mutual funds by the Indian customers. The researchers found that customers primarily preferred mutual fund in comparison to the other financial products due to the enhanced return potential of the mutual funds. Moreover, the ability of the mutual funds to easily liquidate was another prominent reason for the customers to opt for it. Safety was one more pivotal reason because of which people preferred to invest in mutual funds instead of other more risky options available in the Indian market. Moreover, the researchers revealed that the customers were not totally aware about the systematic investment plans. Desigan et al (2006) conducted a study on women investor s perception towards investment and found that women investor s basically are indecisive in investing in mutual funds due to various reasons like lack of knowledge about the investment protection and their various investment procedures, market fluctuations, various risks associated with investment, assessment of investment and redressal of grievances regarding their various investment related problems. Moreover, savings is a habit specially embodied into women. Even in the past, when women mainly depended on their spouses income, they used to save to meet emergencies as well as for future activities. In those days, women did not have any awareness about various investment outlets. But as time passed, the scenario has totally changed. Ramamurthy and Reddy (2005) conducted a study to analyze recent trends in the mutual fund industry and drew a conclusion that mutual funds are good form of investments for medium and small investors mainly due to the efficient management, diversification of investment, easy administration, nice return potential, quick liquidation, transparency, flexibility, affordability and wide range of choices coupled with a proper regulation governed by SEBI. The study also throws light on the recent trends emerging in mutual fund industry, like various exit and entry policies of mutual fund companies, various schemes related to real estate, commodity, bullion and precious metals, entering of banking sector in mutual fund, buying and selling of mutual funds through online. The researcher is very optimistic towards the future of mutual funds in India. Anand and Murugaiah (2004) have investigated various strategic issues pertaining to the marketing of financial services to Indian customers. The researchers have revealed that the Indian financial industry requires new strategies and need to incorporate pristine concepts in order to survive and grow in the present cut throat competition prevailing at national and international level. Moreover, the researchers state that in order to survive the competition the business organizations have to adopt the new stock envisaging strategies and tactics that facilitate them to capture maximum money generation opportunities at lowest risks. The researcher also advocates that the purchase behaviour of the customer is positively and consistently influenced by the previous perception of the business activity pertaining to the mutual fund business. NEED FOR STUDY This research work has been undertaken by the researcher in order to be acquainted with the functioning of mutual funds in periphery of J&K state. The study facilitates to know the Indian mutual fund industry right from its inception to growth and also highlights future prospects. Ultimately this study would help in understanding the benefits of mutual funds towards the investors. OBJECTIVES OF STUDY To know the investment preferences of the customers. To realize the factors affecting the investment decision of the customer. To know which mutual fund company is liked the most by the customers of Jammu and Kashmir. DATA COLLECTION In order to achieve the research objectives and to arrive accurately at the right conclusion, this research work comprises of both primary and secondary data sources. Primary Data: The primary data of this research work has been collect with the help of a self administered questionnaire. All the questionnaires were collected through personal contact from the respondents. Secondary Data: Secondary data comprising of the company profile and other details were collected from the company and also through already available books, journals, magazines, newspaper and oral communication. Instrument Developed: In order to achieve the research objectives the researcher has devised a self administered questionnaire comprising of 17 statements. 550 questionnaires were distributed among businessman, professionals and individual investor, out of which only 486 questionnaires were found fit to be subjected to the statistical tests. The researcher has applied descriptive statistics with the help of Statistical Package for Social Sciences (SPSS) Version P a g e

75 DATA ANALYSIS AND INTERPRETATION The following questions were asked by the researcher to the respondents in order to achieve the objectives of this research work and the response of the same are quoted per question as under: Are respondents a regular or new investor in mutual fund? From the above data it is inferred that 78% of the respondent were new investors and 22% were the same old regular investors. Which type of fund respondents prefers the most? From the data it is inferred that 26% of the respondents had invest in diversified equity fund, 24% in debt fund, 10% in ELSS, 13% in regular income and 27% respondent had gone for sector specific funds. What kind of investments respondents prefer most? The acquired data for survey reveals that 34% of respondents prefer investing in savings account, 22% prefer investing in fixed deposits, 10% in post office savings, 10% prefer investing in insurance, 5% choose mutual funds as their best option, on the same lines 5% customers prefer shares or debentures, 8% customers want to invest in precious metals and only 6% customers want to invest in real estate. While investing your money which factor respondents prefer most? 34% of respondent believes that company reputation influences their decision to a great extant while choosing a fund, 16% believes it is high returns, 22% believes it is low risk and remaining 28% think it is liquidity of the fund which motivates them the most for investing. In which kind of mutual fund would respondents like to invest? Out of total number of respondents 66% of them liked public sector mutual fund companies. On the other hand 34% of the respondents preferred private sector mutual fund companies. Have respondents ever invested your money in mutual fund? The analysis reveals that out of total respondent 82% had ever invested in mutual funds and rest 18% had never invested in mutual funds. What are sources of information while investing in mutual funds? It was identified that 26% of the investors information regarding mutual funds was derived from advertisement, 12% came to know about it through magazines and newspapers, 23% believes it was internet, the respondents assumed that 10% vital information came from financial advisors, 8% from friends and rest came from miscellaneous sources. Where respondents do find respondents as a mutual fund investor? It is evident that 35% of the respondent are aware of only those scheme in which they have invested, 15% said that they have partial knowledge about the mutual fund, 23% said that they are fully aware of the mutual funds they are investing into and remaining 27% said that they are not at all aware of mutual funds in which the fund manager is investing their money. What type of mutual fund scheme respondents prefer? According to the collected data 45% respondent like to invest in an open ended scheme, where as 20% in regular income fund, 15% in specific sector fund, 6% in long cap, 5% in growth fund and 9% in close ended schemes. What type of return respondents expect? It was identified that 53% of respondents want to receive their returns monthly, 22% said that they want their returns quarterly, 17% of the respondents expressed their desire to avail their returns biannually and 8% of the respondents wanted returns annually. What are respondents near future liabilities? Data reveals that 46% of the respondent had invested in mutual fund to cater the need of education of dependents, 14% had invested with the objective of pension, 23% for the marriage of the spouse and 17% had their different specific reasons for investment. 265 P a g e

76 In which Mutual Fund respondents have invested? According to the surveyed data, 28% of the respondents invested in HDFC mutual funds, 19% respondents believe that investment in Reliance MF is a good decision, 16% selected ICICI, 14% respondents chose SBI and 12% selected UTI. 6% respondents were inclined towards other mutual funds. If not invested in Mutual Fund then why? It is inferred from the collected data that according to the 47% of respondents reasons for not investing in mutual fund is lack of awareness pertaining to the appropriate MF schemes, 25% of the respondents are bunged do to the risk factor associated with the MF industry and remaining 28% have miscellaneous reasons. Which sectors are respondents interested in mutual fund sector? According to the data available 18% of the respondent want to invest in Oil and petroleum sector, 17% customers preferred to invest in gold funds, 16% want to invest in diversified equity funds, 5% prefer power sector, 8% in debt funds, 9% in banking sector, 14% in real estate funds and last but not the least 13% respondent prefer the pharmacy sector for their investments. How would respondents like to receive the returns every year? 50% of the respondents would like to receive return through growth in NAV, 29% of the respondents would like dividend payouts and remaining 21% respondents desire dividend reinvestment. When respondents invest in Mutual Funds which mode of investment will you prefer? It is inferred from the collected data that 68% of the investors had chosen Systematic Investment Plan as a preferred mode of investment Which feature of the mutual funds allure respondents most? It is inferred from the collected data that 37% of the respondent believes that better return and safety if the best feature of the mutual fund, 26% believes that it is regular income which allures them, 15% go in for the diversification factor, 13% are attracted towards the reduction in risk and transaction cost and 9% of the respondents invest to avail tax benefits. Rank the companies according to respondent s preference from highest rank (1) to lowest rank (6): Graph Sources: Author s Compilation Form the above hierarchical alignment of the companies the researcher can infer that the respondents of the study area are more satisfied and allured towards HDFC mutual funds followed by Reliance mutual funds, UTI mutual funds, ICICI mutual funds, SBI mutual fund and in the end other mutual funds companies operating in the specified region. FINDINGS AND CONCLUSIONS OF STUDY HDFC RELIANCE UTI ICICI SBI MF OTHERS The researcher has come up with the following findings after an extensive and tedious research work: 1. The researcher inferred that out of the total respondents 78% of the respondents were new investors and 22% were the same old regular investors. 2. The study reveals that 26% of the respondent had invest in diversified equity funds, 24% in debt funds, 10% in ELSS, 13% in regular income and 27% respondent had gone for sector specific funds. 3. The researcher believes that 34% of the respondents prefer investing in savings accounts while 22% prefer investing in fixed deposits, 10% in post office savings, 10% prefer investing in insurance, 5% choose mutual funds as their best 266 P a g e

77 option. Additionally, 5% customers prefer to invest in shares or debentures, 8% customers want to invest in precious metals like gold, silver, platinum etc and only 6% customers want to invest in real estate. 4. The study also reveals that only 34% respondents believe that company reputation influences their decision to a great extant while choosing a mutual fund, 16% believes it is high returns of the mutual fund which influences their purchase decision, 22% believes it is the risk level of the mutual fund which they consider the most before making final decision and remaining 28% think it is liquidity factor associated with the mutual fund which motivates them the most for investing. 5. Out of the total number of respondents 66% of the respondents liked public sector mutual fund companies. On the other hand only 34% of the respondents preferred private sector mutual fund companies. 6. The data revealed that out of the total respondent only 28% had invested in mutual funds and on the contrary only 18% respondents had never invested in the mutual funds. 7. The study reveals that 26% of the investors information regarding mutual funds was derived from advertisements, 12% of the respondents came to know about it through magazines and newspapers, 23% believes it was internet, which provided them the needed information. Moreover, the respondents assumed that 10% vital information came from financial advisors, 8% from friends and rest came from miscellaneous sources. 8. The research reveals that 35% of the respondents are aware of only those scheme in which they have invested, 15% said that they have partial knowledge about the mutual funds, 23% of the respondents are fully aware of the mutual funds they are investing into and remaining 27% of the respondents were not at all aware of the mutual funds in which the fund manager is investing their money. 9. According to the collected data 45% respondent like to invest in an open ended schemes, where as 20% in regular income funds, 15% in specific sector funds, 6% in long cap, 5% in growth funds and 9% in close ended schemes. 10. The research illustrates that 53% of the respondents want to receive their returns monthly, while 22% respondents want their returns quarterly, 17% of the respondents expressed their desire to avail their returns biannually and 8% of the respondents wanted returns annually. 11. It was found that 46% of the respondents had invested in mutual funds to cater the needs of education of their dependents, 14% had invested with the objective of pension in mind, 23% for the marriage of their spouse and 17% had their different specific reasons for investment. 12. According to the surveyed data 28% of the respondents invested in HDFC mutual funds, 19% respondents believe that investment in Reliance MF is a good decision, 16% selected ICICI mutual funds for investment, 14% respondents selected SBI mutual funds and 12% of the respondents selected UTI mutual funds while only 6% respondents were inclined towards other mutual funds. 13. The research advocates that 47% of the respondents reason for not investing in mutual fund is lack of awareness pertaining to the appropriate mutual fund schemes, 25% of the respondents are bunged due to the risk factor associated with the mutual fund industry and remaining 28% have miscellaneous reasons. 14. According to the researcher 18% of the respondents want to invest in Oil and petroleum sector, while 17% respondents preferred to invest in gold funds, 16% want to invest in diversified equity funds, 5% prefer power sector, 8% in debt funds, 9% in banking sector, 14% in real estate funds and last but not the least 13% respondent prefer the pharmacy sector for their investments. 15. It was revealed that 50% of the respondents would like to receive return through growth in NAV, 29% of the respondents would like dividend payouts and remaining 21% of the respondents desired dividend reinvestment in appropriate mutual funds. 16. It is inferred from the collected data that 68% of the investors had chosen SIP (Systematic Investment Plan) as a preferred mode of investment. 17. It is inferred from the research that 37% of the respondents believe that better return and safety is the best feature of the mutual fund, 26% believe that it is regular income from the mutual funds which allures them, 15% go in for the diversification factor, 13% are enticed towards the reduction in risk and transaction cost and only 9% of the respondents invest in mutual funds to avail the tax benefits. 18. Form the above hierarchical alignment of the companies the researcher can infer that the respondents of the study area are more satisfied and enticed towards HDFC mutual funds followed by Reliance mutual funds, UTI mutual funds, ICICI mutual funds, SBI mutual fund and in the end other mutual funds companies operating in the specified region. 267 P a g e

78 LIMITATIONS OF STUDY 1. The study is limited to the available different schemes obtainable under the selected mutual funds schemes operating only in the study area. 2. The time and financial constraints have obstructed the process of research works triflingly. 3. Respondents literacy level and co-operation may influence their responses pertaining to the filling up of the questionnaire. SUGGESTIONS The researcher has noted some discrepancies and gaps which need to be blocked and bridged in order to achieve higher synchronization between the customers and the financial service providers, to facilitate the expansion of their business in the present cut throat competitive business environment. Some of the suggestions have been mentioned as under: 1. Proper care need to be taken while providing the correct guidance to the investors so that they can be influenced and motivated to invest more. 2. Effective promotional and advertisement campaigns can be arranged in order to spread awareness among the prospective customers dwelling in villages and far off rural areas. 3. Mutual fund companies need to tailor their products periodically in accordance with the customers of all strata. 4. As the financial advisor of a particular mutual fund company is the first contact person with the customers there is dire need to induct and train appropriate human resource. 5. Graduate customers are more inclined towards mutual fund investments and fortunately in the study area there is a large untapped market. Hence, companies can concentrate their resources in this direction. 6. Many customers have complained about ghastly after sales services. Therefore, there is need to improve the after sales services provided to the customers. REFERENCES 1. Anand, S., & Murugaiah, V. (2004). Marketing of financial services: strategic issues. SCMS Journal of Indian Management, 2, Bitner, M. J., & Hubbert, A. R. (1994). Encounter satisfaction versus overall satisfaction versus quality: the customer voice. In Rust R.T. and Oliver, R.C.(Eds), Service Quality, New Directions in Theory and Practice (pp ). London: Sage publications. 3. Bolton, R. N., & Drew, J. H. (1994). Linking customers satisfaction to service operations and outcomes. Service Quality, New Directions in Theory and Practice ( ). London: Sage publications. 4. Desigan (et. Al.). (2006). Women Investors Perception towards Investment: An empirical Study. Indian Journal of Marketing. 5. Pandian, P. (2003). Security Analysis & Portfolio Management. Vikas Publication Private Limited. 6. Ramamurthy, B. M., & Reddy, S. (2005). Recent Trends in Mutual Fund Industry. SCMS Journal of Indian Management. 7. Singh, B. K., & Jha, A. K. (2009). An empirical study on awareness & acceptability of mutual fund. In Regional Student s Conference, ICWAI (pp ). 8. Retrieved from 9. Retrieved from Retrieved from Retrieved from Retrieved from ***** 268 P a g e

