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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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Capital Investment: It is significant to note the recent tremedous capacity of investors to absorb increasingly large issues of securities of private corporate sector. A brief appraisal of the volume of investment in the private corporate sector during the past decade from 1971-72 to 1979-80 is also relevant. Here, a reference may be made to the study of 282 large companies and their analysis, regarding capital investmentindustry-wise contribution, made by Mr. S.D. Singh." The study reflects on the book value of the investment made from their real value. It brings to limelight the quantum of investments, both at current as well as constant prices, between 1971-72 and 1979-80 by 282 large companies in the

• Data pertain to March 31, 1 983.

7. This has been clear from the series of special studies published by the Economic Times Research Bureau in the Economic Times, November 4, 1981; February 3.

1982; April 7, 1982; and June 2, 1982.

8. See S.D. Singh "Private Corporate Sector: Decade of Capital Formation".

Financial Express November 13.1981, p. 5.


private sector. In contrast to the book value of total investment, which amounted to Rs. 6,683 erores, the real value of investment for the 282 companies on base year (1970-71) prices come to just Rs. 4,148 crores.

The total of 80 companies in the engineering industry accounted for 25 per cent of the volume of investment i.e. Rs. 1,646 crores. Sixty-one companies in the textile group showed a total book value investment of Rs. 1,465 crores i.e. 22 per cent of the total capital formation. Food products and beverages, containing a small sample of just 22 companies, accounted for only five per cent of the total investment. A statistical exhibit of the industry-wise contribution to capital formation in book values as well as real values is provided in Table 5.6.

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[Financial Express, Nov. 13, 1981, p. 5.] Notes For 4 companies, figures considered for only 3 years.


For 2 companies, figures considered for only 4 years.

2For 3 companies, figures considered for only 3 years.


For 1 company, figures considered for only S years.



An industry-wise list of five companies which have contributed the most by way of capital formation during the period under consideration is given in Table 5.7. Against the name of the company is indicated the total investment made at current prices as well as at constant (I 970-7 1) prices. In the Chemical industry, the five largest contributors were Hindustan Lever (Rs. 1O?.4 crores), GSFC (Rs. 83 crores), Union Carbide (Rs. 58.4 crores), Tata Chemicals (Rs. 54 crores), and Indian Explosives (Rs. 47 crores). The figures stated above are at current prices.

In the Engineering category, the top five rank holders were Telco (Rs. 308 crores), Ashok Leyland (Rs. 72 crores), Larsen & Toubro (Rs. 66 crores), Ahmedabad Electr. (Rs. 65 crores), and Mahindra and Mahindra (Rs. 53 crores). (See Table 5.7) The top five in the metal, alloy and cement group of companies were TISCO (Rs. 306 crores), Hindustan Aluminium (Rs. 88 crores), Indian Aluminium (Rs. 61 crores), Guest Keen Williams (Rs. 61 crores), and Mahindra Ugine (Rs. 55 crores).

Gwalior Rayon, with a total book value investment of Rs. 171 crores held the top place in the textile industry. It was followed by Ahmedabad Mfg. and Calico (Rs. 97 crores), DCM (Rs. 91 crores), Century Spg.

(Rs. 83 crores) and Bombay Dyeing (Rs. 61 crores).

Tata Finlay was the top rank holder in the food products and beverages group showing a total investment of Rs. 43 crores. The other four were Duncan Agro (Rs. 31 crores), Tata Oil (Rs. 27 crores), Kothari (Madras) Ltd. (Rs. 20.5 crores), and Andhra Sugar (Rs. 20 crores).

In the miscellaneous category, the top three places were occupied by shipping concerns, which is explained by their capital-intensive nature.

Scindia Steam topped the list with an investment of Rs. 197 crores followed by Great Eastern Shipping (Rs. 147 crores), India Steamship (Rs. I I I crores), Ballarpur Industries (Rs. 57 crores), and Dunlop India (Rs. 55 crores).

Profitability Ratio: An intensive study of the 251 top companies of the private corporate sector, as made by the Research Bureau of the Economic Times", reflects on the trend of the profitability during the last three financial years in the private sector companies. The study reveals a fall in 1980-81 in profitability ratio in contrast to the steady improvement in the last two years. Gross profits as a percentage of total capital employed after showing a continuous rise from 11.2 per cent in 1977-78 to

9. See Study of the Research Bureau of the Economic Times "251 Corporate Giants:

Profitability Ratio Declines", The Economic Times, June 2, 1982, p, I, (Investment Review).


