chapter-iv changing structure of finance in...
TRANSCRIPT
Chapter-IVCHANGING STRUCTURE OF FINANCE INPHARMACEUTICAL INDUSTRY IN INDIA
The chapter aims at identifying the various sources of finance available
to Pharmaceutical industry in India while comparison with Medium & Large
Public limited Companies. An attempt is also made to analyze the changes in
the financing pattern of Pharmaceuticals in India during 1976-2006 with
comparison of M&LP Companies Ltd.
The pace of industrial development in our country has not been
commensurate with the size and demand of the country. One of the most
important causes of this slow development among other things has been the
absence of adequate facilities for financing industries. Finance is the life blood
of industry, without which the wheels of modern industrial system cannot be
greased.1The fact is that there is a general shortage of industrial finance in this
country. Before the beginning of institutional financing in India, finance for
industry was provided by the private sector itself consisting of managing
agents, indigenous bankers, banks, insurance companies, public deposits,
individuals, investors and public trusts. But today some of these agencies do
not exist and those that were present were controlled by the state.2 The
managing agents who were an important sources of industrial finance till
sixties have been abolished. Indigenous bankers who provided industrial
finance mostly by way of subscription to shares and debentures and also by
way of advances against security of shares hardly exist now.
FINANCING TRENDS:The problem of identifying and explaining corporate financing trends
and secular patterns has received relatively scanty attention in the area of
finance research and empirical work.3There have, no doubt, been some
knowledgeable pioneering studies, but their focus has been different. They
have either concentrated on the growth and financing of capital expenditures in
the US manufacturing, mining and transportation sectors.4 or have examined
the flow of funds in the entire economy.5 However, one study has analyzed the
problem from the point of view of the theory of capital structure6 and another
has tested if the modern finance theory can explain the secular trends in the
pattern of business financing over several cycles.7 Sametz’s “trends in the
volume and composition of Equity Finance” may be rated as a valuable
contribution in as much as it not only pinpoints the changes in business
financing patterns but also develops an economic rationale. It has been stated
that the pattern o financing observed is what would be expected from managers
interested primarily in minimizing the costs of finance. The model of financial
behavior of a firm as developed by Sametz may be stated thus: Business firms
have a target debt to Equity ratio. Given this fixed target, the composition of
the numerator (that is, the choice of short-or long-term debt) is determined by
their relative cost. In the same way, the composition of the denominator
between new external equity and new equity acquired via retention is also
determined by the relative cost of each. There is, however, another explanation
of financing behavior with respect to the term structure of the debt. This takes
the form of matching of the maturity of assets and liabilities. The secular trend
upward in short-term finance, for example, is more attributable to the upward
trend in the ratio of current assets than to downward trend in the differential
cost of short-term credit.
SOURCES OF FINANCE:Joint stock companies in any industry employ two types of capital: fixed
capital and working capital. Fixed capital is represented in the balance sheet by
fixed assets viz., land and buildings, plant, machinery and equipment, furniture
and fixtures and vehicles and current assets are represented by inventories,
liquid assets and receivables. The funds required for investment in fixed and
current assets are obtained by the issue of shares to public by creating reserves
through ploughing back of profits from operation, by borrowing from the
public and banks in the form of debentures, borrowing from the public and
banks in the form of debentures, loans an deposits and accumulation of
accounts payable in respect of current liability, in respect of taxation and
benefits to employees and credit obtained from suppliers of raw materials and
stores.
Conventionally these funds are divided into internal and external sources
and they together made up of fresh capital from the market, internal savings
and increase in external liabilities. Internal finance represents the sum of (i)
paid-up- capital (bonus issues during the year) (ii) Reserves and surplus
(amount transferred during the year to various reserves); (iii) Provision for
depreciation; (iv)Tax provision net of advance income tax and other non-
current provisions. On the other hand, external funds refer to funds obtained
through new capital issues, borrowings consisting of borrowings from banks,
special financial institutions government and others, trade dues and other
current liabilities and other miscellaneous non-current liabilities.
1. External Sources of Funds:In a developing economy, external sources of finance play an extremely
crucial role. The sources of external finance may be divided in terms of paid-up
capital raised through the issue of ordinary shares, preference shares and
borrowings which comprise loans and debentures and trade credit.
a) Equity or Ordinary Shares: Equity Shares are regarded as corner stone
of financial structure of a company out with which company cannot be
founded. They provided permanent capital to the company which is not
under contractual obligation to refund it during this life time. As per the
companies Act, 1956 shares which are not preference shares are equity
shares. Equity share holders are residual owners whose claims of creditors,
preferred stock owners met. Even if the company has sufficient income left
after meeting all obligations, equity shareholders cannot legally force the
company to pay dividends to them. Being residual owners, equity share
holders are the last claimants to the assets of the firm. The risk of loss
associated with these shares is compensated to some extent by controlling
power that rests with them. They have unchallenged voice in management.
Each equity share holder is entitled to one vote for each share of stock he
owns. Although a company is managed by the Board of Directors who
control and direct the affairs of the organization, supreme control is
endowed with equity share holders. The shareholders approval must be
obtained by the Board of directors in General Meeting for all important
matters affecting interest of the enterprise. Although they have no legal
recourse to compel the company to distribute the profit, they have been
given power to maintain their proportionate interest in the assets, earnings
and control of the company to distribute profit, they have been given power
to maintains their proportionate interests in the assets, earnings and control
of the company and for the purpose they have been given right to purchase
additional issues of equity shares at a price prevailing below the market
price.8
Pros and Cons of Equity Financing:Equity capital is the most important long-term source of financing. It
offers the following advantages to the company:
Permanent capital: Since ordinary shares are not redeemable, the
company has no liability for cash outflow associated with its redemption. It is a
permanent capital, and is available for use as a long as the company goes.
Borrowing base: The equity capital increases the company’s financial
base, and thus its borrowing limit. Lenders generally lend in proportion to the
company’s equity capital. By issuing ordinary shares, the company increases its
financial capability. It can be borrow when it needs additional funds.
Dividend Payment discretion: A company is not legally obliged to pay
dividend. In times of financial difficulties, it can reduce or suspend payment of
dividend. Thus, it can avoid cash outflow associated with ordinary shares. In
practice, dividend cuts are not very common and frequent. A company tries to
pay dividend regularly. It cuts dividend only when it cannot manage cash to
pay dividends. For example, in 1986 the Reliance Industries Limited
experienced a sharp drop in its profits and had a severe liquidity problem; as a
consequence, it had to cut its dividend rate from 50% to 25%. The company
however, increased the dividend rate next year when its performance improved.
Equity Capital has some disadvantages to the firm compared to other
sources of finance. They are as follows:
Cost: Shares have a higher cost at least for two reasons: Dividends are
not tax deductible as are interest payments, and floatation costs on ordinary
shares are higher than those on debt.
Risk: Ordinary Shares are riskier form investors point of view as there
is uncertainty regarding dividend and capital gains. Therefore, they require a
relatively higher rate of return. This makes equity capital as the highest cost
source of finance.
Earnings Dilution: The issue of new ordinary shares dilutes the
existing shareholders earnings per share if the profits do not increased
immediately in proportion to the increase in the number of ordinary shares.
Ownership Dilution: The issuance of new ordinary shares may dilute
the ownership and control of the existing share holders. While the share holders
have a pre-emptive right to retain their proportionate ownership, they may not
have funds to invest in additional shares. Dilution of ownership assumes great
significance in the case of closely held companies. The issuance of ordinary
shares can change the ownership.
b) Preference Shares:A preference share is a combination of the features of an ordinary share
and debt.9 Preference shares represent that part of share capital of a company
which carrier’s preferential rights and privileges with respect to income and
assets over equity stock. Only a comparatively few preferred stock holders
have the right to subscribe to additional issues of stock. This pre-emptive right
of subscription exists largely to protect stock holders shares in the voting power
and the corporate surplus.10
Features:Preference shares have several features. Some of them are common to all types
of preference shares while others are specific to some.11
Claims on income and assets: Preference Share is a senior security as
compared to ordinary share. It has a prior claim on the company’s income in
the sense that the company must first pay preference dividend before paying
ordinary dividend. It also has a prior claim on the company’s assets in the event
of liquidation. The preference share claim is honored after that of debenture
and before that of ordinary share. Thus, in terms of risk, preference share is less
risky than ordinary share. There is a cost involved for the relative safety of
preference investment. Preference share holders generally do not have voting
rights and them participant in extra-ordinary profits earned by the company.
However, a company can issue preference share with voting rights.
Fixed Dividend: The dividend rate is fixed in the case of preference share, and
preference dividends are not tax deductible. The preference dividend rate is
expressed as a percentage of the par value. The amount of preference dividend
will thus be equal to the dividend rate multiplied by the par value. Preference
share is called fixed income security because it provides a constant income to
investors. The payment of preference dividend is not a legal obligation.
Usually, a profitable company will honor its commitment of paying preference
dividend.
Cumulative Dividends: Most Preference Shares in India carry a cumulative
dividend feature, requiring that all past unpaid preference dividend be paid
before any ordinary dividends are paid. This feature is a protective device for
preference share holders. The preference dividends could be omitted or passed
with out the cumulative feature. Preference shareholders do not have power to
force company to pay dividends; non payment of preference dividends also
does not result into insolvency. Since Preference share does not have the
dividend enforcement power, the cumulative feature is necessary to protect the
rights of preference share holders.
Redemption: Theoretically both redeemable and perpetual preference shares
can not be issued. Perpetual or irredeemable preference share does not have a
maturity date. Redeemable preference shares have a specified maturity. In
Practice redeemable preference shares in India are not often retired in
accordance with the stipulation since there are not serious penalties for
violation of redemption feature.
Sinking Fund: Like in the case of a debenture, a sinking fund provision may
be created to redeemed preference share. The money set aside for this purpose
may be used either to purchase preference share in the open market or to buy
back the preference share. Sinking funds for preference shares are not common.
Pros and Cons:Preference Share has a large number of advantages to the company
which ultimately occur to ordinary share holders.12
Less Risk leverage advantage: Preference Share provides financial
leverage advantages since preference dividend is a fixed obligation. This
advantage occurs without serious risk of default. The non-payment of
preference dividends does not force the company into insolvency.
Dividend Postponability: Preference Share provides some financial
flexibility to the company since it can post pone payment of dividend.
Fixed dividend: The Preference Dividend payments are restricted to the
stated amount. Thus, Preference share holders do not participate in
excess profits as do the ordinary share holders.
Limited Voting Rights: Preference share holders do not have voting
rights except in case dividend arrears exist. Thus the control of ordinary
share holders is preserved.
The following are the limitations of Preference Shares:
Non-deductibility of dividends: The primary disadvantage of
preference share is that preference dividend is not tax deductible. Thus it
is costlier than debenture.
Commitment to pay Dividend: Although preference dividend can be
omitted, they may have to be paid because of their cumulative nature.
Non payment of preference dividends can adversely affect the image of
a company, since equity holders cannot be paid any dividends unless
preference share holders are paid dividends.
Debt Financing:The use of bonded debt in the pattern of financing has gone wider and
deeper significance. Recourse to debt generally tends to reduce the cost of the
capital and consequently helps to improve the overall return of the company.
Debt is considered a cheaper source of financing not only because of being less
expensive in terms of interest cost an issuance cost but essentially because of
the availability of tax benefits.13 Apart from these financial considerations, non
financial factors also explain the use of debt rather than equity capital. When
additional equity funds are not available at reasonable cost, the firms may be in
a position to attract debt. Debt is also attractive since it does not disturb the
controlling position of the existing owners. Besides, debt provides the
flexibility in the financial structure of the corporation by changing the costs of
capital. The company’s payment of interest is regarded as a cost and is
deducted from taxable income. Thus interest is paid from before tax income. In
contrast, dividends on equity shares are paid out of after tax income. Therefore,
the government provides a tax subsidy on the use of debt which it does not
provide on equity.
However, it should not be misconstrued that debt should always be used
for meeting long-term capital requirements. Debt brings in its wake an element
of risk. This is primarily because interest and principal payments are fixed
charges. Further, debt proves fatal when the expectations and plans on which
the debt was issued are changed another limitation is that with successive doses
of debt, a firm has to pay higher rate of interest. As a general rule only those
companies whose earnings are reasonably stable and high enough to cover
fixed interest charges on debentures can afford the luxury of financial leverage
(Debt-Equity mix).14 Now let us discuss different forms of debt financing.
c) Debentures:A debenture is a long –term promisory note for raising loan capital. The
firm promises to pay interest and principal as stipulated. The purchasers of
debentures are called debenture holders. An alternative form of debenture in
India is bond. Mostly public sector companies in India issue bonds. In USA,
the term debenture is generally understood to mean un secured bond.
Features:
A debenture is long-term, fixed income, financial security. Debenture holders
are the creditors of the firm. The par value of the debenture is the face value
appearing on the debenture certificate. Corporate debentures in India are issued
in different denominations. The large public sector companies issue bonds in
the denominations of Rs 1000. Some of the important features of debentures
are discussed below:
Interest Rate: The interest rate on debenture is fixed and known. It is
called the contractual rate of interest. It indicates the percentage of
the par value of the debenture that will be paid out annually (or semi-
annually or quarterly) in the form of interest. Debenture interest is tax
deductible for computing the company’s corporate tax. However, it is
taxable in the hands of a debenture holder as per the income tax rules.
However, public sector companies in India are some times allowed by
the government to issue bonds with tax-free interest. That is, the bond
holder is not required to pay tax on his bond interest income.
Maturity: Debentures are issued for a specific period of time. The
maturity of a debenture indicates the length of time until the company
redeems the par value to debenture holders and terminates the
debentures. In India, a debenture is typically redeemed after 7 to 10
years in installments.
Redemption: As indicated earlier, debentures are mostly redeemable;
they are generally redeemed on maturity. Redemption of debentures
can be accomplished either through a sinking fund or buy-back (call)
provision.
Sinking Fund: A sinking fund is cash set aside periodically for
retiring debentures. The fund is under the control of the trustee who
redeems the debentures either by purchasing them in the market or
calling them in an acceptable manner. In some cases, the company
itself may handle the retirement of debentures using the sinking funds.
The advantage is that the periodic retirement of debt though the
sinking fund reduces the amount required to redeem the remaining
debt at maturity. Particularly when the firm faces temporary financial
difficulty at the time of debt maturity, the repayment of huge amount
of principal could endanger the firm’s financial viability. The use of
the sinking fund eliminates this potential danger.
Buy-back (call) Provision: Debenture issues include buy-back
provision. Buy- back provisions enable the company to redeem
debentures at a specified price before the maturity date. The buy-back
(call) price may be more than the par value of the debenture. This
difference is called call or buy-back premium. In India, it is generally
5 percent of the par value.
Indenture: An Indenture or debenture trust deed is a legal
agreement between the company issuing debentures and the debenture
trustee who represents the debenture holders. It is responsibility of the
trustee to protect the interests of debenture holders by ensuring that the
company fulfils the contractual obligations. Generally, a financial
institution, or a bank, or an insurance company or a firm of attorneys is
appointed as a trustee. The debenture trust deed (indenture) provides
the specific terms of the agreement, including a description of
debentures, rights of debenture holders, rights of issuing company and
responsibilities of trustee.
Security: Debentures are either secured or unsecured. A secured
debenture is secured by a lien on the company’s specific assets. If the
company’s defaults, the trustee can seize the security on behalf of the
debenture holders. In India, debentures are usually secured by a charge
of the present and future immovable assets of the company. This is
called equitable mortgage. When debentures are not protected by any
security, they are known as unsecured or naked debentures.
Pros and Cons:
Debenture has a number of advantages as long-term source of finance:
Less costly: It involves less cost to the firm than the equity financing
because (a) investors consider debentures as a relatively less risky
investment alternative and therefore, require lower rate of return and
(b) interest payments are tax deductible
No Ownership dilution: Debenture holders do not have voting
rights; therefore debenture issue does not cause dilution of owner-
ship.
Fixed payment of interest: Debenture holders do not participate in
extra-ordinary earnings of the company. Thus the payments are
limited to interest.
Reduced real obligation: During periods of high inflation,
debenture issue benefits the company. Its obligation of paying
interest and principal which are fixed decline in real terms.
Debentures have some limitations:
Obligatory payments: Debenture results in legal obligation of
paying interest and principal, which if not paid, can force the
company into liquidation.
Financial risk: It increases the firm’s financial leverage, which
may be particularly disadvantageous to those firms which have
fluctuating sales and earnings.
Cash out flows: Debentures must be paid on maturity, and
therefore, at some points, it involves substantial cash out flows.
Restricted covenants: Debenture indenture may contain restrictive
covenants which may limit the company’s operating flexibility in
future.
d) Term Loans:Debt capital of a company may consist of either debentures or bonds
which are issued to public for subscription or term loans which are obtained
directly from the banks and financial institutions. Term loans are sources of
long-term debt. In India, they are generally obtained for financing large
expansion, modernization or diversification projects. Therefore, this method of
financing is also called project financing.
Features of Term Loans:Term loans represent long-term debt with a maturity of more than one
year. They are obtained from banks and specially created financial institutions.
