Current Economic Statistics and Review For the Week 
Ended November 04, 2006 (44^th Weekly Report of 2006)

Theme of the week:

Private Limited Companies: Their Growing Number and Importance in Indian Corporate Sector*

Private corporate business sector is classified into two segments: one comprising non-government non-financial companies and the other consisting of non-government financial and investment companies (excluding banking and insurance companies as they are governed separately). All of these are further subdivided into public limited companies and private limited companies.

According to the Companies Act 1956, a private limited company is one which:

(a) restricts the right to transfer its shares, if any;

(b) limits the number of its members to 50; and

(c) prohibits any invitations to the public to subscribe for any shares in or       debentures of the company; provided that where two or more persons hold one or more shares in the company jointly, they shall, for the purpose of this definition , be treated as a single member.

A company, which is not a private limited company as defined above, is a public limited company.

Private corporate sector in India has obviously been the prime mover of India ’s industrialisation process. This was so even when a controlled regime was in operation. No doubt, at that time, in terms of fresh investments public sector commanded a dominant position and the private corporate sector always functioned complementary to the public sector. Growth of private corporate sector, therefore, had to take place within the limits laid down by government regulations. The Industries (Development and Regulation) Act, the  Monopolies and Restrictive Trade Practice Act (MRTPA), the Capital Issues (Control) Act and other regulatory measures, imposed limitations on the expansion of existing firms and entry of new firms to the defined areas. Hence, the private corporate sector had to operate and grow within a controlled policy framework.

Though, gradual changes had been taking place in the controlled regime since the 1980s, the 1991 economic reforms ushered in an era of full-throated liberalization in almost every facet of Indian economy and in industrial sector in particular. This liberalisation facilitated an improved investment climate for private investment within the country as well as for flow of foreign direct investment. The interest rate reforms in the financial sector and taxation reforms in the fiscal area provided large incentives to the corporate sector. These and many other aspects of macroeconomic policy contours are reflected in the overall as well as the financial performance of the private corporate sector in the post reform period. Combination of financial and non-financial enterprises in the private sector is construed as private corporate sector. Non-financial enterprises are engaged in manufacturing /production of goods and services. Public limited companies dominate the non-financial private corporate sector; they contribute about 40 per cent of gross value added of the registered manufacturing private sector.

Keeping in view the rapidly evolving role of the private corporate sector, the EPW Research Foundation (EPWRF) has been focusing on the financial performance of the private corporate sector. A few weeks ago, theme paper on the financial performances of the public limited companies was released through this medium.. In continuation of that exercise, the present note aims at reviewing the financial performance of private limited companies, the other segment of the private corporate sector. For this too, the RBI’s company finance studies for over two decades from 1982-83 to 2003-04 have been used. In this exercise an attempt is made to bring out the salient features of the working of non-government non-financial private limited companies vis-à-vis the working of non-governmental public limited companies through a series of financial indicators. As the subsequent paragraphs will indicate these financial indicators throw interesting insights into the differential responses of the public limited and private limited companies to the liberalization process.

II

Data and their Background

The Reserve bank of India (RBI) has been regularly publishing studies on the financial performance of the private corporate sector for the past five decades. Early  studies of non-financial companies by the Reserve Bank made in 1949 and 1952, comprising 2,500 and 1,000 companies, respectively, were exploratory in nature, aimed at understanding the presentation of corporate statistics and the subtle nuances, if any, in the concepts and definitions adopted by the companies. Based on the experience gained from these studies, a system for the analysis and processing of financial statistics from the annual accounts of companies was evolved and the studies based on the same were taken up on a regular basis from 1954 onwards. Though, earlier studies covered only non-Government non-financial public limited and private limited companies, later they were extended to other sub-sectors of the corporate sector.

Change in the format of the RBI studies

Moreover, even amongst the non-government non-financial public and private limited companies, the studies were conducted separately for two size groups, namely, small companies and medium & large limited companies. However, from 1985 onwards, such studies on size groups were given up and all non-government non-financial companies in the respective categories were put together to produce consolidated results, though for the two categories, public limited and private limited companies separately. Earlier, each study carried data for five years in respect of the same sample companies. Now, the RBI covers three years, i.e. a study year and the earlier two years by selecting and studying the three-year balance sheets of the same companies in the sample. In this note, the selection of year is done in such a way that the selected year is the largest of the samples in terms of the number of companies included in that particular year.

Selection of companies

The criterion adopted by the RBI , for the selection of companies in the studies is the size of their paid-up capital, though the distribution of companies in the population according to the size of paid-up capital (PUC) is found to be skewed with a few  large companies with high PUC accounting for the bulk of the coverage in total PUC , as it is the only characteristic for which information is readily available at the population level. Hence this note is more or less symbolic rather than representative of the study of the private corporate sector. Even so, as the coverage is fairly large, these RBI study have come to be recognized as reflecting the general performance of the private corporate sector. Also, in the absence of more representative sample studies, these studies are very often blown up to provide nation-wise results of certain characteristics such as corporate savings and corporate investment.

Study Year

Initially, until 1965-66 the RBI selected the study year from July to June. However, considering several factors like distribution of companies, the need to synchronize the corporate statistics with other economic indicators available for the fiscal year period and the availability of population information from the Department of Company Affairs, etc. the study year was changed to April-March from 1966-67 onwards. That is, companies closing their accounts in any month of a year between April and next March are covered as belonging to that year.

A brief information about methodology adopted by RBI

Whenever a company changes the closing month, its accounts cover a period exceeding or falling short of the 12-month period. To make the data comparable, all items in the profits and loss account are annualized and adjusted proportionately to cover 12 months’ working. The balance sheet data of such companies are retained as presented in the accounts of the companies. Hence, balance sheet data reported in these cases may refer to varying periods.

In the case of amalgamation/merger of companies, adjustments are required in the data for ensuring comparability, which is being done by RBI by getting comparable statistics for such companies for back periods and by introducing necessary adjustments in their accounts; in doing so inter-company transactions, if any, are eliminated, from the amalgamated accounts of the constituent units before they are combined. And hence, adjustments in accounts are made to the extent the information is available in respect of amalgamation /merger of companies.