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12.0 per cent in 1978-79 and to 12.7 per cent in 1979-80 declined to

12.3 per cent in 1980-8 I. Similarly, gross profits as a percentage of sales also after showing a continuous rise from 10.0 per cent in 1977-78 to

10.5 per cent in 1978-79 and 11.2 per cent in 1979-80 declined to 10.8 per cent in 1980-81. The rates of growth in gross profits, profits before tax and profits after tax (net profits) decelerated during 1980-81. While annual rate of growth of gross profits of 251 companies fell from 22.7 per cent in 1979-80 to 14.3 per cent in 1980-81, that of profits before tax fell steeply from 26.6 per cent to 9.2 per cent. The growth in net profits also showed a fall from 36.1 per cent to 15.8 per cent."

While the total dividends paid by 251 companies increased from 69 crores in 1979-80 to Rs. 78 crores in 1980-81, they accounted for a lower share of 37.4 per cent of the net profits in 1980-81 (38.7 per cent in 1979-80).

Out of these 251 companies as covered in the study, 99 profit making companies in both years showed distinct improvement in the ratios of gross return on sales in 198C-81. The shifts which were noticed in the profitability ratio of gross return on sales income were also discernible in the case of other profitability ratio-gross return on total capital employed. Here also, there was a noticeably shift to the lower profitability range. lOa Sbares New Capital Issues: The Capital Issues Control Act 1947 regulates the new issues of capital. New capital issues can be classified into three

types, as follows :

(i) Issues requiring prior consent of the Controller of Capital Issues (CCI), Government of India, which include issues to be made at a premium, all issues by MRTP companies, debenture issues to be offered to the public for amounts exceeding Rs. one crore in a period of one year, bonus issues ond issues of preference shares and debentures carrying participation or conversion rights;

(ii) Issues requiring acknowledgement of the CCI i.e. issues of securities other than those stated above by public limited companies for amounts exceeding Rs. one crore in a period of 12 months; and (iii) Exempted issues, mainly the issue of non-MRTP companies for amounts less than Rs. one crore.

10. Id. at p. IV.

lOa. See also Bhairav H. Desai, "Composition of Capital Structure and Profitability:

case study of Indian Chemical Industry," The Economic Times, November 2, 1985, p. IV.


The guidelines regarding the issue of share capital other than bonus shares were issued on 14 May, 1975; and amplified/amended from time to time. An additional guideline" approved is that companies raising equity capital would be allowed to retain over-subscribed equity to the extent of 25 per cent of the amount for which they seek the consent of the Central Government. The operation of this would be on a voluntary basis and the company concerned would itself take a decision, subject to the approval of government to seek retention of the over-subscribed equity to the extent of 25 per cent of the amount consented by the Controller of Capital Issues. The company would, however, while seeking the consent for raising equity, be required to state its option regarding retention of the over-subscribed amount, if any, to the extent of 25 per cent. The company would also have to mention its desire to retain over-subscription to its prospectus/statement in lieu of prospectus.

In case, the issue of shares is on a rights basis, the company's intention regarding over-subscription would have to be mentioned in the circular letter sent to its existing shareholders. The company's option once exercised in this regard would be irrevocable.

CCI granted approvals to 98 proposals for capital issues amounting to Rs. 186.02crores in November 1985. During the period April-Nov.

1985 a total of 585 proposals for issues amounting to Rs. 1606.49 crores were cleared as against 454 proposals amounting to Rs. 1,309.37 crores in the corresponding period of the previous year. In percentage terms the clearances during April-Nov. 1985 indicate a 23 per cent increase in the amount and about 29 per cent increase in the number of consents over the corresponding period in 1984-85.12 • From time to time the Central Government has.aken steps to regulate" and encourage new issue activity. In this direction the latest steps include the guidelines of 1984-85 for issue of shares and debentur~ by public limited companies to meet their modernisation/expansion co;!J or to augment their long term capital. (See also Chapter II) Public Response to Equity: Over the years the primary capital market has been sustained largely by equity and public response to equity was steady during 1977-81, with the annual public subscription ranging between Rs. 60 crores and Rs. 80 crores. During the five years ending 1980-81, equity contributed a total primary capital of Rs. 307.16 crores

11. Issued by the Ministry of Finance, Department of Economic Affairs, Office of the Controller of Capital Issues vide their press release dated 18.3.1985.