In India by private placement rather than a public subscription as is the case
with most debenture issues. The purpose of term loans is mostly to finance the
company’s capital expenditures.
Maturity: Banks and specially created financial institutions are the
main sources of term loans in India. FIs provide term loans generally for
a period of 6 to 10 years. In some cases, a grace period (moratorium) of
1 to 2 years is also granted: this is the period during the company has
not to take any payment. Commercial banks advance term loans for a
period of 3 to 5 years.
Direct negotiation: A firm negotiates term loans for project finance
directly with a bank or FI. Thus term loan is a private placement. Some
times debentures may also be privately placed to FIs, but most debenture
issues are placed for public subscriptions. The advantages of private
placement are the ease of negotiation and low cost of raising loan.
Unlike in the case of public issue, the firm need not underwrite term
loans. Thu it avoids underwriting commission and other flotation costs.
Security: Term loans are always secured. Specifically the assets
acquired using term loan funds secure them. This is called primary
security. The company’s current and future assets also generally secure
term loans. This is called secondary or collateral security. Also, the
lender may create either fixed or floating charge against the firm’s
assets.
Restrictive covenants: in addition to the asset security, lender would
like to protect further. Therefore, FIs add a number of restrictive
covenants. A financially weak firm attracts stringent terms of loan from
lenders. The borrowing firm has generally to keep the lender informed
by furnishing financial statements and other information periodically.
Convertibility: FIs in India provide huge amount of loan assistance to
the companies. Because of the substantial financial stake of these
institutions, in the past they had the option to convert a part of the rupee
loan into equity. FIs would state the terms and conditions of the
conversion. FIs in India insist on the option of converting loans into
equity.
E) Public Deposits:Public Deposits constitute an important source in providing funds to the
corporate sector for meeting its medium and long-term financial needs, the
reasons for the increasing reliance on public deposits are that the availability
and volume of bank credit are restricted by considerations of margin, security
offered and periodical submission of statements. But in the case of public
deposits, there are no such conditions and they are available for comparatively
easier and longer terms than bank credit. They are considered to be the source
of finance which provides a degree of flexibility in the operations in the
company. In view of these advantages, the companies attract public deposits at
rates higher than those offered to them by saving instructions. Since the
companies are able to eliminate intermediaries, it is advantageous to the
company as well as to the depositor. The cost of deposits to the company is less
than the cost of borrowing from banks.
How ever the rules regarding the company deposits have made it difficult,
for the companies to raise adequate funds through deposits.15 Restrictions have
been imposed on the quantum of acceptable deposits, the period of accepting
deposits and the rate of interest offered on such deposits. Under the directions
issued to non-banking non-financial companies effective from 1st January 1967
imposed a limit to companies to eh extent of 25% of paid-up capital and free
reserves as diminished by the balance of accumulated losses, if any. However,
exemptions were given to the deposits in the form of unsecured loans
guaranteed by directors and deposits raised from share holders. After a number
of amendments in the mean while this was further amended, by an act of
companies (Acceptance of Deposits), Amendment Rules effective from 1st
April 1978.16 Consequently, companies were allowed to accept deposits from
the public up to 15% of their paid-up capital and free reserves. This will have
to be brought down to 10 percent by 1st April 1980. The maximum period of
deposits has been shortened from 5 years to 3 years.17 Another amendment
which ahs created immediate liquidity problem is that companies will have to
deposit with banks for invest in government securities a sum equal to at least
10% of the amount of deposits maturing during the year. This reduces the
effectiveness of public deposits to 90% and because of the short notice;
companies have been forced to look for substitute sources of funds.18
F) Loans from Financial Institutions:After Independence, starting with the establishment of the Industrial
Finance Corporation of India in 1948, a number of development banks have
been set up at all India and regional levels for accelerating the development of
large, medium and small scale industries by providing financial and various
other development assistance required.
At present there are four institutions-The Industrial Finance Corporation
of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit
and Investment Corporation of India (ICICI), and Industrial Reconstruction
Corporation of India (IRCI) - at the national level. At the Regional level there
are 18 State Financial Corporation (SFCs) and 22 Industrial
Development/Investment Corporations (SIDCs/SIICs) for providing exclusive
assistance to the small industries, and there are also the National Level and
State Small Industries Development Corporations at the State Level.19
Apart from these development banks, industries in India are financed by
institutions like commercial banks, Industrial Co-operatives, Unit Trust of
India (UTI), Life Insurance Corporation (LIC) and investment Companies.
The Industrial Reconstruction Bank of India (i.e. the reconstituted
Industrial Reconstruction Corporation of India) is the principal credit and
reconstruction agency for industrial revival. It is entrusted with the task of
undertaking modernization, expansion, reorganization, diversification or
rationalization of Industries and coordinating similar work of other institutions
engaged there in. It will also assist, promote industrial development,
reconstruction and revival and undertake rehabilitation of industrial concerns
by providing or procuring assistance and operating schemes for such purposes.
G) Bank Financing:The role of commercial banks is significant in as much as dimensionally
they account for over four-fifths of the total credit extended by all the financial
institutions. In terms of availability and volume bank credit ranks second only
to trade credit as source of short-term finance. Among the institutional sources
of industrial finance, banks are by far the oldest and quantitatively the most
important.20Indian commercial banks confined themselves until recently to
short-term financial activity of corporate sector and abstained from term
financial activity. However, in recent years they have ventured into new lines
of activity of extending financial support to cover tem capital needs to
industrial enterprises. As for development of bank credit between public and
private sector, the private sector companies claimed 71 to 94 percent of total
bank credit. As in the public sector enterprises, bank loan has emerged as a
significant constituent of the corporate financial structure in the private sector
as well. Still about 90% of the bank finance available to corporate sector today
comprises working capital finance.21 Dependence of business enterprises on
bank differs from unit to unit depending essentially on their financial needs.
Industries which are required to hold larger amount of inventories would place
heavier reliance on bank credit as compared to others requiring less amount of
inventories. Significance of bank loan in financial structure of companies rests
on a host of factors including size of the business unit, influence of size works
on both the demand and the supply sides of bank loans. Supply of bank loan to
smaller enterprises is usually limited due to reluctance of banks to lend these
enterprises because of their poor credit worthiness. Almost 95% of the volume
of loans granted by Indian banks is secured.22
H) Trade Credit:‘Trade Credit’ or as it is often called ‘Mercantile Credit’ is the credit
extended by sellers to buyers at all levels of the production and distribution
process down to the retailer.23 It is the most important source of external
finance and may be used to finance the cost of raw-materials, merchandise or
business services employed in the various stages of production and distribution.
The extent to which the Trade Credit is used as a source of funds varies widely
among firms. Small firms generally use trade credit more extensively than large
firms. “When monetary policy in tight and credit is difficult to obtain, small
firms tend to increase their reliance on trade credit.24 A large number of factors
influence the trend and significance of trade credit as a source of finance.
Significant among them are: customs and traditions prevailing in the industry,
competition prevailing in the market general industry in particular, the rate of
inflation in the economy and the credit standing of a purchaser.
There are three types of trade credit: open account, notes payable, and
trade acceptances. By far the most common type is the open account
arrangement.
ROLE OF INTERNAL SOURCES IN FINANCING THE
PHARMACEUTICAL INDUSTRY:Internal sources are the sources of funds that are generated in the
company itself. Internally generated funds have contributed enormously to the
financing and growth of corporations in recent times. Enough attention has
been paid to logically explaining the role of internally generated funds in the
financing of growth and development of a firm.25A great merit of internal funds
is their low relative cost. The permanence of such funds minimizes solvency
risks too. A substantial portion of expansion both at micro and macro levels is
reported to have been financed through reinvestments26
The generation of internal funds thus clearly shows the good corporate
health. On the other hand, the heavy dependence on external sources leads the
organization into troubles. The flow of external sources is very much restricted
when compared to internal sources. Nowadays, the restriction on external funds
is very much on increasing phase. When ever, there is lack of availability of
funds in the capital market, the only sources available to the organization is
internal source of funds.
A study of corporate intention in the U.S.A during 1915-1943 by
Dobrovolsky disclosed that “ On an average each dollar of increased earnings
was allocated twenty eight to thirty cento to dividends and seventy to eighty
cents to reinvestments.27 In more recent years in are relatively prosperous stage
of the U.S. Economy, U.S corporations were ploughing back around 50 percent
of their profits for use in the business.28 In U.K., Germany, France and
Belgium also retained profits are the most important source of industrial
capital.29
There has been considerable controversy on the true role of internal
finance as a secular force. Lintner (1960), for instance, observed no long-term
trend towards increasing reliance upon internal funds.30Using evidence of the
secular stability of the ratio of new common stock issues to all new security
finance and assuming that short-term financial trends were irrelevant, Millar
(1963) hypothesized that the ratio of new common stock to total new corporate
finance was stable and finally inferred that the corporate prosperity to save
remained essentially un changed.31 While Burns argues that the growing
importance of internal financing has reduced the reliance of business firms on
externally raised capital so that they are hedged effectively against the ordinary
fluctuations in the credit markets.32
Similar studies of the Indian private corporate sector have been far too
scanty. A rather early study was undertaken in the field of business savings.
The studies on corporate savings by Braj Kishore33, Sastry and Krishan
Murhty34, Rao and Sharma 35are relevant in this context. Thus, the importance
of internal sources of finance can be summed up in the following way. Internal
financing accounts for a substantial portion of financing for a number of
reasons:
a) It is an expensive in method of acquiring funds. The cost of
acquiring internal funds is negligible.
b) Ploughing back of earnings avoids taxation leakage
c) It stimulates a high growth rate 36
STRUCTURE OF FINANCE IN PHARMA & MLP SECTORS IN
INDIA:So far we have discussed the various sources of corporate finance in India.
Now let us discuss the structure of finance in the Pharmaceutical and Public
Limited Companies in India. The relative importance of internal and external
funds in the total sources of funds for the pharmaceutical sector and public
limited companies in India can be observed from the Tables IV.1
Sources of Funds-Internal Vs External:Table 4.1 presents data on the relative importance of internal and external
source of funds in the total sources for the pharmaceutical industry in India
with comparison of M&LP Sector during 1976-1977 to 2005-2006.
Pharmaceutical Industry:The overall pattern of financing of the industry denotes that external
sources account for a relatively large share in the financing industry during the
period of 30 years of study. Of the aggregate total sources of Rs 164152 Lakhs,
external sources contributed Rs 84476 Lakhs constituting 66.7% of the total
sources. The external sources exceed the internal sources during some years
and we can further observe that there were cyclical fluctuations in the
generation of internal sources by industry. The contribution of internal sources
was even exceeded 87% approximately (1994-1995) of the total sources and
there was also years in which the internal sources contributed a mere 8.9% of
the total sources (1991-1992). In fact during 1976-1977, 1987-1988 and 200-
2001 there were negative contributions from internal sources.
In terms of quinquennial averages the share of external sources in total
sources of finance increased from 42.2% during 1976-1981 to 63.5% 1981-
1986 and during the years 1986-1991 the contribution is 129.6; during 1991-
1996 the external sources were declined to 56.6% and immediately it gain up to
67.3% in the years 1996-2001; during the years 2002-2006 the contribution
reduced to 40.9 percent.
we can observe that the percentage of Internal sources to Total sources
was around 57.8% during the years 1976-1981 has been declined continuously
to negative up to the decade 1986-1991 and in the years 1991-1996 it gone up
to 43.4 percent, where the contribution reduced to 32.7% during 1996-2001 and
immediately in the years 2002-2006 the percentage raised to 59.1 percent.
Thus, during the span of 30 years of the study period the contribution of
the external sources to the total sources of the industry was 66.7 percent and
that of the internal sources accounted for the remaining 33.3%. (Chart 4.1)
Medium & Large Public Limited Companies:The internal sources of the public limited companies was negative stage
during the year 1976-1977 was raised it contribution continuously and reached
to Rs 117929 Lakhs in the year 1982-1983; From the year 1983-1984 onwards
the sources with fluctuations reached to Rs 8231400 Lakhs during the year
2005-2006. On aggregate the total sources of Rs 2817506 Lakhs, internal
sources contributed Rs 1209779 Lakhs constituting 30.2% of the total sources.
It can be further observed that there were optimum utilization of internal
sources during the year 1993-1994 and also there were cyclical fluctuations in
the generation of the internal sources of the public limited companies. There
were also years in which the internal sources contributed a mere 15.8% of the
total sources (1977-1978 & 1986-1987). In fact during 1976-1977 & 2000-
2001 there were negative contributions from internal sources.
TABLE- IV.1SHARE OF INTERNAL & EXTERNAL SOURCES OF FUNDS IN THE TOTAL SOURCES OF FUNDS IN
PHARMACEUTICALS AND M&LP IN INDIA DURING 1976-2006
Years
Internal Sources External Sources Total Sources% of Internal
sources to TotalSources
%of ExternalSources to Total
SourcesPharmaceu
tical M & LP Pharmaceutical M & LP Pharmaceu
tical M & LP Pharmaceutical
M &LP
Pharmaceutical
M &LP
1976-1977 -979 -2498 279 55412 -700 52914 # @ $ 104.71977-1978 1096 16404 1151 87131 2247 103535 48.8 15.8 51.2 84.21978-1979 1978 29964 1244 92981 3222 122945 61.4 24.4 38.6 75.61979-1980 1555 55919 4215 147636 5770 203555 26.9 27.5 73.1 72.51980-1981 651 62912 4796 203185 5447 266097 12.0 23.6 88.0 76.41981-1982 6267 117929 6162 403087 12430 521016 50.4 22.6 49.6 77.41982-1983 2988 84286 7620 337533 10607 421819 28.2 20.0 71.8 80.01983-1984 9414 161488 23793 378408 33208 539896 28.3 29.9 71.7 70.11984-1985 5903 194358 4677 315491 10580 509849 55.8 38.1 44.2 61.91985-1986 3680 420295 14978 562338 18658 982633 19.7 42.8 80.3 57.21986-1987 5997 95469 4717 516799 12455 612268 56.0 15.6 44.0 84.41987-1988 4605 141702 -6178 375711 -1573 517413 $ 27.4 # 72.61988-1989 5620 216220 24303 819640 29923 1035860 18.8 20.9 81.2 79.11989-1990 9784 330820 54067 1068040 63851 1398860 15.3 23.6 84.7 76.41990-1991 27054 451400 22277 717210 49330 1168610 54.8 38.6 45.2 61.41991-1992 3919 664100 39923 1644900 43842 2309000 8.9 28.8 91.1 71.21992-1993 26288 1074800 33088 1433000 59376 2507800 44.3 42.9 55.7 57.11993-1994 60251 1223800 82658 -4200 142908 1219600 42.2 100.3 57.8 @1994-1995 158633 2226800 24661 2198600 184295 4425400 86.5 50.3 13.5 49.71995-1996 11163 1879600 20591 2169300 31753 4048900 35.2 46.4 64.8 53.6
1996-1997 72450 3081600 21651 4932500 94102 8014100 77.0 38.5 23.0 61.51997-1998 52151 1173900 101702 2750700 153853 3924600 33.9 29.9 66.1 70.11998-1999 41578 931500 51149 1879000 92727 2810500 44.8 33.1 55.2 66.91999-2000 -34348 1328200 -37878 991900 -72226 2320100 # 57.2 # 42.82000-2001 -29507 -1590500 103673 2749900 74166 1159400 @ @ 139.8 237.22001-2002 71694 859400 35107 2698800 106801 3558200 67.1 24.2 32.9 75.82002-2003 80037 772300 43159 385000 123196 1157300 65.0 66.7 35.0 33.32003-2004 511915 70461400 150528 7900300 662443 14946400 77.3 47.1 22.7 52.92004-2005 856394 5013700 1146805 3927900 2003199 8941600 42.8 56.1 57.2 43.92005-2006 422067 8231400 549348 6493600 971415 14725000 43.4 55.9 56.6 44.1
1976-1977 to 1980-1981 860 32540 2337 117269 3197 149809 57.8 17.3 42.2 82.71981-1982 to 1985-1986 5651 195671 10281 399371 17097 595043 36.5 30.7 63.5 69.31986-1987 to 1990-1991 10612 247122 19837 699480 30449 94662 @ 25.2 129.6 74.81991-1992 to 1995-1996 52051 1413820 40184 1488320 92235 2902140 43.4 53.7 56.6 46.31996-1997 to 2000-2001 20465 984940 48060 2660800 68524 3645740 32.7 4.3 27.3 95.72001-2002 to 2005-2006 388421 4384580 384989 47281120 773411 8665700 59.1 50.0 40.9 50.0
During 1976-2006 79677 1209779 84476 1607727 164152 2817506 33.3 30.2 66.7 69.8Source: Appendix-II c;@-numerator negative;$-Denominator negative;#-Both numerator and denominator are negative.
CHART-4.1
SOURCES OF FUNDS IN PHARAMACEUTICALS
-40
-20
0
20
40
60
80
100
120
140
1976-1981
1981-1986
1986-1991
1991-1996
1996-2001
2001-2006
During1976-2006
Internal SourcesExternal Sources
CHART-4.2
SOURCES OF FUNDS IN M&LP
0
20
40
60
80
100
120
1976-1981 1981-1986 1986-1991 1991-1996 1996-2001 2001-2006 During2002-2006
Internal SourcesExternal Sources
In terms of quinquennial averages the share of internal sources in total sources
of finance is increasing alternatively from 17.3% during 1976-1981 to 30.7% in 1981-
1986, where 1986-1991 the contribution declines to 25.2%; during 1991-1996 the
internal sources raised to 53.7% and immediately in the next decade i.e. 1996-2001
the internal sources were reduced to least as 4.3; during 2001-2006 the sources raised
to 50%.
