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«v CAPITAL FORMATION: SHARES AND DEBENTURES o Introduction o Capital Formation, Market Trend o Banks and Money Supply Capital Investment Profitability ...»

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Chapter

v

CAPITAL FORMATION:

SHARES AND

DEBENTURES

o Introduction

o Capital Formation, Market Trend

o Banks and Money Supply

Capital Investment

Profitability Ratio

o Shares

New Capital Issues

Public Response to Equity

o Debentures

Nature and classification

Popularity of Issue of Debentures

Regulation and Guidelines on Debentures

Conversion of Preference Shares Convertible and non-convertible Government Regulation and Debentures o C.c.P. Shares Salient Features o Concluding Remarks FIVE Introduction Capital formation and industrial finance assume significance in the light of the fact that India is on the threshold of economic development.

While new industries are developing fast, the old units are expanding and even otherwise require more working capital. The capital market has always been an important source of finance for the private corporate sector in India. The amount of funds raised in the capital market has varied from year to year and even from time to time, mainly depending on the magnitude of savings available for investment climate, including government economic policies, corporate rate of return and future expectations.

The investment climate in the private corporate sector is of great concern to the State, the Reserve Bank of India and financial institutions.

What happens to new issues is of vital importance to the growth of the private corporate sector and to the progress of country's economy.

Monetary authorities, being concerned with the issue of working capital on requirements of industry, have appointed various study groups and committees, viz. Dahejia Study Group (1968), Narasimham Study Group (1970), Tandon Committee (1974), Chore Committee (1979) and Patel Committee (1984) etc. In the Budget for 1985-86 various steps are listed which aim at easier mobilization of resources from the market by the corporate sector and reducing its dependence on banks and financial institutions.

Capital Formation and Market Trend The evolution of the Indian capital market has been through various policy measures designed to widen and strengthen it so as to quicken

196 GOVERNMENT REGULATION OF CORPORATE SECTOR

the tempo of institutionalisation of savings and investment. During the last decade capital formation in the private corporate sector has shown fluctuating tendencies both at current and constant prices. Capital formation gross and net (at current prices) was highest, gross at Rs. 2,830 crores and net at Rs, 1,889 crores respectively in the year 1980-81. These were lowest in the year 1972-73, gross at Rs. 899 crores and net at 425 respectively. This is based on a special study conducted by the Economic Times Research Bureau as stated in Table 5.1

–  –  –

1971-72 561 1972-73 425 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1125 1979-80 1373 1980-81 [ The Economic Times, February 3, 1982, p. IV. ] The question of industrial finance, whether short-term or long-term, cannot be considered in isolation. It is generally related to the trends, composition and channelisation of the savings into appropriate productive activities consistent with national priorities. The capital market has

• Public limited companies and private limited companies.

CAPITAL FORMATION: SHARES AND DEBENTURES

thus a crucial role to play in the process of economic development. As regards external sources of long-term funds for the corporate sector the four main sources are the capital market, term financing institutions, banks and deposits from the public. The size of capital market is basically determined by the volume and pattern of savings in the domestic economy. Thus, it is found that the total amount of capital raised in the market 'which was about Rs, 106 crores per annum between 1976-77 and 1980-81 rose to about Rs, 423 crores in 1981-82. The unprecedented boom in the capital market in early 1982 was the cumulative effect of several factors.' The most important of these had been the changes in the economic policies of the government.

The general improvement noticed in the activity on the capital market during 1980 and 1981 was sustained during 1982 and in the first half of 1983 according to the Reserve Bank's Report on Currency and Finance for 1982-83.

There was a substantial rise of 55.3 per cent in the aggregate value of consents/acknowledgements granted by the Controller of Capital Issues to non-government public limited companies from Rs. 719.1 crore in 1981 to Rs. 1,116.9 crores in 1982. The value of consents/acknowledgements granted during January-Jun 1983 was, however, lower at Rs. 444.0 crores against Rs. 566.8 crores in January-June 1982.

New capital issues by public limited companies (other than termlending institutions) increased by 39.2 per cent to Rs. 666.4 crores in 1982 from Rs. 478.7 crores in 1981. During the first half of 1983 new capital issues amounted to Rs. 39.9 crores as compared with Rs. 332.7 crores in corresponding period of 1982.