79 STUDY OF INTERDEPENDENCY OF BSE SENSEX WITH RESPECT TO NSE, NIKKEI, HANGSENG Yogendra Singh Rajavat 15 Amitabh Joshi 16 ABSTRACT In this paper the authors attempt to explain the behavior of BSE Sensex with reference to NSE, NIKKEI, and HANGSENG. Bombay stock exchange is one of the oldest stock exchanges. The study was done to analyze causal relationship among the various stock exchanges. The study was done by taking two year daily wise from 31/12/2010 to 31/12/2012 data of BSE, NSE, NIKKEI and HANGSENG. This paper examines the various research studied conducted with reference to Indian or International stock exchange context. This paper tries to find out the co movement and interdependency among the Asian stock exchanges. The correlation shows that BSE is highly co related with NSE (98%), NIKKEI (64%), and HANGSENG (82%). The granger causality test is used to study the cause and effect relationship among the stock exchanges. KEYWORDS Stock Exchanges, Correlation, Granger Causality Test, Bombay Stock Exchanges etc. INTRODUCTION A share market or equity market is a public entity for exchanging company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. Share market is a place where the shares of different companies are bought and sold. These are the organized Platform through which the buyers and sellers can trade in shares or other forms of securities like bonds, derivatives are called STOCK EXCHANGE. The stock exchanges could be a corporation or a mutual organization. They primarily serve the purpose of listing and trading the shares. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also called the BSE 30 (BOMBAY STOCK EXCHANGE)or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange (BSE). The 30 component companies which are some of the largest and most actively traded stocks are representative of various industrial sectors of the Indian economy. Published since January 1, 1986, the SENSEX is regarded as the pulse of the domestic stock markets in India. The National Stock Exchange (NSE) is stock exchange located at Mumbai, India. It is the largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1 trillion and over 1,652 listings as of July The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization. NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. The Nikkei 225 more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average, is a stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since It is a price-weighted index, and the components are reviewed once a year. Currently, the Nikkei is the most widely quoted average of Japanese equities, similar to the Dow Jones Industrial Average. In fact, it was known as the "Nikkei Dow Jones Stock Average" from 1975 to 1985.The Nikkei 225 began to be calculated on September 7, 1950, retroactively calculated back to May 16, Since January 2010 the index is updated every 15 seconds during trading sessions. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 48 constituent companies represent about 60% of capitalization of the Hong Kong Stock Exchange. HSI was started on November 24, 1969, and is currently compiled and maintained by Hang Seng Index s Company Limited, which is a wholly owned subsidiary of Hang Seng Bank, one of the largest banks registered and listed in Hong Kong in terms of market capitalization. REVIEW OF LITERATURE Ali et al., (2011) has done a study on Co movement Between Emerging and Developed Stock Markets the study reveals that there is no co movement and interdependence among Pakistan s equity market with the markets of UK, USA, Taiwan, Malaysia and Singapore. Therefore, investors can reduce risk through investment in these countries. Whereas the stock prices of Pakistan equity market move together with the stock prices of India, China, Japan and Indonesia so there is no chance of risk minimization for investors through international portfolio in these countries. 15 Assistant Professor, Prestige Institute of Management, Madhya Pradesh, India, yogendra_rajavat@yahoo.co.in 16 Assistant Professor, Prestige Institute of Management, Madhya Pradesh, India, dramitabhjoshi@gmail.com 269 P a g e

80 Ismail (2009) has done a study on, Is there any Co movement Between Stock Markets of Turkey, Russia and Hungary? This study investigates whether there exists long run relationship and Granger Causality between Turkish, Russian and Hungarian stock indices. Applying to Granger Causality test reveals that the bidirectional causality for the Turkish and Russian stock indices. We also find that Hungarian stock market does Granger cause to Turkish stock market but not vice versa. Furthermore, Russian stock market does Granger cause to Hungarian stock market but not vice versa. Patel & Patel (2006) has done a study the study on co-movement & interdependency of Indian stock market with selected foreign stock markets which indicates that the Granger causality test it can be reveal that BSE is not affected by any of the selected market but BSE does granger cause to FTSE, Hangseng, JKSE, CSE, and TSEC. It means that these markets are dependent on BSE. Goh (2005) looked at the dynamic relationship among the five ASEAN markets, namely, Singapore, Malaysia, Indonesia, Thailand and the Philippines. They found that the co integration among the stock indices before the crisis but not during the crisis. Panayotis Alexakis has investigated the possibility of short and long term statistical relationships among the organized stock markets of Greece and the U.K., during the period Wong et al., (2004) the authors found there is co-movement between some of the developed and emerging markets, but some emerging markets do differ from the developed markets with which they share a long-run equilibrium relationship. Furthermore, it has been observed that there has been increasing interdependence between most of the developed and emerging markets since the 1987 Stock Market Crash. This interdependence intensified after the 1997 Asian Financial Crisis. With this phenomenon of increasing co-movement between developed and emerging stock markets, benefits of international diversification become limited. Yu (1997) studied Hong Kong, Tokyo and Singapore markets by using daily data for a period of They traced bidirectional relationship in Tokyo, no causation in the Singapore markets and also found that changes in exchange rates Granger cause changes in stock prices. Wu and Su (1998) did another study about Asia and US. They found co integration among the US, Japan, UK and Hong Kong stock markets. Masih and Masih (1997) investigated the dynamic relation between South Asian countries, Taiwan, South Korea, Singapore, Hong Kong and developed countries US, Germany, UK, and Japan. They found co integration between these two. Chowdhury, A. R. (1994) looked at the relationship among Argentina, Brazil, Chile, Colombia, Mexico, Venezuela, USA stock exchanges. They found that the markets are co-integrated with or without the presence of the USA which appears to exert domineering influence. Taylor and Tonks (1989) found the long run relationship between UK, Germany, Netherlands and Japan stock markets. Yet, they could not find any co-integration for US. He applied to Johansen estimation technique and reported that there are four co integrating vectors indicating a common stochastic trend among the markets. OBJECTIVES OF STUDY The primary objective of this paper is to study causality among Bombay stock exchange, National stock exchange, NIKKEI, HANGSENG. RESEARCH METHODOLOGY The Study This study is based to find interdependence of BSE with major stock exchanges. In this paper the authors are presenting the inter dependency among stock exchanges. BSE the 30 component companies which are some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy. Published since January 1, 1986, the SENSEX is regarded as the pulse of the domestic stock markets in India. The National Stock Exchange (NSE) is stock exchange located at Mumbai, India. The exchange was established in 1992 and has grown to be the country's largest securities exchange NSE is also known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization. The Nikkei 225 more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average, is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei 225 began to be calculated on September 7, 1950, retroactively calculated back to May 16, Since January 2010 the index is updated every 15 seconds during trading sessions. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index in Hong Kong. HSI was started on November 24, 1969, and is currently compiled and maintained by Hang Seng Index s Company Limited, which is a wholly owned subsidiary of Hang Seng Bank, one of largest banks registered and listed in Hong Kong in terms of market capitalization. 270 P a g e

81 Data Collection Day wise data of BSE, NSE, NIKKEI, and HANGSENG was collected for a period of 2 years i.e. from 31 December 2010 to 31 December Data Analysis The analysis was done on Eviews software. The Granger Causality Test was performed to find the cause and affect relationship between the variables. RESULT AND ANALYSIS The correlation Table1 shows correlation among all selected market over a period of time. Correlation is statistical tool which measures the degree of relationship between two and more variable. Here, by term relationship, we mean the tendency of variable to move together. In the sense, it denotes interdependency amongst variables. The movement of variable may be in positive or negative direction. Correlation of BSE with HANGSENG is 82% which indicates: BSE is highly correlated with HANGSENG. We can see that BSE is also highly correlated with NSE (98%); BSE is moderately correlated with NIKKEI (64%). Table-1: Correlations BSE HANGSENG NSE NIKKEI BSE Pearson Correlation **.983 **.641 ** Sig. (2-tailed) N HANGSENG Pearson Correlation.817 ** **.775 ** Sig. (2-tailed) N NSE Pearson Correlation.983 **.796 ** ** Sig. (2-tailed) N NIKKEI Pearson Correlation.641 **.775 **.614 ** 1 Sig. (2-tailed) N Sources: Primary Data Analysis **. Correlation is significant at the 0.01 level (2-tailed). H01.1: NSE does not Granger Cause BSE Hypothesis is not rejected. Since the probability value is 14.6% in Table2 is more than 5%, hence the hypothesis is not rejected. H01.2: BSE does not Granger Cause NSE Hypothesis is rejected. Since the probability value is 0% in Table2 is less than 5 percent, hence the hypothesis is rejected. H02.1: NIKKEI does not Granger Cause BSE Hypothesis is not rejected. Since the probability value is 12.3% in Table2 is more than 5%, hence the hypothesis is not rejected. H02.2: BSE does not Granger Cause NIKKEI Hypothesis is rejected. Since the probability value is 1% in Table2 is less than 5 percent, hence the hypothesis is rejected. H03.1: HANGSENG does not Granger Cause BSE Hypothesis is not rejected. Since the probability value is 10.1% in Table2 is more than 5%, hence the hypothesis is not rejected. H03.2: BSE does not Granger Cause HANGSENG Hypothesis is rejected. Since the probability value is 0% in Table2 is less than 5 percent, hence the hypothesis is rejected. H04.1: NIKKEI does not Granger Cause NSE Hypothesis is rejected. Since the probability value is 0.9% in Table2 is less than 5 percent, hence the hypothesis is rejected. H04.2: NSE does not Granger Cause NIKKEI Hypothesis is rejected. Since the probability value is 0.7% in Table2 is less than 5 percent, hence the hypothesis is rejected. H05.1: HANGSENG does not Granger Cause NSE Hypothesis is not rejected. Since the probability value is 7.7% in Table2 is more than 5%, hence the hypothesis is not rejected. H05.2: NSE does not Granger Cause HANGSENG Hypothesis is rejected. Since the probability value is 0.6% in Table2 is less than 5 percent, hence the hypothesis is rejected. 271 P a g e

82 H06.1: HANGSENG does not Granger Cause NIKKEI Hypothesis is not rejected. Since the probability value is 61.4% in Table2 is more than 5%, hence the hypothesis is not rejected. H06.2: NIKKEI does not Granger Cause HANGSENG Hypothesis is rejected. Since the probability value is 0% in Table2 is less than 5 percent, hence the hypothesis is rejected. CONCLUSIONS Table-2: Pair Wise Granger Causality Tests Null Hypothesis Obs F-Statistic Probability NSE does not Granger Cause BSE BSE does not Granger Cause NSE NIKKEI does not Granger Cause BSE BSE does not Granger Cause NIKKEI HANGSENG does not Granger Cause BSE BSE does not Granger Cause HANGSENG NIKKEI does not Granger Cause NSE NSE does not Granger Cause NIKKEI HANGSENG does not Granger Cause NSE NSE does not Granger Cause HANGSENG HANGSENG does not Granger Cause NIKKEI NIKKEI does not Granger Cause HANGSENG Sources: Primary Data Analysis The Correlation Analysis revels that the BSE is highly correlated with NSE (98%), NIKKEI (64%), and HANGSENG (82%). The granger causality test is used to study the cause and effect relationship among the stock exchanges. From Granger causality test it can be reveal that BSE is not affected by any of the selected market but BSE does granger cause to NSE, NIKKEI and HANGSENG. It means that these markets are dependent on BSE. These results are in conformity with the results generated by Patel & Patel (2006). They found that BSE is not affected by any of the selected market but BSE does granger cause to FTSE, Hangseng, JKSE, CSE, and TSEC. It means that these markets are dependent on BSE. REFERENCES 1. Searat, Ali, Babar, Zaheer Butt, & Kashif, ur Rehman. (2011). Co movement Between Emerging and Developed Stock Markets: An Investigation Through Co integration Analysis. World Applied Sciences Journal, ISSN , 12(4), Goh, Kim_Leng, Wong, C. Y., Kok, L. K. (2005). Financial Crisis and Inter temporal Linkages across the ASEAN-5 Stock Markets. Review of Quantitative Finance and Accounting, 24, Wing-Keung, Yann Ching Lim. (2004). The Relationship between Stock Markets of Major Developed Countries and Asian Emerging Markets. Journal of applied mathematics and decision sciences, 8(4), Wu, C., & Su, Y. (1998). Dynamic Relations among International Stock Markets. International Review of Economics and Finance, 7, Yu. (1997). Dynamic relationship between stock prices and exchange rates: Evidence from three South Asian countries. International business research, 2(2), Masih, A. M. M. & Masih, R. (1997). A comparative analysis of the propagation of stock market fluctuations in alternative models of dynamic causal linkages. Applied Financial Economics, 7 (1), Chowdhury, A. R. (1994). Stock market interdependencies: Evidence from the Asian NIEs. Journal of Macroeconomics, 16, Taylor, M. P., & Tonks, I. (1989). The internationalization of stock markets and the abolition of UK exchange control. Review of Economics and Statistics 71, Ismail, Aktar. (2009). Is there any co movement between stock markets of Turkey, Russia and Hungary? International Research Journal of Finance and Economics, 26, ISSN Retrieved from Patel, Dhaval, & Patel, Ritesh. (2006). The study on co-movement & interdependency of Indian stock market with selected foreign stock markets. Journal of Arts, Science & Commerce, E-ISSN ISSN Retrieved from ***** 272 P a g e