The external sources of the total sources contribution on aggregate is Rs
1607727 Lakhs. The external sources in terms of percentages, during 1976-1977,
1993-1994 are having negative contributions. In some years it was recorded a highest
of public limited companies of not depending on the internal sources. In terms of
quinquennial averages the share of external sources was 82.7 during 1976-1981,
where as in the years 1981-1986 the contribution reduced to 69.3% and in the years
1986-1991 the sources were inclined to 74.8% and immediately in the years 1991-
1996 the contribution of external sources were decreased to 46.3%, in the years of
1996-2001 it increased to 95.7%; during 2002-2006 it declines to 50 percent.
On the whole, during the study period (1976-2006) the average share of
internal sources to total sources was 30.2% and the remaining 69.8% belongs to
external sources. (Chart 4.2)
STRUCTURAL CHANGES:
Table 3.2 presents the summarized position of the structural changes in the
total sources of funds of pharmaceutical industry and Public limited companies during
the periods 1976-1981, 1981-1986,1986-1991,1991-1996,1996-2001 & 2002-2006.
Pharmaceutical Industry:
1. Internal Sources: we can observe that the percentage of Internal sources to
Total sources was around 57.8% during the years 1976-1981 has been declined
continuously to negative up to the decade 1986-1991 and in the years 1991-
1996 it gone up to 43.4 percent, where the contribution reduced to 32.7%
during 1996-2001 and immediately in the years 2001-2006 the percentage
raised to 59.1 percent.
2. Of the components of internal sources of funds, the share of paid-up capital
continuously declined from 11.8% during the years of 1976-1981 to 5.2% in
the years 1981-1986 and in 1986-1991 there was negative and during 1991-
1996 it increased to 43.4 percent; during the years 1996-2001 the paid up
capital reduced to 32.7% and during 2002-2006 it inclined to 59.1%.
3. Reserves and Surplus have occupied an important place in the contribution of
internal sources to total sources. Though the reserves declined from 44.4%
during 1976-1981 continuously up to negative in the years 1986-1991 and
during the years 1991-1996 the reserves inclined to 31.1% where in the last
years of decade i.e. 2001-2006 it reduced to 44.9% of the total funds.
4. The contribution of Provisions have occupied last place in internal sources with
1.6% during 1976-1981 which inclines to 5.9 percent in the years 1981-1986,
where 1986-1991 shows negative stage; during the years 1991-1996 the
contribution of provisions increased to 7.2% where in the years 1996-2001
decreased to 4.5% and in the last period 2002-2006 shows 13% contribution of
provisions in total sources of funds during the study period.
External Sources:1. Of the external sources the Borrowings played an important role in financing
assets formation followed by Paid –up Capital, trade dues and other current
liabilities.
2. Fresh issues of capital increased from negative stage during 1976-1981 to 6.1
percent in the years 1981-1986, where the capital declines to negative in the
years 1986-1991 and during the years 1991-2001 it continuously increased to
6.3%; during 2002-2006 it reduced to 1.8%.
3. The pharmaceutical industry heavily depended on borrowings during all the
periods of the study. Borrowings accounted for 23.3% during the period of
1976-1981 where it has been raised continuously up to 98.7 percent during
1981-1991 and in the years of 1991-1996 it fall down to 40.5% and
immediately in the years 1996-2001 it rose to 67 percent, where in the last
years of the study i.e. 2001-2006 the borrowings contribution reduced to 22.9
percent.
4. Trade dues and other current liabilities showed a sharp jump from 20.2%
during 1976-1981 to 31% in the years of 1981-1991 and from there the percent
declined continuously and reached to negative during 1991-2001 and in the
years of 2002-2006 the contribution shows 16.2%.
Medium & Large Public Limited Companies:1) In terms of quinquennial averages the share of internal sources in total sources of
finance is increasing alternatively from 17.3% during 1976-1981 to 30.7% in
1981-1986, where 1986-1991 the contribution declines to 25.2%; during 1991-
1996 the internal sources raised to 53.7% and immediately in the next decade i.e.
1996-2001 the internal sources were reduced to least as 4.3; during 2001-2006
the sources raised to 50%.
2) Of the components of internal sources of funds, the share of paid-up capital
increased from 3.2% during 1976-1981 to 3.8% in the period 1981-1986 where
as in the decade 1986-1991 the paid up capital increased to 6.7%; during 1991-
1996 the capital reduced to 6.4% and during 1996-2001 the contribution is
negative and in the years of 2001-2006 it came down to 0.6 percent.
3) Reserves and Surplus which accounted for 13.2% during 1976-1981 where it
increased to 24.9% during 1981-1986 and 1986-1991 the reserves reduced to
18.1% and in the years of 1991-1996 the reserves contribution increased to 45.4
percent; during 1996-2001 it reduced to 21.2 percent, where in the years 2001-
2006 the contribution raised to 30 percent.
4) Provisions are maintained approximately from between 1-2 percent during the
period 1976-1996 and in the years 1996-2001 the provisions raised to 5.2
percent-19 percent in the years 2001-2006.
External Sources:1) Of the external sources the Borrowings & Trade Dues and Other current
liabilities played an important role in financing assets formation followed by
Paid-up capital and miscellaneous non-current liabilities.
2) Fresh issues of capital have continuously reduced from 7.6 percent from 1976-
1996 to 1 percent and where as in the years 1996-2001 the share of capital
increased to 33.3% and in the years of 2001-2006 it reduced to 5 percent.
3) Borrowings accounted for 40.5% in the year 1976-1986 has been declined to
49.5% in years of 1986-1991, where as in the years 1991-1996 the borrowings
dependence was reduced to 31% and in the years of 1996-2001 the share was
increased to 36.8 percent; during 2002-2006 it reduced to 12.4%
4) Trade dues and other current liabilities have continuously reduced from 34.4-
14.2 percent during 1976-1981 to 1991-1996 and in the years of 1996-2001 it
increased to 25.5% to 32.6% in the years 2002-2006.
TABLE IV.2CHANGING STRUCTURE OF FINANCE IN PHARMACEUTICAL INDUSTRY IN INDIA DURING 1976-2006
Sources of Finance
(1)
1976-1977 to
1980-1981
(2)
1981-1982 to
1986-1987
(3)
1987-1988 to
1990-1991
(4)
1991-1992 to
1996-1997
(5)
1997-1998 to
2000-2001
(6)
2001-2002 to
2005-2006
(7)
Internal Sources 57.8 36.5 @ 43.4 32.7 59.1
1. Paid-Up Capital 11.8 5.2 @ 5.1 2.1 1.2
2. Reserves & Surplus
i. Capital Reserve
ii. IAR
iii. Sinking Funds
iv. Others
44.4
6.6
5.9
149.4
@
25.4
4.9
3.3
@
17.2
@
21.2
8.4
@
@
31.1
@
@
2.7
30.2
26.1
31.2
0.0
@
@
44.9
12.0
0.0
@
34.5
3. Provisions
a. Taxation
b. Dividends
c. Other Current Provisions
d. Non-Current Provisions
1.6
@
0.0
@
10.6
5.9
2.6
2.2
1.3
@
@
@
@
1.9
0.1
7.2
0.0
6.7
0.5
0.0
4.5
0.0
3.8
0.5
0.1
13.6
8.6
3.2
0.8
0.5
(1) (2) (3) (4) (5) (6) (7)
External Sources 42.2 63.5 129.6 56.6 67.3 40.9
4. Paid-Up Capital @ 6.1 @ 1.8 6.3 1.8
5. Borrowings
Short-Term Borrowings
(a) From Banks
(b) Public Deposits
(c) Others
Long-Term Borrowings
(a) Debentures
(b) Banks
(c) Indian Financial Institutions
(d) Foreign Institutional agencies
(e) From Govt & Semi-Govt Bodies
(f) From companies
(g) Deferred payments
23.3
6.9
7.2
0.0
@
16.4
14.8
0.0
@
@
2.8
0.0
0.0
29.7
19.1
9.0
9.5
0.5
10.6
5.0
1.7
3.5
0.0
@
0.6
0.7
98.7
45.9
53.9
@
0.0
52.7
63.7
@
@
0.0
0.1
@
2.2
40.5
8.7
17.9
2.5
@
31.7
7.6
1.1
21.1
@
0.1
1.7
0.9
67.0
15.9
14.8
1.1
0.0
51.1
@
3.5
50.9
@
@
0.4
@
22.9
11.6
12.2
@
0.0
11.3
@
10.4
@
4.3
0.8
0.6
0.1
6. Trade Dues and Other CurrentLiabilities
20.2 27.7 31.9 14.3 @ 16.2
7. Miscellaneous Non-Current Liabilities 0.6 0.1 0.0 0.0 0.0 0.0
8. TOTAL SOURCES 100.0 100.0 100.0 100.0 100.0 100.0Source: Appendix-II c;@-numerator negative;
TABLE IV.3CHANGING STRUCTURE OF FINANCE IN SELECTED M & LP COMPANIES DURING 1976-2006
Sources of Finance
(1)
1976-1977 to
1980-1981
(2)
1981-1982 to
1986-1987
(3)
1987-1988 to
1990-1991
(4)
1991-1992 to
1996-1997
(5)
1997-1998 to
2000-2001
(6)
2001-2002 to
2005-2006
(7)
Internal Sources 17.3 30.7 25.2 53.7 4.3 50.0
1. Paid-Up Capital 3.2 3.8 6.7 6.4 @ 0.6
2. Reserves & Surplus
i. Capital Reserve
ii. IAR
iii. Sinking Funds
iv. Others
13.2
1.2
28.0
@
7.2
24.9
14.5
2.2
0.1
8.2
18.1
7.1
0.2
1.3
9.4
45.4
24.6
@
2.6
18.7
21.2
8.0
@
1.9
12.2
30.4
14.7
0.0
@
18.2
3.Provisions
a. Taxation
b. Dividends
c. Other Current Provisions
d. Non-Current Provisions
0.9
1.3
0.0
2.9
@
1.9
0.6
0.0
1.2
0.0
0.5
@
2.2
@
0.3
1.9
0.0
1.7
0.2
@
5.2
0.0
2.3
1.8
1.1
19.0
13.3
2.2
2.1
1.3
(1) (2) (3) (4) (5) (6) (7)
External Sources 82.7 69.3 74.8 46.3 95.7 50.0
9. Paid-Up Capital 7.6 1.7 2.1 1.1 33.3 5.0
10. Borrowings
Short-Term Borrowings
(a) From Banks
(b) Public Deposits
(c) Others
Long-Term Borrowings
(a) Debentures
(b) Banks
(c)Indian Financial Institutions
(d) Foreign Institutional agencies
(e)From Govt&semi-Govt Bodies
(f) From companies
(g) Deferred payments
(h) Others & Debt
40.5
12.6
12.6
0.0
0.0
27.9
0.0
0.0
15.0
@
3.2
5.5
0.0
14.8
40.8
16.5
8.6
7.9
0.0
24.4
9.8
0.7
9.8
0.7
0.6
@
0.0
3.5
49.5
9.9
13.3
@
0.0
39.5
2.5
8.2
16.1
1.3
2.7
1.0
1.5
6.2
31.0
5.9
5.2
0.7
0.0
25.1
4.6
1.4
10.2
4.4
0.6
0.9
@
3.3
36.8
9.4
9.5
@
0.0
27.4
6.7
8.1
16.9
@
@
0.1
0.1
@
12.4
19.1
20.0
@
0.8
@
@
12.6
@
0.9
0.2
0.4
@
@
11. TradeDuesandOtherCurrentLiabilities 34.4 26.6 23.2 14.2 25.5 32.6
12. MiscellaneousNon-Current Liabilities 0.1
13. TOTAL SOURCES 100.0 100.0 100.0 100.0 100.0 100.0Source: Appendix-II c;@-numerator negative;
CONTRIBUTION OF INTERNAL SOURCES TO GROSS
CAPITAL FORMATION:It may be useful to examine here as to what proportion of total capital
formation was financed by the internal sources even though it may not be quite
realistic to associate specific sources of funds with specific uses. Gross capital
formation consists of investment in gross fixed assets and inventory 37 Internal
Sources as percentage of gross Capital formation in Pharmaceutical sector in
India during 1976-1977 to 2005-2006 can be observed from the table IV.4.
Pharmaceutical Industry:It can be seen from the table that the internal sources as percentage of
gross capital formation increased from 2.6 percent during 1976-1981 to 7.5
percent in the years of 1981-1986 where as in the next five years i.e. 1986-1991
the percentage reduced to 5.9%, during the years 1991-1996 the percentage
increased to 12.9%. During the period 1996-2001 the share of internal sources
reduced to 3.7 percent where as in the decade 2002-2006 the percentage
increased to 20%. How ever, when considered year wise, internal sources as
percentage of gross capital formation not more than 40 percent during the study
period. On the other hand, the gross fixed assets were not financed from
external sources during the years of the study.
Medium & Large Public Limited Companies:
Internal sources as percentage of gross capital formation in Public
limited companies increased from 1.9 percent during 1976-1981 to 5.4% in the
years of 1981-1986 and further to 4.0% in the decade of 1986-1991, Later there
was an inclining stage in internal sources to 9.5% in the years of 1991-1996
and further it got down to 3.7% during 1996-2001; during the years of 2001-
2006 it increased to 7.8%. On the whole during the study period the percentage
of internal sources to gross capital formation during the whole period of the
study (1976-2006) was 5.4%.
TABLE IV.4CONTRIBUTION OF INTERNAL SOURCES OF FUNDS TO GROSS CAPITAL FORMATION
AND FIXED ASSETS IN PHARMACEUTICALS AND M&LP DURING 1976-2006
YearsInternal Sources Gross Capital
Formation Gross Fixed AssetsInternal Sources as% of Gross Capital
Formation
Internal Sources as% of Gross Fixed
AssetsPharmace
uticalM &LP Pharmaceu
ticalM &LP Pharmac
euticalM &LP Pharmace
uticalM &LP Pharmace
uticalM
&LP1976-1977 -979 -2498 23706 1249527 13223 849971 @ @ @ @1977-1978 1096 16404 25836 1358210 14264 933324 4.2 1.2 7.7 1.81978-1979 1978 29964 29466 1494242 16390 1011008 6.7 2.0 12.1 3.01979-1980 1555 55919 34848 1690470 18636 1113706 4.5 3.3 8.3 5.01980-1981 651 62912 40560 1931596 21559 1274155 1.6 3.3 3.0 4.91981-1982 6267 117929 52543 2395564 29699 1590438 11.9 4.9 21.1 7.41982-1983 2988 84286 60569 2779162 34125 1895796 4.9 3.0 8.8 4.41983-1984 9414 161488 85989 3257550 51136 2318154 10.9 5.0 18.4 7.01984-1985 5903 194358 94909 3768953 56892 2749181 6.2 5.2 10.4 7.11985-1986 3680 420295 108686 4701047 65606 3488244 3.4 8.9 5.6 12.01986-1987 5997 95469 118279 5250802 73994 3932352 5.1 1.8 8.1 2.41987-1988 4605 141702 121921 5803490 79066 4399980 3.8 2.4 5.8 3.21988-1989 5620 216220 147914 3395070 86922 1685140 3.9 6.4 6.5 12.81989-1990 9784 330820 192050 7690500 112184 5672430 5.1 4.3 8.7 5.81990-1991 27054 451400 235025 8757400 149503 6452800 11.5 5.2 18.1 7.01991-1992 3919 664100 265973 10573700 166280 7900100 1.5 6.3 2.4 8.41992-1993 26288 1074800 315636 12766200 199672 9629800 8.3 8.4 13.2 11.21993-1994 60251 1223800 350013 13334200 226271 10595000 17.2 9.2 26.6 11.61994-1995 158633 2226800 448883 16057700 301505 12674400 35.3 13.9 52.6 17.61995-1996 11163 1879600 475302 19218900 314755 15169300 2.3 9.8 3.5 12.4
1996-1997 72450 3081600 543806 25629200 367968 20853400 13.3 12.0 19.7 14.81997-1998 52151 1173900 638216 29547700 450898 24561800 8.2 4.0 11.6 4.81998-1999 41578 931500 699046 31210400 514987 26458600 5.9 3.0 8.1 3.51999-2000 -34348 1328200 680388 34042700 477141 28892800 @ 3.9 @ 4.62000-2001 -29507 -1590500 766721 35453300 558135 29862600 @ @ @ @2001-2002 71694 859400 849396 39973200 620475 33733500 8.4 2.1 11.6 2.52002-2003 80037 772300 956256 40678500 675641 33852400 8.4 1.9 11.8 2.62003-2004 511915 70461400 1370672 50972400 965985 42888700 37.3 13.8 53.0 16.42004-2005 856394 5013700 2647213 56748300 1953625 47265400 32.4 8.8 43.8 10.62005-2006 422067 8231400 3090451 6727700 2290135 55899500 13.7 12.2 18.4 14.7
1976-1977 to 1980-1981 860 32540 30883 1401343 16814 942476 2.6 1.9 4.7 2.91981-1982 to 1985-1986 5651 195671 80539 2826565 47492 1965545 7.5 5.4 12.9 7.61986-1987 to 1990-1991 10612 247122 163038 5368182 100874 3835629 5.9 4.0 9.4 6.31991-1992 to 1995-1996 52051 1413820 371162 12297840 241696 9450420 12.9 9.5 19.7 12.21996-1997 to 2000-2001 20465 984940 665635 27929780 473826 23187180 3.7 3.7 5.4 4.52001-2002 to 2005-2006 388421 4384580 1782798 44765140 1301172 37520520 20.0 7.8 27.7 9.3
During 1976-2006 79677 1209779 515676 15764808 363646 12816962 8.8 5.4 13.3 7.1Source: Appendix-II c;@-Numerator is negative;$-denominator negative;
#-Both numerator & Denominator negative
Internal Sources as percentage of Gross fixed Assets:
Pharmaceutical Industry:From the table 4.4 we can observe the contribution of Internal Sources
of funds to the formation to fixed assets in the Pharmaceutical sector during the
period of 1976-2006. In the initial years of the study i.e. 1976-1977 there is no
contribution and after wards it shows the fluctuations and reached to 14.7
percent in the year 2005-2006. The average share of internal sources in
financing the gross fixed assets in pharmaceutical industry increased from 4.7
percent during 1976-1981 to 12.9% during 1981-1986 and further it got down
to 9.4% in the years 1986-1991. But it increased to 19.7 percent during 1991-
1996 and further in t got down to 5.4 percent and immediately in the years
2002-2006 it increased to 27.7%. On the whole period of the study i.e. 1976-
2006 the share of internal sources to contribution of gross fixed assets is
13.3%.
