Introduction through equity as compared to previous years


The report contains a review of 5 research papers on
capital structures. First we look at the factors and composition of capital
structures of Public Ltd companies in India.It is then followed by analysis of
capital structure across various industries in India.


Ltd Companies and their capital structure

Capital structure refers to what frames the capital
employed,which simply is the composition or mixture of debt and capital.An
important and basic aim of a firm is to strengthen shareholder`s wealth and
capital structure decisions aim at achieving this fundamental.There are certain
theories associated with capital structure such as the MM
approach,Operating,Net Operating and traditional approach.All theories hold
certain assumptions and merits and demerits since any country or the real word
has factors such as bankruptcy and agency costs and also the presence of
taxes.In today`s India,firms usually follow the given order to raise finance-internal,external
borrowed finance and finally external equity finace,this is known as pecking
theory.Firms might also go ahead with the signalling theory to send positive
messages about themselves or to maintain their flexibility when it comes to
raising debt.Calls related to capital structure have bearing on both risk and
return associated with a share,which in turn affects the market price of a
share and thus these decisions are of mammoth relevance.Using interest bearing
items,increases the financial leverage which increases the EPS due to the
benefit of tax shield as a reason of interest.At the same time financial
leverage means fixed payments which makes it more risky.Therefore it has a two
fold counterveiling impact.A general notion states a high DFL should be
accompanies by a low DOL and vice versa.The profits which a firm makes,scale at
which they operate,the size of their assets play a major role in determing the
leverage structure of a firm.

A number of factors determine the capital structure
which include cost of funds,cost required to raise such funds,the control or
ownership pattern,the threat associated with that source,agency cost and tax
advantage.Usually debt turns to be cheaper due to tax advantage and the aid of
gearing which it provides.However,lenders might keep in mind various
determinants before subscribing to debt such as firm`s credit rating,number of
defaults if any,interest rate offered,interest-coverage and debt-equity
ratio,gross profit margins and cashflows which the firm has,which means that
firms having good financial statements not only enjoy ease of raising loans but
also enjoy flexibility as well.In India,it has been observed that after the
1990`s the firms have also started to pay focus on raising money through equity
as compared to previous years where a major source of finance used to be
debt.This is attributed to development of new financial products,awareness
among consumers,advancements in financial markets and certain other legal
requirements and compliances.It has also been observed that large firms having
a huge pool of assets and high credit ratings are in a better position to
negotiate with banks which helps them crack better deals when it comes to debt
financing.Thus,we see a wide array of factors affecting capital structure of a

structure of the FMCG Sector in India

Over the years,the fmcg
sector has grown with a huge boom across the world and specially in India.The
companies undertaken for the study include P and G,Emami Ltd,Colgate
Palmolive(India),United Spirits Ltd.Though the FMCG sector has grown with
leaps,the studies suggest that there is still a need to improve the way
operations are conducted to achieve effectual usage of resources which in turn
will ensure optimisation of resources and increase overall effectiveness and productivity
leading to a growth which is sustainable.One more thing which has been noticed
is that these companies have been able to maintain a very good debtor turnover
ratio which clearly indicates that their receivable management has been
absolutely to the mark.One striking fact was observed was that financial
leverage showcased adversarial effect when it came down to valuation or
performance of the company due to Eva and Roa indicators and thus the benefit
of increased EPS was set off from the firm`s perspective.The debt-equity ratio
which was initially high has now seen a downward trend since firms have made
considerable profits in the recent past,and have made debt repayments and used
internal as well as equity source of financing.The increased profits also meant
higher interest coverage ratio,thus providing a secure environment to
lenders.Due to decreased debt,the debt-asset ratio also gives a positive
signal,giving firms further flexibility to raise additional funds in the form
of bonds and debentures.The GPR and NPR have also been increasing since
operations have gone up and sales have increased.We see that colgate and emami
were able to fetch higher returns on long term funds showcasing that
disbursement of funds in these two companies was much better than other
companies.We see that profitability has had a positive impact in Colgate even
when the firms uses very less amount of debt.All in all we see that capital
structure has played an important role in FMCG sector,however different firms
within the industry have used varying strategies keeping in mind their
strengths and weaknesses.