83 FINANCIAL ANALYSIS OF WIMCO LIMITED, BAREILLY Yasmeen Khan 17 ABSTRACT Financial statements refer to the statements, which are prepared by the business concern at the end of the year. These are income statement or trading and profit and loss account, which are prepared by a business concern in order to know the profit & loss earned during a specified period. Position statement or Balance Sheet, which is prepared by a business concern on a particular date in order to know its financial position. These statements reflect a combination of recorded facts; accounting conventions and personal judgments and conventions applied & affects them materially. Ratio analysis is a powerful tool of financial analysis. A ratio is defined as the indicated quotient of two mathematical expressions and as the relationship between two or more things. In financial analysis, a ratio is used as an index or yardstick for evaluating the financial position and performance of a firm. The absolute accounting figures reported in the financial statements do not provide a meaningful understanding of the performance and financial position of a firm. An accounting figure conveys meaning when it is related to some other relevant information. An attempt was made to perform financial analysis of Wimpco Limited to understand the performance and financial position of a firm. KEYWORDS Financial Analysis, Ratio, Balance Sheet, Profit and Loss Account etc. INTRODUCTION Necessity Is the Mother of Invention The common matches that are a part of each and every household in the modern world was invented by a chemist Johny Walker of Stock tones England all by accident, while conducting an experiment. He had been using stick of stir a mixture of potash (potassium carbonate and Antimony). When the scrapped is against the stone floor to get rid of the blob, which had formed on the stick it rapidly burst in to flames John Lundstrom of SWEDEN invented the safety match in This safety match can only catch fire by being rubbed against a special Surface because a part of necessary chemicals are on the match head and the other on the striking board. Production begins in the very same year in Sweden and by the firm of Bryant in May in England. Book matches were devised by an American Joshua Pusey in 1892 and were first manufactured in WIMCO Limited, C. B. Ganj, Bareilly It was established in The whole area where the factory was established was a Tarai region of Himalaya and was a forest region. There was abundance of poplar and Saimer trees in this region and woods of these are used as raw material in the manufacturing of matchsticks. On the other hand rural workers were easily available, so due to the availability of raw materials and workers this location was suitable for matches factory and government gave permission to establish the factory in this area. A Bird s eye view of Wimco In 1918, the Swedish match companies set up its office in India with Objective of manufacturing and selling matches in India. Wimco Limited is the oldest company because of Indo-Swedish venture in the India Was launched as a private limited company on 7 th September 1923 under the name of the Western Indian Match Corporation Limited. Within start duration of the seven years, five manufacturing factories were set up in India. They were situated at Kolkata, Chennai, Ambernath, Dhubri (now closed) and Bareilly (U.P.). A separate unit was setup in the Andaman Island in 1928 (now closed). The company become a public Company on the 19 th July 1929, the company was changed to its present name and fresh certificate of incorporation due to change of name was issued by additional Registrar of companies, Mumbai of 5 th Dec, With the passage of time File Company had engaged itself in the Production and sale of safety matches at it s also engaged presently in Forestry operation. The total match manufacturing process in WIMCO LIMITED is mechanized and at present WIMCO market share to nearly 10 to 15% of total country s requirements. The medium and small-scale unit meets the rest. WIMCO is the single largest safety matches manufacturer in India and is widely present in the Indian market through various brands of matches like Ship, Homelites, Tekka, Horsehead, Three Mangoes, Cheetah Fight, Kapas and Arrow, to name a few. It is the first company in India, to introduce Karborised safety matches, which leave no after-glow. 17 Assistant Professor, Department of Management Studies, Shri Venkateshwar University, Uttar Pradesh, India, gorgeous.yasmeen@gmail.com 273 P a g e

84 We are synonymous with superior quality, safe and consumer friendly goods. Having a wide distribution network, Wimco Limited in recent time s undertaken distribution of other companies, which deal in shampoos, Throat Drops, and Chewing? General Information about WIMCO (Bareilly Branch) It was established in Its total area of estate is approximately 22 Hectares and the area of the factory approximately 7 Hectares. The installed capacity of the plant is 1.75 lakh per annum and it produces safety match boxes. Present strength is Chart-1: Functional Hierarchy of Wimco Chart-2: Hierarchy of Wimco Sources: Author Compilation Chart-3: Flow Chart Sources: Author Compilation 274 P a g e

85 OBJECTIVES OF STUDY To know the financial position of the WIMCO Limited, Bareilly. To compare the result of the previous year (2008) with that of current year (2009) in order to know whether the profits are increasing or decreasing in the future. To gain the practical exposure in the field of finance and accounting. To know the organizational structure & hierarchy of WIMCO Limited, Bareilly. To be aware about the whole production process through a flow chart. RESEARCH METHODOLOGY This research is on the Financial Analysis of WIMCO. It includes contents like meaning of financial analysis, Ratio analysis, nature of ratio analysis, types of ratios, standards of comparison and Analysis of WIMCO. In this paper the focus is on the analysis of balance sheet of Wimco Limited, Bareilly with the help of trend analysis technique. This research is based upon the secondary data. The methodology adopted for the study is as follows: Familiarization, examination and evaluation of the procedures relating to the financial analysis. Collection of relevant data form company records and cross checking of this data. Calculations of financial ratios, parameter and norms, as also their financial implications. Broadly the data were collected for the report on the project work has been through the primary and secondary sources. The primary data is collected by various approaches so as to give a precise, accurate, realistic and relevant data. The main goal in the mind while gathering primary data was investigation and observation. The ends were thus achieved by a direct approach and personal observation from the officials of the company. The other staff members and the employees were interviewed for the sake of maintaining reasonable standard of accuracy. The secondary data as it has always been important for the completion of any report provides a reliable, suitable equate and specific knowledge. The annual reports, company profile, booklets, Balance Sheet of Wimco Limited. For the year 2008 & 2009 and the fixed asset register provided the knowledge and information regarding the relevant subjects. The valuable cooperation and continued support extended by all associated personnel s, head of the department, division and staff members contributed a lot to fulfill the requirement in the collection of data in order to present a complete report on the project work. Research Problem Research is being conducted to know the financial position of the Wimco Limited, Bareilly. TYPES OF RATIOS Several ratios, calculated from the accounting data, can be grouped in to various classes according to the financial activity or function to be evaluated. As started earlier, the parties which generally undertake financial analysis are short and long term creditors, owners and management. Short term creditor s main interest is in the liquidity position or the short term solvency of the firm. Long term creditors, on the other hand, are more interested in the long term solvency and profitability of the firm. Similarly, owners concentrate on different firm s profitability and analysis of the firm s financial conditions. Management is interested in evaluating every aspect of the firm s performance. They have to protect the interests of all the parties and see that the firm grows profitably. In view of the requirements of the various users of the ratios, we may classify them in to the following four important categories: a) Liquidity ratios, b) Leverage ratios, c) Activity ratios, and d) Profitability ratios. Liquidity ratio measure the firm s ability to meet current obligations; leverage ratios show the proportions of debt and equity in financing the firm s assets; activity ratios reflect the firm s efficiency in utilizing its assets, and profitability ratios measure the overall performance and effectiveness of the firm. TREND ANALYSIS The financial statements may be analyzed by computing trends of series of information. In simple words, trend means any general tendency. Analysis of these general tendencies is called Trend Analysis. In this way the trend analysis shows the direction of progress-upward or downward. Being a horizontal analysis of financial statements it is often called as Pyramid method of ratio analysis. In interpretation of financial statements, trend analysis has major importance. The main purpose of trend analysis is to know the trend of available financial information or knowledge. With the help of this analysis, one can forecast for future trend can be made easily. Trend analysis is done by using the following way: TREND PERCENTAGE. The financial statements for a series of years may be analyzed to determine the trend of the data contained therein. This involves the computation of the 275 P a g e

86 percentage relationship that each item in the statement bears to the corresponding item contained in that of the base year. The following are the steps involved in the computation of trend percentages: One year is taken as a base year. Generally, the first or the last year is taken as the base year. The figures of base year are taken as 100. Trend percentages are calculated in relation to base year. If a figure in other year is less than the figure in base year, the trend percentage will be less than 100 and it will be more than 100 if figure is more than base year figure. Each year s figure is divided by the base year s figure. The interpretation of trend analysis involves a cautious study. The mere increase or decrease in trend percentage may give misleading results if studied in isolation. It is also to be remembered that trend percentages are not calculated for all of the items in the financial statements as the fundamental objective is to make comparisons between items having some logical relationship to one another. Such an analysis of business facts is very significant from the point of view of forecasting or budget. It discloses the changes in the financial and operating data between specific periods and makes possible for the analyst to form an opinion as to whether favourable or unfavourable tendencies are reflected by the accounting data. DATA ANALYSIS AND INTERPRETATION Financial Analysis of Wimco 2008 & 2009 and Necessary Comments Current Ratio: The current ratio compares the total current assets of the business unit to its current liabilities. This ratio is also known as working capital. Table-1: Current Ratio Particulars Current Assets Current Liabilities Current Ratio 1.13:1 1.40:1 Current Ratio = Current Assets / Current Liabilities (2009) = / = 1.13:1 (2008) = / = 1.40:1 Comment: Generally 2:1 is considered ideal for concern i.e., current assets should be twice the current liabilities; there will be no adverse effect on business operations when the payment of current liabilities is made. Here in the current year the current ratio is 1.13:1 and of previous year it is 1.40:1 so it is not ideal ratio. In year 2009 current ratio is not more than the previous year. Liquid Ratio: This ratio is concerned with the relationship of liquid assets and current liabilities. Liquidity ratio is also known as Acid test ratio or Quick ratio. Table-2: Liquid Ratio Particulars Liquid Assets Current Liabilities Liquid Ratio 0.42:1 0.62:1 Comment: Generally 1:1 is considered ideal for concern because it is wise to keep the liquid assets at least equal to the current liabilities at all times. According to the analysis quick ratio is a little bit good in 2008 than in Liquid Ratio = Liquid Assets / Current Liabilities (2009) = / = 0.42:1 (2008) = / = 0.62:1 Debt Equity Ratio: The Debt-Equity ratio measures the long-term financial solvency of a business concern. This ratio relates the owner s stakeholders vis-à-vis that of outsiders. Table-3: Debt Equity Ratios Particulars Long Term Debt Shareholder s Fund Debt Equity Ratio 0.04 times 0.03 times Debt Equity Ratio = Long-term Debt / Shareholder s funds (2009) = / = 0.04 times (2008) = / = 0.03 times Comment: A low ratio is generally viewed as favorable from long term creditor s point of view because a large margin of protection provides safety for the creditors. Keeping in view the interest of both (shareholders and long term creditors), debt equity ratio is acceptable. In the year 2008 the debt equity ratio is 0.03 times where as in the year 2009 it is 0.04 times so the ratio of 2008 is much better than P a g e

87 Stock (Inventory) Turnover Ratio: This ratio indicates the relationship between the cost of goods sold and average stock kept during the year. This ratio indicates whether stock has been efficiently used or not. Table-4: Stock Turnover Ratio Particulars Cost of Goods Sold Average Stock Stock Turnover Ratio 6.61 times 8.04 times Comment: Higher the ratio, the better it is because it shows that finished stock is rapidly turned over. The ratio of stock turnover of 2008 is much better than Stock Turnover Ratio = Cost of goods sold / Average Stock (2009) = / = 6.61 times (2008) = / = 8.04 times Debtors Turnover Ratio: Normally all business firms sell goods on cash as well as on credit basis, but every firm wants that the amount from debtors is realized in time or as quickly as possible. Table-5: Debtors Turnover Ratio Particulars Net Credit Sales Average Receivables Debtors Turnover Ratio times times Debtors Turnover Ratio = Net Credit Sales / Average Receivables (2009) = / = times (2008) = / = times Comment: Higher Debtors turnover ratio indicates that the collection from debtors is quick and efficient and debtor s turnover ratio in the year 2008 is times than that of 2009 which is times. It indicates that in 2008 collection from debtors is quick than Working Capital Turnover Ratio: Working Capital turnover ratio reveals the efficiency with which working capital has been utilized by a concern. Table-6: Working Capital Turnover Ratio Particulars Cost of Goods Sold Working Capital Working Capital T/O Ratio times 6.50 times Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital (2009) = / = times (2008) = / = 6.50 times Comment: The high ratio indicates efficient use of working capital in the concern. In the year 2009 working capital turnover ratio is times in comparison to 2008 ratio i.e., 6.50 times. So it means that the company is having efficient working capital. Current Assets Turnover Ratio: This ratio measures the concern s efficiency or inefficiency in utilization of its current assets. Table-7: Current Assets Turnover Ratio Particulars Cost of Goods Sold Current Assets Current Assets T/O Ratio 1.78 times 1.88 times Comment: In the year 2008 the ratio is 1.88 times in comparison to the year 2009 which is 1.78 times hence, we can say that company is quite efficient in utilizing its current assets. Current Assets Turnover Ratio = Cost of Goods Sold / Current Assets (2009) = / = 1.78 times (2008) = / = 1.88 times 277 P a g e

88 Fixed Assets Turnover Ratio: This ratio measures the firm s ability to generate adequate sales revenue in relation to the size of the investment made in fixed assets. Table-8: Fixed Assets Turnover Ratio Particulars Cost of Goods Sold Net Fixed Assets Current Assets T/O Ratio 6.52 times 7.43 times Fixed Assets Turnover Ratio = Cost of Goods Sold / Net Fixed Assets (2009) = / = 6.52 times (2008) = / = 7.43 times Comment: The ideal ratio is 5:1 hence, the company is in better position because in the previous year (2008) fixed assets turnover ratio is 7.43 times and in current year (2009) this ratio is 6.52 times. So there is better utilization of fixed assets in the company. Net Worth Turnover Ratio: This ratio establishes the relationship between Net worth or capital employed by shareholders and net sales. Table-9: Net Worth Turnover Ratio Particulars Net Sales Net Worth Net Worth T/O Ratio 1.31 times 1.35 times Net Worth Turnover Ratio = Net Sales / Net Worth (2009) = / = 1.31 times (2008) = / = 1.35 times Comment: In the year 2008 the Net worth ratio is 1.35 times where as in the year 2009 it is 1.31 times so the ratio of the year 2008 is much better than the year It indicates that the capital employed by the shareholder s in a business is used efficiently. Earning Per Share Table-10: Earning Per Share Particulars Profit After Tax Number of Equity Shares Earning Per Share 0.09 Per Share 0.46 Per Share Comment: The Company is having more EPS in the year 2008 than 2009 because in 2008 profit after tax is more than profit after tax in It indicates that company is unable to maintain its past performance. Earnings Per Share = Profit after tax (PAT) / Number of Equity Shares (2009) Profit After Taxation - Arrears of Preference Dividend = = Earning Per Share = Profit after Tax (PAT) / Number of Equity Shares = * / = 0.09 per share (2008) Profit After Taxation - Arrears of Preference Dividend = = Earnings Per Share = * / = 0.46 per share Gross Profit Ratio: This ratio indicates the relationship between Gross profit and Net sales. This ratio is also known as Gross Margin. Table-11: Gross Profit Ratio Particulars Gross Profit Net Sales Gross Profit Ratio 0.81% 3.69% Comment: No ideal standard is fixed for this ratio, but the gross profit ratio must be adequate. In the year 2008 gross profit is 3.69% in comparison to the year 2009 i.e., 0.81% Gross profit ratio is primarily a test of the efficiency of purchases and sales management. Gross Profit Ratio = Gross Profit * 100 / Net Sales (2009) = * 100 / = 0.81% (2008) = * 100 / = 3.69% 278 P a g e