Medium & Large Public Limited Companies:
It can be seen from the above table 4.4 the share of internal sources of
funds to the formation of gross fixed assets in the M&LP companies during the
period 1976-2006. In the initial years of the study i.e. during 1976-1981 the
percentage was 2.9% and afterwards it shows an increasing trend to 7.6% in the
decade of 1981-1986 and in the years of 1986-1991 it decreased to 6.3%.
During the period of 1991-1996 it raised to 12.2%, where as in the years 1996-
2001 it reduced to 4.5%. In the years of 2002-2006 we can observe the share
was increased to 9.3%. On the whole, during the study period it was around
7.1%.
COMPOSITION OF INTERNAL SOURCES:The relative share of the components of internal funds to total funds of
the Pharma Sector in India during 1976-2006 is given in Table IV.5. It may be
seen that the item ‘Reserves & Surplus’ is the main internal sources of finance
during the period followed by ‘Provisions’.
Pharmaceutical Industry:
1. Provisions:Infact, Provisions which are inclusive of depreciation, taxation and other
current and non-current provisions like dividends and contingencies occupied
prime place among the internal sources in financing the operation of the private
enterprises. In discussions on company finance, may attention is paid to the
acquisition of new capital and explosion policies but the maintenance of
original investment in a company is also equal importance and it has however
not received much consideration. The replacement of worn out assets is
normally financed from the funds set aside for depreciation out of profits made
during the active life of assets. From the financial point of view, depreciation
has been the largest single source of internal funds.
From the table 4.5 we can observe can observe that the percentage of
provisions on average of six period we can observe that the provisions were
rounded to 3.9% of the total sources of finance during the study period.
Provision on Taxation: Out of the total provisions, the contribution of the
taxation provision is large in some years of the study. The share in the total
sources has ranged from negative stage during 1976-1977 and with fluctuations
it reached to 1.4 percent during 2005-2006. It was recorded a highest percent as
33 during 2001-2002. In terms of quinquennial averages we can it was inclined
to 2.6 percent during 1981-1986 from negative stage in the years of 1976-1981,
where as in the years 1986-2001 and in the last decade i.e. 2001-2006 it raised
to 8.6%.
Dividends: There was no share of dividends in total sources during the years
1976-7977 to 1982-1983 and where as from the year 1983-1984 with
fluctuations from 5.3 percent it reached to 1.3 percent during the year 2005-
2006. In terms of quinquennial averages there was no contribution during the
years 1976-1981 and it inclines to 2.2 percent during 1981-1986 and during the
years 1986-1996 there was no contribution and in the last years of the study the
contribution raised to 3.2 percent.
Other current provisions: The other current provisions contribution was very
low and almost we can observe the negative situations in the study period by
year wise. In terms of quinquennial averages we can observe that there was
contribution during 1976-1981 and a slight change in the period 1986-1991 of
increasing stage to 1.2-1.6 and where as in the years 1991-2001 it is 0.5 and in
the last years of the study i.e. 2002-2006 it is 0.8 percent.
Non Current Provisions: We can observe the share of contribution is having
fluctuations and even negative financing in some years of the study. In terms of
quinquennial averages the share is 10.6 percent to total sources during the years
1976-1981 but fallen continuously from negative financing to null stage during
1981-1991 and in the last years of there was a slow changes in financing from
0.1-0.5 percent during the years 1991-2006.
2. Reserves and Surplus: Next to Depreciation, importance among the
internal sources comes to reserves and surplus followed by paid-up capital
(bonus issues) in terms of contribution to the total sources of funds. Reserves
and surplus consists of (i) development rebate reserve (ii) capital reserve and
(iii) other reserves.
If year to year variations are ignored and only a long-term view is taken,
the share of reserves and surplus in terms of quinquennial averges it was 44.4%
during the decade of 1976-1981 and the percentage was continuously decreased
to negative stage from 25.4% during 1981-1991. From the years of 1991-1996
the percentage increased to 31.1% where as in the period 1996-2001 the share
of reserves were came down to 26.1 percent but in the last decade i.e. 2002-
2006 the share of reserves and surplus is 44.9 percent of the total funds during
the period of the study.
Investment Allowance Reserve: Of the reserves and surplus the IAR has
given second importance in the contribution to total sources and on averge the
contribution is 5.9 percent during 1976-1981 declined towards 3.3 percent in
the years 1981-1986, which increases to 8.4 percent in the years 1986-1991 and
in the decade 1991-1996 there was negative financing and in the remaining
years there was no contribution.
Capital Reserve: The capital reserves has occupied an important place in the
contribution with an average of 6.6 percent during the years 1976-1981 and
reduced to 4.9 percent in the years 1981-1986. In the years of 1986-1991 the
percentage raised to 21.2 percent and in the decade 1991-1996 there was
negative contribution and in the years 1996-2001 the share is raised to 31.2
percent, in the last years 2002-2006 the contribution declines to 12 percent.
Other Reserves: Next to the CR and IAR the other reserves have occupied an
important place where there are negative finances in the decade 1976-1981,
1991-1996, 1996-2001 and in the years 1981-1986 it increased to 17.2 percent
and in the period 1991-1996 the share increased to 30.2 percent.
Sinking funds: The contribution of Sinking funds is so high as149.4 during
1976-1981 which shows negative contribution in the decades 1981-1986, 1986-
1991 and in the years of 1991-1996 the share was increased to 2.7 percent and
in the years 1996-2006 there was negative financing.
3. Paid-Up capital (Bonus Shares):
Although bonus issue does not directly add to the resources available to
the company (as they are simply a conversion of reserves into paid up capital),
they are an important means of enhancing the attractiveness of the share in the
eyes of investors and consequently, the marketability of the subsequent issues
of fresh equity. The attraction of a bonus issue to the investor is based on the
expectation that the future dividend per share will not drop commensurately
with the rate of bonus issue and on the tendency in the stock market for share
prices to respond more to dividend anticipation than to profit prospects
The paid-up capital was low in the share of internal sources and the
percentage was around 11.8% during the years of 1976-1981 and decreasing
the percentage of share continuously and reached to negative during the years
1981-1986 to 1986-1991 and where as in the years 1991-1996 the share was
inclined to 5.1 percent and in the decade 1996-2001 the contribution came
down continuously from 2.1-1.2 during the years 2002-2006.
Thus it can be concluded from the above discussions that the importance
of internal sources of financing the pharmaceutical industry declined over the
period and this can be observed from the fact of falling percentages of internal
sources as percentage of gross capital formation. Among the internal sources
the share of provisions, reserves and surplus and the paid up capital (bonus
issues) were having fluctuations of the study.
Medium & Large Public Limited Companies:
1. Provisions:From the table 4.6 we can observe that the share of provisions in internal
sources was given least importance during the study period. During the years
1976-1981 the contribution is 0.9 which slowly raised in alternative periods i.e
during 1981-1986, 1991-1996 and in the decade 1986-1991 the provisions were
reduced to 0.5 percent. In the years 1996-2001 the contribution inclined
continuously from 5.2%-19.0 percent in the decade 2002-2006.
2. Reserves and Surplus:The share of Reserves and surplus occupied an important place with
high percentage during the study period. The percentage of reserves in terms of
quinquennial averages is 13.2 during the years 1976-1981, where as in the
years 1981-1986 the percentage increased to 24.9 and in the years 1986-1991 it
reduced to 18.1 percent; But in the years 1991-1996 the share of reserves were
raised to 45.4% and during the years 1996-2001 the contribution decreases to
21.2 percent where as in the last decade of 2002-2006 the reserves share is
30.4%.
3. Paid-Up capital:The share of paid-up capital was showing 3.2% in the decade 1976-1981 where
as in the period 1981-1986 it increased to 3.8% to 6.7% in the decade of 1986-
1991 and during the years 1991-1996 the paid up capital decreased to 6.4% to
negative financing in the period 1996-2001 and in the last years of the study
there is slight contribution as 0.6 percent.
TABLE IV.5SHARE OF COMPONENTS OF INTERNAL SOURCES TO TOTAL SOURCES IN PHARMACEUTICALS DURING 1976-2006
(In terms of Percentages)
Years Paid-UpCapital
Reserves & Surplus Provisions
CapitalReserve
InvestmentAllowance
Reserve
SinkingFunds Others Total Taxation Dividends
OtherCurrent
Provisions
Non-Current
ProvisionsTotal
1976-1977 $ $ # # $ # $ 0.0 $ $ $1977-1978 24.8 @ 3.4 0.3 17.0 16.6 13.9 0.0 @ @ 7.41978-1979 10.5 21.8 4.8 0.2 13.3 40.0 14.0 0.0 @ 0.6 10.91979-1980 12.1 0.0 4.1 0.1 5.8 10.0 2.5 0.0 2.1 0.3 4.81980-1981 12.7 5.2 0.5 0.1 2.4 8.1 @ 0.0 @ 0.3 @1981-1982 17.2 1.2 3.9 @ 28.6 33.5 @ 0.0 3.7 @ @1982-1983 3.7 1.4 1.0 @ 13.7 16.0 5.1 0.0 3.2 0.1 8.41983-1984 1.0 12.7 2.6 0.0 10.0 25.4 @ 5.3 @ 0.2 2.01984-1985 4.2 7.4 5.3 0.0 19.5 32.2 12.4 6.4 1.1 @ 19.51985-1986 @ 2.0 3.6 0.0 14.3 20.0 @ @ 1.6 0.0 @1986-1987 7.4 24.4 @ 0.2 21.9 46.5 @ 1.3 @ 2.4 2.11987-1988 $ # # $ $ $ $ $ $ $ $1988-1989 2.2 @ @ 1.6 23.1 21.1 @ 2.7 0.5 0.5 @1989-1990 0.9 5.4 0.4 1.6 9.6 16.9 @ @ @ @ @1990-1991 3.6 33.6 0.2 1.7 15.2 50.6 0.0 0.3 0.1 0.1 0.01991-1992 1.0 @ @ 3.2 29.2 8.2 0.0 @ 0.5 @ 0.01992-1993 3.7 12.9 @ 2.6 22.7 37.9 0.0 2.1 0.1 0.4 0.01993-1994 2.0 28.4 0.0 0.2 10.1 38.7 0.0 1.2 0.0 0.2 0.01994-1995 1.7 55.0 @ 2.7 24.6 82.1 0.0 3.0 0.0 @ 0.01995-1996 16.9 @ @ 4.7 64.5 @ 0.0 27.7 1.9 @ 0.01996-1997 0.8 24.4 @ 2.6 52.9 79.7 0.0 @ 0.4 0.1 0.0
1997-1998 2.7 5.6 @ @ 27.1 29.0 0.0 1.2 0.9 0.0 0.01998-1999 12.5 0.3 0.0 2.8 25.5 28.6 0.0 2.6 1.0 0.1 0.01999-2000 5.6 # 0.4 $ $ 30.8 0.0 # 1.5 $ 0.02000-2001 @ 35.4 @ @ @ @ 0.0 8.5 @ 1.6 0.02001-2002 @ 10.4 0.0 @ 28.3 34.0 33.7 @ 1.1 0.3 33.72002-2003 @ 8.1 0.0 @ 49.4 54.2 2.7 7.8 0.6 0.5 2.72003-2004 4.9 14.9 0.0 @ 48.1 62.3 3.0 5.3 0.9 0.9 3.02004-2005 1.4 15.3 0.0 0.5 19.7 35.5 1.6 2.7 1.0 0.4 1.62005-2006 1.1 11.5 0.0 0.1 27.1 38.7 1.7 1.4 0.3 0.3 1.7
1976-1977 to 1980-1981 11.8 6.6 5.9 149.4 @ 44.4 @ 0.0 @ 10.6 1.61981-1982 to 1985-1986 5.2 4.9 3.3 @ 17.2 25.4 2.6 2.2 1.3 @ 5.91986-1987 to 1990-1991 @ 21.2 8.4 @ @ @ @ @ 1.9 0.1 @1991-1992 to 1995-1996 5.1 @ @ 2.7 30.2 31.1 0.0 6.7 0.5 0.0 7.21996-1997 to 2000-2001 2.1 31.2 0.0 @ @ 26.1 0.0 3.8 0.5 0.1 4.52001-2002 to 2005-2006 1.2 12.0 0.0 @ 34.5 44.9 8.6 3.2 0.8 0.5 13.0
During 1976-2006 2.1 12.5 2.8 24.3 @ 27.3 0.8 1.7 @ 1.9 3.9Source: Appendix-II c@-numerator negative;$-denominator negative#-Both Numerator& Denominator negative
TABLE IV.6SHARE OF COMPONENTS OF INTERNAL SOURCES TO TOTAL SOURCES IN M & LP DURING 1976-2006
(In terms of Percentages)
Years Paid-Up
Capital
Reserves & Surplus Provisions
CapitalReserve
InvestmentAllowance
Reserve
SinkingFunds Others Total Taxation Dividends
OtherCurrent
Provisions
Non-Current
ProvisionsTotal
1976-1977 2.7 @ 1.4 @ 354.4 @ @ 0.0 10.8 @ @1977-1978 6.6 2.8 0.2 0.1 4.1 7.3 @ 0.0 0.8 @ @1978-1979 9.5 0.7 1.5 0.4 14.7 17.3 1.9 0.0 3.4 @ 4.51979-1980 1.3 0.3 1.0 0.2 7.0 8.4 3.5 0.0 1.8 0.4 5.71980-1981 0.4 0.1 0.3 0.0 7.6 8.0 2.7 0.0 0.9 @ 3.31981-1982 0.8 @ @ @ @ @ 5.0 0.0 @ @ 4.21982-1983 18.0 @ 5.1 @ 26.1 30.8 2.1 0.0 3.0 @ 3.61983-1984 7.5 6.6 0.0 0.0 43.3 50.0 19.0 20.8 @ @ 24.01984-1985 4.2 4.5 0.2 0.0 8.8 13.5 @ @ 0.3 @ 0.01985-1986 7.7 $ $ @ $ @ # # # $ 15.31986-1987 6.1 8.4 3.1 0.0 22.8 34.3 3.4 3.9 3.1 @ 10.41987-1988 11.6 1.7 @ 0.2 12.4 13.0 0.3 0.5 1.0 @ 1.81988-1989 4.0 2.7 0.0 0.2 9.2 12.0 @ 0.3 0.4 0.2 @1989-1990 3.8 8.6 0.0 0.2 0.0 8.8 @ 0.0 0.2 @ @1990-1991 19.0 @ @ 0.8 11.0 10.8 0.0 0.6 0.1 0.0 0.81991-1992 9.0 $ $ 0.1 # @ $ $ # 0.0 0.31992-1993 4.7 9.9 0.0 0.2 8.3 18.4 @ @ 0.1 0.0 @1993-1994 @ 6.0 @ @ 91.4 96.2 3.4 @ @ @ 0.01994-1995 4.2 15.4 0.0 0.2 22.9 38.6 @ 1.4 0.1 0.0 1.21995-1996 3.3 47.9 @ 0.2 7.0 55.1 0.0 0.6 @ @ 0.61996-1997 199.4 107.1 @ 4.6 96.9 205.8 16.4 12.1 2.9 0.3 31.8
1997-1998 22.5 @ 0.0 1.8 @ @ @ @ 0.1 0.1 @1998-1999 31.2 @ 0.0 2.0 16.9 17.1 0.0 0.2 0.6 0.1 0.81999-2000 26.8 56.1 @ 2.4 12.1 66.0 0.0 @ 0.6 0.5 0.02000-2001 18.0 14.9 0.2 2.0 13.7 25.1 0.0 1.1 0.7 0.3 @2001-2002 11.3 18.0 @ @ @ @ 19.0 1.2 5.1 0.4 25.62002-2003 @ 13.8 0.2 @ 17.4 22.2 38.7 3.6 @ 5.6 46.82003-2004 11.3 13.8 @ @ 24.2 36.9 2.5 2.1 3.3 @ 7.82004-2005 3.9 9.1 @ $ 35.7 44.6 3.9 2.0 3.0 1.2 10.12005-2006 3.0 19.0 0.0 @ 31.2 49.7 2.5 2.2 0.5 @ 4.7
1976-1977 to 1980-1981 3.2 1.2 28.0 @ 7.2 13.2 1.3 0.0 2.9 @ 0.91981-1982 to 1985-1986 3.8 14.5 2.2 0.1 8.2 24.9 0.6 0.0 1.2 0.0 1.91986-1987 to 1990-1991 6.7 7.1 0.2 1.6 9.4 18.1 @ 2.2 @ 0.3 0.51991-1992 to 1995-1996 6.4 24.6 @ 2.6 18.7 45.4 0.0 1.7 0.2 0.1 1.91996-1997 to 2000-2001 @ 8.0 @ 1.9 12.2 21.2 0.0 2.3 1.8 1.1 5.22001-2002 to 2005-2006 0.6 14.7 0.0 @ 18.2 30.4 13.3 2.2 2.1 1.3 19.0
During 1976-2006 @ 25.5 11.7 @ 12.3 25.5 2.3 1.4 1.3 @ 4.9Source: Appendix-II c@-numerator negative;$-denominator negative#-Both Numerator& Denominator negative
Reasons for the fall of Internal Sources:In the following pages an attempt has been made to identify various
reasons for the fall of internal sources in both sectors i.e. Pharmaceutical and
Medium & Public Large limited Companies during the study period in India.