 The items, closing stock and opening stock, were shown under income and expenditure sides, respectively, in the statements of combined income and expenditure up to the year 1960-61. This practice was later changed to present change-in-stock i.e., increase (+) or decrease (-) in the value of stock of finished goods and work-in-progress and the net figures were included under income. Reported non-recurring incomes not related to the business are termed as non-operating surplus/deficit.

Section   205 and 305 of the Companies Act 1956 deal with the methods and rates, which the companies adopt for working out depreciation provisions. The Companies Act mentions that under each head of fixed assets, original cost, addition to or deletion there from, and total depreciation written off or provided for up to the end of the balance sheet year, should be given in annual accounts of a company. Section 205 further states that no dividend shall be declared or paid by a company for any financial year except out of profits of the company for that year after providing for depreciation. The depreciation provision made by the company should be in accordance with provisions of Section 205(2) and Section 350. The RBI studies present data on depreciation provision as reported in the accounts of companies.

Concepts and definitions

Manufacturing Expenses comprise (a) raw materials, components etc. consumed, (b) stores and spares consumed (c) power and fuel, and (d) other manufacturing expenses.

Remuneration to Employees or Wage Cost comprises (a) salaries, wages and bonus, (b) provident fund, and (c) employees’ welfare expenses.

Gross Saving is measured as sum of retained profits and depreciation provision.

Gross Value Added is the sum of net value added and depreciation provision.

Net Value Added   comprises (a) wage cost, (b) managerial remuneration, (c) rent paid net of rent received, (d) interest paid net of interest received, (e) dividends paid net of dividends received, (f) tax provision, and (g) retained profits net of non-operating surplus/deficit.

Net Worth   comprises (a) paid-up capital, (b) forfeited shares, and (c) all reserves and surpluses.

Current Assets comprise (a) inventories, (b) loans and advances and debtor balances, (c) book value of quoted investments, (d) cash and bank balances, and (e) advance of income tax in excess of tax provision.

Current Liabilities constitute (a) short-term bank borrowings, (b) unsecured loans and other short-term borrowings from companies and others, (c) trade dues and other current liabilities, and (d) tax provision in excess of advance of income tax and other current provisions.

Quick Assets comprise (a) sundry debtors, (b) book value of quoted investments, and (c) cash and bank balances.

Sales are net of rebates and discounts and excise duties and cess.

III

A Brief Profile of the Private Corporate Sector

Growth of Non-Government Companies

There was a phenomenal and almost steady increase both in number and estimated paid-up capital of the non-government companies between 1981 and the mid-1990s. There were 61,863 non-government companies limited by shares with an estimated paid-up capital of Rs.4, 914 crore in March 1981. In the next ten years, i.e. by 1991, this number went up to 223,285 with an estimated paid-up capital of Rs. 20,313 crore, i.e., at a compounded annual growth rate (CAGR) of 13.5 per cent in number and 14.6 CAGR in paid-up capital (Table 1). However, with the opening of the economy and easing of the restrictions from 1991, the number of companies did not rise as in the past. There was significant slowdown in the growth between 1990-1994. For a brief period it picked up but after 1998 the annual increase in the number has been very moderate. But, the increases in the amount of PUC have been sizeable. Since 1998 this growth seems to have more or less stabilised with the growth in number averaging about 5.2 per cent per year.

These phenomena reflect the absence of incentives for companies split in the liberalised environment. Also, the perceptions regarding size, monopoly, etc., have been put on reverse gear, almost eulogizing economies of scale and size as crucial factors in the process of competition and industrial expansion. Overall, companies at work had reached a staggering figure of 6,40,203 with a paid-up-capital of Rs. 341,605 crore.

Table 2 shows the growth in non-government public and private limited companies between 1991 and 2004 i.e. during the post-reform period, which reveals some interesting insight. The compounded annual growth rates (CAGR) in the number of companies, in both public and private limited, were more or less the same at about 8.5 per cent and also there has not been much change in their share in total non-government companies (Table 2). But, in recent years, i.e., between 1998 and 2004, while public limited companies grew at a compounded annual growth rate of 2.8 per cent, growth in private limited companies was double to that of public limited companies at 5.6 per cent.  However, the investment pattern in these companies as measured by estimated paid-up capital throws some interesting information. The paid-up-capital of public limited companies during the latter period grew by 17.8 per cent as against a growth of 20.7 per cent in private limited companies.

Table 3, which shows the fresh annual registrations of companies between 1996-97 and 2004-05, also confirms the vastly better performance of private limited companies as compared to public limited companies – both in terms of number and PUC.

IV

Review of Financial Performance: Trends in Income and Expenditure

The 1980’s were generally characterized by licence raj and high interest cost as the RBI was following a tight money policy. There were various controls on investment and expansion. But since 1991, the latest 14-year period has witnessed metamorphic changes in the evolution of the Indian economy. With a view to harnessing the latent entrepreneurial talents in the economy, the Government of India ushered in an era of free markets. The licensing system was drastically reformed. The Monopoly and Restrictive Trade Practice (MRTP) Act had been eased thereby allowing companies to invest and to expand freely. Corporate taxes were slashed and interest rates were liberalised so that the borrowing cost became cheaper and the companies could face the competitive environment fairly confidently. Liberal trade policy, especially import policy, helped importing of capital goods and technology easier. There were drastic reforms in India ’s tariff structure and the system of protection rates was made more moderate.. As a result, the corporate performance, especially that of private limited companies, has exhibited   all-round buoyancy.

Sales growth and profitability

During the 22-year period from 1983-84 to 2003-04, the average annual growth in sales of private limited companies works out to be 13.8 per cent as against an average annual growth rate of 12.6 per cent of public limited companies. Though, the basic trend in growth is same in both private and public limited companies, in the post-reform period private limited companies have outshone public limited companies in their sales performance (Table 4 and Appendix 1).