89 Net Profit Ratio: It is a measure of the over-all profitability of a business concern. Net profit ratio indicates the relationship between the net profit earned by the concern and net sales. Table-12: Net Profit Ratio Particulars Net Profit Net Sales Net Profit Ratio 0.61% 3.19% Net Profit Ratio = Net Profit * 100 / Net Sales (2009) = * 100 / = 0.61% (2008) = * 100/ = 3.19% Comment: Higher the ratio the better it is because it gives the idea of improved efficiency of the concern. This ratio is very useful to the proprietor because it reveals the overall profitability of the concern. The profitability ratio in the year 2008 is more in comparison to the current year The company is having more profit in the year 2008 than the year Return on Capital Employed: This ratio expresses the relationship between capital employed and net profit of a business concern. Table-13: Net Profit Ratio Particulars Profit Before Interest and Tax Capital Employed Return on Capital Employed 1.03% 7.97% Comment: Higher the ratio the better it is. In the year 2009 the ratio is 1.03% and in the year 2008 the ratio is 7.97% which shows that company s earning capacity is good in the previous year in comparison to current year. Return on Capital Employed = Profit Before Interest and Tax * 100 / Capital Employed (2009) = * 100 / = 1.03% (2008) = * 100 / = 7.97% Profit after Tax to Sales: This ratio expressed the relationship between Profit after tax and sales. Table-14: Profit after Tax to Sales Particulars Profit Before Tax Sales Profit After Tax to Sales 0.81% 3.69% Comment: In the year 2009 the ratio is 0.81% which is least in comparison to the year 2008 where the ratio is 3.69%. Profit after Tax to Sales = Profit before Tax * 100 / Sales (2009) = * 100 / = 0.81% (2008) = * 100 / = 3.69% Profit Margin: This is a widely used measure of performance and is comparable across companies in similar industries. Table-15: Profit Margin Particulars Profit Before Interest & Tax Net Sales Profit Margin 0.81% 3.76% Comment: In the year 2009 profit margin ratio is 0.81% in comparison to the year 2008 which is 3.76%. Profit margin is reducing in year 2009 which is not a good indicator for the financial position of the company. Profit Margin = Profit Before Interest and Tax * 100 / Net Sales (2009) = * 100 / = 0.81% (2008) = * 100 / = 3.76% 279 P a g e

90 BALANCE SHEET AS ON 31 ST MARCH, 2009 & 31 ST MARCH, 2008 Particulars Rs. In lacs Rs. In lacs Increase/ Decrease SOURCES OF FUNDS Shareholders Funds Share capital 6, , (7.20%) Reserves and surplus 7, , (5.33%) 13, , (6.22%) Loan Funds Secured loans % Unsecured loans (2.54%) % Total 14, , % APPLICATION OF FUNDS Fixed Assets Gross block 22, , (4.06%) Less: Accumulated Depreciation 10, , % Provision for Impairment Net block 11, , % Capital work-in-progress % 12, , % Investments Deferred Tax Asset (NET) Current Assets, Loans and Advances: Plantation Work in Progress % Inventories 4, , % Sundry Debtors (46.73%) Cash and Bank Balances (60.85%) Loans and Advances 2, , (6.14%) % Less: Current Liabilities and Provisions: Current Liabilities 7, , % Provisions (42.20%) 7, , % Net Currents Assets , (58.43%) Total 14, , (4.86%) FINDINGS 1. The company s current ratio is 1.13:1 in 2009 in comparison to 2008 which is 1.40:1 so it means that either current assets are decreasing or current liabilities are increasing that s why this ratio is decreasing in the year 2009 which shows that company is not in a good position to pay its liabilities. 2. Liquid ratio in 2009 is 0.42:1 and in 2008 it is 0.62:1 which shows liquidity position of the company is little bit good in The debt equity ratio is 0.04 times in 2009 whereas in 2008 it is 0.03 times. In debt equity ratio a low ratio is generally viewed as favorable from long term creditor s point of view because a large margin of protection provides safety for the creditors. 4. Company s stock turnover ratio is 6.61 times in 2009 and 8.04 times in Debtors turnover ratio is times in 2009 as compared to 2008 i.e times which indicates that in 2008 collection from debtors is quick than Working capital turnover ratio is times in 2009 and 6.50 times in High ratio indicates efficient use of working capital in the concern it means company is having efficient working capital. 7. Current assets turnover ratio in 2009 is 1.78 times in comparison to 2008 which is 1.88 times so we can say that company is quite efficient in utilizing its current assets. 280 P a g e

91 8. Fixed assets turnover ratio is 6.52 times in 2009 and 7.54 times in It indicates better utilization of fixed assets in the company. 9. Net worth turnover ratio is 1.31 times in 2009 and 1.35 times in 2008; it indicates that the capital employed by the shareholder s in a business is used efficiently. 10. Profit margin is 0.81% in 2009 and in 2008 it is 3.76% which shows that profit margin is reducing which is not a good indicator for the financial position of the company. 11. The company EPS is 0.46 in and in it is Hence, WIMCO s long-term version is to protect the shareholder s interest. 12. Company s gross profit ratio is 0.81% in 2009 and 3.69% in Net profit ratio in 2009 is 0.61% and 3.19% in This ratio is very useful to the proprietor because it reveals the overall profitability of the concern. Company is having more profit in the year 2008 than the year Return on capital employed ratio is 1.03% in 2009 and 7.97% in 2008 it shows company s earning capacity is not good in CONCLUSIONS As per analysis in company got the profit of Rs lakhs in current year company get lakhs of profit. This shows that company is not in a good position as it is going in a loss because company s financial position is not good in 2009 as comparison to So still company need to get more profit by which as soon as possible, company may cover up its losses and pay dividend to its shareholders. The profitability ratio in the year 2008 is more in comparison to the current year The company is having more profit in the year 2008 than the year In the year 2009 Profit after tax to sales ratio is 0.81% which is least in comparison to the year 2008 where the ratio is 3.69%. Profit margin ratio is 0.81% in 2009 as compared to 2008 which is 3.76%. Profit margin is reducing in year 2009 which is not a good indicator for the financial position of the company. LIMITATIONS Data analysis & trend analysis of the research is limited to balance sheet only. Balance sheets of only 2 years have been studied & compared but the company is in operation for so many years. Only specific tools (i.e. ratio analysis) have been used for data analysis, while so many other tools are also there. Organizational rules & regulations. Limitations of the financial tools used. SUGGESTIONS There is wastage of raw material so company should reduce its wastage. Company should maintain its machinery so that it will give more output. Company should try to increase its sales volume by increasing productivity. REFERENCES 1. Kothari, C. R. Research Methodology (2 nd revised ed.). Wishwa Prakashan. 2. Jain, S. P., & Narang, K. L. Advanced Accountancy. New Delhi- Ludhiana: Kalyani publishers. 3. Garg, A. K. Financial Analysis for Management. Swati Prakashan. 4. Jain, & Khan. Tata Macgraw Hill Publications, Second revised edition. 5. Maheshwari, S. N., & Maheshwari, S. K. Financial Accounting (9 th ed.). New Delhi: Vikas Publishing House Private Limited. 6. Lal, Jawahar, & Srivastava, Seema. Financial Accounting (2 nd revised ed.). New Delhi: S. Chand and Company Limited. 7. ( ). WIMCO (Annual report). 8. Retrieved from ***** 281 P a g e

92 EMPIRICAL STUDY OF PERSONAL MICRO CREDIT: A DRIVING FORCE FOR DEVELOPMENT OF LOWER INCOME WOMEN Renuka S. Nifadkar 18 Anil P. Dongre 19 ABSTRACT Micro Credit is the extension of very small amount of loan to the poor people who lack collateral, steady employment and variable credit history. Micro Credit is provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those, which provide these facilities. The concept of micro credit is known more by its approach than by monetary limits to the amount of loans. Micro finance is a broader term than Micro credit. The main components of Micro finance are deposits, loan payment services, insurance, and money transfers. However the Micro credit is only one component of Micro Finance. The concept of micro credit is known more by its approach than by monetary limits to the amount of loans. An extremely small loan given to impoverished people to help them become self employed. It is also known as "micro lending" or "micro loan". In India, the National Bank for Agriculture and Rural Development (NABARD) finances banks that on-lend funds to self-help groups (SHGs). Apart from the NABARD now days Micro Finance Institutions (MFI), Public sector banks, Private sector banks, RRBs and DCCBs are also finances to poorest women for upliftment of women. Patsansthas registered under the Co-operative societies are lending funds to the poor women. These Patsansthas are generally lending the funds to the Individual member of the group with the backing of each others guarantee. The concept of Personal Micro Credit than funding to the SHGS becomes very popular and targeted means of finance. These Patsansthas are giving not only funds but also provides technical assistance to the women for developing the enterprenual skills of the women. The researcher conducted the research at Navjeevan Nagari Sahakari Patsanstha, a credit society registered with Co-operative department running a financing activity towards upliftment of women through the Personal Micro Credit We study of the concept of Personal Micro Credit and whether it affects on the upliftment of the women. KEYWORDS NABARD, SHG s, Personal Micro Credit, MFI, Micro Credit, Upliftment etc. INTRODUCTION Microcredit is the extension of very small loans (microloans) to poor borrowers who typically lack collateral, steady employment and a verifiable credit history. It is designed to spur entrepreneurship, increase incomes, alleviate poverty and often also to empower women. Microcredit is a part of microfinance, which is the provision of a wider range of financial services, in particular savings, to the poor. Micro Credit is provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semiurban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those, which provide these facilities. The concept of micro credit is known more by its approach than by monetary limits to the amount of loans. Of course, the target segment is the poorest. This research paper is on Micro Credit and not Micro finance. Micro finance is a broader term than Micro credit. The main components of Micro finance are deposits, loan payment services, insurance, and money transfers. However the Micro credit is only one component of Micro Finance. An extremely small loan given to impoverished people to help them become self employed, also known as "micro lending" or "micro loan". OBJECTIVES OF STUDY 1. To study the micro credit process 2. To study the impact of Micro Credit on Socio Economic status of the low income women. 3. To understand the diff between personal Micro Credit and Micro Finance. SCOPE AND LIMITATIONS 1. The place of the study is Nasik City. 2. The women from urban rural area are not covered under the purview of the study. 3. Only Personal Micro Credit scheme from NCCS is under purview. 4. Recommendations and conclusions may or may not apply to other credit society. 18 Assistant Professor, Singad Institute of Business Administration & Research, Maharashtra, India, renuka.nifadkar@gmail.com 19 Director, School of Social Science, Head-U.G. Department of of Mnagement Sudies, North Mahashtra University, Maharashtra, India, ap_dongre@rediffmail.com 282 P a g e

93 HYPOTHESIS OF STUDY Sample Size Personal Micro Finance improves the saving habits of the self employed women belonging to low income group. Personal Micro Finance increases the average income of the self employed women belonging to low income group. Research Methodology Table-1 Population 49 groups of 5 each, 5 Groups of 3 each Sample size 12 groups of 5 each, 1 group of 3 each Sample Method Random sampling Table-2 Research Type Desk Research and Survey Sources of Data Primary Data: Structured Questionnaire & Interview Schedule. Secondary Data: Websites, Books and journals Period 1 and ½ Years Analysis Tool Chi Square test using bar charts and tables ORIGIN OF CONCEPT In 1972, noted civil rights leader Dr. Ela Bhatt founded Self Employed Women Association of India (SEWA). It is a trade Union for poor, self employed woman workers of India. SEWA members are women who earn a living through their own labour or small businesses. The main goals are to organize women workers for full employment. Full employment means employment whereby workers obtain work security, income security, food security and social security (at least health care, child care and shelter). SEWA organizes women to ensure that every family obtains full employment. By self-reliance we mean that women should be autonomous and self-reliant, individually and collectively, both economically and in terms of their decision-making ability. The concept of micro credit is known more by its approach than by monetary limits to the amount of loans. Of course, the target segment is the poorest, but the Mohammed Yunus, 1974 in Bangladesh tried the concept of joint-liability or peer-pressure. Most micro credit loans are dispensed through village or community-level self- help groups (SHGs) who agree to create a pressure on the individual borrower to perform as per contract. In India, the National Bank for Agriculture and Rural Development (NABARD) finances banks that on-lend funds to self-help groups (SHGs). Apart from the NABARD now days Micro Finance Institutions (MFI), Public sector banks, Private sector banks, RRBs and DCCBs are also finances to poorest women for upliftment of women. Patsansthas registered under the Cooperative societies are lending funds to the poor women. These Patsansthas are generally lending the funds to the Individual member of the group with the backing of each other s guarantee. The concept of Personal Micro Credit than funding to the SHGS becomes very popular and targeted means of finance. These Patsansthas are giving not only funds but also provides technical assistance to the women for developing entrepreneurial skills of the women. THE SCENARIO OF MAHARASHTRA STATE AS ON 31/3/2011 State: Maharashtra Total number of MFIs operating in the state= 30, Number of MFIs having HQ in the state=14, Banks providing microfinance services=57 (Public Banks=21, Private Banks=3, RRBs=3, DCCBs=30) Total number of SHGs under SBLP in the state= Total savings-client outreach= Total SHG-savings with banks (in lakhs) = Total credit-client outreach= (MFIs= , Banks= ) Total portfolio outstanding (in lakhs) = (MFIs= , SHG= ) No. of districts served by MFI=35 Out of which no. of poorest districts= 19 Sources: PERSONAL MICRO CREDIT PROCESS This research paper is focused on whether the Personal Micro Credit is help in upliftment of socioeconomic status of the poor women in Nashik City. More precisely the researcher study the role of Personal Micro Credit disbursed by Navjeevan Nagari Sahakari Patsanstha to the poor income women. 283 P a g e