Since major portion of the internal sources constitute the retained earnings, the
depreciation provision and the bonus shares, we have limited our discussion
only to some components.
Retained Earnings:Retained Earnings are often referred to as earn earned surplus or
reinvested income.38The term undivided profits may be used to explain the
meaning of retained earnings. Though the amount of retained earnings or
undivided profits may be legally available fro dividend declaration it merely
represents the amount already ploughed back in to the business to effect an
overall increased in its net assets. The cost of retained earnings is an
opportunity cost, i.e. the benefits to the share holders forego by leaving the
funds in the business.39 The significance of Companies savings can be
examined in two ways, viz.,
i. The Retained earnings in relation to Profits Before Tax: which gives an
idea of the amount of profits that have been retained and
ii. The percentage of Retained earnings to Profit after Tax: This will give
an idea of the rate of savings and other dividend ratios.
Retained Profits as Percentage of Profits Before Tax (PBT):One of the salient features of the relationship between profits retained
and profits before tax (PBT) in pharmaceutical industry is that it displays
smooth trend while comparing to public limited companies. Wide fluctuations
characterize this relationship as depicted in Table 4.7. given below:
Pharmaceutical Industry:The Retained profits as percentage of PBT, which was on average 17.1
percent during the first five year period increased to 22.5 percent during the
second five years period i.e. 1986-1991. it increased to 37.5 percent during
1991-1996 and further it growth to 55.1%. But during the years 1996-
2001tehre was declining growth in retained earnings as percentage of PBT and
immediately it grown up to 49.6% during the years 2001-2006. Thus out of 30
years, the pharmaceutical industry retained profits to the extent of 38.3 percent
of PBT.
Medium & Large Public limited Companies:In case of Medium and Large Public limited Companies the retained
earnings as percentage of PBT increased from 23.8% during 1976-1981 to 30.4
percent in the years 1981-1986 where as in the period 1986-1991 the profits
percentage reduced to 25.4 percent and in the years 1991-1996 the percentage
increased to 45.9%. In the period 1996-2001 the share of retained earnings
before PBT was reduced to 44%-37.3% in the years 2001-2006. On the whole,
the retained earnings as percentage of PBT are 34.5% during the decade.
Retained Profits as Percentage of Profits After Tax (PAT):Profits retained as percentage of PAT can also be studied from table
IV.8.
Pharmaceutical Industry:As seen from the table the ratio fluctuated from year to year many years.
The Pharmaceutical industry on the whole was maintaining the profits during
the 30 years of the study retained 58.4 percent of profits and paid the remaining
41.6 percent as dividends to the share holders. As that the industry has not
retained profits more than 50 percent during the years 1976-1981, 1981-1986.
The industry has started retaining more than 50 percent of its profits after tax
only after 1991’s to 2000’s.
Medium and Large Public Limited Companies:The Retained earnings after PAT is increasing from 51.6 percent during
1976-1981 to 55.7 percent in the year 1981-1986 and in the years 1986-1991
the percentage reduced to 40.7% where as in the decade 1991-1996 the share of
retained earnings were increased to 61.4 percent to 64.5 percent during 1996-
2001; in the last years 2001-2006 is 49 percent. On the whole period of the
study it is 53.8 percent.
TABLE IV.7
PROFITS RETAINED AS PERCENTAGE OF P.B.T AND PAT INPHARMACEUTICALS AND M&LP SECTOR DURING 1975-2005
YearsProfits Retained as % of
PBTProfits Retained as % of
PATPharmaceutical M&LP Pharmaceutical M&LP
1976-1977 15.2 17.6 43.3 41.01977-1978 18.0 25.4 46.8 51.91978-1979 16.0 25.3 45.0 51.91979-1980 20.0 33.2 51.0 62.21980-1981 16.2 34.7 41.4 61.81981-1982 27.8 35.2 54.2 61.41982-1983 23.9 23.4 51.9 44.51983-1984 14.3 26.2 35.0 48.41984-1985 20.7 32.3 44.0 54.51985-1986 25.7 33.7 49.1 56.01986-1987 23.4 18.2 41.5 32.81987-1988 32.3 7.8 52.3 14.81988-1989 41.6 29.1 61.5 45.31989-1990 45.8 38.3 66.9 58.41990-1991 44.2 44.8 66.9 64.61991-1992 49.3 39.5 72.2 62.21992-1993 53.8 35.9 75.3 53.91993-1994 52.8 51.7 73.9 68.01994-1995 64.9 57.7 80.6 71.91995-1996 54.4 56.5 69.6 72.31996-1997 53.3 47.5 72.7 65.11997-1998 55.5 43.9 69.8 60.91998-1999 42.6 35.9 56.0 52.41999-2000 43.2 36.3 59.8 53.22000-2001 46.7 31.2 61.7 45.22001-2002 52.3 18.9 71.0 29.32002-2003 48.7 39.6 64.4 56.92003-2004 50.9 43.6 67.4 60.42004-2005 45.3 53.3 60.4 71.72005-2006 50.6 55.0 65.4 73.7
1976-1977 to 1980-1981 17.1 23.8 45.5 53.81981-1982 to 1985-1986 22.5 30.4 46.8 53.01986-1987 to 1990-1991 37.5 25.4 57.8 77.51991-1992 to 1995-1996 55.1 45.9 74.3 196.31996-1997 to 2000-2001 48.3 44.0 64.0 121.12001-2002 to 2005-2006 49.6 37.3 65.7 58.4
During 1976-2006 38.3 34.5 58.4 93.4Source: Appendix-II c
On the whole, the analysis of retained profits as percentage of PBT and
PAT shows that the industry has retained more than 50%. The profits retains as
percentage of PBT of Pharmaceutical industry was 38.3% while comparing
with Public limited companies (34.5) percent during 1976-2006. Like wise the
profits retained as percentage of PAT was 58.1% as against 53.8 percent of the
average of Public limited companies of the same period (1976-2006).
Reasons for Inadequate Retained Earnings:It is obvious from the above that both sectors failed to retain huge profits
and thus force to depend more on external sources. Now let us observe why the
both sectors failed to retain more of its profits and strengthen the case. The
reasons for inadequate retained earnings of both sectors in India is mainly due
to
a) Low corporate profits
b) High corporate taxation
c) High dividend distribution
a) Low Corporate Profits:
The idea that ‘profit is good’ is unacceptable to many people. The idea
that higher profits are even better is still un path able. What the critics of profit
are erroneously perceived is that business men aim not developing economic
activities but on profiteering and fleecing the consumers. Probably, their
intention tells them that one man ‘a’ profit is another man ‘a’ loss and as such
the obvious conclusion is that profit means exploitations. But experience is s
better guide than instinct. Experience teaches that in a competitive economy
business profit must accrue to those ventures that best serve the general
economic welfare. The targets of private business are private profits. Profit is a
signal for the allocation of resources and a yard stick for judging managerial
efficiency. Profit is the dominant goal in the business and profit making should
be the main objective in terms of which the general effectiveness of an
organization is measured. Earnings are still the final measure of corporate
performance and the profit test-whether conceived as suitable, just, reasonable
or maximum is constantly used to gauge the success of its activities.
Key Profitability Ratios for the period 1976-1977 to 2005-2006 are
presented in Table-3.1 for the both Pharmaceuticals and Public limited sectors.
Pharmaceutical Industry:
It can be observed from the table that the gross profit increased from Rs
5521 Lakhs during 1976-1977 to Rs 553181 Lakhs during 2005-2006. On the other
hand the PAT is also increased from Rs 1609 Lakhs to Rs 41633 Lakhs during
the same periods. But these absolute figures can not be taken into account
because the sample number of companies varied from time to time and hence
the various percentages are taken into account. It can also be observed that
gross profit as percentage of sales in quinquennial terms declined from 13.4%
during 1976-1981 to 10% during the year 1982-1986 and further the gross
profit reduced to 8.9% during 1987-1991. In the years 1992-1996 the profit
raised to 11.6%; and in the years 1997- 2001 it rose to 14.7%, where as in the
last five years i.e. 2002-2006 the profit recorded to 16.5%. During the Study
period 1976-2006 the whole Gross profit Ratio is 12.5% (Chart-3.1)
On the other hand, the PAT as percentage of Net worth in terms of
quinquennial averages during the years 1976-1981 it was 15.3% decreased to
11.8% in the years 1982-1986 and in the years 1987-1991 the return raised to
13.3%, and immediately in the years 1992-1996 the percentage increased to
16.4%, where as in the years 1997-2001 the return decreased to 14.7% and
immediately in the year 2002-2006 the percentage increased to 19.8. On the
whole, period of the study the return on stock holder’s equity was 15.2%.
(Chart-3.2)
Medium and Large Public Limited Companies:
The Gross Profit as percentage of sales of all other industries in India is
also presented in the table 3.1 for comparison purposes. In the terms of
quinquennial averages the gross profit during the year’s 1976-1981 was 9.6%
decreased to 8.7% during the decade of 1982-1986 and the profit increased to
9.6% in the years of 1987-1991; where as in the years 1992-1996 the profit
raised to 12.5% .On the whole, period of the study i.e. 1976-2006 the profit on
average was around 10.4% as against 12.4% in the case of Pharmaceutical
industry.
In terms of quinquennial averages during the years 1976-1981 it was
12.6% decreased to 10.1% in the years 1982-1986 and in the years 1987-1991
return reduced to 8.8%, but immediately in the years 1992-1996 the percentage
increased to 12.3% where as in the years 1997-2001 the return decreased to
7.2% and immediately in the year 2002-2006 the percentage increased to 11.3.
On the whole, period of the study the return on stock holder’s equity was
10.4%. (Chart-3.2)
Thus it can be concluded that the pharmaceuticals fortunes from the
profitability point of view have been varying from time to time and one can
undoubtedly conclude that the pharmaceuticals industry’s profitability has
fluctuations during the decade. But comparing to the other industries we can
conclude that Pharmaceutical industry’s profit is high and is in profitable
situation.
Corporate Taxation:The share of taxation in gross profits is determined by a combination of
(i) the rates of corporate taxation and (ii) the size of profit before tax (i.e., gross
profits minus interest). In India, statutory rates of corporation tax are quite
different from the effective rates of corporation tax, the former being naturally
higher than latter. This is so because of the effect of several incentives which
reduced the tax base40.
Pharmaceutical Industry:The table 3.8 of Chapter III shows the effective rates of corporate tax i.e.
tax as percentage of gross profit and tax provision as percentage of PBT. The
keen observation of the table presents that the tax as percentage of gross profits
in terms of quinquennial averages the percentage declined from 52.2% during
1976-1981 to 36.4% during 1982-1986, where as in the years 1987-1991 the
percentage fallen to 22.9% - 18% approximately up to the years 1992-2001 and
in the year’s of 2000’s it raised to 21.5%.
The analysis of tax provision as percentage of PBT, which gives the
effective rate of corporate tax, reveals that the tax provision as percentage of
PBT which was at 62.5% during 1976-1981 has decreased to 52.5 percent
during 1982-1986, in the years of 1987-1991 it got down to 35.9 percent and
where as in the decade 1992-1996 the percent reduced to 26-25%
approximately during the years 1997-2006. On the whole, period of the study
the percentage of tax provision to PBT is 37.7% and towards gross profit is
28.2%.
Medium & Large Public Limited Companies:
The tax provision as percentage of gross profit was 32.9% during the
years 1976-1981, where it reduced to 22% in the years 1982-1986 and in the
years of 1987-1991 the percentage came down to 16.7%-15.4% during 1992-
1996; during 1997-2001 decade the percentage got down to 14.8% and in the
last decade 2002-2006 it has been increased to 19.7%.
The tax as percentage of PBT during the year 1976-1981 shows 50%
reduced to 43.3% during 1982-1986, which maintains the continuity of
declining towards 38.6% during 1987-1991; during 1992-1996 the percentage
reduced to 27.1% and in the years 1997-2006 it was revolving between 29.9-
29.0 percent. On the whole, period of the study we can observe the provision
as percentage of gross profit is 20.8 and PBT is 37.4 during the study period.
Dividend Ratio in Pharmaceutical Industry:Usually the essential requisite for good accumulation of corporate
savings is a conservative dividend policy. But there is a wide spread belief that
the pharmaceutical industry has a propensity to pay ‘bumper dividends’ in
times of prosperity and to maintain the same in times of adversity.41 To
ascertain the fact whether the industry is liberal or not in respect of dividend
distribution, one is required to verify some of the most important ratios such as:
i. Total Dividends distributed as percentage of PAT
ii. Retained Earnings as percentage of PAT
It can be observed from the table 3.9 that the Dividends as percentage of
profits after tax have been reducing during the study period. The percentage
during the year 1976-1981 is 54.5% reduced to 53.2 percent in the years 1982-
1986 where as in the years of 1987-1991 the percentage got down to 42.2%-
25.7% during 1992-1996; in the years of 1997-2001 the percentage increased to
36 where as immediately in the years 2002-2006 the percentage got down
34.8%. As the industry distributed low dividends and as there was high raise in
the retained earnings of the industry during the study period.
Dividend Ratio in Public limited Companies:We can analyze the situation from the table 3.9 given above that the
public limited company’s profits after tax regarding dividend percentage was
46.2% during 1976-1981 which increases to 47% in the years 1982-1986;
during 1986-1991 rose to 83.7%, during 1992-1996 it inclined to 94.4% and
immediately in the years 1997-2001 the percentage of dividends got down to
90%-41.9% during 2002-2006. On the whole, during the study period the
distribution of dividends as percentage of PAT was 67.3% and retained
earnings percentage was 93.4 during the decade.
Role of Depreciation:Depreciation is the provision made in the books of an enterprise to allow
for the loss in the value of fixed assets through wear and tear are the result of
use, obsolescence occurs when there is a premature loss of value owing to
technological progress, inventions, introduction of new methods or designs or
changes in customer preference. This loss in value is accounted for by making
a provision for depreciation.42 In other words, a certain amount of income is set
aside each year for replacing worn out or out of date capital. An allowance for
depreciation on a company’s assets is made before the calculation of profit on
the ground that the consumption of capital assets is one of the costs of earning
the revenue of the business. There exist two contradictory theories among both
the economists and accountants when it comes to the actual determination of
this cost. The accountant treats depreciation on the basis of the historical cost
of the asset and emphasizes the importance of maintaining the original money
value intact by providing appropriate depreciation allowances each year.43 For
economists it is the real capital and its money value that must be maintained
intact and that sufficient depreciation provisions must be made to cover the
replacement of real capital.44In a period of stable prices, two concepts would
result in making the same depreciation provisions. But in a period of inflation,
or deflation, the divergence between these two becomes quite significant.