Equity prices on the major stock market ruled generally buoyant during July 1982 to June 1983. The Reserve Bank's All India Index number of ordinary share prices (base 1970-71 : 100) at 200.7 for the week ended June 25, 1983 recorded an increase of 16.0 per cent over the index a year before. Towards the close of 1983, the markets were extremely buoyant with the Economic Times Share Index touching all time peak of 287.1. 2 The Reserve Bank Report (1982-83) points out that the data available in respect of 284 issues show that 230 issues were over subscribed, 17 were fully subscribed and 37 were under subscribed.





1. See "Capital Market", The Economic Times, June 12, 1982 p. 1.

2. See "Capital Market Trends ", The Economic Times, January 28, 1984,p. IV.

198 GOVERNMENT REGULATION OF CORPORATE SECTOR

–  –  –

[The Economic Times, April 23, 1985 and October 28, 1985, p. 4]

• Issued through prospectus. Figures in bracket pertain to the number of companies issued shares (d) related to quoted companies' prices are taken at their nominal values premium prices are excluded.

200 GOVERNMENT REGULATION OF CORPORATE SECTOR

During the first half of 1983 there were 483 issues for raising an aggregate capital of Rs. 39.9 crores as against 236 issues for Rs. 332.7 crores in the corresponding period of the preceding year.

The total capital raised from the capital market through shares, debentures and right shares increased from Rs. 252.9 crores in 1983-84 to Rs. 333.3 crores in 1984-85 (31.8 per cent). The rise in the amount raised by capital issues was mainly attributable to spurt in debentures which recorded a rise from Rs. 27.9 crores in 1983-84 to Rs. 46.7 crores or by 67.4 per cent in 1984-85. The amount raised under equity and preference shares through prospectus also increased from Rs. 185.2 crores in 1983-84 to Rs. 248.5 crores (34.2 per cent) in 1984-85.3 Latest data available indicate that during 1985-86 (April-September) equity and preference issue was of Rs. 142.5 crores. (See Table 5.2).

The number of capital issues that entered the market declined from 272 in 1983-84 to 207 in 1984-85. This is mainly due to the fall in the new issues under ordinary and preference shares which declined from 216 in 1983-84 to 168 in 1984-85. The number of companies issuing right shares also decreased from 50 in 1983-84 to 37 in 1984-85. However, the number of debenture issues recorded a nominal rise from 6 in 1983-84 to 7 in 1984-85. The average value per debenture issue after declining from Rs. 5.16 crores in 1981-82 to Rs. 4.65 crores in 1983-84 rose to Rs. 6.67 in 1984-85.

Out of the total capital of Rs. 333.3 crores raised in 1984-85 (See Table 5.2), equities and preference shares accounted for 74.6 per cent (73.2 per cent in 1983-84), debentures 14 per cent (11.0 per cent in 1983-84) and right shares 11.4 per cent (15.8 per cent in 1983-84).

The overall trend in the total capital issued during the four quarters of 1984-85 showed that the amount raised in the first three quarters were higher than those raised in the corresponding quarters of 1983-84, but the amount issued in the last quarters of 1984-85 was lower than that in the corresponding quarter of 1983-84.

In all 207 companies raised capital from the market in 1984-85 while 272 companies raised capital from the market in 1983-84. Of this the Jan-March 1985 quarter had the largest number of 58 companies followed by October-December 1984 quarter (54 issues), July-September 1984 quarter (51 issues)' and April-June 1984 quarter (44 issues). The overall trend in the number of capital issues in the four quarters of 1984-85 was lower than that of the corresponding quarters of 1983-84.

3. See "Issues in 1984-85". Report of N.D. Prajapati, The Economic Times Research Bureau, The Economic Times, April 23, 1984, pp. J, 6.

CAPITAL FORMATION : SHARES AND DEBENTURES

However, the total capital excluding over-subscription of issues, raised from the capital market through fresh issues of shares and debentures and right issues recorded a rise from Rs, 80.5 crores in the first quarter of 1985 (April-June) to Rs, 125 crores in the third quarter of 1985 (July-September). This was the highest amount raised when compared to the four corresponding quarters of the preceding three years 1~82, 1983 and 1984.