Structure Of Automobile Industries(2010-14)

This review contains an overlook of capital
structure of Automobile industries with the examples of Tata Motors,Maruti
Suzuki and Mahindra and Mahindra.There was a specific focus on debt,equity and
leverages of these companies during the analysis of capital structure.In the
automobile sector,the firm`s value of productive assets,monopoly franchise has
an impact on the value of capital which in turn determines the value of the
firm and the value of its`s securities.Thus,a chain is involved when we look at
the value of a company specifically in the automobile sector and each component
plays a major determinant.We see that over the years,the equity has gone up in Tata
Motors majorly due to convertible debentures and since the market price of
shares was very high,the company found it better to raise funds through equity
rather than debt.In the other two companies,the figures have been relatively
stable.We see that debt has constantly increased in Mahindra and Mahindra since
the gearing instrument helped them take the benefit of leverage as well as
increase the EPS,making the shareholders happy.The Debt of Maruti Suzuki has
seen huge fluctuations indicating that proper management was debt was highly
out of the question in this particular case.Tata Motors reduced debt till 2012
through huge profits used for redemptions as well as using it`s market price of
shares and the conversion policy to it`s advantage.We see that all companies
saw fluctuations in the DOL,which can be attributed the market environment as
well as internal positions of the company,however Tata and Suzuki have made a
constant effort in recent years improve their DOL.Tata is the only company
which was also able to maintain a decent range of DFL as compared to other
two.The impact of both DOL and DFL has been reflected in DCL for each of the

Tata Motors and Maruti Suzuki showed a clear
realation between capital indicators and MPS.However,for Tata motors an inverse
relation was found between MPS,debt and equity.

structure of IT sector(special focus on TCS)

The following research
is about capital structure of IT sector with a key focus on TCS.In TCS,we find
that the company has widened its asset base with an arch focus of financing
these through long-term funds.The debt from 2012 to 2014 has gone up,however
the debt-equity ratio has seen an insignificant increase,showcasing the fact
that equity for raising finance has again been prioritised.Since the amount of
debt is substantially low(1.9%) the debt to total fund ratio is also very
bantam.The interest coverage ratio is 100 times more than the standard
indicating that gearing instruments have not been used effectively and that the
firm has a very very low financial risk and follows an extreme form of
conservative policy.This clearly indicates that the leverage advantage to the
firm as well as investors is highly missing since the tax shield advantage has
not been used by the company.

There is a need for TCS
to optimise its capital structure which can be done by proper usage of funds in
the company.

structure of steel companies in India

The given paper talks
about how capital structure has changed over the years for the steel companies
in India and how various components play an important role in deciding the
firm`s capital structure.Steel industry is one such area where the firm`s own
characteristics have a hefty role to play when it comes to deciding the mix of
structure.We see that before 1990s,steel players used debt as source of finance
since it was much cheaper and firms enjoyed protection as well as loans froms
specific institutions at a lower rate to boost steel production in the
country.However,with the opening up of the economy after 1991,the number of
infrastructure projects around the country grew which increased the demand for
steel in the domestic market,also a global increase in demand of steel was seen
during the period because of a favourable market.At the same time entry of
foreign firms meant Indian firms which were already debt saturated need more
long term funds and as a result of these 3 factors,the capital structure saw a
shift from a heavily debt financed structure to a mix of debt and equity.

The characteristics which
are widely used to ascertain and estabilish the capital structure today are
interest coverage,profitability,liquidity,size of the entity,etc.If the firm is
in a position where it is constantly able to generate huge profits,the source
of finance used by the firm is likely to be reserves and hence the debt-equity
ratio of such fims is likely to be low and the same holds true conversely.There
is a need to meet short term obligations in terms of interest and hence a high
liquidity ratio might mean a high debt ratio.However,if investments are finance
through the liquid assets then the above conclusion cannot be drawn.Larger
firms are in a better position to negotiate with banks plus the ownership
aspect in these firms suggests that debt here is likely to play a major
role.The company size also offers one more benefit of lower financial stress
since they are more likely to be diversified.A higher interest coverage ratio
provides a sense of security to lenders who will be willing to lend if the
given ratio is relatively high.

Thus,we see that how
capital structure in India is different from sector to sector and how the
firm`s own characteristics,basic fundamentals,macro-environment and the market
factors affect the capital structure of a company and how the firms can use the
capital structure to improve their performance and increase returns for


1.    International Journal of Innovative Research and
Practices Vol.3, Issue 11, November 2015 ISSN 2321-2926


2.    IOSR
Journal of Business and Management (IOSR-JBM)

e-ISSN: 2278-487X, p-ISSN:
2319-7668. Volume 19, Issue 9. Ver. IV. (September. 2017), PP 27-31


international Journal of Economic and Business Review,Vol-3,Issue-5,May 2015


Journal of Business Quantitative Economics and Applied Management Research

1,Issue 1,April 2015


International Interdisciplinary Research Journal ISSN-2347 6915

2(1),January (2014)


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