Conventionally the practice in the accounting profession has been to
calculate depreciation on a historical cost basis and to write off the original
money value of the asset (minus its resale price) over its total life.45The various
methods that are employed in calculating depreciation are : The Straight line
method, The reducing balance method, The Sinking fund method, and The
Annuity method
Depreciation Provision in Pharmaceuticals and M&LP Industries:
Pharmaceutical Industry:
The depreciation provision as percentage of total sources, internal
sources can be observed from the table 4.8. It can be observed from the table
that the average of depreciation to total sources marginally declined from 24.5
percent during 1976-1981 to 20.5 percent during 1981-1986; negative stage
during 1986-1991 and further it raised to 7.5 percent. Again in the decade
1991-1996 the depreciation reduced to 4 percent and immediately inclined to
10.7 percent. It may also be observed that the average percentage of
depreciation to the total internal sources reduced from 70.1 percent in the
period 1976-1981 to 53.5 percent during 1981-1986 and immediately it
increased to 91.3 percent in the decade of 1986-1991. But later in the years of
1991-1996 the depreciation reduced to 11.3 percent and immediately in the
period 1996-2001 it rose to 20.9; during 2002-2006 it reduced to 18.2 percent.
On the other hand, the depreciation as percentage of gross fixed assets
reduced from 45.7 percent to 39.6 percent during the years 1976-1981 to 1981-
1986, where as in the years 1986-1991 the percentage increased to 42.7% and
immediately reduced to 17.9% in the period 1991-1996 to 13.8% in the years
1996-2001; 2001-2002 the percent reduced to 36.8 percent. On the whole, for
the entire span of 30 years of study the average percentage of depreciation to
total sources, total internal sources and gross fixed assets were 2.7 percent, 44.2
percent, 32.7 percent respectively. As there were fluctuations in depreciation
percentage of total sources, internal sources of funds during 1970’s, 1980’s,
1990’s, and the industry was unable to replace their assets due to inadequate
depreciation and consequently the investment in fixed assets fallen up to
1990’s. Where as the position of fixed assets were grown up in the last decade
of the study period.
Medium & Large Public Limited Companies:
From the table 4.8 we can observe the percentage of depreciation to total
sources was 42.1 percent during 1976-1981 got down to 22.2% in the period
1981-1986 where as in the decade 1986-1991 the depreciation increased to
29.7% where as immediately in the next period i.e. 1991-1996 it reduces to
20.2 percent but in the years 1996-2001 there was inclining stage to 50.8
percent; during 2001-2006 it got down to 50.8 percent. The percentage of
depreciation to internal sources was negative during 1976-1981 where as it
increases to 75.2 percent in the period 1981-1986 which continuously inclined
to 128.1 percent during 1986-1991, which decreases to 38.1 percent in the
years 1991-1996. But during 1996-2001 it raised to 97.3 and immediately it
decreased to 66% in the years 2002-2006.The percentage of gross fixed assets
of depreciation is 4.8 during 1976-1981 increases to 5.3 percent during 1981-
1986 which increases to 7.2 in the years 1986-1991 where as the percentage
reduced to 4% in the years 1991-2006. On the whole, the percentage of total
sources, internal sources and fixed assets of the public limited companies is 36
percent, 34 percent and 5 percent during the decade i.e. 1976-2006.
TABLE IV.8DEPRECIATION AND FIXED ASSETS FORMATION IN PHARMACEUTICALS AND M&LP
DURING 1976-2006 (Rs in Lakhs)
Years
Depreciation (RsinLakhs)
% of Depreciationto Total Sources
%of Depreciation toTotal Internal
Sources
% ofDepreciation to
Fixed AssetsPharmace
uticals M&LP Pharmaceuticals M&LP Pharmace
uticals M&LP Pharmaceuticals
M&LP
1976-1977 -308 47003 # 76.5 # @ # 4.81977-1978 719 51278 32.0 45.4 63.5 286.5 69.1 5.01978-1979 857 51029 26.6 41.7 42.9 171.1 40.3 5.11979-1980 845 57992 14.6 25.1 52.5 91.3 37.6 4.61980-1981 1015 73217 18.6 21.8 138.7 92.2 34.7 4.61981-1982 3826 81844 30.8 14.1 52.9 62.1 47.0 4.61982-1983 1832 139463 17.3 19.4 55.7 97.1 41.4 4.31983-1984 4368 164796 13.2 25.8 34.5 86.4 25.7 6.01984-1985 3136 191212 29.6 32.3 47.6 84.8 54.5 6.01985-1986 3742 196366 20.1 19.5 86.8 45.5 43.0 5.51986-1987 2795 207450 22.4 32.1 43.0 205.7 33.3 5.01987-1988 4800 264850 $ 40.1 97.8 146.4 94.6 4.71988-1989 5999 296220 20.0 25.6 105.0 122.5 56.8 15.71989-1990 6617 345760 10.4 21.2 52.6 89.5 29.3 5.21990-1991 5542 379200 11.2 29.6 18.8 76.6 14.8 5.41991-1992 3013 448200 6.9 16.4 182.2 57.1 18.0 4.81992-1993 9593 523600 16.2 17.9 34.2 41.7 28.7 4.71993-1994 8963 459200 6.3 42.9 13.6 42.8 33.7 4.91994-1995 13779 536400 7.5 10.4 8.4 20.6 18.3 3.61995-1996 -2240 664000 @ 13.2 @ 28.5 @ 3.5
1996-1997 13568 938500 14.4 8.3 18.1 21.5 25.5 3.21997-1998 9308 1064400 6.1 23.9 15.0 79.9 11.2 3.81998-1999 26092 1294100 28.1 37.9 61.7 114.3 40.7 4.01999-2000 23317 1488500 $ 55.8 $ 97.4 $ 4.52000-2001 -6059 1671100 @ 128.4 67.4 173.2 $ 5.02001-2002 28739 1826500 26.9 47.0 38.1 216.4 85.5 5.02002-2003 23139 1828400 18.8 157.8 28.9 25.9 72.3 5.42003-2004 100134 1932700 15.1 12.2 19.4 36.5 52.6 4.32004-2005 254454 2269700 12.7 21.6 27.5 23.6 34.7 4.12005-2006 65807 2896100 6.8 15.4 15.2 27.6 24.3 4.1
1976-1977 to 1980-1981 1452 49553 24.5 42.1 70.1 @ 45.7 4.81981-1982 to 1985-1986 3175 130106 20.5 22.2 53.5 75.2 39.6 5.31986-1987 to 1990-1991 5194 262129 @ 29.7 91.3 128.1 42.7 7.21991-1992 to 1995-1996 8733 469320 7.5 20.2 11.3 38.1 17.9 4.31996-1997 to 2000-2001 16279 1089900 4.1 50.8 20.9 97.3 13.8 4.12001-2002 to 2005-2006 88707 1905680 10.7 50.8 18.2 66.0 36.8 4.6
During 1976-2006 20590 651115 2.7 36.0 44.2 34.8 32.7 5.0Source: Appendix-II c;@-numerator is negative;
$-Denominator negative;$-denominator negative; #-both numerator & denominator negative
ROLE OF EXTERNAL SOURCES IN FINANCING THE
PHARMACEUTICAL & PUBLIC LIMITED SECTOR:
COMPONENTS OF EXTERNAL SOURCES:The Principal components of external sources of funds to total sources
of funds of Pharmaceuticals and Public limited companies have been presented
in Table IV.9.
Pharmaceutical Industry:Fresh Issue Capital: It can be observed from the table that the new issue
capital market has never been a major source of finance for pharmaceutical
industry because of inherent characteristics of the Indian economy. For the last
30 year period (1976-2006) the pharmaceutical industry is incapable of raising
funds from the capital market which can be clearly can be observed from the
fact that the fresh issue of capital as percentage of total sources increased from
negative stage during 1976-1981 to 6.1 percent in the years 1981-1986, where
the capital declines to negative in the years 1986-1991 and during the years
1991-2001 it continuously increased to 6.3%; during 2002-2006 it reduced to
1.8%. During the last five years of study there was declining stage from high
percent 27 to 1.2 percent. One interesting observation is that the capital raised
from the capital market through fresh issue was below 10 percent of the total
sources during all the years of the study except in the year 2000-2001. For the
whole, period of the study (1976-2006) the contribution of fresh issue capital of
the total sources is 2.2 of the decade.
Borrowings: The contribution of borrowings consists of borrowings from
banks, term lending institutions and others, accounted for 23.3 percent during
1976-1981 to 29.7 percent during 1981-1986 and further it increased to a sharp
jump to 98.7 percent during 1986-1991. Later the borrowings decreased
substantially to 40.5 percent during 1991-1996; during 1996-2001 it increased
to 67 percent and immediately in the decade 2001-2006 the percentage reduced
to 22.9 percent. For the whole period of the study the share of borrowings to
total sources is 47 percent.
Trade Dues and Other Current Liabilities:
Coming to the Trade dues and other current liabilities, which is the
second major external source of finance after borrowings; its contribution
increased phenomenally during seventies over sixties and kept up its status in
the same way till early eighties. It was only in case of trade dues that there was
so much faster growth that its contribution was more than doubled. It can also
be seen from the table 5.1 that the trade dues and other current liabilities
substantially a sharp jump from 20.2% during 1976-1981 to 31% in the years
of 1981-1991 and from there the percent declined continuously and reached to
negative during 1991-2001 and in the years of 2002-2006 the contribution
shows 16.2%. On the whole, trade dues contributed on average around 17
percent of the total funds of pharmaceutical industry in India. The
miscellaneous contribution of total funds was so marginal (0.1 percent) during
the period of the study.
Medium & Large Public Limited Companies:It can be observed from the table 4.9 that public limited companies in
general are able to secure funds in the form of equity from the capital market
though at a declining rate.
Fresh issues of capital : Fresh issues of capital have continuously reduced
from 7.6 percent from 1976-1996 to 1 percent and where as in the years 1996-
2001 the share of capital increased to 33.3% and in the years of 2001-2006 it
reduced to 5 percent. On the whole period of the study the issue of capital is
8.5 percent.
Borrowings: Borrowings accounted for 40.5% in the year 1976-1986 has been
declined to 49.5% in years of 1986-1991, where as in the years 1991-1996 the
borrowings dependence was reduced to 31% and in the years of 1996-2001 the
share was increased to 36.8 percent; during 2002-2006 it reduced to 12.4%. On
the whole period of the study the share of borrowings of total funds is 35.2%.
TABLE - IV.9COMPONENTS OF THE EXTERNAL SOURCES OF FUNDS IN PHARMACEUTICALS AND M&LP
DURING 1976-2006 (In terms of Percentages)
YearsPaid-Up Capital Borrowings Trade Dues & C.L Miscellaneous
Non- C.L Total
Pharmaceutical M&LP Pharmace
uticalM&L
PPharmace
utical M&LP Pharmaceutical
M&LP
Pharmaceutical M&LP
1976-1977 $ 14.0 $ 68.8 $ 21.3 # 0.6 -26.0 104.71977-1978 1.6 10.1 19.2 35.1 30.6 38.9 @ 0.0 49.6 84.21978-1979 0.7 6.3 20.4 29.8 18.7 39.8 @ @ 38.0 75.61979-1980 1.0 3.9 32.9 34.0 38.7 34.5 0.4 0.1 72.1 72.51980-1981 1.5 3.9 57.6 34.8 29.2 37.5 @ 0.1 86.6 76.41981-1982 7.8 1.9 20.8 43.8 21.0 31.5 0.1 0.2 41.8 77.41982-1983 2.8 2.8 39.6 44.8 29.4 32.4 @ 0.0 69.0 80.01983-1984 9.8 1.7 33.8 44.7 28.1 23.4 @ 0.3 61.9 70.11984-1985 6.5 1.4 9.4 34.2 26.9 26.1 1.3 0.2 37.7 61.91985-1986 3.4 1.0 44.7 36.7 33.0 19.7 @ @ 76.9 57.21986-1987 4.6 3.9 51.1 50.2 @ 30.4 0 0.0 47.9 84.41987-1988 $ 3.5 # 57.1 # 12.1 # @ 412.1 72.61988-1989 0.3 1.4 34.8 46.3 46.1 31.4 0 0.1 80.9 79.11989-1990 4.4 2.0 44.7 49.0 35.6 25.4 @ 0.0 80.3 76.41990-1991 5.0 @ 33.6 44.7 6.6 16.9 0 @ 40.2 61.41991-1992 @ 1.3 67.1 44.1 29.1 26.0 0 @ 96.2 71.21992-1993 3.0 1.0 39.0 41.1 13.8 15.0 @ 0.0 52.7 57.11993-1994 4.0 @ 8.0 7.7 45.9 @ 0 21.4 53.9 @1994-1995 3.3 1.6 32.3 30.2 @ 17.9 @ 0.0 10.6 49.71995-1996 4.1 1.6 56.3 32.0 4.5 19.9 0 0.0 60.8 53.61996-1997 2.6 0.4 @ 44.4 29.6 16.8 0 0.0 20.4 61.5
1997-1998 6.3 1.9 45.8 53.3 13.9 14.8 0 0.0 59.8 70.11998-1999 0.7 @ 32.6 47.0 21.8 20.6 @ 0.0 54.4 66.91999-2000 $ 1.1 # 28.1 $ 13.6 0 0.0 58.5 42.82000-2001 27.7 164.0 151.4 11.3 @ 61.9 0 0.0 112.4 237.22001-2002 3.5 11.2 12.4 33.0 17.0 31.7 @ 0.0 29.4 75.82002-2003 0.1 1.0 14.9 @ 20.0 77.9 0 0.1 34.9 33.32003-2004 0.8 8.9 6.2 27.1 15.7 16.8 0 0.0 21.9 52.92004-2005 3.4 2.6 33.9 21.1 20.0 20.3 0 0.0 53.9 43.92005-2006 1.2 1.5 47.0 26.6 8.4 16.0 0 0.0 55.4 44.1
1976-1977 to 1980-1981 @ 8.1 13.1 42.8 15.2 32.8 1.7 0.1 29.9 83.81981-1982 to 1985-1986 5.7 2.3 32.2 40.4 26.9 30.2 0.2 0.2 59.4 73.11986-1987 to 1990-1991 @ 2.3 102.4 47.9 37.3 23.8 @ 0.0 139.6 73.91991-1992 to 1995-1996 2.0 0.7 36.0 33.6 14.7 13.6 0 4.2 50.7 47.81996-1997 to 2000-2001 1.6 0.8 48.0 41.0 2.8 17.1 0 0.0 50.8 59.02001-2002 to 2005-2006 7.1 37.5 43.8 9.4 6.7 41.7 0 0.0 50.5 88.6
During 1976-2006 2.1 8.6 45.9 35.8 17.3 26.5 0.3 0.8 63.5 71.1Source: Appendix-II c;@-numerator negative;$- Denominator negative;#- Both numerator & Denominator negative
Trade dues and other current liabilities: Trade dues and other current
liabilities have continuously reduced from 34.4-14.2 percent during 1976-1981
to 1991-1996 and in the years of 1996-2001 it increased to 25.5% to 32.6% in
the years 2002-2006. On the whole period of the study the trade dues
contribution is 26.1 percent. The non current liabilities and miscellaneous was
so marginal (0.0) percent during the study period.
Let us now hold the discussion on the role of following major
components of the external sources of finance viz.,
1. Borrowings
2. Share Capital
3. Trade dues and other current liabilities.
Role of Borrowings:It has been mentioned that borrowings have been playing an important
role in financing the companies. Borrowings may be classified into short-term
borrowings and long-term borrowings. In contrast with equity shares which are
both external and internal, all debt finance is an exclusively external source. It
broadly represents the financial claims of outsiders over business. From the
stand point of the supplier’s identity, it could be classified as borrowings and
trade credit. A distinction could also be made between different components of
debt on the basis of the maturity period of outstanding claims. From this angle
debt could be short-term (mostly comprising bank loans, other than term loans
and trade credit) and long term (consisting of debentures, term loans, mortgage
loans, lease finance and loans by special financial institutions). First let us
discuss the role of borrowings in financing the Pharmaceuticals and Public
limited companies followed by the trade credit can be observed from the given
tables IV.10.