While, gross profits of private limited companies grew at an annual average growth rate of 17.8 per cent, that those of public limited companies growth average only 14.1 per cent during the 22-year period. The performance in this regard, both in private and public companies is somewhat better in the pre-reform period as shown in Table 4, mainly due to the mid-1990s saw the experiencing the beginning of an industrial recession and hence, corporate profits beginning to slip and even registering negative growth. But from 2001-02 onwards, gross profits have witnessed a steady rise (Appendix 6).

Changing composition of expenditures

The review period saw a gradual easing of manufacturing expenses and wage bills in relation to value of production. (See Appendices 2 to 5 for detailed year-to-year data).  The share of manufacturing expenses in value of production in the early 1980s had generally accounted for two-thirds, while the wage bill absorbed about 10-13 per cent in case of both public and private limited companies. But thereafter, both fell through the years. The share of manufacturing expenses in value of production in case of private limited companies initially edged up from 72.7 per cent in 1982-83 to 73.4 per cent in 1985-86, but steadily declined thereafter to reach 70.2 per cent in 1990-91 and 68.1 per cent in 1995-96, it again looked up and reached 69.1 per cent in 2003-04.

 Though, the share of manufacturing expenses in case of public limited companies followed the same trend as private limited companies, the decline in case of public limited companies has been sharper, particularly after 2001-02 when the recovery process began (Table 5). This may be due to using automated production with advanced technology by public limited companies; the scope for productivity increases and savings in energy costs are found to be greater in the later big-size set of companies. Also, these companies always enjoy lower ratio of manufacturing expenses as compared with private limited companies.

In the case of, private limited companies the wage share in value of production was always lower until mid-1990s but the feature got reversed thereafter, (Chart B), implying that the share of wage bill in value of production in respect of public limited companies has eroded more steeply than that in private limited companies (Table 5). Roughly the per company wage bill for the private limited companies ranging from 0.33 crore to Rs. 1.73 crore has been puny as compared with that for public limited companies ranging from Rs. 2.32 crore to Rs. 18.82 crore between 1982-83 to 2003-04.

Reducing inventory holdings

 The companies’ intention to reduce inventory cost was met with good success as can be seen from the inventory to sales ratio in case of private limited companies going down from 20.0 per cent in 1982-83 to 15.0 per cent in 2003-04 (Appendix 20 and Chart C). But public limited companies have been more successful as this ratio in their case came down from 27.7 per cent in 1983-84 to 16.2 per cent during the period. But, a steady increase in short-term bank borrowings to inventories after the 1990s reflected the companies’ recourse to banks for their working capital requirements at a time when average interest cost to corporate has drastically come down (Table 6 and Chart D). Also, with reductions in inventory-sales ratios, absolute requirements of bank credit per company would also have come down.

Interest cost and other allocations

The incidence of interest cost measured in terms of interest payments as percentages of total expenditure (consisting of manufacturing expenses, wage bill and other expenses including depreciation and interest as depicted in Table 7) in case of private limited companies during the period experienced more or less a steady increase over the year to reach 5.1 per cent in 1991-92 from 3.6 per cent in 1982-83, but thereafter it steadily and rather distinctly fell to 2.3 per cent in 2003-04 (Appendix 6). Likewise, in case of public limited companies, it went up from 4.6 per cent in 1982-83 to reach 6.8 per cent in 1992-93, but thereafter it hovered around at that level in most of the years, then in the recent years it started its downward movement and almost halved to reach 3.6 per cent by 2003-04 (Table 7).

The incidence of interest cost as measured by, the interest burden on gross profits (interest paid as percentage of gross profits) has been fluctuating due to the fluctuating nature of company profits. Also, the interest cost remained high until the end of the 1990s, therefore, in respect of the private limited companies, such incidence of interest cost rose from 66.4 per cent in 1982-83 to 90.5 per cent in 1988-89, but there-after it was followed by a steep decline to 24.1 per cent by 2003-04, the lowest in the last two decades (Appendix 20). Public limited companies’ interest burden on gross profits which was 51.6 per cent in 1982-83, similarly went up to 61.1 per cent in 1992-93 but followed by a sharp fall to 30.1 per cent in 2003-04.

Profit margin

The per company gross profits of private limited companies registered a 10-fold quantum jump from Rs. 0.17 crore in 1982-83 to Rs. 2.0 crore in 2003-04. As a result of this, the profit margin on sales measured by gross profit as percentage of sales moved up from 5.4 per cent in 1982-83 to 9.1 per cent in 2003-04. Performance by public limited companies in this regard was better with per company gross profit recording a 18-fold leap from Rs. 1.6 crore to Rs. 29.5 crore during the period. Consequently, profit margin which was hovering around 8 to 9 per cent in the 1980s, depicted a range of 10 to 12 per cent in a majority of the years of the post-reform period.

The post-reform period has been mainly characterized by relative low taxes. The effective tax rate, revealed by tax provision as percentage of profit before tax, which was fluctuating between 50 to 101 per cent in the pre-reform period in respect of private limited companies, exhibited a distinct downward movement in the post-reform period  to reach  32.2 per cent in 2003-04 in case of private limited companies (Appendix 20). In the case public limited companies (Table 9), tax incidence did not fluctuate but it did dip to the lowest ratio of 25.7 per cent in 2003-04.

Return on equity, i.e., the ratio of profit after tax to net worth which measures the rate of return on investment made by corporate investors, increased from 7.5 per cent in 1982-83 to 12.0 per cent in 2003-04 for private limited companies.  Public limited companies whose return on equity, which was hovering around 4 to 8 per cent in a majority of years in the pre-reform era, started increasing and was fluctuating between 12 to 15 per cent till 1995-96, but thereafter, it declined probably due to recession; however, it once again rose to 13.4 per cent in 2003-04.

Profit allocations 

The increase in gross profit, low taxes and reduced interest rate all have contributed for an increase in the return of investment. This is manifested in the fact that the dividend rate of private limited companies i.e. the ratio of ordinary dividend to ordinary paid-up-capital, rose from 4.9 per cent in 1982-83 to 10.2 per cent in 2003-04 (Appendix 20). The dividend rate of public limited companies increased much more steeply from 12.0 per cent in 1882-83 to 26.8 percent in 2003-04.  Though there were annual variations in the retention   ratio, i.e., profits retained as percentage of profit after tax, in 2003-04 it was 60.2 per cent in the case of private limited companies and 60.4 per cent in the case of public limited companies.