94 The process of the lending the Micro Credit is as follows: Figure-1 Since two years the Patsansthas is funding to the poor income Women for their empowerment. Table-3 Number of Groups 49 Groups of 5 each and 12 Groups of 3 each Total Number of Borrowers 256 Women Amount of loan disbursed per borrower Rs. 5000/- Tenure of Loan 12 Months Monthly repayment Rs. 600/-per Month Rs. 100/-Transfer to Savings and Rs. 500/-towards Loan. So, far 110 Women out of 256 borrowers has cleared the loan successfully. Out of the 110 women the Patsanshta has given loan facility of Rs. 10,000/- to the 20 women. Table-4 Amount of Loan Disbursed Rs /- Tenure of Loan 15 Months Monthly repayment Rs. 800/-per Month Rs. 150/-Transfer to Savings and Rs. 650/-towards Loan. From the above table it shows that the not a single women is defaulter. Instead of that the 110 women repaid the loan successfully; and the Patsanstaha funded Rs. 10,000/-to the 20 women borrowers. DATA ANALYSIS The researcher has asked several questions to the borrowers. The researcher met the borrowers personally to the randomly selected borrowers. The analysis of the information collected through the questionnaire and direct interviews is as under: Table-5: Monthly Income of Borrower before Loan * Monthly Income of the Borrower after Loan Monthly Income of the Borrower before Loan Monthly Income of the Borrower after Loan UP to RS 2001 to RS 3001 to RS 4001 to RS 5001 RA Above RS 2000 RS 3000 RS 4000 RS 5000 to RS 6000 to 7000 RS Up to Rs RS 2001 to RS RS 3001 to RS RS 4001 to RS Above RS Total Total 284 P a g e

95 Monthly Income of the Borrower before Loan Table-6: Monthly Income of the Borrower before Loan * Monthly Income of the Borrower after Loan UP to RS 2000 UP to RS 2000 Monthly Income of the Borrower after Loan RS 2001 to RS 3000 RS 3001 to RS 4000 RS 4001 to RS 5000 RS 5001 to RS 6000 RA to 7000 Above RS Total Count % of Total 1.6% 7.9% 11.1% 3.2% 0% 0% 0% 23.8% RS 2001 to Count RS 3000 % of Total 0% 1.6% 15.9% 15.9% 1.6% 0% 1.6% 36.5% RS 3001 to Count RS 4000 % of Total 0% 0% 3.2% 7.9% 6.3% 1.6% 0% 19.0% RS 4001 to Count RS 5000 % of Total 0% 0% 0% 1.6% 0% 1.6% 0% 3.2% Above Count RS 6000 % of Total 0% 0% 0% 0% 0% 4.8% 12.7% 17.5% Total Count % of Total 1.6% 9.5% 30.2% 28.6% 7.9% 7.9% 14.3% 100.0% Graph-1: Monthly Income of the Borrower before Loan Table-7: Symmetric Measures Value Asymp. Std. Error(a) Approx. T(b) Approx Sig. Interval by Interval Pearson's R (c) Ordinal by Ordinal Spearman Correlation (c) N of Valid Cases 63 Table-8: Chi-Square Tests Value Df Asymp. Sig. (2-Sided) Pearson Chi-Square (a) N of Valid Cases 63 A33 cells (94.3%) have expected count less than 5. The minimum expected count is.03. The calculated p value of Chi-Square is less than the benchmark value This denotes that the proposition Income increased after taking the loan is rejected. So it proves that the income is increased after taking the loan. The average Income of Women using the weighted average is Rs. 2921/- per month has found increased to 4516/- per month after taking the loan. Table-9: Savings per Month before Taking Loan Case Processing Summary Cases Valid M T N Percent N Percent is N Percent ot Amount * Savings Per Month before Taking Loan % 3 4.8% % s a i l n g 285 P a g e

96 Table-10: Savings per Month before Taking Loan Savings Per Month before Taking Loan Total Number of Persons Table-11: Savings per Month after Taking Loan Case Processing Summary Cases Valid Missing Total N Percent N Percent N Percent Amount * Savings per Month after Taking Loan % 3 4.8% % Table 12: Savings per Month after Taking Loan Cross Tabulation Count Savings Per Month after Taking Loan Total Number of Persons Number of Persons Total From the above data it shows that out of 63 respondents the 53 women save Rs. 100/- per month and only 7 women save Rs. 200/- per month. However, after availing the loan out of 53 women only 12 women i.e. 21% women s saving remained as it is and remaining 79% women s savings is increased. It is also found that the women who save Rs. 200/- before taking the loan have started savings in between Rs. 300/- to 400/- per month % age of number of persons out of total respondent. Table Total % % 0% 0% 100% From the above table, it shows that the 88.89% of the total respondent save Rs. 100 Per Month and 11.11% respondent saves Rs. 200/-per month before taking the loan. %age of numbers of persons out of total respondents. Table 15: Monthly Income of the Borrower after Loan * Savings per Month after Taking Loan Savings Per Month Total after Taking Loan UP to RS RS 2001 to RS RS 3001 to RS RS 4001 to RS RS 5001 to RS RS 6001 to RS ABOVE RS Total P a g e

97 Table Total % % % % 100% From the above table it shows that after taking the loan habit of savings among the women shows increased. It reveals that 22.22% women saved Rs. 100 per months which are 88.89% before taking the loan. Then 42.86% women save Rs. 200/- per month which is only 11.11% before taking the loan; and 23.81% women started savings up to Rs. 300/- per month and 11.1% women started savings Rs. 400/- per month. Table-17 The calculated p value of Chi-Square is less than the benchmark value This denotes that the proposition savings after taking the loan are not increased is rejected. It proves that the savings habit is increased after taking loan. CONCLUSIONS Personal Micro Finance plays a vital role in the life of low income group people. It is observed that the average income of the respondents under study has been increased in between 48% to 55%. From the above study it is also revealed that self employed women improved their saving habits to certain extent. No doubt improved saving habits does not mean improved standard of living. Researcher feels that as the study is for a limited period of two years will not give a clear picture but if the habit is continued for a longer period it may give the results. Researcher found that around 46% of the respondents have purchased the small assets to improve their standard of living. Researcher concludes that within a span of one and half year respondents have showed their capacity to earn more as well as ability to save and eagerness to improve the standard of living. REFERENCES 1. Rajesekhar, D. (1991). Problems and Prospects of Group Lending in NGO Credit Programs in India: Savings and Development (Research paper). 2. Rajgopalan S. (2005). Micro Finance: Challenges and Opportunities. ICFAI University Press. 3. Agarwal, Vijay, & Kashyap, V. R. K. (2005). Micro Finance: An Introduction. ICFAI University Press. 4. Retrieved from 5. Retrieved from 6. Retrieved from ***** FOR ANY CLARIFICATION OR SUGGESTION, WRITE US: Editor-In-Chief Pezzottaite Journals, 24, Saraswati Lane, Bohri, Near Modern Dewan Beverages, Jammu Tawi , Jammu and Kashmir, India. (Mobile): editorinchief@pezzottaitejournals.net contactus@pezzottaitejournals.net 287 P a g e

98 RELATIVE PERFORMANCE OF INDEX FUNDS: EMPIRICAL EVIDENCE FROM INDIA Kamini Tandon 20 Nidhi Malhotra 21 ABSTRACT Globally indexation and other means of passive fund management have been in vogue since 1970s. In the Indian context, the concept of passive fund management has gained momentum only during the last decade. Though the origin of index funds in India can be traced back to as early as 1988, yet not much significant developments could be witnessed by the Indian mutual funds industry in the initial period. The present study is undertaken to evaluate the performance of indexed mutual funds in India for a period of five years. An attempt has been made to bring out a comparison between the public sector and private sector indexed mutual funds with respect to historical returns and risk adjusted performance measures such as Sharpe ratio and, Treynor ratio& Jenson s Alpha. The study indicates that there is not much significant difference in the performance of public owned and privately owned mutual funds. KEYWORDS Performance, Index, Funds, Returns, Assets Management Companies etc. INTRODUCTION An Index fund in generic terms can be referred to as a mutual fund scheme that invests in the securities of the target Index in the same proportion. Hence the underlying idea is to provide returns that closely track the benchmark Index. As such, index funds carry all the risks normally associated with the type of asset the fund holds implying that an index fund does not mitigate market risk, but what it really does is, it merely ensures that the returns will not deviate much from the returns of the underlying base index. The assumption of indexed management is that financial markets are efficient over the long term, making it virtually impossible for active managers to consistently outperform market averages consistently. The evolution of index funds can be traced back to the 1970 s in the United States. With the growth and gradual maturity of the equity markets in U.S., it was increasingly becoming difficult for the fund managers to outperform the Index net of trading costs, broker commissions, market spreads and taxes. Moreover, as the mutual fund industry grew in size, it became difficult to say that a fund manager who had outperformed the Index this year would be able to do the same year after year. It was being felt if it was difficult to beat the Index consistently, one could at least get index returns. Thus, many Investment managers started purchasing stocks in proportion to the Index, either knowingly or simply by default. As a result this process became to known as closet indexation. This paved the way to the concept of a passive buy and hold portfolio with a reduced trading cost and with a greater control over the portfolio risk. These factors along with technological advancement formed the foundation for the development of Index funds. The initial success can be attributed to Wells Fargo bank (of U.S.) who launched its first product in 1971 with a $ 6 million contribution from the Samsonite pension fund. The growth in Index funds thereafter has been a natural consequence of increased emphasis on equity investment by institutional investors around the world. However, in the US markets, the growth in index funds and index products gained momentum only from Interest in Index funds spread from the US markets to the UK. UK recorded a significant Index fund presence such that by the end of 1989 it was estimated that around 30 billion pounds had been invested in a combination of domestic and international Index portfolios. Once again, it was the pension funds, which represented a major portion of the institutional assets that were indexed in the U.K market. The wave of Indexation continued into continental Europe, the Middle East. However, in Asia, with the exception of Japan, indexation is still in its infancy. In the Indian context, index funds came in to existence in With over more than two decades of existence, the underlying potential of these funds still remains to be tapped. The much awaited liberalization of the pension sector allowing them to invest in the equity markets can give index funds their much due share of glory. Further, with banks now allowed to invest a portion of their assets in the equity markets, index funds may prove to be a good avenue for such investments. The review of literature points out that much of the studies are based on tracking errors, risk returns, price transmission etc. but very limited work has been done when it comes to a comparative study of public sector and private sector index funds in India. Thus, the present study is undertaken to evaluate the performance of indexed mutual funds in India for a period of five years. An attempt has been made to bring out a comparison between the public sector and private sector indexed mutual funds with respect to historical returns and risk adjusted performance measures such as Sharpe ratio and, Treynor ratio& Jenson s Alpha. 20 Assistant Professor, Banarsidas Chandiwala Institute of Professional Studies, New Delhi, India, kaminitandon@gmail.com 21 Assistant Professor, Banarsidas Chandiwala Institute of Professional Studies, New Delhi, India, malhotra.nidhi6@gmail.com 288 P a g e

99 REVIEW OF LITERATURE Not much literature is available on performance evaluation of index funds per say. Whatever is available is limited to the performance evaluation of mutual funds in general only. From the ownership perspective, there is limited existing literature which brings out a comparison between the performances of index funds owned by public sector and private sector mutual funds companies. Sharpe (1966) evolved the reward to variability measure, that is, average excess return on the portfolio divided by the standard deviation of the portfolio whereas; Treynor & Mazuy (1966) developed a methodology for testing mutual fund s historical success in anticipating major turns in the stock market and found no evidence that the funds had successfully outperformed the market. Meyer s (1977) findings based on stochastic dominance model revalidated Sharpe s findings with the caution that it was relevant for mutual funds in the designated past rather than for the future period. Sarkar A K (1991) critically examined mutual fund evaluation methodology and pointed out that Sharpe and Treynor performance measures ranked mutual funds alike in spite of their differences in terms of risk. The Sharpe and Treynor index could be used to rank performance of portfolios with different risk levels. Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this paper, measures of evaluating portfolio performance based on lower partial moment are developed. Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified target rate like risk-free rate. Kshama Fernandes (2003) evaluated index fund implementation in India. In this paper, tracking error of index funds in India is measured.the consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek market of equity mutual funds. The methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid method is employed in order to develop mutual fund s performance models. Goal programming model is employed to determine proportion of selected mutual funds in the final portfolios. Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly select conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500 during the study period. This paper is an attempt to review the performance of index funds in India over the period which are managed by different public sector and private sector mutual funds companies. OBJECTIVES OF STUDY As discussed above, this paper is undertaken to: 1. Find out whether index funds have delivered returns consistent with the underlying benchmark index. 2. Carry out comparative performance evaluation of index mutual funds as managed by public sector and private sector asset management companies (AMC) over a five year period The results so obtained would help in ascertaining whether the returns are influenced by ownership pattern or not. RESEARCH METHODOLOGY The study undertaken is descriptive in nature as it aims to carry out a comparative performance evaluation of index mutual funds across public sector and private sector AMC s. Six public sector index schemes and six private sector index schemes belonging to 12 asset management companies have been selected on the basis of assets under management (AUM).All the shortlisted schemes are growth schemes with S&P CNX Nifty as the benchmark index. Traditionally investors have based the success of their portfolios on returns. The underlying risk factors used to be ignored. But ever since the 1960s, investors have known how to quantify and measure risk with the variability of returns. The present study combines three sets of performance measurement tools to evaluate the performance of funds. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. The performance in terms of 5yr compounded annualized returns for different schemes are compared with the benchmark S&P CNX Nifty and accordingly funds are ranked. Additionally, to evaluate the comparative risk adjusted performance (Jenson s alpha) of public sector and private sector mutual funds, Mann Whitney s U-test was used to find out if there is any difference in the performance of different shortlisted schemes 289 P a g e