Pharmaceutical Industry:The borrowings can be observed from the table 4.10 that the total
borrowings of total sources funds 40.5% in the year 1976-1986 has been
declined to 49.5% in years of 1986-1991, where as in the years 1991-1996 the
TABLE- IV.10.SHARE OF BORROWINGS TO TOTAL SOURCES AND TOTAL EXTERNAL SOURCES IN PHARMACEUTICALS AND
M&LP DURING 1976-2006 (In terms of Percentages & Rs in Lakhs)
Years Total Borrowings Total External Sources %of Borrowings to TotalSources
%of Borrowings toExternal Sources
Pharmaceutical M &LP Pharmaceutical M &LP Pharmaceutical M &LP Pharmaceutical M &LP1976-1977 96 36422 279 55412 $ 68.8 $ 65.71977-1978 431 36326 1151 87131 19.2 35.1 38.7 41.71978-1979 657 36619 1244 92981 20.4 29.8 53.7 39.41979-1980 1901 69279 4215 147636 32.9 34.0 45.7 46.91980-1981 3137 92535 4796 203185 57.6 34.8 66.5 45.51981-1982 2579 228092 6162 403087 20.8 43.8 49.7 56.61982-1983 4203 188962 7620 337533 39.6 44.8 57.4 56.01983-1984 11235 241383 23793 378408 33.8 44.7 54.7 63.81984-1985 999 174212 4677 315491 9.4 34.2 25.0 55.21985-1986 8340 360610 14978 562338 44.7 36.7 58.1 64.11986-1987 6367 307428 4717 516799 51.1 50.2 109.6 59.51987-1988 -5301 295640 -6178 375711 # 57.1 # 78.71988-1989 10405 479230 24303 819640 34.8 46.3 42.8 58.51989-1990 28530 685200 54067 1068040 44.7 49.0 52.8 64.21990-1991 16567 522220 22277 717210 33.6 44.7 74.4 72.81991-1992 29429 1017600 39923 1644900 67.1 44.1 73.7 61.91992-1993 23147 1030900 33088 1433000 39.0 41.1 70.0 71.91993-1994 11383 94500 82658 -4200 8.0 7.7 13.8 @1994-1995 59467 1334600 24661 2198600 32.3 30.2 237.1 60.71995-1996 17883 1296900 20591 2169300 56.3 32.0 86.8 59.81996-1997 -8691 3557800 21651 4932500 @ 44.4 @ 72.11997-1998 70479 2092700 101702 2750700 45.8 53.3 69.3 76.1
1998-1999 30216 1321900 51149 1879000 32.6 47.0 59.1 70.41999-2000 -82663 651600 -37878 991900 # 28.1 # 65.72000-2001 48156 130800 103673 2749900 151.4 11.3 108.3 4.82001-2002 -1266 1173300 35107 2698800 12.4 33.0 37.6 43.52002-2003 68959 -528400 43159 385000 14.9 @ 42.6 $2003-2004 83369 4053300 150528 7900300 6.2 27.1 27.4 51.32004-2005 395395 1884900 1146805 3927900 33.9 21.1 59.2 48.02005-2006 249316 3911700 549348 6493600 47.0 26.6 83.2 60.2
1976-1977 to 1980-1981 1244 2196 2278 5962 23.3 40.5 46.5 47.91981-1982 to 1985-1986 5471 950 10281 2027 29.7 40.8 50.7 59.11986-1987 to 1990-1991 11313 15282 20086 25678 98.7 49.5 69.8 66.71991-1992 to 1995-1996 28262 @ 40184 29201 40.5 31.0 93.8 @1996-1997 to 2000-2001 24320 12853 48060 @ 67.0 36.8 78.7 57.82001-2002 to 2005-2006 241835 2098920 384989 3841940 22.9 12.4 55.0 13.2
During 1976-2006 52074 355033 84313 647672 47.0 35.2 65.7 @Source Appendix-IIc;@-numerator negative;$-Denominator negative;#-Both numerator & Denominator
borrowings dependence was reduced to 31% and in the years of 1996-2001 the
share was increased to 36.8 percent; during 2002-2006 it reduced to 12.4%.On
the other hand, borrowings a percentage of external sources contributed around
46.5% in the years 1976-1981 which increased to 50.7 percent in the decade
1981-1986 and further to 69.8 percent during 1986-1991. In the period 1991-
1996 the share of borrowings is 93.8% which reduced to 78.7 percent which
immediately decreased to 55 percent. On the whole average the share of
borrowings to external sources is 65.7 percent. Thus it can be concluded that
borrowings played an important role in financing the pharmaceutical industry
in India particularly during the period 1991-1996.
Medium & Large Public Limited Companies:Borrowings accounted for 40.5% in the year 1976-1986 has been
declined to 49.5% in years of 1986-1991, where as in the years 1991-1996 the
borrowings dependence was reduced to 31% and in the years of 1996-2001 the
share was increased to 36.8 percent; during 2002-2006 it reduced to 12.4% .
The share of external sources is 47.9% during 1976-1981 where it increased to
59.1% in the year 1981-1986 to 66.7% in the period 1986-1991; during 1991-
1996 the share of contribution got down to negative stage and further it
increased to 57.8 percent in the period 1996-2001 and immediately the share of
contribution decreased to 13.2 percent during 2001-2006. On the whole the
contribution is negative during the study period. Thus we can conclude that the
industry doesn’t depend upon the borrowings.
Let us now find out the reasons for the fluctuations in the borrowings by
examining the different means of the total borrowings.
Let us observe the reasons for the fluctuations in the total borrowings by
studying the different sources of the total borrowings.
a) Borrowings from Commercial Banks:In the gamut of financial institutions in our country, the role of
commercial banks is significant in as much as, dimensionally, they account for
over four-fifths of the total credit extended by all the financial institutions.
Indian commercial banks following the British Banking System confined
themselves until recently exclusively to short-term financial activity of
corporate sector and abstained from term-financial activity. However, in recent
years they have ventured into new lines of activity of extending financial
support to cover term capital needs of industrial enterprises. Still about 90
percent of the bank finance available to corporate sector today comprises
Working Capital Finance.46
Banking accommodation can take the form of cash credit, overdrafts,
and loans and bills purchased and discounted. Cash credit is an operative
account with a specific credit limit granted by a bank. On the other hand,
overdraft is a facility by which the customer’s current account is allowed to be
over-drawn up to a sanctioned limit. Normally these are granted against the
security of current assets like inventories, shares, receivables, like debts, etc.
Although credit limits are sanctioned for short-term, normally a year, they are
renewed continuously unless some things happens which requires cancellation
there of.
Industry’s requirement of bank credit depends upon two factors, namely,
the expansion of production and the increase in prices. The norms imposed by
the RBI stipulates the extent of raw materials, work-in-progress, finished stock
and book debts that can be financed by banks. With the expansion in
production, the requirements of different kinds of inventories or book debts
would increase more or less in the same proportion. This also is true of price
rise. Hence the additional requirements in any year even going by the RBI
norms would be equal to the increase in production plus the rise in the prices.
Besides, industry may be required to hold larger inventories when it is faced
with a downward trend in the business cycle. Unless these considerations are
kept in view, industry may be short of working capital and forced to cut down
production, resulting in loss in income, employment and exports.
Share of Bank Borrowings:The share of bank borrowings in the total sources and total external
sources can be seen from the below table IV.11
Pharmaceutical Industry:
Short term bank borrowings:The share of bank borrowings in total sources and total external can be
observed from the table 4.11. It can be observed from the table that bank
borrowings as percentage of total sources inclined continuously from 7.2
percent during 1976-1981 to 9 percent during 1981-1986 and further to 53.9
percent during 1986-1991. Though the percentage inclined but in the period
1991-1996 it declined continuously to 17.9 percent to 14.8 percent during
1996-2001 and further to 12.2 percent during 2001-2006. The share of external
sources of bank borrowings to total external sources is reducing from 47.7%
during 1976-1981 to 39.4 percent during 1981-1986 and increased to 44.8%
during 1986-1991. Further it reduced to 38.0 percent during 1991-1996 and it
again fall down to 9.5 percent during 1996-2001 where as the contribution
increases to 28.3%.
Long-term bank borrowings:The long-term bank borrowings have not taken place in the contribution
of sources and from the below table we can observe there is no share of bank
borrowings during 1976-1981 which increases to 1.7 during 1981-1986 and
further it reduced to negative financing in the period 1986-1991 which
increased to 1.1% to 3.5 percent during 1996-2001; during 2001-2006 the share
was increased to 10.4 percent. On the whole the share of long term bank
borrowings was low margin i.e. 2.6 percent during the study period. The share
of borrowings to external sources showing zero percent during 1976-1981
which rises to 2.1% during 1981-1986 and further it reduced to negative during
1986-1991. But later in the years 1991-1996 it increased to 4% up to the period
1996-2001 and during the years 2001-2006 it increased to 28.3%. On the whole
the share of long-term bank borrowings is around 5.9 percent.
Medium & Large Public Limited Companies:
Short-term borrowings:
TABLE- IV.11SHARE OF BANK BORROWINGS TO TOTAL SOURCES AND TOTAL EXTERNAL SOURCES OF FUNDS IN
PHARMACEUTICALS AND M&LP DURING 1976-2006 (In terms of Percentages)
Years
%of Bank Borrowings to Total Sources %of Bank Borrowings to External SourcesShort-term bankborrowings % to
Total Sources
Long-term bankborrowings % to
Total sources
Total bankborrowings % to
Total sources
Short bankborrowings % toExternal Sources
Long-term bankborrowings % toExternal sources
Total bankborrowings % toExternal sources
Pharmaceutical M&LP Pharma
ceutical M&LP Pharmaceutical M&LP Pharma
ceutical M&LP Pharmaceutical M&LP Pharmac
eutical M&LP
1976-1977 @ 11.8 0.0 0.0 @ 11.8 $ 11.3 0.0 0.0 $ 11.31977-1978 14.0 14.6 0.0 0.0 14.0 14.6 28.3 17.3 0.0 0.0 28.3 17.31978-1979 7.3 18.0 0.0 0.0 7.3 18.0 19.2 23.8 0.0 0.0 19.2 23.81979-1980 17.6 11.6 0.0 0.0 17.6 11.6 24.4 16.0 0.0 0.0 24.4 16.01980-1981 29.7 6.9 0.0 0.0 29.7 6.9 34.3 9.1 0.0 0.0 34.3 9.11981-1982 38.8 9.9 0.0 35.9 38.8 45.8 92.7 12.7 0.0 46.4 92.7 59.21982-1983 30.7 5.3 0.0 9.7 30.7 15.1 44.5 6.7 0.0 12.2 44.5 18.81983-1984 8.9 9.3 2.8 @ 11.7 @ 14.4 13.2 4.5 @ 18.9 @1984-1985 10.0 9.8 @ 0.0 9.1 9.8 26.6 15.9 @ 0.0 24.1 15.91985-1986 6.9 8.5 6.7 0.0 13.5 8.5 8.9 14.8 8.7 0.0 17.6 14.81986-1987 37.8 14.7 @ 0.0 28.4 14.7 96.0 17.4 @ 0.0 72.1 17.41987-1988 $ 9.2 # 34.8 122.9 43.9 # 12.6 0.0 47.9 31.3 60.51988-1989 33.1 19.5 1.4 4.0 34.5 23.5 40.8 24.7 1.7 5.0 42.5 29.71989-1990 23.0 11.2 0.9 1.9 24.0 13.1 27.2 14.7 1.1 2.5 28.3 17.21990-1991 13.0 11.7 1.5 0.1 14.5 11.8 28.9 19.0 3.3 0.2 32.1 19.21991-1992 32.8 10.3 @ @ 32.0 9.9 36.0 14.4 @ @ 35.2 13.91992-1993 16.5 13.1 @ @ 16.3 12.9 29.6 22.9 @ @ 29.3 22.61993-1994 @ @ @ 1.2 @ @ @ # @ @ @ 7140.5
1994-1995 22.6 11.5 2.2 2.0 24.8 13.6 167.8 23.2 16.5 4.1 184.3 27.31995-1996 @ 16.8 4.6 4.5 @ 21.4 @ 31.4 7.0 8.5 @ 39.91996-1997 @ 8.8 @ 4.2 @ 13.0 @ 14.4 @ 6.8 @ 21.21997-1998 22.5 9.5 9.7 2.1 32.2 11.7 34.1 13.6 14.6 3.1 48.7 16.61998-1999 @ @ 3.9 15.7 @ 12.1 @ @ 7.1 23.5 @ 18.01999-2000 # 9.0 # 4.9 # 14.0 53.8 21.2 12.2 11.5 65.9 32.72000-2001 69.1 23.6 0.9 13.3 70.0 36.9 49.4 10.0 0.6 5.6 50.0 15.62001-2002 @ 11.1 8.4 14.8 @ 25.9 @ 14.6 25.4 19.5 @ 34.22002-2003 27.7 58.6 25.0 15.9 52.7 74.5 79.1 176.1 71.3 47.7 150.5 223.82003-2004 7.8 9.7 4.6 9.9 12.4 19.7 34.5 18.4 20.3 18.8 54.8 37.22004-2005 10.7 5.7 9.4 11.3 20.2 17.0 18.7 12.9 16.5 25.7 35.2 38.72005-2006 20.8 15.0 4.5 10.9 25.2 25.9 36.7 34.0 7.9 24.8 44.6 58.7
1976-1977 to 1980-1981 6.9 12.6 0.0 0.0 6.9 12.6 47.7 15.5 0.0 0.0 47.7 15.51981-1982 to 1985-1986 19.1 8.6 1.7 0.7 20.8 9.2 39.4 12.7 2.1 @ 39.6 12.31986-1987 to 1990-1991 45.9 13.3 @ 8.2 44.9 21.4 44.8 17.7 @ 11.1 41.3 28.81991-1992 to 1995-1996 8.7 5.2 1.1 1.4 9.8 6.6 38.0 1515.5 4.3 @ 42.2 1448.81996-1997 to 2000-2001 15.9 9.5 3.5 8.1 19.3 17.5 9.5 10.7 4.0 10.1 13.5 20.82001-2002 to 2005-2006 11.6 20.0 10.4 12.6 22.0 32.6 28.3 51.2 28.3 27.3 56.6 78.5
During 1976-2006 18.0 11.5 2.6 5.2 20.6 16.7 34.3 270.6 5.9 @ 40.1 267.5Source: Appendix-IIc;@-numerator negative;$-Denominator negative;#-Both numerator & Denominator negative
The contribution of short bank borrowings was 12.6% during 1976-1981
which reduced to 8.6% during 1981-1986 and further it increased to 13.3%
during 1986-1991. But in the years 1991-1996 the share was reduced to 5.2%
and immediately in the period 1996-2001 the share was raised to 9.5 percent;
during 2001-2006 the contribution was increased to 20 percent.The share of
bank borrowings as percentage of external sources declines from 15.5% during
1976-1981 to 12.7% in the period 1981-1986; further it increased to 17.7% in
the decade 1986-1991 where the borrowings have crossed to a high margin
during 1991-1996 &immediately jumped down to 10.7 percent and during
1996-2001 it raised to 51.2 percent in the period 2001-2006.
Long-term borrowings:
We can observe that the long-term bank borrowings were very low
during the decade of 1976-1981 and 1981-1986 where as in the years 1986-
1991 the share of contribution increased to 8.2 percent. But during 1991-1996
the share was reduced to 1.4 percent and immediately it increased to 8 percent
during 1996-2001 and again it gone up to 12.6 percent during 2001-2006. In
case of external sources of bank borrowings are showing negative financing
during 1981-1986, 1991-1996. In the years 1986-1991 the contribution is 11%
and in the period 1996-2001 is 10%which increases to 27.3 percent.
Thus it can be concluded that the bank borrowings which plays an
important role in the pharmaceutical industry where the public limited
companies have depended on other sources of finance during the study period.
b) Financial Institutions:The special financial institutions meet the need for medium and long-
term capital when such funds are not easily or directly available from
traditional sources such as the stock exchange or the banks.47 The special
financial institutions have played a useful role in supporting rapid
industrialization of the country. They have provided financial assistance
enabling creation of capacity in a large number of industries, in the form of
new project or expansion/ diversification of existing projects. These institutions
have now assumed a position that without their support hardly any large project
in the companies can materialize.
Pharmaceutical Industry:As the table 4.12 presents data on the borrowings from financial
institutions as percentage of total sources and external sources of funds. It can
be observed from the table that the borrowings from the term lending
institutions did not play an important appreciation role during up to 1976-1981
to 1986-1991. During this period, contrary to the popular belief the borrowings
from financial institutions contributed 3.5 percent during 1986-1991 and 20.5
percent during 1991-1996 which increases to 50.6 percent in the decade 1996-
2001 and immediately it got down to 1.1 percent. While the share of
borrowings to external sources decreased from 14 percent during 1976-1981 to
3.9 percent during 1981-1986 further this decreased to 1.3 percent during 1986-
1991. Later in the years 1991-1996 the percentage reached to 33.9 percent and
further it rose to 71.3 percent during 1996-2001, and in the years 2002-2006 it
shows a negative financing.
Medium & Large Public Limited Companies:
Thus it can be observed the share of borrowings from term lending
institutions towards total sources and external sources can be observed from the
table 4.11 given below as the share inclined to 10.4% during 1981-1986 from
4.4% during 1976-1981, where as in the years 1986-1991 it increased to 17.4
percent. But in the period 1991-1996 it raised to 14.5 percent and started
reducing to 14 percent in the decade 1996-2001 to negative financing during
2001-2006. In case of external sources the share of borrowings were reduced
from 14 percent during 1976-1981 to 3.9 percent during 1981-1986 and further
reduced to 1.3 percent in the period 1986-1991. In the years 1991-1996 the
share was rose to 33.9 percent to 71.3 percent in the years 1996-2001, where as
in the decade 2001-2006 the percentage reduced to negative.
