Capital Structures of the Indian Industrial Sector

Chapter 1

INTRODUCTION

1.1 Introduction

Capital is the main factor of every industry, a company start with capital and end with demolition of that capital. So the capital and capital structure are one of the most important terms in every business, Companies have been struggling with capital structures for more than four decades. During credit expansions, companies have been unable to build enough liquidity to survive the contractions, especially those enterprises with unpredictable cash flow streams which end up with excess debt during business slowdowns

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In this research I am going to Exam the changes in the capital structure of Indian industrial sector, with a special reference to Indian textiles industry .The purpose of this paper is to determine whether firm-specific capital structure determinants in the emerging market of India. support the capital structure theories which were developed to explain the company structures in developed economies. In other words, the main motivation for this study is to highlight the role of firm characteristics and industrial sector-specific variables in determining capital structure. This is an attempt to a panel data study of capital structure determinants.

• Statement of the Problem

There is lot of study conducted in the field of capital structure theory but no systematic study with applying econometric model and tools used like panel data are not conducted in India yet. It consist analyzing both time and cross sectional variables. There is No studies are conducted on specified sector. The study by sector wise is more effective than in macro level research which is avoid sector variable. Each industry has its own uniqueness and situations. When taking macro level data set will miss its sector uniqueness. This research is an enquiry through panel data analysis with considering sector as important factors. Specifically researcher tries to answer some questions, firstly which selected factors are more influence in short term leverage of a firm, and which is not influence on it . Secondly long term leverage has any determinate in Indian industry and which factors is more influenced in total debt decision. Also questioned extraneous variable like bank rate, inflation rate can make any impact on capital structure. The researcher conduct a pre study for specifying research problem.

• Pre study

The pre study was conducted by analyzing all companies in india by classify these companies in sector wise. Assigning debt equity ratio as variable for prestudy, by Using cmie and Bloomberg database, researcher collect all companies 5year debt equity ratio and classified them in sector wise. Companies arranged under in a Automobiles & ancillaries, Banking, chemical , communication, construction & real estate, construction material, consumer goods sector, energy, food & Agro, hotel & tourism, IT, investment & finance, Machinery, metal, mining ,textiles, transport and wholesale & re tale sectors. Take 5 year average of all company and find out standard deviation of each sector. The value arranged below table.

Table 1.1 .Result of Pre study

In this table textiles sector have very high debt equity and not ordinary deviation between companies. High standard deviation mean that in textile sector, some companies has very low debt and some has very high. It is india’s one of the oldest and major export sector too. Highest deviation and irregularity in debt is not a better sign. So need an attention on capital strucre determinant of Indian textile sector.

2. Objectives of the study

The goal of these studies is analyze various factors determining capital structure in Indian industries. Objective of the study is listed below; it is analyses three econometric model, short term, long term and total leverage of Indian textile sector.

1.2.1. Objective settled on the basis of second model short term debt leverage

1a. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of profitability on short term debt

1b. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of liquidity on short term debt

1c. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Tangibility on short term debt

1d. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Growth on short term debt

1e. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Bank rate on short term debt

1f. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of tax rate on short term debt

1g. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of on short term debt

1h. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of cost of debt on short term debt

1i. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Age of firm on short term debt

1j. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Size of firm on short term debt

1.2.2. Objective settled on the basis of second model long term debt leverage

2a. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of profitability on long term debt

2b. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of liquidity on long term debt

2c. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Tangibility on long term debt

2d. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Growth on long term debt

2e. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Bank rate on long t term debt

2f. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of tax rate on long t term debt

2g. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of inflation on long t term debt

2h. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of cost of debt on long term debt

2i. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Age of firm on long term debt

2j. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Size of firm on long term debt

1.2.3. Objective settled on the basis of Third model total debt leverage

3a. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of profitability on total debt

3b. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of liquidity on total debt

3c. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Tangibility on total debt

3d. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Growth on total debt

3e. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Bank rate on total debt

3f. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of tax rate on total debt

3g. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of on total debt

3h. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of cost of debt on total debt

3i. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Age of firm on total debt

3j. To study and analyses the determinant of a capital structure of Indian textiles sector investigating the impact of Size of firm on total debt

3. Hypotheses

The hypotheses of this research are set on the basis of above said objectives.