V

Pattern of Assets and Liabilities

Changing composition of liabilities

Total net assets/liabilities of the private limited companies increased at an average annual rate of 14.2 per cent during the period 1982-83 to 2003-04 (see Appendices 7 to 14 for detailed year-to-year data on private limited companies). Composition of total liabilities is given in Appendix 7. Borrowing is the major constituent of total liabilities followed by ‘trade dues and current liabilities’ and ‘reserve and surplus’. The share of borrowings recorded an increasing trend during the study period. But within borrowing, share of borrowings from banks recorded a rising trend, short-term borrowings forming 72.4 per cent of total bank borrowings. These borrowings are mainly used for financing working capital, especially inventories, as it forms 70.8 per cent of inventories in 2003-04. Despite large increases in borrowings the debt to equity ratio which rose steadily from 65.4 per cent in 1982-83 to 111.7 per cent in 1988-89, declined thereafter equally steadily year after year to reach 26.9 per cent in 2003-04.

Public limited companies’ net assets/liabilities increased at an average annual rate 15.0 per cent during the period under study.  The composition of total liabilities during the period 1983-84 to 2003-04 reveals that the share of borrowing by companies though still a major contributor at 33.4 per cent their dependence to this kind of financing their need has come down from a high of 38.3 per cent in 1983-84 to 35.1 per cent in 2003-04, after reaching a high of 43.1 per cent in 1991-92, replaced mainly by reserves and surplus whose share steadily increased from 17.1 per cent in 1983-84 to 34.1 per cent in 1995-96 there after it came down to 29.4 per cent in 2003-04 and increasing provision from 3.6 per cent in 1983-84 to 5.3 per cent in 2003-04 there by bolstering the fact that the corporate sector in 2003-04 is in vibrant growth path.   

Evolving pattern of assets

Net fixed assets of private limited companies constituted 27.4 per cent of the total net assets in 1982-83. This share moved up to 35.0 per cent in 2003-04 after reaching a high of 37.6 per cent in 2001-02 (Appendix 11). This 22-year period also witnessed significant decline in the share of inventory in total assets. Another important component of total assets, the loans and advances and other debtor balances declined marginally from 30.8 per cent in 1982-83 to 29.4 per cent in 2003-04. The investments of the companies have been on the rise during the period reflecting increased inter-corporate investments. The share of investments to total assets grew from 3.3 per cent in 1982-83 to 8.9 percent in 2003-04.

 The share of current assets to total net assets steadily declined from 71.0 per cent in 1985-86 to 67.8 per cent 2003-04. The quick ratio, i.e., quick assets to current liabilities rose sharply from 38.9 per cent in 1986-87 to 67.6 percent in 2003-04. The ability to meet current liabilities, or short-term liquidity comfort level as indicated by the ratio of current assets to current liabilities, at 1.1 most of the   years under review rose to 1.3 by 2003-04. The rate of return on investment (gross profits as percentage of total net assets) registered a steady rise during the period albeit with some fluctuations during the early 1990s; it was at 10.0 per cent in 2003-04. The efficiency of assets deployed in business indicated by the ratio of sales to net fixed assets deteriorated from a high of 315.7 per cent in 1982-83 to 190.7 per cent in 2003-04. This is also reinforced by the fact that the ratio of gross value added to gross fixed assets came down from a high of 59.3 per cent in 1982-83 to 39.9 per cent in 2003-04 (for details of gross savings and gross value added, see Appendices 18 and 19). Moreover, value of production which was 6.0 times net fixed assets 1982-83, dropped to 3.2 in 2003-04, implying increased capital intensity of production. With the saving of labour inputs, labour productivity may have been improved. But, it is too soon to judge the trends in total factor productivity as the recent improvement in investment has occurred after a prolonged investment famine in the industrial sector.

The share of net fixed assets in case of public limited companies constituted 39.9 per cent in 1982-83 after moving up to 49.0 per cent in 1997-98 came down to 42.1 per cent in 2003-04. Like private limited companies also witnessed a significant decline in inventory from 30.7 per cent in 1982-83 to 13.4 percent in 2003-04. The share of investments to total assets grew from 1.5 per cent in 1982-83 to 14.8 percent in 2003-04 reflecting the increasing trend of inter-corporate investments.

The share of current assets to total net assets steadily declined from 58.6 per cent in 1982-83 to 44.4 per cent 2003-04 reflecting the better inventory management by the companies also bolstered by the fact that the share of inventories to total liabilities also registered substantial decline. The quick ratio, i.e., quick assets to current liabilities rose sharply from 47.0 per cent in 1986-87 to 49.2 per cent in 2003-04. The ability to meet current liabilities, or short term liquidity comfort level as indicated by the ratio of current assets to current liabilities, at 1.2 after reaching 1.5 in 1994-95 slipped to 1.1 in 2003-04.-04. The rate of return of investment (gross profits as percentage of total net assets) registered a steady rise during the period albeit with some positive fluctuations during the early 1990s, and it was at 14.2 per cent in 1995-96, thereafter it slide down to 11,4 per cent in 2003-04. Like in the case of private limited companies, the efficiency of assets deployed in business indicated by the ratio of sales to net fixed assets deteriorated from a high of 110.6 per cent in 1982-83 to 82.7 per cent in 2003-04. This is also bolstered by the fact that the ratio of gross value added to gross fixed assets came down from a high of 41.4 per cent in 1982-83 to 28.1 per cent in 2003-04. More over value of production, which was 2.8 times, net fixed assets 1982-83 slipped to 2.0 in 2003-04.

Sources of Funds

During the period under review, for financing their assets formation the companies’ reliance on external funds came down. The dependence on external funds by private limited companies, which was at 62.3 per cent in 1982-83, went up to 65.8 per cent in 1991-92 and thereafter slipped to 43.1 per cent in 2003-04 (Appendix 20 and also appendices 15 and 14 for detailed year-to-year data). A similar trend has also witnessed by public limited companies (Table 8). These reflect the phenomena of rising profits, better plough back and increase in owned funds.