Capital issues by the private corporate sector in the current year (1985-86) are expected to be of the order of Rs. 2500 crores.?

In the light of such an assessment, it is no wonder that the Planning Commission has envisaged a larger role for the capital market. The draft Seventh Five year Plan document says that a stage has come to enlarge the role of the capital market and for enterprises to bid for resources on the basis for their capacity and credit-worthiness.

According to the Planning Commission the market could also be depended by the creation of new financial institutions. In view of such an attitude on the part of the Planning Commission, it could be said that the long-term outlook for the share markets too is quite encouraging.

It would thus appear that the capital markets are now under-going just process of readjustment and that the underlying current remains fairly bullish.

As stated in Chapter IV the public financial institutions have also recorded considerable rise in their operations during the previous years.

Banks and Money Supply With the rapid growth of banks and their branch offices, particularly, after 1969-the landmark in Indian banking-when the major commercial banks were nationalised, there has been tremendous growth in banking. The number of bank branches has gone up from 8262 (end of June 1969) to nearly 42016 branches, including those of Regional Rural Banks (end of June 1983). Total deposits with commercial banks have gone up from Rs, 4646 crores in June 1969 to nearly Rs. 59,769 crores (January 20, 1984).4 The aggregate deposits upto September 1984 were of Rs. 65,575 crores." The allocation policies adopted by the government and the Reserve Bank of India are such as to ensure regular

• See the Economic Times, November 5,1985, p. I.

4. See Reserve Bank of India Bulletin, February 1984, p. 83.

S. See Reserve Bank of India Bulletin, February 1985, p.s, 74. Also see "Banking Portents", The Economic Times, August 8, 1985, p. 5.

202 GOVERNMENT REGULATION OF CORPORATE SECTOR

and adequate flow of the deposits with banks to the desired and productive sectors of the economy. Total outstanding loans by commercial banks to industrial borrowers-small, medium and large, increased from Rs. 2,068 crores (end of March 1968) to Rs. 17,981 crores (end of June 1983).

During the Sixth Plan M3 or broad money crossed the Rs. 100,000 crores mark and at the end of March 1985, it was at Rs. 100,550 crores which was more than double the level as on end-march 1980. In the decade ended 1979-80 M3 rose four times, from Rs, 1O,95~ crores at the end of March 1971 to Rs. 46,801 crores at the end-March 1980.

Particularly striking feature to note is that between 1970-71 and 1984-85 while the share of Ml in broad money fell from 66.8 per cent, to 38.0 per cent that of time deposits with banks rose from 33.2 per cent to 62.0 per cent. The trends and pattern of growth in money stock" are given in Table 5.3.

TABLE 5.3 Growth in Money Stock

–  –  –

• Data pertain to March 31, 1983.

6. See K.S. Ramachandran, "Twofold rise in Money Supply", Financial Express, May 7, 1985, p. 1.

CAPITAL FORMATION: SHARES AND DEBENTURES

The growth pattern of bank deposits in the Plan shows that while aggregate deposits became more than double, time deposits grew faster than demand deposits. The share of time deposits declined. However, between 1981-82 and 1982-83, this trend was reversed with demand deposits registering some kind of a spurt. Details of the growth pattern of Bank deposits of all scheduled commercial banks from 1977-78 to 1984-85 are given in Table 5.4.

–  –  –

[ Financial Express, May 7, 1985, p. 4] Trends in expansion of bank credit show that the share of advances for food procurement had nearly doubled in the Plan period. Between end-March 1981 and end-March 1985 while outstanding food credit rose more than threefold, non-food credit grew by just more than 80 per cent.

As on end-March 1981 outstanding non-food credit was nearly 15 times the advances for food procurement but four years later it was less than eight times. (See Table 5.5)

• Data pertain to March 31, 1983.

204 GOVERNMENT REGULATION OF CORPORATE SECTOR

–  –  –

[Financial Express, May 7,1985, p. 4] The private corporate sector generally has recorded remarkable performance during the last two years, inspite of tensions of credit squeeze, in respect of volume of capital investment, output, sales profits, dividends, etc."



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