100 on the basis of ownership pattern. The Mann-Whitney U test is used to compare differences between two independent groups when the dependent variable is either ordinal or interval/ratio, but not normally distributed. HYPOTHESIS OF STUDY H0: There is no significant difference between the risk adjusted returns of public and private sector index mutual funds. H1: There is significant difference between the returns of public and private sector indexed mutual funds. The period of study spreads over a five year time span i.e the reason for selecting the aforesaid period of study is that the global financial crisis had posed tough times for the Indian financial markets. Considering the bear phase, it becomes imperative to understand which funds stood out and whether the ownership structure had any significant influence on the performance of such funds. FINDINGS AND ANALYSIS Table-1: Fund Fact Sheet Scheme Name AMC Scheme AUM (In Cr.) As on 31/12/12 Benchmark Index Time Since Inception (In yrs) Public Sector (Pu.) UTI Nifty Index Fund UTI Mutual Fund S&P CNX Nifty 12 IDBI Nifty Fund Index IDBI Mutual Fund S&P CNX Nifty 2 SBI Magnum Index SBI Mutual Fund S&P CNX Nifty 11 L.I.C NOMURA LIC NOMURA Mutual Fund S&P CNX Nifty 10 Mutual Fund Index Nifty CANARA REBECO CANARA ROBECO S&P CNX Nifty 8 Nifty Index Mutual Fund Principal Index Fund IDFC Mutual Fund S&P CNX Nifty 13 Private Sector (Pvt.) Franklin(I) NSE Index Franklin Templeton Mutual Fund S&P CNX Nifty 12 ICICI Pru Index ICICI Prudential Asset S&P CNX Nifty 10 Fund Nifty Plan Management Co. Limited. HDFC Index Nifty HDFC Mutual Fund S&P CNX Nifty 10 Birla Sun Life Index Fund Birla Sun Life Mutual Fund S&P CNX Nifty 10 IDFC Nifty Fund IDFC Mutual Fund S&P CNX Nifty 2 TATA Index Nifty Fund Plan A Sources: Tata Mutual Fund 7.06 S&P CNX Nifty 10 Table-2: Comparison of 5 yr (Compounded Annualized) Returns with Benchmark Index S&P Nifty 50 Scheme Name Last 5 Years Return % Rank S&P CNX Nifty 5 Year Return % Difference of Fund Returns Over Benchmark Returns Category Average (%) ICICI Prudential Index Fund Franklin India Index Fund - NSE Nifty Plan - Growth Canara Robeco Nifty Index - Growth UTI Nifty Fund - Growth Tata Index Fund - Nifty Plan - Plan A SBI Magnum Index Fund - Growth Principal Index Fund - Growth HDFC Index Fund - Nifty Plan Birla Sun Life Index Fund - Growth LIC Nomura MF Index Fund - Nifty Plan - Growth Sources: It can be observed from Table II that top outperforming scheme ICICI Prudential Index fund outperforms the benchmark index returns by 0.60%.Out of the top 5 companies on the basis of 5 yr compounded annualized returns, 3 are private sector companies namely ICICI Prudential Index fund, Franklin India Index Fund and.the category average returns as can be observed is 3.17%. Sharpe s index = (Rp Rf) σp P a g e

101 Where, Rp = Portfolio return over a period, Rf = Risk-free return over a period, σp = Total risk, standard deviation of portfolio return. Higher value of Sharpe s index indicates better performance of portfolio and vice versa. The Sharpe s measure of portfolio performance is also relative measure that ranks the funds in terms of risk (total risk) and return. The ratio is also termed as reward to variability ratio. Table-3: Ranking of Funds on Basis of Sharpe Ratio Scheme Name Public / Private Sharpe Rank Franklin India Index NSE Nifty Pvt IDFC Nifty Fund Pvt Canara Rebeco Nifty Index Pu Lic Nomura Mf Index Nifty Pu *IDBI Nifty Fund Index(2 Yr) Pu Birla Sun Life Index Fund Pvt Hdfc Index Nifty Pvt Tata Index Nifty A Pvt Principal Index Fund Pu UTI Nifty Index Pu ICICI Pru Index Fund Nifty Plan Pvt SBI Magnum Index Pu Sources: Table-3 indicates the top two positions for Sharpe ratio is again that of private sector funds namely Franklin India Index NSE Nifty and IDFC Nifty fund. However, as can be observed that there is not a stark difference in terms of Sharpe ratio between the remaining of public and private sector index funds. Treynor s index = (Rp Rf) βp Where, Rp = Portfolio return over a period, Rf = Risk-free return over a period, βp = Market-risk, beta coefficient. Higher value of Treynor s index indicates better performance of portfolio and vice versa. The Treynor s measure of portfolio performance is relative measure that ranks the funds in terms of risk (market risk) and return. The index is also termed as reward to volatility ratio. Table-4: Ranking of Funds on Basis of Treynor s Ratio Scheme Name Public / Private Treynor Rank ICICI Pru Index Fund Nifty Plan Pvt U.T.I Nifty Index Pu Canara Rebeco Nifty Index Pu Birla Sun Life Index Fund Pvt Franklin India Index Nse Nifty Pvt HDFC Index Nifty Pvt Tata Index Nifty A Pvt Principal Index Fund Pu SBI Magnum Index Pu IDFC Nifty Fund Pvt LIC Nomura Mf Index Nifty Pu *IDBI Nifty Fund Index(2 Yr) Pvt Sources: Treynor s index is positive for all the shortlisted schemes as can be observed from table4. Again not much of variations can be observed among the public sector and private sector index funds with respect to this index. Jensen's Measure is a risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's alpha." 291 P a g e

102 Jensen s Measure is calculated as: ap = rp [rf + bp ( rm rf ) ] Where, rp = Expected total portfolio return, rf = Risk free rate, bp = Beta of the portfolio, rm = Expected market return. Jensen s measure is one of the ways to help determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen s alpha means a fund manager has beat the market with his or her stock picking skills. The Jensen ratio measures how much of the portfolio s rate of return is attributable to the manager s ability to deliver above-average returns, adjusted for market risk. The higher the ratio, the better the risk-adjusted returns. A portfolio with a consistently positive excess return will have a positive alpha, while a portfolio with a consistently negative excess return will have a negative alpha. Table-5: Ranking of Funds on Basis of Jenson s Alpha Scheme Name Pu./Pvt. Alpha Rank Tata Index Nifty A Pvt Principal Index Fund Pu ICICI Pru Index Fund Nifty Plan Pvt IDBI Nifty Fund Index(2 Yr) Pu Franklin India Index Nse Nifty Pvt IDFC Nifty Fund Pvt Canara Rebeco Nifty Index Pu SBI Magnum Index Pu UTI Nifty Index Pu LIC Nomura Mf Index Nifty Pu Birla Sun Life Index Fund Pu ICICI Pru Index Fund Nifty Plan Pvt Sources: It can be inferred from table V that all the shortlisted schemes have positive alpha. Since the alpha score is just marginally positive, this indicates that risk adjusted rights are not too much on the higher side. Table-6: Mann-Whitney U Test Ranks Group N Mean Rank Sum of Ranks Alpha Private Sector Public Sector Total 12 The above table is very useful because it indicates which group had the highest value (in this we can say better performance) namely, the group with the highest mean rank. We can conclude that private sector index funds are only marginally better than public sector index funds. Table-7 Test Statistics b alpha Mann-Whitney U Wilcoxon W Z Asymp. Sig. (2-tailed).936 Exact Sig. [2*(1-tailed Sig.)].937 a Exact Sig. (2-tailed).981 Exact Sig. (1-tailed).490 Point Probability.043 a. Not corrected for ties. b. Grouping Variable: group 292 P a g e

103 The above table shows us the actual significance value of the test. Specifically, the "Test Statistics" table provides the test statistic, U value, as well as the asymptotic significance (2-tailed) p-value. As the significance value is greater than 0.05, thus we fail to reject the null hypothesis i.e. there is no significant difference between the performance of public sector and private sector mutual funds. CONCLUSIONS The results of the study as discussed above clearly indicate that ownership structure does not bear any influence on the risk and return of the performance of index mutual funds in the Indian context. This paper by employing various tools of performance evaluation such as Sharpe ratio, Treynor ratio and Jenson s alpha and measuring the 5 yr compounded annualized returns of the shortlisted schemes infers that performance of the chosen funds is more or less similar in its category across private and public sector owned AMC s. Also the Mann Whitney U test is employed which reconfirms the above results and conveniently facilitates the acceptance of the null hypothesis so constructed. As the present study was limited to evaluating the performance of index funds in particular, the future scope of the study can be extended to include other category of mutual funds also, so as to obtain more robust results. REFERENCES 1. Mishra, Banikanta, & Rahman, Mahmud. (2001). Measuring mutual fund performance using lower partial moment. Global Business Trends, Contemporary Readings. 2. Kshama, Fernandes. Evaluating index fund implementation in India (Working Paper). Retrieved from 3. Meyer. (1977). Further Applications of Stochastic Dominance to Mutual Fund Performance. Journal of Financial and Quantitative Analysis, 12, Michael, C. Jensen. (1967). The Performance of Mutual Funds in the period Journal of Finance, 23(2), Sarkar, A. K. (1991). Mutual Funds in India - Emerging Trends. The Management Accountant, 26(3), Rao, Narayan S. & Ravindran, M. Performance Evaluation of Indian Mutual Funds (Working Paper0. Retrieved from 7. Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, 56, Treynor, Jack L., & Mazuy, Kay K. (1966). Can mutual funds outguess the markets? Harvard Business Review, 4(7), Zakri, Y. Bello. (2005). Socially responsible investing and portfolio diversification. The Journal of Financial Research, XXVIII(1), ***** FOR PAPER SUBMISSION & CLARIFICATION OR SUGGESTION, editorinchief@pezzottaitejournals.net contactus@pezzottaitejournals.net Editor-In-Chief Pezzottaite Journals, 24, Saraswati Lane, Bohri, Near Modern Dewan Beverages, Jammu Tawi , Jammu and Kashmir, India. (Mobile): P a g e

104 FINANCIAL DERIVATIVES: AN INNOVATIVE FINANCIAL INSTRUMENT TO HEDGE RISK Akshatha B. G. 22 ABSTRACT Financial derivatives are simply explained as financial instruments that changes in value based on fluctuations of underlying variables. Derivatives are abstract instrument containing a contract to be executed on a future date. Simple derivatives are futures, forwards, options, and swaps. The reason that financial derivatives exist is due to risk. Investors use financial derivatives to reduce risk when they make a trade. Derivatives are used as tools of risk management by hedgers and for the purpose of earning profits by speculator. Hedge is a way of protecting limiting or controlling something. Derivatives are excellent tool for risk management through hedging. Hedging in relation to the activity of investing devotes protection against risk arising out of unanticipated change in future price of instruments. This paper based on structured questionnaire and the data collected will be arranged properly for the analysis. The evaluation and interpretation will be made by using suitable statistical tools and techniques in order to arrive a authenticate information about the investors opinion towards financial derivatives to hedge the risks. This paper concentrates on the new emerging challenges, opportunities and issues in the field of financial derivatives. Finally, it attempts to offer suggestions to increase the investor s awareness about financial derivatives towards its financial transaction. KEYWORDS Financial Derivatives, Financial Instrument, Forwards, Futures, Options, Stock Market, Swaps etc. INTRODUCTION India has a long history of future trading can be trade back to the medieval times to the rise of mercantile trade. The financial markets are the centers that made provisions for buying and selling of the financial claims and services. Financial market are classified as money market and capital market, money market deal in the short term finance with a period of maturity of one year and less, Capital market is a market for long term securities. It contains the financial instrument of maturity period exceeding one year. Investors in general were not familiar or interested in corporate securities and the investor population is small, trading volume was small and price earning multiple modest and equity investor in general were compensated for the borne by them. During the mid 1990 s, with Indian government initiated the process of liberalizing of the financial market in all sectors specifically opening the market for foreign investment. The stock market s structure and trading in India have gone under a sea change. Institutionalization of broking activities, modernization, and automation of stock exchange and entry of foreign institutional investor has opened a multiple option to various participants in the financial market. Today, the Financial Derivative has become increasingly popular and most commonly used in the world of finance. This has growth with so phenomenal speed all over the world that now it is called as the derivative revolution. In an estimate, the present annual trading volume of derivative market has correct US $ 30,000 billion, representing more than 100time gross domestic product of India. As a result, awareness about the financial derivatives instruments and their application has increased among the investing people at large. REVIEW OF LITERATURE Jayanta Kumar Seal and Aviudita Sen (2007) made a study on Commodity Derivative in Indian A Brief understanding in their article states that, commodity trading in India the various trading strategies involved in commodity derivatives and the future of this segment of financial market. The market has made considerable progress in terms of technology, governance and the trading activity. Therefore the price risk management should be no administered price mechanism, management of price risk will be very important over the free trade policy is introduced. Monomita Mandy and Suman Lodh (2008), describes Present Status of Indian Derivatives Market A Perspective in their article states that, the derivatives shows that the Indian derivatives market is developing at a very rapid pace. The uses are aware of the structure of the contracts, the unique price and the characteristics related to risk of the available instruments. The practices regarding derivatives done in the developed financial markets, this most favourable investment can help in substantial boost of the economy and overall improvement in the market sentiment. Raju, G., (2010) made a study on Derivative Trading in India A Trend Analysis in his article states that, the derivatives trading in India especially future and options have shown tremendous growth since its inception in NSE and BSE are providing facility for trading in derivatives through their future and option segment. The analysis of the growth pattern of 22 Lecturer, Department of PG Studies and Research, Kuvempu University, Karnataka, India, akshathabg149@gmail.com 294 P a g e