Indian textiles companies on short term debt

1. H_01a = There is no significant impact of Indian textile companies’ profitability on short term debt
2. H_01b = There is no significant impact of Indian textile companies’ liquidity on short term debt
3. H_01c = There is no significant impact of Indian textile companies’ Tangibility on short term debt
4. H_01d = There is no significant impact of Indian textile companies’ growth on short term debt
5. H_01e = There is no significant impact of Indian textile companies’ bank rate on short term debt
6. H_01f = There is no significant impact of Indian textile companies’ tax rate on short term debt
7. H_01g = There is no significant impact of Indian textile companies’ inflation on short term debt
8. H_01h = There is no significant impact of Indian textile companies’ cost of debt on short term debt
9. H_01i = There is no significant impact of Indian textile companies’ age of firm on short term debt
10. H_01j = There is no significant impact of Indian textile companies’ size on short term debt

Indian textiles companies on long term debt

11. H_02a = There is no significant impact of Indian textile companies’ profitability on long term debt
12. H_02b = There is no significant impact of Indian textile companies’ liquidity on long term debt
13. H_02c = There is no significant impact of Indian textile companies’ Tangibility on long term debt
14. H_02d = There is no significant impact of Indian textile companies’ growth on long term debt
15. H_02e = There is no significant impact of Indian textile companies’ bank rate on long term debt
16. H_02f = There is no significant impact of Indian textile companies’ tax rate on long term debt
17. H_02g = There is no significant impact of Indian textile companies’ inflation on long term debt
18. H_02h = There is no significant impact of Indian textile companies’ cost of debt on long term debt
19. H_02i = There is no significant impact of Indian textile companies’ age of firm on long term debt

Indian textiles companies on total debt

20. H_03j = There is no significant impact of Indian textile companies’ size on Total debt
21. H_03a = There is no significant impact of Indian textile companies’ profitability on Total debt
22. H_03b = There is no significant impact of Indian textile companies’ liquidity on Total debt
23. H_03c = There is no significant impact of Indian textile companies’ Tangibility on Total debt
24. H_03d = There is no significant impact of Indian textile companies’ growth on Total debt
25. H_03e = There is no significant impact of Indian textile companies’ bank rate on Total debt
26. H_03f = There is no significant impact of Indian textile companies’ tax rate on Total debt
27. H_03g = There is no significant impact of Indian textile companies’ inflation on Total debt
28. H_03h = There is no significant impact of Indian textile companies’ cost of debt on Total debt
29. H_03i = There is no significant impact of Indian textile companies’ age of firm on Total debt
30. H_03j = There is no significant impact of Indian textile companies’ size on Total debt

4. Significance and Scope of the study

Capital and capital structure are one of the most important terms in every business; Companies have been struggling with capital structures for more than four decades. During credit expansions, companies have been unable to build enough liquidity to survive the contractions, especially those enterprises with unpredictable cash flow streams which end up with excess debt during business slowdowns. So researching about capital structure determinant is important. Especially in current condition, India is developing and emerging market, and also attracting capital with outside capita by ‘make in India’ project. The study significant in recent situation also finds out which factor are more influencing capital structure determinants. The study by sector wise is more effective than in macro level research which is avoid sector variable. Each industry has its own uniqueness and situations. When taking macro level data set will miss its sector uniqueness. This research is an enquiry through panel data analysis with considering importance of sector.

5. Research design and Methodology

This research is designed on the basis of giving importance of sector uniqueness, the study conducted on the base of panel data analysis, which used time and cross sectional factors.

