Introduction

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

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Public
Ltd Companies and their capital structure

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

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

Capital
structure of the FMCG Sector in India

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

Capital
Structure Of Automobile Industries(2010-14)

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

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

Capital
structure of IT sector(special focus on TCS)

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

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

Capital
structure of steel companies in India

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

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

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

References

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

 

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

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

www.iosrjournals.org

 

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

 

4.   
International Journal
of Business Quantitative Economics and Applied Management Research

ISSN:2349-56777,Volume
1,Issue 1,April 2015

 

5.   
Galaxy
International Interdisciplinary Research Journal ISSN-2347 6915

GIIRJ,Vol
2(1),January (2014)

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