105 derivative trading shows that option are gaining more important than future. The high leveraging potential of derivative made it attractive to both hedgers and speculators in the Indian stock market. STATEMENT OF PROBLEMS Derivative market in India plays a vital role in economic and financial development. Derivatives securities provide them a valuable set for managing risks. Derivatives provide an opportunity to earn profit for those investors who are ready to go for higher risks. The investor needs an improved analytical skill in order to trading this instrument. The derivatives assist the investor traders and managers of lager pools of funds to devise strategies so that they may make proper asset allocation increase their yields and achieve other investment goals. Most of the investor do not aware about these instruments because of ineffective flow of information about derivative instrument lack of trading awareness and lack of knowledge about derivatives market. In the mean while, the investors not able to withstand against these instruments and it result in ineffective trading. In the same time every investor not ready to accept high risk in order to earn high returns. SCOPE OF STUDY The present study is confined to derivatives market and its instruments for better understanding various strategies with different situation and action have been given. It includes the date collect in the recent year and also the market in the derivative in the recent year. This study extends to the trading of derivatives market done in the stock broking firm in Shivamogga. OBJECTIVES OF STUDY 1. To study the history of Derivative market. 2. To study the growth of Derivative trading in India Stock Market. 3. To know the investor opinions and preference towards Derivative transactions. 4. To know the relationship of Derivatives and risk management. 5. To offer the suggestion to the capital market towards the growth of Derivatives. RESEARCH METHODOLOGY Primary Data The data collected from standardized questionnaire. The questionnaires were filled by 100 people who were mainly from Shivamogga region. The sample consists of people who are employed or work or people dealing in derivative market to know their perceptions towards investment in derivative market. Secondary Data It is the data, which has already been collected by someone or an organization for the purpose of research study. The data for study has study has been collected from various sources like books, journals, articles, magazines and websites. ORIGIN AND EVOLUTION OF DERIVATIVES The derivatives market have existed for centuries as a result of the need for both users and producers of natural resources to hedge against price fluctuation in the underling commodities has been the delivery force behind the development of derivatives exchanges, the demand for product based on financial instrument - such as bond, currencies, stock and stock indices have now far out stripped that for the commodities contracts. In 1848, future contracts came into existence with the establishment of Chicago Board of Trade. Commodity future trading in India was initiated long back in 1950s. However, the 1960s marked a period of great decline in future trading. Market after market was closed usually because different commodities prices increases were attributed to speculation on these markets. Accordingly, the central government imposed the been on trading in derivatives in 1969 under a notification issue. The last 1990s shows this sign s of opposite trends A large scale revival of futures market in India. As such, on November 17, 1997 India s first International Futures Exchange at Kochi, known as the India pepper and spice trade association international commodity exchange [IPSTA ICE] was established. The central minister for agriculture announced in June 1996 that he was in favour of introduction of future trading both domestic and international. The trend is not confined to the commodity market alone it has initiated in financial futures too. CONCEPT OF DERIVATIVES Derivatives instrument are financial contracts whose pay off structure is determined by the value of an underlying commodity, interest rate, index exchange rate etc. Thus Derivative instruments derive the value from underlying variable or assets. Therefore, derivative are specialized contracts to facilitate temporarily for hedging which is protection against losses resulting from unforeseen price or volatility changes. Thus, derivatives are a very important tool of risk management. Derivative perform a number of economic functions like price discovery, risk transfer and market completion. 295 P a g e

106 MAJOR RECOMMENDATION OF DR. L. C. GUPTA COMMITTEE Before discussing the emerging structure of derivative market in India, let us have brief view of the important recommendations made by the Dr. L. C. Gupta Committee on the introduction of derivatives market in India. These are as under: 1. The committee is strongly of the view that there is urgent need of introducing of financial derivative to facilitate market development and hedging in a most cost efficient way against market risk by the participants such as mutual funds and other investment institutions. 2. There is need for equity derivatives, interest rate derivatives and currency derivatives. 3. Future trading through derivatives should be introduction in phased manner starting with stock index futures, which will be followed by options on index and later option on stocks. It will enhance the efficiency and liquidity of cash market in equities through arbitrage process. 4. There should be two level regulation (regulatory frame work for derivative trading) i.e., exchanges level and SEBI level. Future, there must be considerable emphasis on self regulatory competence of derivative exchange under the overall supervision and guidance of SEBI. 5. The derivative trading should be initiated on a separate segment of existing stock exchange having an independent governing council. The number of the trading member will be limited to 40% of the total number. The chairman of the governing council will not be permitted to trade on any of the stock exchanges. 6. The settlement of derivatives will be through an independent clearing corporation / clearing house, which will become counter party for all traders or alternatively guarantees the settlement of all trades. The clearing corporations will have adequate risk containment measures and will collect margins through EFT. 7. The derivative exchange will have on line trading and adequate surveillance system. It will disseminate trade and price information on real time through two information trading network. It should inspect 100% of member every year. 8. There will be complete segregation of client money at the level of trading/clearing member and even at the level of clearing corporation. 9. The trading and clearing member will have stringent eligibility condition at least two persons should have passed the certification programme approved by the SEBI. 10. The clearing should deposits minimum Rs. 50 lakh with clearing corporation and should have a net worth of Rs. 3 Cr Removal of the regulatory prohibition on the use of derivative by mutual funds while making the trustees responsible to restrict the use of derivative by mutual funds only to hedging and portfolio balancing and not for specification. 12. The operation of the cash market on which the derivative market will be based needed improvement in many respect. 13. Creation of a derivative is a derivative advisory committee and economic research using by SEBI. 14. Declaration of derivatives as securities under section 2(h) of the SCRA and suitable amendments in the notification issued by the central government in June, 1969 under section 16 of the SCRA. The SEBI board approved the suggested by laws recommended by the L. C. Gupta committee for regulation and control of trading and settlement of derivative contracts. FINANCIAL DERIVATIVES IN INDIA Table-1: Showing Financial Derivatives in India Date Progress 14 December, 1995 NSE asked SEBI for permission to trade future, 18 November, 1996 SEBI setup L. C. Gupta committee to draft a policy framework for index futures, 11 May, 1998 L. C. Gupta committee submitted report, 7 July, 1999 RBI gave permission for OTC forward rate agreement (FRAs) and interest rate swaps, 24 May, 2000 SIMES chose NIFTY for trading futures and options on an Indian Index, 25 May, 2000 SEBI gave Permission to NSE and BSE to do index future trading, 9 June, 2000 Trading of BSE Sensex future commenced at BSE, 12 June, 2000 Trading of NIFTY future commenced at NSE, 296 P a g e

107 31 August, 2000 Trading of future and options on NIFTY to commence at SIMES, July, 2001 July, 2003 Sources: Secondary Data Trading on equity future commenced at NSE on 31 securities, Trading on FC-rupee option started. FINANCIAL DERIVATIVE AND RISK MANAGEMENT The concept of risk management is evolved from the industry s history, its economics and extraordinary change in its environment. During the past decade, the objective of risk management in financial companies has been significantly redefined. Initially, the concept of risk management started with preventing credit losses or other deterioration in asset values. The credit policy of lending department managed default risk, auditors managed, operational risk and insurance department managed total risk. Many felt that risk was something to be minimized or avoided. The 1980s and early 1990s brought dramatic change in risk exposure. Developments and research have changed the objective of risk management. The risk of doing business in financial services is increasing. Today, management s understanding of strategic management of risk is an important competitive advantage. Risk management provides a powerful means of both defence and offense in today s competitive market place for financial services. The most appropriate instrument for risk management is derivatives are: Hedging Derivatives are gaining importance due to increased volatility in the capital market and the Foreign Exchange Market. The Stock Index Futures and options were introduced in Since then financial future have spread to various developed and emerging markets. Those are recognized as the best and most cost-efficient way of risk hedging in certain type of commercial and financial operations. In 1990, about four contracts in futures changed hands in the US exchange. In the decade, trading jumped from 98 million to over 276 million contracts. It has been found that the futures contract consist of 60-70% of the total trading. Hedging Strategy Using Future Today, the corporate units operate in a complex business environment. Managers often find that the profitability of their organizations heavily depends upon on such factors which are beyond their control. Important among these are external influences like commodity prices, stock prices, interest rates, exchange rates, etc. As a result, modern business has become more complex, uncertain and risky. So, it is essential for the executive of the firms to futures market is to permit managers to reduce or control risks by transferring it to others who are willing to bear the risk. In other words, futures markets can provide the managers certain tools to reduce and control their price risks. So the activity of trading derivatives with the objectives of reducing or controlling risk is called hedging. Hedging, in its broadest sense, is the act of protecting oneself against futures loss. More specifically in the context of futures trading, hedging is regarded is regarded as the use of futures transactions to avoid or reduce price risk in the spot market. USE OF DERIVATIVE FOR HEDGING Let us assume that a person wants to buy 1000 dollars after a month at ` 42/$. But the price may vary at that time. So he may enter into a future contract to avoid the risk of currency fluctuation. Similarly, people may enter into options, either call or put. A call option gives the holder (buyer) the right to buy a number of shares at the strike price on or before the expiration date by paying an option premium. So, if you believe that a share price will go up, you can buy a call option by paying the premium. If the share price goes up you make a profit (after covering your premium cost). If the share price falls, you don t exercise your option and your loss is limited to the option premium paid. If you expect the price to fall and sell (or write) a call option, the option premium you receive is your profit in case the share falls. But a rise in price will mean a loss (a part of which would be covered by the option premium). The value of call options usually increases with the value of the underlying share. A put option gives the holder (buyer) the right to sell a specified number of shares at the strike price on or before the expiration date. In a way, it is the inverse of a call option. So, if you believe that the share price is likely to fall, you can buy a put option and any subsequent fall in the share price will be your profit. So, you could either buy a cell option or write a put option if you expect a particular share to rise, but your risk reward exposure will be different. Conversely, if you believe that the share price is going to fall, you could buy a put option or write a call option. It is also possible to hedge the risk of default on a bond/loan through a Credit derivative. So far, we have seen examples of derivatives for hedging business/investment risks. Derivatives can also be undertaken for speculation. Speculators, as you know, are of two types. One type is of optimistic variety and sees a rise in prices in future. He is known as bull. The other type is a pessimist and he sees a fall in prices, in future. He is known as bear. They undertake futures transactions with the intention of making gains through difference in contracted prices and future prices. If, in future, their expectations turn out to be true, they gain. If not, they lose. Of course, they may limit their losses through options. 297 P a g e

108 ANALYSIS AND INTERPRETATIONS Table-2: Showing Socio-Economic Profile of Investors Sl. No. Particulars Number of Respondents Percentage (%) 1. Gender Male Female Total Age Less than Total Occupation Business 9 18 Profession 9 18 Employed Others Total Respondents opened De-mat Account Yes No 2 4 Total Awareness towards Risk Towards in Investment Yes No Total Kinds of Risks Involved in Investment Systematic Risk 7 14 Non-Systematic Risk 4 8 Credit Risk Market Risk Total Techniques for Managing Risks Avoidance 9 18 Diversification 5 10 Financial derivatives Ignore the risk 7 14 Others 5 10 Total Personal Motive in Investing in Financial Derivatives Speculation Arbitrage 5 10 Hedging Risk Management Total Sources: Field Survey In the above table it clearly shows that majority of the male employed from the age group years are interested to invest in Financial Derivatives and having 96% of Investor having D-mat account to transact their investment and opine that among the different risks, their investment is exposing to market risk and used different techniques like diversification and derivatives for managing their risks. LIMITATIONS OF STUDY 1. The present study is confined to Shivamogga branch only. 2. Some investors cannot give accurate answer. 3. The accuracy of the study is limited because it is based on investors opinion. 4. Suggestions made are within the limited information and experience of researcher. 298 P a g e

109 FINDINGS OF STUDY Investor generally prefers to take advice from existing investor before investing in Derivative Market. Investor is generally not investing in Derivative market due to lack of knowledge, very risky and not availability of advisers. Derivative Market is very difficult to understand. It was found that trading volume was not very high in the Derivative markets because lack of awareness among the investors. The rules, regulations and procedures of Derivative Market are not reaching the common people. There is a lot formalities involved in trading in market. Variation of lot size, addition or deletion of contracts may cause unhealthily environment on investor. Premiums, Discounts on Derivative segments are very difficult to predict. The Derivative concepts are not fully established in Indian Market as compare to other countries. SUGGESTIONS Patience is the number one essential quality for trading success. Trading volume should be increased in the derivative market by providing proper awareness to investor about the market. Investor should prefer to take proper advice from stock brokers before investing derivative Market. Investor should invest in derivative market with high knowledge and proper availability of advisers. As an investor, he has to make a plan before going to trade and predict accurately what the next pattern will be. A knowledge need to be spread concerning the risk and return of the derivative market. RBI should play a greater role in supporting derivatives product. SEBI should conduct seminars regarding the use of derivatives to educate individual investors. Investor should use the diversification technique to reduce the risks involved in their investments. The exchange must educate and convince the investors about the benefits involved in derivatives trading. The exchange should have a satisfactory record of monitoring its members, handling investor complaints and preventing Irregularities in trading. CONCLUSIONS Derivative market plays a very significant role in Indian Stock market. A derivative in security derived from a debt instrument, share, secured or unsecured loan, risk instrument, a contract for difference or any other form of security/a contract which derives its valve from the price/index of the prices of the underlying securities. The most commonly used derivative contracts are forward, future and options. Derivative markets, across the world, have grown rapidly contribution to growth of the respective economic as well. Growth of derivative market in India would also serve as a stepping stone for the growth of the economy. Indian markets have thrown open a new avenue for retail investors and traders to participate in derivative and commodity. In such a scenario, it is the responsibility of the exchanges, regulators and the governments to educate the market participants about the benefits of derivative markets. If the investor develops the dedication and discipline to always trade in the direction of the trend using the trading price, stock, Index, or commodities future trading newsletter, it will result in making profitable trading. REFERENCES 1. Robert, L. Derivative Markets (2 nd ed.). Mc Donald. 2. George, Klein man. Commodity Future and Options. Pearson Education. 3. Donald, E. Fischer, & Ronald, J. Jordon, Securities Analysis and Portfolio Management (6 th ed.). New Delhi: Hall of India Private Limited. 4. Johnson, Stafford R. (2009). Introduction to Derivative. New York: Oxford University Press. 5. Gordon, J. Alexander, William, F., Sharpe, Jeffery, & Bailey, V. Fundamentals of Investment. New Delhi: Hall of India Private Limited. 6. Kumar, S. S. S. (2008). Financial Derivatives (2 nd ed.). New Delhi: PHI Learning Private Limited. 7. Gupta, L. S. (2009). Financial Derivatives (6 th ed.). New Delhi: PHI Learning Private Limited. ***** 299 P a g e