12. The Economic Times, Jan. 7, 1986, p. I.

13. See Ministry of Finance, Department of Economic Affairs, Stock Exchange Division Notification No. F 14/1!SEj85 dated 7.5.1985.


against Rs. 60.59 crores by debenture issues. In the financial year 1981-82 sanctions for equity issues given by the Controller of Capital Issues amounted to Rs. 205.42 crores as compared to Rs, 286.80 crores in 1980-81 (See Table 5.8). In the case of debentures, sanctions were given for Rs. 416.86 crores in 1981-82, while the record of previous twelve months was a mere Rs, 83.30 crores. Public subscription for equity was Rs. 214.05 crores in 1981.82 as against Rs. 65.57 crores in the previous year. In 1981-82, the share of equity in total primary capital realisation was 47.4 per cent. But this fell to 36.7 per cent in 1982-83 and still further to 26.3 per cent in 1983-84. In the last financial year even though the private corporate sector came to the market with larger equity issues, the public response to them was only more depressing than in the previous year. While sanctions of equity issues rose from Rs. 270.30 crores in 1982-83 to Rs. 353.86 crores in 1983-84, capital raised in terms of equity merely limped from Rs, 132.37 crores to Rs. 146.82 crores (See Table 5.9).

The total capital raised from the capital market through fresh issue of shares and debentures and right shares recorded a rise from Rs. 58.7 crores in the first quarter of 1985 (January-March) to Rs, 80.5 crores in the second quarter of 1985 (April-June). Fresh issues of shares spurted from Rs. 45.0 crores in Jan- March 1985 to Rs. 59.4 crores in April-June 1985. The spurt in the capital issues was mainly attributable to fresh issue of shares and debentures.

Out of the initial issues of equity and preference shares of Rs. 59.4crores, shares worth Rs. 34.61 crores were offered for public subscription, while reservation for directors and other firm allotments to Rs. 20.25 crores and foreign participation to Rs. 4.54 crores. Among the 32 companies which raised equity capital (no preference issue) during April-June 1985 the prominent ones from the angle of amount of issue were Sewa Papers (Rs. 10.24 crores) followed by Kinetic Honda Motor (Rs. 10 crores), Swaraj Mazda (Rs. 7.25 crores), Dytron (India) (Rs. 4.35 crores), Andhra Scooters (Rs, 3.65 crores), Eskayef (Rs, 3 crores), United Soya Products (Rs. 260 crores), KTC Tyres (India) (Rs. 2.25 crores), ISPL Industries and Pressman Leasing (Rs. 1.50 crores each) and Kera Sinter (Rs. 1.45 crores), Two Companies namely Eskayef and Rolly Metals issued shares at a premium of Rs, 8 and Rs. 3 per share respectively. Apart from this, eighteen companies issued right share to the tune of Rs. II.! crores. Thirteen companies capitalised Rs, 19.8 crores from reserves and surplus during this period."

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[Based on data given in the Report of the Planning Commission's study group on Financing of the Private Sector in the Sixth Plan. ] [ Financial Express, Sept. 29, 1984, p. 5. ] The public response to new issues floated during the second quarter of 1985 was encouraging. Some issues were over subscribed several times. The flow of investible funds to equity markets has shot up substantially in the year 1985 (Samvat 2041) and the increasing flow is expected to be maintained in coming months judging by the large amount of capital raised from the capital market and the extent of over subscriptions to several new issues.

Although 1985 witnessed such an unprecedented buying of shares in the annuals of the corporate history of the country, significantly there was no payment crisis in the major stock exchanges. This is indeed creditable. The equities are likely to maintain a steady trend in the year 1986.

Debentures In any corporate organisation, big or small, doing business or 'engaged in manufacturing activity or service industry, funds are raised in two ways-equity and debts. Equity funds come from shareholders


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