 Among the external sources of private limited companies, the share of borrowing as a source of funds fell from 47 per cent to 24 per cent during the period under review, this reduction in share being replaced to a great extent   by sundry creditors; there were also some resource mobilizations through equity. In case of public limited companies, the share of borrowing came down from 65 per cent to 34 per cent during the period

Uses of Funds    

The addition to gross fixed assets per private limited company depicted a steady gain, in absolute terms from Rs. 0.15 crore in 1983-84 to Rs. 0.82 crore by 2003-04. But, share of gross fixed assets formation in the use of funds decreased from 51.8 per cent to 33.8 per cent during the period under review. Gross capital formation to uses of funds also deteriorated from 76.3 per cent in 1983-84 to 51.3 per cent by 2003-04. In case of public limited companies, per company gross fixed assets registered substantial increase from Rs.1.4 crore in 1983-84 to Rs. 17.2 crore.  The share gross fixed asset formation in the use of use funds fell from 61.5 per cent to 40.2 per cent during the period under review. Gross capital formation to uses of funds also slipped from 66.6 per cent in 1983-84 to 53.1 per cent by 2003-04  

IV

An Assessment

The performance of the corporate sector reveals some interesting insight into the way the private sector has been responding to the challenges of reforms and competition.

First, the growth in the number of non-government companies and the amount of paid-up-capital between 1981 to 2005 has been phenomenal, reflecting the growing role of private corporate sector. With narrowing of incentives for splitting in the liberalised environment, growth of the number of companies has slowed during the past few years. Though, both private and public limited companies growing fast, the performance of private limited companies is worth mentioning especially in the recent period when such companies have outperformed public limited companies in opening new companies. This is indicative of the new entrepreneurship getting into organized form of business but keeping as yet a close control over the ownership.

  Second, the growth in sales in the post-reform period may appear similar to that in the pre-reform period, but because of the lower level of inflation, the real growth certainly been much higher in the later period. Here also private limited companies outperform public limited companies.  Besides, there has been a significant change in the structure of industries experiencing better growth.

 Third, the declining trend in wage cost had begun in the 1980s when a semblance of economic reforms had already been tasted by the corporate sector. Again, there has occurred a significant qualitative change in the composition of wage labour, with a sharp increase in the size of superior technical and managerial staff in case of public limited companies.

 Fourth, both private and public companies’ have begin to save on inventories, on interest cost and on general intermediate costs.

Fifth, companies have begun to improve their technological levels in the production and investment process, which are reflected in better efficiency and productivity.

Sixth, the corporate sector has been engaged in the post-reform period in the process of financial engineering, replacing high cost funds with low cost funds.

Finally, there has been considerable attempt by the companies to have foreign exposures through larger exports, higher imports and also increasing foreign borrowings.

__________

* This note is prepared by R.Krishnaswamy.

Highlights of  Current Economic Scene

AGRICULTURE  

The ministry of agriculture has proposed to increase the minimum support price (MSP) of wheat by Rs 150 per quintal, including a bonus amount of Rs 50 per quintal. With this unprecedented hike of Rs 150 per quintal, wheat MSP for rabi marketing period 2007-08 would stand at Rs 800 per quintal as against the Rs 700 per quintal (inclusive of bonus of Rs 50 per quintal) in rabi marketing period 2006-07. Incidentally, the Commission for Agriculture Costs and Prices (CACP) had recommended fixing the MSP at only Rs 700 per quintal, with an additional bonus linked to market conditions at the time of procurement.

Cabinet Committee on Economic Affairs (CCEA) has approved the minimum support prices (MSP) for all crops, except for wheat and rape and mustard seeds, being planted in the 2006-07 rabi season. The MSP for chana (chickpea or Bengal gram) has been set at Rs 1,445 per quintal, up from Rs 1,435 per quintal for 2005-06. The same has gone up from Rs 1,535 to Rs 1,545 per quintal for masur (lentil) and Rs 550 to Rs 565 per quintal for barley, while remaining unchanged at Rs 1,565 per quintal for safflower.

The central government, in order to control the rising prices, has made an ad hoc additional allocation of 1lakh tonnes of wheat to the states and union territories, which would be distributed in November 2006 to families above the poverty line (APL). This allocation is in addition to 2,00,000 tonne wheat released for August and September 2006.

As per the estimates of central government based on port arrivals, wheat import by private traders is expected to be around 4 lakh tonnes till mid-October 2006 and 3-4 lakh tonnes more wheat is likely to reach the country by December 2006. The government has allowed duty-free wheat import only till Dec 31, 2006 so far and has clarified that it would not extend the concession beyond December 2006 despite repeated pleas from the private traders for relaxation till February 2007.

The International Grains Council has pegged the global wheat production at 585.2 million tones for the crop year ending July-June 2006-07, projecting a fall of 0.4 per cent and 5.4 from 587.6 million tonnes predicted in September 2006 and 618.3 million tonnes forecast a year earlier, respectively. The output would be lower than previously predicted on account of a drought in Australia , which has affected wheat production adversely.

According to the provisional figures from the Coir Board, coir exports from the country have risen by 13.8 per cent in terms of value and 7.33 per cent in terms of quantity during the first half of fiscal year 2006-07. The country has exported 71,840 tonnes of coir worth Rs 268.4 crore during April-September 2006 compared to 66,934 tonnes worth Rs 236 crore during the same period a year ago. Coir mats have the major share in the total export with a 13 per cent increase in quantity exported to 33,453 tonnes worth Rs 208.3 crore, which was a 17 per cent higher compared to the previous year. Coir fibre has reported the highest growth of 63 per cent in quantity to 1,243 tonnes and 59 per cent in value to Rs 1.5 crore. However, coir rugs and carpets have shown a massive decline both in quantity as well as in terms of value.