110 AWARENESS OF INVESTORS IN INSURANCE SECTOR: A STUDY WITH REFERENCE TO YSR DISTRICT, ANDHRA PRADESH Rajani Levaku 23 P. Mohan Reddy 24 ABSTRACT The insurance sector acts as a mobilize savings and a financial intermediary and is a promoter of investment activities. It can play a significant role in the economic development of a country, while economic development itself can facilitate the growth of the insurance sector. After the opening of insurance to private players, there has been a great growth in insurance in India; but India is far behind world averages in terms of insurance penetration, and insurance density. This research determines the socio economic status and awareness of 115 investors of insurance from YSR district, Andhra Pradesh. The study reveals that awareness is low and needs to be improved among the uneducated, lower age group and daily wage class. The study also shows that real growth in life insurance will occur when customers realize the true value of life insurance beyond tax saving. Insurance, Investor, Tax, Life Insurance etc. INTRODUCTION KEYWORDS Insurance occupies an important place in the complex modern world since risk, which can be insured, has increased enormously in every walk of life. This has led to growth in the insurance business and evolution of various types of insurance covers. The insurance sector acts as a mobiliser of savings and a financial intermediary and is also a promoter of investment activities. It can play a significant role in the economic development of a country, while economic development itself can facilitate the growth of the insurance sector. It begins by defining insurance as a concept, followed by a discussion on the importance of insurance for individuals, households, and the economy. The penetration of the insurance business and insurance density in India are compared with those in other countries. The need to create and enhance the level of awareness about different aspects of insurance is also discussed. Insurance is a form of risk management which is used primarily to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of loss, from one entity to another, in exchange for payment. Insurance is essentially an arrangement where the losses experienced by a few are extended among many who are exposed to similar risks. It is a protection against financial loss that may occur due to an unexpected event. The transaction involves the insured assuming a guaranteed and known, relatively small, loss in the form of payment to the insurer in exchange for the insurer's promise to compensate or indemnify the insured in the case of a large, possibly devastating loss. The insured receives a contract called an insurance policy which details the conditions and circumstances under which the insured will be compensated. Insurance can be classified broadly into: (a) life insurance, and (b) general or non-life insurance. OBJECTIVES OF STUDY To determine the socio economic status of the respondents who have invested in insurance. To understand and determine the awareness of people under study on insurance. RESEARCH METHODOLOGY Sampling Design The sample size is 115 respondents from YSR District who have invested in insurance. Tools for Data Collection The tool used for data collection is questionnaire. This was pre-tested by conducting a pilot study through which primary data was collected from 115 respondents. Analysis was done and changes were made to overcome the errors. ANALYSIS AND FINDINGS a) Socio - Economic Analysis The analysis shows the distribution of the respondents according to the various demographic factors: 23 Academic Consultant, Department of Commerce, Yogi Vemana University, Andhra Pradesh, India, rajani_rdy@yahoo.com 24 Professor, Department of Commerce, S. V. University, Andhra Pradesh, India, dr_mohanreddy@yahoomail.com 300 P a g e

111 Table-1: Gender Wise Classification Gender Number of Respondents Percentage Male Female Total Sources: Field Survey Gender-wise classification of the sample respondents is shown in table1. Out of 115 respondents, per cent of respondents belong to male category, majority of them are having endowment polity for saving benefit and they took the policy through agent. Table-2: Age-wise Classification Age Number of Respondents Percentage Above Total Sources: Field Survey Table 2 gives the information regarding age-wise classification of the sample respondents having policy. Out of the total sample size of 115 respondents who have invested in insurance, 45.2 per cent belongs to years majority. The years age policy holders are very low. The reason might be lacking awareness and know how among these people. Normally, the people who are in the age group of years are at the earning stage and also they have awareness on technology which motivate them towards insurance. Table-3: Occupation Wise Classification Occupation Number of Respondents Percentage Private employees Govt. employees Business class Professionals Others Total Sources: Field Survey It is found that out of the total sample size of 115 respondents who have invested in insurance, majority per cent belong to the business class, per cent private employees belong to the per cent belong to the Government employees, per cent belong to the professionals and very few 1.74 per cent belong to the other class. Table-4: Educational Qualification-wise Classification Qualification Number of Respondents Percentage UG PG Technical Uneducated Total Sources: Field Survey It is revealed that out of the total sample size of 115 respondents who have invested in insurance very few 4.35 percent respondents are uneducated, only percent are technical, are UG, and majorities per cent have a PG. Table-5: Family Size Wise Classification Family Size Number of Respondents Percentage Adults With children Total Sources: Field Survey 301 P a g e

112 There are two categories of family into which the total respondents have been divided. First is the family consisting of adults only - any member who is above the age of 14 has been considered as an adult. Second is the family consisting of children who are below the age of 12 years. Majority percent are from a family with adults only and the rest percent are from a family with children have shown by the table 5. b) Awareness of People under Observation on Insurance Services and Insurance Policies Table-6: Knowledge of Various Policies and Schemes Knowledge of Policies and Schemes Number of Respondents Percentage Yes No Total Sources: Field Survey It is found in this study that majority per cent of the respondents are aware about the policies and schemes offered by insurance agencies. This is confirmed by Krishnamurthy (2005) based on empirical studies that awareness of insurance in India has improved substantially. Table-7: Purpose of Policy Purchase Purpose of Policy Purchase Number of Respondents Percentage Tax Relief Savings Security Total Sources: Field Survey Purpose of taking an insurance policy refers to the reason why the insurance policy was taken shown by the table 7. The three broad categories under which this analysis is done are for the purpose of saving, for the purpose of risk, and for the purpose of tax. Majority per cent has opted for insurance to cover risk and per cent for tax purposes. The business class and the government class have taken the policy for the purpose of tax. The private salaried have gone for insurance for the purpose of risk and tax. For the purpose of saving, only a few choose. Table-8: Type of Policy Types of Policy Number of Respondents Percentage Whole life - - Life insurance Endowment Money back Mediclaim policy Ulip policy Total Sources: Field Survey Table 8 found that majority per cent of the respondents have taken life insurance when compared to other policies. As the educational qualification increases the investment in Mediclaim policy, ULIP s (Unit Linked Insurance Plan).These three types of policies need education to better understand the policy. CONCLUSIONS The study reveals that the awareness about insurance is low. Insurance companies should reach out to those who are uneducated and the lower age group people, by awareness campaigns like radio and television advertisements. The insurance companies should concentrate more on improving their services. The real growth in life insurance will occur when customers realize the true value of life insurance beyond tax saving. The awareness of insurance as a long term saving should be created both by the government, among the uneducated, low income group and the households having more earning members. In conclusion, saving can be promoted by insurance companies both government and private companies by building a relationship of trust. This can be only achieved if the insurance companies show the people that they are there not only to do business but that they care for the welfare of all types of the people. SUGGESTIONS To increase the level of insurance penetration LIC may focus on bringing products that suit to the rural customers. 302 P a g e

113 The company if possible should invest in advertising, conduct road shows, and spend money on Hoardings, so that it can better propagate awareness about its various lesser known products. LIC should also tie up with several other banks apart from the existing ones to sell its products i.e. through bank assurance. The company has the option of tying up with local NGO s for selling its rural insurance products. Customer friendly documentation i.e. it should be made easier and faster. LIC may provide additional funds to its development officers and agents. All the hidden charges should clearly be stated in the form and explained by the agent and LIC should provide better training to its agents. Claim settlement process should be made fast and must not involve lengthy decision making process. Some special focus should be laid on individual risk coverage while designing the products. REFERENCES 1. Kannan, N., & Thangavel, N. (2008). Overview of Indian Insurance Sector. Academic Open Internet Journal, 22, ISSN Retrieved from 2. Krishnamurthy, S. (2005). Insurance Sector: Challenges of Competition and Future Scenario. 3. Roy, S., & Vishal. (2007). Dynamics of Private Sector General Insurance in India: A Case Study AIMS International, 1(3), Saraogi, G. (2009). Comparative Analysis of Insurance Products Institute for Technology and Management (Report). Warangal. 5. Sastry, V. S. (2010). Indian Insurance Data Issues (Paper). In Seminar on Data Base Issues in Financial Sector at Mumbai. Insurance Regulatory and Development Authority, Hyderabad. (2010, March 13). 6. Shukla, R. (2007). How India Earns, Spends and Saves Results from the Max New York Life- NCAER India Financial Protection Survey (ISBN: ). New Delhi: The Max New York Life Insurance Limited. 7. Singh, B. K. (2009). An Empirical Study on Perception of Consumer in Insurance Sector. E-Journal of Business and Economic Issues, 4(3), ***** 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. 303 P a g e

114 ROLE OF VALUE ADDED SERVICES IN TELECOM SECTOR Md. Mahmood Ul Farid 25 ABSTRACT The study was aimed at identifying the role of Value added Services on Telecom Service Provider. A mobile value-added service (VAS) provides differentiation and the ability for mobile operators to charge a premium price. Mobile VAS include non-voice advanced messaging services such as SMS, MMS, MIM, and UM and wireless data services based on wireless data bearer technologies such as WLAN, GPRS, WAP with VAS applications including mobile gaming. Mobile VAS also includes voice-based services such as PTT. After the research it can be said that Value Added Services contribute a major chunk of profits for operators and the younger generation are the most important target audience. KEYWORDS Value Added Services, Satisfaction Level, Demographic, Telecom, Service Provider, Mobile etc. INTRODUCTION Mobile phones today have moved beyond their fundamental role of communications. In this era users buy mobile phones not just to be in touch, but to express themselves, their attitude, feelings & interests. Customers use their cellular phones to play games, read news, surf the Internet, and to listen music, for shopping or banking transactions. There is vast world exist beyond communication that needs to be explored, tapped and excel. Entire cellular industry is heading to provide innovative options to their customers. Subscribers are started choosing their operators on the basis of the value added services they offer. SCOPE OF PAPER With the increasing competition in telecommunication sector average Voice revenue per customer is falling, which contributes about 90 percent of revenue. Still overall revenues for an operator have increased, thanks to a whole host of value-added services (VAS). Amongst all the VAS, short messaging service (SMS) has proved to be the most important one. News, jokes, travel, horoscope, P2P messaging are the best examples of such services. REVIEW OF LITERATURE According to Sethi, (2006) Telecommunication is one of the prime support services needed for rapid growth and modernization of various sectors of the economy. Although the sector has grown rapidly in recent years, its growth needs to be accelerated further. It is equally important to accelerate structural changes in this sector in line with trends in other countries to ensure that the telecommunication services are not only made available on the scale needed to sustain rapid growth in the economy as a whole but also that the quality and cost of these services come up to the requirements of a modernizing economy. According to Singh, Telecommunications is a prime support service needed for rapid growth and modernization. It is also one of the fastest growing sectors in India and has immense potential for growth. The telecommunication activity is commercial in nature and people are willing to pay for it. Deregulation and competition are key elements in telecommunications reforms all over the world and will be a guiding principle to the evolution of policy in this sector in coming years. Private investment is expected to play a major role supplementing the efforts of the public sector in expanding capacity and also providing competition within the system. The quantum of investment by the private operators would basically be determined by the rate of return on such investments both basic as well as value-added services. RESEARCH METHODOLOGY The study was administered in Bihar (Patna and Bhagalpur region) State, India. The telephone service providers in Bihar during the study period were as follows: a) BSNL (Bharat Sanchar Nigam Limited), b) Airtel, c) Reliance, d) Aircel, and e) Others. BSNL (Bharat Sanchar Nigam Limited) is the Government owned service provider and the others are private players. The adequacy, accuracy and appropriateness of the data collection tool were ensured after incorporating necessary corrections, before administering the questionnaire for the final data collection. Sampling Method, taking into account the operational difficulties associated in the process of data capturing. However, by going through this method of sampling it was ensured that all units of the population were adequately represented. Sample: The pilot study was administered on 120 samples, taken through convenient sampling method. A questionnaire is distributed to telecom customers. But the total number of usable questionnaire is 100 (20 questionnaires were found incomplete). 25 Research Scholar, Department of Commerce and Business Management, TM Bhagalpur University, Bihar, India, mahmood.mba@gmail.com 304 P a g e

115 Data collection: Questionnaire is developed in two parts. First part contains demographic questions such as gender, age and education level. The second part assesses behaviour of customer care, customer care rating and waiting period for customer care. Statistical Techniques used: To arrive at certain conclusions regarding the hypothesis advanced in the present investigation, the following statistical tools for the analysis of data were employed. Percentage Analysis, Correlation Analysis T-test, calculations have been made making extensive use of Microsoft Excel and SPSS Software Packages on the computer. RESEARCH RESULTS AND DISCUSSIONS In this part of the analysis, we discuss demographic information of the respondents. Table1 shows that 79% are males. Ages ranged from 15 to 25 years are 46% and between 26 and 40 years old are 29%. 20% of participants ages are between 41 and 55 years old. From educational perspective, 43% of participants hold graduation degree. 36% hold high school degree and 14% hold post graduate degree. Most Preferred Connection and Technologies Table-1: Demographic Information Frequency Percentage Gender Male Female Age 15 to 25 years to 40 years to 55 years and above Education Illiterate High School Graduation Post Graduate To find the popularity of value added services amongst the pre-paid and post-paid users. The results shows in Table2 type of connection of prepaid is (90%) and (10%) in the post-paid connection. Most of respondents (80%) were using GSM handsets and (14%) respondents were using CDMA handsets while 6% customers using both. The Factors Influencing the Selection of VAS Table-2: Type of Connection Frequency Percentage Type of Connection Pre-paid 90 90% Post-paid 10 10% Type of Technology GSM 80 80% CDMA 14 14% Both 6 6% Table 3 presents the results of the analysis the factors influencing the selection of value added services. The most important factor for selection of Value Added services was price followed by perceived benefits price of the service, features, availability and quality of services. The question was asked to determine the most popular value added services. The most preferred VAS were contests, followed by caller tunes, ring tones, wallpapers in that order. Table-3: Factors Influencing VAS selection Factors Influencing Frequency Percentage Price 36 36% Quality of Service 8 8% Benefit (Perceived) 32 32% Features 21 21% Availability 5 5% 305 P a g e

116 Table-4 VAS Caller Tunes Ringtones MMS New Alerts Wallpapers Others Rank Customer Satisfaction from Value Added Services As the Table 5 clearly depicts that, extra benefits i.e. VAS of telecom service providers about 32% customers are satisfied about this services. Whereas 14% customers are dissatisfied and 37% customers are neutral with VAS of their service provider. Satisfaction Level and Service Provider Table-5: Customer Satisfaction from VAS Satisfaction Level Frequency Percentage Very Dissatisfied Dissatisfied Neutral Satisfied Very Satisfied Graph-1 100% 80% 60% 40% 20% Very Satisfied Satisfied Neutral Dissatisfied Very Dissatisfied 0% BSNL Airtel Reliance Aircel Others From the above graph we can find out that, there is a tough competition in this segment between the service providers. Aircel, Airtel, Reliance and Others are running neck to neck, about 41.7%, 40.7% and 40% of their respective customers satisfied or very satisfied with their VAS. And 30% customers of Airtel are dissatisfied with their value added services. At the same time worst performer of this segment is BSNL, 66% of their customers are not satisfied with the VAS provided by them. Graph-2: Age and Satisfaction Level 100% 80% 60% 40% 20% 0% 15 to to to and Above Very Satisfied Satisfied Neutral Dissatisfied Very Dissatisfied As per the above graph most satisfied (43%) age group is years. Age group of years is the second best satisfied (41%) group. On the other hand, the unhappiest age group is years; about 46.6% of this segment is dissatisfied with Value Added Services of their service providers. 306 P a g e