1.7.1 Research Design

This research set three econometric models. On the basis of this model three dependants (long term debt ratio, short term debt ratio and total debt ratio) and ten independent variables are created. The three econometric models are

1. for short term debt ratio model

lder_it=β₀+β₁(prof)+ β₂(liq)+ β₃(tang)+ β₄(gro)+ β₅(infl)+ β₆(bnkrt)+ β₇(tax) +β₈(cod)+ β₉(age)+ β₁₀(size)+ u_it

2. Long term debt ratio model is

sder_it=β₀+β₁(prof)+ β₂(liq)+ β₃(tang)+ β₄(gro)+ β₅(infl)+ β₆(bnkrt)+ β₇(tax) +β₈(cod)+ β₉(age)+ β₁₀(size)+ u_it

3. Total debt model is

der_it=β₀+β₁(prof)+ β₂(liq)+ β₃(tang)+ β₄(gro)+ β₅(infl)+ β₆(bnkrt)+ β₇(tax) +β₈(cod)+ β₉(age)+ β₁₀(size)+ u_it

Where,

Lder=long term debt ratio define by long term debt/book value of equity

sder =short term debt ratio define as short term debt/ book value of equity

der= total debt ratio estimate by total debt by /book value of equity

i= number of companies or panel (175 firms); t= time variable (here 5 years); β₀=stand for model constant; β₁ to ₁₀= co-efficiency of independent variables;

Independent variables

pro = profitability of firm defined by EBIT/ sales

liq= liquidity is by total current asset divided current liability

Tang= tangibility, it identified by net tangible asset to total asset

gro= growth rate in total asset of a firm

infl= economic inflation factors (CPI)

bnkrt = bank rate fixed by RBI

tax = tax liability defined by profit after tax to profit before tax

cod = cost of debt calculated as interest /total outsider liability

age =age of a firm; firm older than 10 years give value ‘1’ otherwise ‘0’

size = size of a firm defined by getting natural logarithm of Size ;

u_it =error term

the research designed on the base of above said panel data models.

1.7.2 Sources and Data

In this research all data are secondary nature, Data are collected by using CMIE and Bloomberg Database, some variable like bank rate and inflation are collected from Reserve bank of India website. For the research researcher collect five year data of 175 textiles companies which listed in both NSE and BSE are collected. The textiles industry is selected by pre study explained in Para 1.1.1

1.7.3 Data Analysis

Data are analysed using panel data methods, which include time and cross sectional factors.. The three econometric models, short term leverage model, long term leverage model, total leverage model are analysed by various panel data tools. For analysing researcher used Stata11 software and Microsoft excel. The tools used for the analysing are listed below:

• Pooled OLS regression

If individual effect ui (cross-sectional or time specific effect) does not exist (ui =0), ordinary least squares (OLS) produces efficient and consistent parameter estimates

Y_it =α + Xit ‘ β +ε_it (ui =0)

It used regress a data irrespective of time and cross sectional values

• Fixed effect

Fixed effect models are designed to study the causes of variation within a panel group or entity. a time invariant characteristic cannot used such a changes because each entity is constant for each person.

• Random effect

A random effect model assumes that individual effect (heterogeneity) is not correlated with any regresses and then estimates error variance specific to groups (or times).

• Breusch-Pagan Lagrange multiplier (LM)

Lag model test is a post estimation test it is used for checking randomness in study it assumed that there is no random effect estimates. Mainly used for choose best model, pooled OLS or Random effect

• Hausman test for fixed effect

Hausman test also post estimator test it is used find out fixed effect in estimation. It analyses deviation of Two estimation model fixed and random model, and interpret is there any fixed effect or not.

1.8 Chapterisation

This research report consist five chapters , first chapter consist introduction part it is give a basic idea about how the research is designed and including identifying research problem data source a tools used . in this chapter reported objective of the study and various hypotheses set for further research

The second chapter is provide literature review, various studies conducted in same area and related area. This is providing a clear idea about previous studies nationally and internationally. So researcher can set research gap through this chapter. The third chapter is belonging to theoretical frame work, various theory related to this research are described there. It is used to providing a clear cut idea about theoretical frame and subject knowledge in researched area

The forth chapter is analyses part it detail description of analysis with fixed and random methods and other test used. Fifth chapter is last chapter it consist finding and suggestions in the research .

1.9 Limitation

The research study has various limitation are

• Time span of research is very less, so it is not possible cover all minor part of research area.
• The panel data collection is crucial stage, the data availability and collecting each and every observation for panel is difficult task
• The study only five year data it may be influenced extreme variables like economic depression and law changed
• Lack of knowledge and lack of expert in panel data analyses is limitation in this research
• Variable, which is not stated in the research may cause to influence dependant variables.
• Research is may not be free from clerical and human error so its result and interpretation has may vary