The central government has designed a five-point strategy to boost the marine product exports from $1.7 billion to $4 billion in five years and ensuring additional employment for one million. The five planks of the vision document include product diversification, focus on potential brackish water aquaculture in Maharashtra, Gujarat and Orissa, a substantial increase in value-addition of marine product exports from 15 per cent to 75 per cent, making India a major hub for outsourcing and reprocessing of marine products and creating a bio-security zone. Marine Products Export Development Authority (MPEDA) and National Fisheries Development Board would work jointly to ensure implementation of the strategic vision outlined in the document.

National Agro Foundation (NAF), a Chennai-based non-governmental organisation, has developed a model for second green revolution with the principal intentions of raising the annual income of the marginalised farmers through scientific and integrated agricultural practices. The model has been applied in clusters of 47 villages, involving 1300 families, in the Kancheepuram and Tiruvallur districts of Tamil Nadu. So far, increase in yields and productivity has been achieved through 450 demonstration farms in for paddy, maize, groundnut, sugarcane, pulses, vegetables and flowers. For instance, on very marginalised land, production per acre, in case of maize, has shown an increase of 150 per cent (from 800 kg to 2,000 kg), 55 per cent in case of paddy (from 1.5 tonnes to 2.33 tonnes), 40 per cent for sugarcane (from 45 tonnes to 65 tonnes), 116 per cent for water melon (from 6 tonnes to 13 tonnes) and 113 per cent for groundnut (from 600 kg to 1,278 kg).

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) rose by 5.26 percent  for the week ended  October 14,2006 as compared 5.16 per cent last week or 5.21 per cent in the corresponding week last year.

During the week under review, the WPI has gone up to 208.2 from the previous weeks’ level of 207.9 (Base: 1993-94=100). The index of ‘primary articles’ group (weight 22.02 per cent) increased by 0.2 percent  to 212.4 from its previous week’s level of 211.9, mainly due to a fall in prices of ‘food article like  wheat, potato, onion and brinjal. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) remained at the last week level of  329.5 . The index of ‘manufactured products’ group has risen to 179.7 from 179.4 during the week under review thereby registering a growth rate of 0.2 per cent., Though, food products, registered decline in their prices during the week; substantial increase in the prices of methanol (27.4 per cent) pushed up the manufactured products prices.

 The latest final index of WPI for the week ended August 19, 2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 205.5 and 5.12 per cent as against their provisional levels of 204.7 and 4.92 per cent, respectively.

Banking

ICICI Bank, the country’s second-largest bank, has reported a higher than expected 30 per cent rise in net profit in the second quarter ended September 30, 2006. The bank’s net profit, increased to Rs 755 crore in July-September 2006 from Rs 580 crore in the corresponding quarter a year ago owing to a sharp rise in fee income and profit from the sale of equity investments.

Corporation Bank has reported around 20 per cent rise in net profit at Rs 127 crore for the quarter ended September 2006 against Rs 105 crore in the same period a year ago.

Public Finance

The higher growth in the corporate tax collections during the second quarter of the fiscal year 2006-07 have reflected in buoyant direct tax collections, which have increased almost 44 per cent till October 15, 2006, compared with the Budget target growth rate of 28 per cent amounting to Rs 87,147 crore. The budget had estimated overall direct tax collection at Rs 2,10,684 crore.  The increase in direct tax collections is mainly on account of a 52 per cent increase in corporation tax collection at Rs 53,853 crore, as against Rs 35,476 crore in the same period last year. The Budget had pegged corporation tax collections for the current financial year at Rs 1,33,010 crore with a growth target of 34 per cent. Income tax collections, inclusive of fringe benefit tax, banking cash transaction tax and securities transaction tax during the period under consideration, have stood at Rs 33,184 crore compared with Rs 24,939 crore, an increase of over 33 per cent. The Budget had pegged income tax collection for the current fiscal year at Rs 77,409 crore with a growth target of around 19 per cent.  Fringe benefit tax collection was Rs 1,595 crore against Rs 1,018 crore last year, an increase of nearly 57 per cent. Banking cash transaction tax collections more than doubled at Rs 260 crore, as against Rs 94 crore last year, an increase of over 177 per cent.  The mop-up from securities transaction tax up to October 15 has touched Rs 2,556 crore, which is an increase of over 96 per cent compared with Rs 1,304 crore collected during the same period in 2005-06.  The only head, which reflected lower collections, is other direct taxes —comprising primarily of wealth tax, gift tax and some older taxes such as estate duty, interest tax, expenditure tax and hotel receipt tax among others. However, barring wealth and gift tax, all the other taxes have been repealed over the years.  Collections under this head up to October 15 stood at Rs 110 crore compared with Rs 122 crore collected in the same period last year. The overall collection under this head for the current financial year has been pegged at Rs 265 crore against Rs 307 crore collected during 2005-06. 

To meet the fiscal deficit target this year, the finance ministry has asked all ministries and departments to cut their non-Plan spends by 5 per cent. It has also decided to reject any demands for increase in non-Plan expenditure in the next five months this fiscal. This measure can save the government Rs 7,500 crore in 2006-07. Besides this, the finance ministry has specified a series of stringency measures like capping the number of foreign visits by government officials at four every year. These savings would help augment funds for various social sector schemes under the National Common Minimum Programme of the UPA government. The implementation of the 5 per cent cut would be reviewed on quarterly basis. As far as foreign travel is concerned, if the nature of work in some ministries demands more visits, a schedule for the entire year should be prepared and visits prioritised, the guidelines added.

Financial Markets

Capital Markets

Primary Market

Parsvnath Developers Ltd is to tap market between November 6 and 10 through issue of 3.32 crore shares of Rs 10 each in a price band of Rs 250-300 per share.

Lanco Infratech Ltd is also set to tap the market in the same duration through issue of 4.4 crore of Rs 10 each in a price band of Rs 200-240 per share.

Secondary Market

The market has witnessed renewed buying following a robust set of results for Q2 September 2006 and has been now within striking distance of a lifetime high of 12,994.45. For the week, the benchmark BSE Sensex has spurted 197.40 points to finish above the 12,900, on strong demand for index pivotals. On 21 October, the sensex has opened with a sharp 76-point surge at 12,785.78, on the first day of Samvat year 2063. It, however, has finished 27.42 points (0.2 per cent) higher as selling began in the latter part of Muhurat trading session. On the next day, the market has shed 113.54 points to 12,623.28 due to profit-booking as well as the volatility in the market ahead of the expiry of derivative contracts for October series. The market has remained closed on Tuesday and Wednesday on account of festivals. The Sensex has risen 75.13 points on 26 October, to settle at 12,698.41 on the back of steady-to-firm global bourses and on the US Federal Reserve’s decision to keep US interest rates unchanged, triggered fresh buying. Short covering in derivatives due to expiry of October 2006 derivative contracts also aided the rally. On 27 October, the BSE Sensex surged 208.40 points, to 12,906.81. It settled above 12,900 for the second time after 16 October 2006 as buying resumed in heavyweight stocks, taking the BSE sensex near to its all-time high of 12,994.45, inspired by the smooth rollover of October derivative contracts.

On 21 October, JHS Svendgaard Laboratories has ended at Rs 57.05, a marginal discount to the IPO price of Rs 58. Development Credit Bank has ended at a sharp premium of 82.7%, at Rs 47.50, over the IPO price of Rs 26 on 27 October. It witnessed a huge volume of 5.76 crore shares on the day of debut.

According to Eureka Hedge, a global hedge fund tracking firm, two India-focussed hedge funds, India Capital Fund and Atyant Capital India Fund, have been among the top five best performing Asian hedge funds in September 2006.  India Capital Fund, which gave a return of 9.20 per cent in September, was the second best performing hedge fund in Asia during the month, after 11.25 per cent returns by Prodigal Absolute Return Fund, another Asian hedge fund. 

Similarly, Aryant Capital India Fund came fourth with a return of 8.27 per cent in September, according to Eureka Hedge. The capital markets regulator does not encourage hedge funds to invest in the Indian capital markets, but sources said the Sebi has granted registration to those hedge funds with long-term mandate for investments in the country. 

The National Stock Exchange (NSE) in a circular has asked its members to upload the PAN details collected from its clients to exchanges “as part of the unique client code” for investors. In a move to counter the existence of duplicate PAN cards, NSE has also asked the members to verify the PAN details with the information provided on the Income Tax website. 

The Securities and Exchange Board of India (Sebi) proposes to allow only Indian banks and insurance companies to be strategic investors in stock exchanges and is expected to bar corporate houses from taking equity in any bourse. 

Derivatives                                   

The nifty has been very close to a new high, which is reflected in the fact that index futures have been trading at a premium after a sharp increase in open interest across the November and December series. The spot nifty has closed at 3739 on Friday, while the November nifty futures have been at 3748.7 and December at 3748.5.

Government Securities Market

Primary Market

The Government of India have announced the sale (re-issue) of ''7.40 per cent Government Stock 2012" and "7.50 per cent Government Stock 2034" for a notified amount of Rs.6,000 crore and Rs. 3,000 crore respectively on November 3, 2006.

Secondary Market

Ahead of the RBI’s credit policy and US Fed meeting, the market has remained cautious. Also, the holiday-shortened week has seen the market participants preferring short duration papers.           Despite the inflation rate surging ahead, the yields have eased; the weighted average YTM of  7.59 per cent 2016 bond has been 7.64 per cent on October 27 as compared to 7.68 per cent on Oct 20. The 1-10 year YTM spreads decreased by 7 bps to 68bps.

Call rates during the period has ranged between 6.96 per cent and 7.16 per cent, while repo rates have ranged between 6.46 per cent and 6.99 per cent and the CBLO rates has ranged between 6.14 per cent and 6.80 per cent. The daily average outstanding amounts in the LAF (reverse repo) operations has conducted during the period were Rs.9,887 crore vis-à-vis Rs.19,210 crore and Rs. 11,518 crore for CBLO and call market, respectively. During the week, the RBI has received daily average subscription of Rs.602 crore for LAF (repo) operations.

The US Federal Open Market Committee has kept the benchmark US interest rate unchanged at 5.25 per cent. In its statement, it mentioned that the economic growth has slowed down over the course of year, partly reflecting a cooling of the housing market. It has identified inflation as a major risk although inflationary pressures are likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Bond Market

The Reserve Bank of India (RBI) is expected to announce a slew of measures to bring vibrancy into the debt market as part of its mid-term review of the annual monetary policy.  This is in response to Prime Minister Manmohan Singh’s call for deepening the debt market to fund infrastructure projects.  The central bank is expected to allow repos (repurchase) in corporate bonds. This will give an opportunity to investors who have illiquid corporate bonds to recycle them and borrow money against these securities and add depth to the debt market. Repo is currently allowed only in government securities. 

Foreign Exchange Market

The spot rupee has been on an appreciation mode driven by foreign exchange inflows and later by dollar sales by the PSU banks to infuse rupee liquidity in the money market.  The rupee has closed at Rs.45.22/USD on October 27, 2006 as compared with Rs. 45.31/USD as on October 20, 2006.

The forward premia has remained high as market is expecting a rate hike in the forthcoming monetary review this month. Towards the end of the week, strain on liquidity has pushed up the near term premia for dollars. The six-month forward premia has closed at 1.65 per cent (annualized) on October 27, vis-à-vis 1.61 per cent on October 20.

Commodities Futures derivatives

November wheat futures have risen by 2.5 per cent on NCDEX to close at Rs 1,056 a quintal. Market seems to have discounted the news of stock limits imposed on private players with prices of wheat, chana and urad firming up last week on festive demand.  Wheat prices have firmed up further around 3 per cent in Delhi spot markets and wheat November futures have risen around 2.5 per cent on the NCDEX to close at Rs 1,056 per quintal. The shortage of wheat in the international market has also supported the prices.

Corporate Sector

A Business Standard Study on the capital expenditure (capex) of the Indian corporates for 2005-06 show that the share of private sector during 2005-06 has risen considerably from 2001 onwards. Of the, 1,769 listed companies that spent Rs 1,09,845 crore on capex in 2005-06, 1,559 private companies contribution has stood at Rs 77,766 crore; 42 public sector undertaking (PSUs) collectively spent Rs 27,487 crore and 168 multinational companies (MNCs) have spent the remaining Rs 4,592 crore.

The private sector has been on expansion mode in the past two years, raising its share in overall capex from less than 60 per cent in 2001-02 to 71 per cent in 2005-06, as depicted in Table 1. In contract, the share of PSUs in capex has declined from around 35 per cent between 2003-04 to 25 per cent in 2005-06. The share of MNCs has also fell from 7.6 per cent in 2001-02 to 4.2 per cent in 2005-06.

France based InfoTech consultancy company Capgemini has acquired US based Kanbay International for $ 1.25 billion.

TVS Motor Company has posted 36.5 per cent growth in its sales turnover in Q2 2006 at Rs 1,078 crore from Rs 789 crore during the same period a year ago. The companies overall expenditure has increased by 37 per cent to Rs 1,022 crore in the quarter under review from Rs 743 crore in Q2 2005. Its net profit for the second quarter of 2006-07 has dropped by 22 per cent at Rs 24.8 crore from Rs 32 crore, owing to the withdrawal of an export subsidy by the Union government in Budget 2006-07. The previous period’s (Q2 2005-06) net profit has included Rs 9.7 crore of the export subsidy.

India ’s leading motorcycle maker, Hero Honda Motors Limited has reported a subdued performance during July-September 2006. The company has registered just 3 per cent increase in net sales to Rs 2,230 crore during Q2 2006 from Rs 2,166 crore in Q2 2005. The companies’ profitability at the operating level has affected due to increased inflationary costs in raw materials like steel, aluminium and rubber.

India ’s largest car maker Maruti Udyog Limited (MUL) has reported a 12.5 per cent increase in sales revenue at Rs 3,541 crore during Q2 2006 as compared to Rs 3,146 crore over the same period a year ago. The company has achieved a growth of 39.5 per cent in net profit to Rs 367 crore, up from Rs 262 crore in Q2 2005, on the back of strong sales volume of its vehicles. For the half-year ended (April-September) 2006, MUL's sales revenue has risen by 16 per cent to Rs 6,809 crore and net profit has surged by 51 per cent to Rs 737 crore.

Hindustan Petroleum Corporation Limited has reported a net profit of Rs 1,222 crore for the quarter ended September 2006, against a net loss of Rs 22 crore for the corresponding period a year ago. The company has registered a 44 per cent rise in net sales to Rs 24,367 crore as compared with Rs 16,762 crore in the previous year. It has reported under-recoveries of Rs 120.7 crore for April-September 2006-07 as against the sale of petrol, diesel, LPG and kerosene. The figure stood at Rs 158.8 crore for the corresponding period last year.

After receiving the approval from the government for issuance of oil bonds, oil major Indian Oil Corporation has reported a net operating profit of Rs 3,050 crore for Q2 2006, as compared to Rs 949 crore for the same quarter in the previous year. The company has sold 25.56 million tonnes of products, including exports, during April-September 2006. The throughput of the refineries and pipeline network has stood at 20.54 million tonnes and 24.38 million tonnes, respectively, from 18.57 million tonnes and 22.08 million tonnes in the previous year.

Engineering giant Bharat Earth Movers Limited has registered a healthy 68 per cent growth in sales turnover at Rs 644 crore in Q2 2006 and its net profit has risen by 25.8 per cent at Rs 36.6 crore. The company’s current order book position has stood at Rs 2,216 crore.  It has reported a higher net profit of Rs 51.6 crore for the half year ended 2006-07, a growth of 24.3 per cent over the corresponding period of the previous year.

Great Eastern (GE) Shipping Company, the country’s largest private shipping company, has posted a growth of 51 per cent in its net profit at Rs  235.5 crore for the quarter ended September 2006. The company's income from operations has grown by 26 per cent to Rs 593.20 crore during the quarter under review. The gain on sale of ships during Q2 2006 has stood at Rs 38.8 crore against Rs 34.6 crore in Q2 2005. The growth in net profit has been mainly owing to higher tanker freight rates, increased profits from inchartered tonnage and lower dry-docking and repair costs.

Fuelled by newly acquired businesses, Dr Reddy’s Laboratories (DRL) has reported a whooping 214 per cent increase in net profit at Rs 280 crore for the quarter ended September 2006, as compared with Rs 89 crore in the corresponding quarter previous year. The company's sales revenue has also shot up by 245 per cent at Rs 2,004 crore from Rs 580 crore in Q2 2005. In the second quarter of 2006, DRLs 88 per cent of the total revenue has come from foreign market.

Information Technology

Software major Tata Consultancy Services (TCS) has won an interior design contract from US airframe manufacturer Boeing Company and will work closely with its customers to design the interiors of new aircraft. As per the contract, TCS will use CAD/CAM technology to visually create the interiors of an aircraft for a prospective customer. In addition TCS is also setting up an “airline innovation laboratory” in Chennai to showcase mock-up interiors of aircraft. The laboratory will enable customers to test software used by the airline industry.

France-based infotech consulting company Capgemini has acquired US-based Kanbay International for $1.25 billion to accelerate its growth in India and better its position in finance consulting in North America . At present Capgemini’s employee count stands at 6000 in infotech and 600 in BPO. Post merger, the employee count will increase to 12,000 in infotech. Capgemini is to pay $29 per share in cash, representing a premium of 15.9 per cent to Kanbay’s closing share price on October 25, 2006.

Wipro Infotech has signed an agreement to acquire the West Asia and SAARC operations of 3D Networks and Planet PSG for $73 million in an all-cash deal. This is Wipro’s eight acquisition since December 2005.

Telecom

State-owned telecom major MTNL’s net profit has fall by 25 per cent to Rs 121 crore in the quarter ended September 30, 2006 from Rs 162 crore in the corresponding period last year, on the back of stiff competition from private players and its reduced tariff plans.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

LIST OF WEEKLY THEMES

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