TABLE- IV.1SHARE OF BORROWINGS FROM FINANCIALINSTITUTIONS TO TOTALSOURCES AND
TOTAL EXTERNAL SOURCES OF FUNDS INPHARMACEUTICALS AND M&LP DURING 1976-2006 (In terms of Percentages)
Years
%of FI Borrowings to TotalSources
%of FI Borrowingsto External Sources
Pharmaceutical M & LP Pharmaceutical M &LP
1976-1977 $ @ 56.4 @1977-1978 4.8 3.6 9.6 4.31978-1979 @ 4.7 @ 6.21979-1980 2.0 7.6 2.8 10.41980-1981 2.1 12.1 2.4 15.81981-1982 3.6 @ 8.6 @1982-1983 2.8 2.2 4.0 2.71983-1984 9.9 47.0 16.0 67.01984-1985 @ 5.8 @ 9.41985-1986 9.1 8.6 11.8 15.11986-1987 @ 10.8 @ 12.81987-1988 @ 38.7 @ 53.41988-1989 @ 13.4 @ 16.91989-1990 8.1 13.9 9.6 18.31990-1991 10.2 10.0 22.6 16.31991-1992 19.7 17.3 21.7 24.31992-1993 14.7 16.7 26.4 29.21993-1994 7.3 25.6 12.6 $1994-1995 2.6 7.6 19.5 15.31995-1996 57.9 5.5 89.3 10.2
1996-1997 @ 10.1 @ 16.41997-1998 22.2 11.2 33.7 16.01998-1999 48.7 27.0 88.4 40.41999-2000 90.3 1.2 @ 2.72000-2001 92.7 22.2 66.3 9.42001-2002 20.1 @ 61.1 @2002-2003 @ @ @ @2003-2004 @ @ @ @2004-2005 6.2 5.9 10.9 13.52005-2006 20.3 3.9 35.9 8.9
1976-1977 to 1980-1981 @ 4.4 14.0 6.21981-1982 to 1985-1986 3.5 10.4 3.9 15.91986-1987 to 1990-1991 @ 17.4 1.3 23.51991-1992 to 1995-1996 20.5 14.5 33.9 @1996-1997 to 2000-2001 50.6 14.3 71.3 17.02001-2002 to 2005-2006 1.1 @ @ @
During 1976-2006 11.0 7.8 20.2 @Source: Appendix-IIc;@-numerator negative;$-Denominator negative;
#-Both numerator & Denominator negative
Thus it can be concluded that the borrowings from financial institutions
in Pharmaceutical industry and Public limited companies doesn’t play an
important role in financing capital formation in the both sectors. This increase
the contribution might be due to the relaxation of various conditions by the
special financial institutions.
Still there are too many problems confronted by the pharmaceutical
industry and public limited companies in securing finance from term lending
institutions. Of which the most important impediment facing the private sector
in borrowing from term-lending institutions is mandatory convertibility cause.
Since 1971, the financial institutions required under the guidelines issued by
government to introduce a convertibility option on to all loans made to
companies which have drawn more than Rs 50 lakhs of financial assistance
from them. This limit has recently been raised to Rs 1 crore. In a recent
modification of the guidelines, they were directed no to acquire more than 40
percent of the share capital through conversion except in special circumstances
such as persistent default or mismanagement where they can go up to 51
percent with the approval of the government. In 1977, the soft loan scheme was
exempted from the convertibility clause. In 1980, this exemption has been
extended to assistances for modernization, additional balancing equipment
within the existing capacity, rehabilitation of sick units and for financing small
over runs in respect of projects already financed by institutions.
C) Other Borrowings:
The term other borrowings include borrowing through debentures,
public deposits, and others and government and other agencies. The other
borrowings as percentage of total sources of funds and external sources can be
seen from the table 4.13.
Pharmaceutical Industry:The share of other borrowings as percentage of total sources reduced to
15.5 percent during 1981-1986 from 17.3% during 1976-1981; further it
increased to 54.5 percent during 1986-1991 and in the years 1991-1996 it
TABLE- IV.13SHARE OF BORROWINGS FROM OTHERS TO TOTAL SOURCES AND TOTAL EXTERNAL SOURCES OF
FUNDS IN PHARMACEUTICALS AND M&LP DURING 1976-2006 (In terms of Percentages)
Years%of Other Borrowings to Total
Sources%of Other Borrowings to
External SourcesPharmaceutical M & LP Pharmaceutical M & LP
1976-1977 # @ @ @1977-1978 3.4 8.2 6.9 8.91978-1979 13.3 @ 35.0 @1979-1980 11.9 2.4 16.5 2.81980-1981 26.2 2.0 30.2 2.31981-1982 16.1 13.0 38.6 7.61982-1983 16.1 37.9 23.4 67.51983-1984 11.4 30.2 18.4 120.51984-1985 12.2 9.0 32.3 10.71985-1986 21.4 $ 27.9 $1986-1987 18.2 @ 46.3 @1987-1988 # 9.5 56.7 11.41988-1989 6.3 5.9 7.7 6.51989-1990 12.2 5.2 14.5 5.71990-1991 12.3 1.4 27.2 1.61991-1992 25.1 5.2 27.6 5.21992-1993 9.7 0.5 17.4 0.71993-1994 1.8 17.6 3.1 826.31994-1995 5.2 11.2 38.5 18.81995-1996 @ 3.6 @ 8.21996-1997 5.7 @ 24.8 8.71997-1998 @ 20.7 @ 16.1
Source: Appendix-IIc;@-numerator negative;$-Denominator negative;#-Both numerator & Denominator negative
1998-1999 18.0 7.4 32.6 12.41999-2000 @ 26.3 @ 97.02000-2001 @ 13.8 @ 21.22001-2002 @ 9.6 @ 12.62002-2003 @ @ @ @2003-2004 @ 10.3 @ 19.42004-2005 7.9 @ 13.9 @2005-2006 1.1 @ 1.9 @
1976-1977 to 1980-1981 17.3 23.5 @ 26.11981-1982 to 1985-1986 15.5 21.2 28.1 30.91986-1987 to 1990-1991 54.5 10.7 30.5 14.41991-1992 to 1995-1996 1.1 9.8 6.1 @1996-1997 to 2000-2001 @ 4.9 1.2 20.02001-2002 to 2005-2006 @ @ @ @
During 1976-2006 14.3 10.7 9.0 @
reduced to 1.1 percent, later in the period 1996-2001 which reduced to
negative financing up to during 2001-2006. The share of borrowings to
external sources rises from negative financing during 1976-1981 raised to 28.1
percent during 1981-1986, where it increases to 30.5 percent during 1986-
1991. But in the period 1991-1996 the percentage reduced to 6.1-1.2 percent
during 1996-2001 and in the years of 2001-2006 the percentage came to
negative financing position.
Medium & Large Public Limited Companies:
The share of borrowings to total sources reduced from 23.5 percent
during 1976-1981 to 21.2 percent during 1981-1986 which reduced to 10.7
percent during 1986-1991and later on it reduced to 9.8 percent during 1991-
1996 and further decreased to 4.9% during 1996-2001 to negative position
during 2002-2006. The share of borrowings to external sources is increased to
30.9 percent during 1976-1981 from 26.1 percent during 1981-1986 and further
it decreased to 14.4 percent to negative stage during the periods 1986-1991 &
1991-1996. Where the share has increased to 20 percent during 1996-2001 and
immediately came down to negative stage during 2002-2006.
Over the period of the study the share of others played an important role
in the provision of funds to the pharmaceutical industry and in public limited
companies.
Role of Trade Dues and Other Current Liabilities & Miscellaneous
Non-Current Liabilities:After observing the importance of trade credit, let us now discuss the
contribution of trade credit in the financing of the Pharmaceutical and Public
limited industries in India. Table 4.14 presents the information of the share of
Trade dues and miscellaneous, as percentage of total sources and external
sources of funds.
TABLE- IV.14SHARE OF TRADE DUES AND OTHER CURRENT LIABILITIES TO TOTAL SOURCES AND TOTAL EXTERNAL
SOURCES IN PHARMACEUTICALS AND M&LP DURING 1976-2006 (In terms of Percentages)
Years
% of Trade Dues andOther Current liabilities
to Total Sources
% of Trade Dues andOther Current Liabilities
to External Sources
% of Miscellaneous noncurrent liabilities to Total
Sources
%of Miscellaneous nonCurrent liabilities to
External sourcesPharmaceutical M&LP Pharmaceutical M&LP Pharmaceutical M&LP Pharmaceutical M&LP
1976-1977 $ 21.3 40.9 20.3 # 0.6 @ 0.61977-1978 30.6 38.9 59.8 46.2 @ 0.0 @ 0.11978-1979 18.7 39.8 48.3 52.6 @ @ @ @1979-1980 38.7 34.5 53.0 47.6 0.4 0.1 0.5 0.21980-1981 29.2 37.5 33.1 49.2 @ 0.1 @ 0.21981-1982 21.0 31.5 42.3 40.8 0.1 0.2 0.2 0.21982-1983 29.4 32.4 41.0 40.5 @ 0.0 @ 0.01983-1984 28.1 23.4 39.2 33.4 @ 0.3 @ 0.41984-1985 26.9 26.1 60.9 42.2 1.3 0.2 3.1 0.31985-1986 33.0 19.7 41.1 34.4 @ @ @ @1986-1987 @ 30.4 @ 36.0 0.0 0.0 0.0 0.01987-1988 # 12.1 19.1 16.7 # @ 0.0 @1988-1989 46.1 31.4 56.8 39.7 0.0 0.1 0.0 0.11989-1990 35.6 25.4 42.0 33.3 @ 0.0 0.0 0.01990-1991 6.6 16.9 14.6 27.5 0.0 @ 0.0 @1991-1992 29.1 26.0 32.0 36.5 0.0 @ 0.0 @1992-1993 13.8 15.0 24.7 26.3 @ 0.0 0.0 0.01993-1994 45.9 @ 79.4 # 0.0 @ 0.0 @1994-1995 @ 17.9 @ 36.1 @ 0.0 0.0 0.01995-1996 4.5 19.9 6.9 37.2 0.0 0.0 0.0 21.41996-1997 29.6 16.8 128.7 27.2 0.0 0.0 0.0 0.0
1997-1998 13.9 14.8 21.1 21.2 0.0 0.0 0.0 0.01998-1999 21.8 20.6 39.6 30.8 @ 0.0 0.0 0.01999-2000 $ 13.6 @ 31.8 0.0 0.0 0.0 0.02000-2001 @ 61.9 @ 26.1 0.0 0.0 0.0 0.02001-2002 17.0 31.7 51.8 41.8 @ 0.0 0.0 0.12002-2003 20.0 77.9 57.1 234.3 0.0 0.0 0.0 0.02003-2004 15.7 16.8 69.1 31.9 0.0 0.0 0.0 0.02004-2005 20.0 20.3 34.9 46.2 0.0 0.0 0.0 0.02005-2006 8.4 16.0 14.8 36.2 0.0 0.0 0.0 0.0
1976-1977 to 1980-1981 20.2 2.7 47.0 3.2 0.6 @ @ 0.01981-1982 to 1985-1986 27.7 0.4 44.9 0.6 0.1 0.1 0.6 0.01986-1987 to 1990-1991 31.9 1.1 24.8 1.4 0.0 1.2 @ 0.01991-1992 to 1995-1996 14.3 0.8 @ @ 0.0 @ 0.0 0.01996-1997 to 2000-2001 @ 141.3 10.9 59.8 0.0 20.0 @ 0.02001-2002 to 2005-2006 16.2 32.6 45.6 78.1 0.0 0.0 0.0 0.0
During 1976-2006 17.4 29.8 28.2 12.3 0.1 3.0 @ 0.0Source: Appendix-IIc;@-numerator negative;$-Denominator negative;#-Both numerator & Denominator negative
Pharmaceutical Industry:Table 4.14 presents the data on the share of trade dues and other current
liabilities as percentage of total sources and external sources, miscellaneous
non-current liabilities. It is obvious from the table that trade credit contribution
increased there of substantially from 20.2 percent during 1976-1981 to 27.7%
during 1981-1986 further it increased to 31.9% during 1981-1986; and later it
reduced to 14.3% during 1986-1991 to negative stage during 1991-1996;
during 1996-2001 the sources were raised to 16.2 percent. In case of external
sources the contribution of trade dues decreased from 47 percent during 1976-
1981 to 44.9 percent during 1981-1986 and later on it reduced to 24.8 percent
during 1986-1991 to negative stage during 1991-1996 which increased to 10.9
percent during 1996-2001 to 45.6 percent during 2001-2006.
The miscellaneous non current liabilities doesn’t have contribution to
total sources during the years 1986-1991, 1991-1996,1996-2001, 2001-2006
and in the period 1976-1981 it shows 0.6% which reduced to 0.1 percent. In
case of external sources the share of miscellaneous shows negative financing
during 1976-1981, 1986-1991, 1996-1991 and in other periods the contribution
is 0.6 percent during 1981-1986 and in the remaining years it shows zero i.e.
during 1991-1996 and 2001-2006.
Medium & Large Public Limited Companies:
The contribution of trade dues to total sources declines from 2.7 percent
during 1976-1981 to 0.4 percent during 1981-1986 which declines to 1.1
percent during 1986-1991; further it decreased to 0.8 percent during 1991-1996
and further it gone to high share to 141% during 1996-2001 and in the period
2001-2006 it reduced to 32.6 percent. In case of external sources reduced from
3.2 percent during 1976-1981 to 0.6 percent during 1981-1986; further it
increases to 1.4 percent during 1986-1991and later it decreased to negative
during 1991-1996; during 1996-2001the share was increased to 59.8 percent to
78.1 percent during 2001-2006.
The miscellaneous current liabilities increases from negative during
1976-1981 to 0.1 percent during 1981-1986 to 1.2 percent during 1986-1991;
further it reduced to negative during 1991-1996 where as in the period 1996-
2001 it increased to 20 percent and came down to zero during 2001-2006. In
case of external sources there was no contribution during the periods 1976-
1981 to 2001-2006.
Though the trade credit is a good source of finance but substantial
increase in trade credit, not followed by the similar increases in loans and
advances, may create liquidity problems in Pharmaceutical and public sectors.
Conclusions:From the foregoing analysis of the pattern of capital finance in the
selected public limited and pharmaceutical companies, the following
conclusions may be usefully drawn:
The foregoing analysis brought into the light the structural changes that
have taken place in the sources of funds of pharmaceutical industry in India
during 30 years i.e. 1976-2006. It became clear from the analysis on internal
sources of funds that the industry was able to generate an average around 33.3
percent of internal sources as percentage of total sources during the period of
the study. As against the contribution of internal sources was 30 percent in case
of the public limited companies in India and 70 percent in case of many
developed and developing countries.
The pharmaceutical industry in India should have accumulated huge
amounts of reserves and surplus and stabilized now. But unfortunately, the
dependence of the industry on the external sources has been increasing not
because of the growth of industry but because of the fall of internal funds. The
industry is almost deccumulating its reserves year by year. All the major
components of internal sources viz, provisions, reserves declined while the
industry almost capitalized its reserves constantly during the period.
The major components of external sources of pharmaceutical industry
are borrowings trade dues and fresh issue shares. The industry’s reliance on
borrowings was on average 45.9 percent. The share of Trade dues is
continuously reducing the dependence as a source of finance during the decade.
Internal sources played an important role in financing the capital
formation of many industries in developed and developing countries. But
unfortunately the contribution of internal sources for financing the gross capital
formation, particularly the gross fixed assets declined during the last 30 years
of the study.
The analysis of the components of internal funds reveals that the
reserves and surplus occupied an important prime place followed by provisions
and paid-up capital. The internal sources of the industry declined mainly due to
the fall in the provisions, particularly the provision of depreciation, followed by
capital.
Further analysis on the reasons for inadequate retained earnings reveals
that the industry is mainly unable to retain more of its profits due to low profits
and maintenance of dividend at higher rates irrespective of profitability.
The analysis on the role of depreciation provision reveals that the
depreciation provision declined substantially particularly after 1980’s. This was
mainly because of the increasing cost of fixed assets due to persistent inflation
in the country. The industry was unable to replace of its assets due to
inadequate depreciation and consequently the investment in fixed assets also
fell sharply.
In external sources the borrowings played an important role in financing
the pharmaceutical industry in India followed by trade credit and external
equity. The capacity of the pharmaceutical industry in raising funds from the
capital market through equity and preferences shares fell sharply. The
Pharmaceutical industry on average raised new capital from the capital market
to the extent of 2.2 percent during the 30 years of the study. The low or nil
return is mainly responsible for keeping the investors aloof from the industry.
In borrowings, the borrowings from the banks declined during 1981-
1986’speriod and later after the period 1986-1991 the borrowings raise due to
the nationalization of banks and diversion of more funds of the banks to the
industry as a consequence of the implementation of the recommendations of
the Dahejia, Tandon and Chore Committees.
The borrowings from the term lending institutions on the other hand
were reducing after 1980’s. The development banks in India particularly IDBI
have increased their contribution substantially to the pharmaceutical industry.
The provision of funds under the soft loan scheme of IDBI for modernization
of the industry helped the industry in securing more funds from the special
financial institutions. The other schemes including modernization loans, special
loans also helped the industry in securing more funds from special financial
institutions.
The other sources for the financing of the industry were declining after
1980’s due to non-payment of interest and principal to the debenture and public
deposit holders by many companies in the industry.
The contribution of the trade credit and other current liabilities were not
more and dependence on the credit was good as long as it’s increase in loans
and advances. But excess of dependence on the trade credit the industry leads
to the problems. Though the industry is depending on the trade credit is less
than with comparing of the public sector.
References:1. Memoria, C.B.( 1975): Organisation and Financing of Industries in India, Kitab
Mahal, Allahabad , P.97
2. Dr.Prasad.G., and Dr.Viyyanna Rao, K., (1982): Changing Structure of Corporate
Finance in India, (Vol.XXXI , December), The Chartered Accountant, P.443.
3. Kishore Braj, (1981): Corporate Capitalization in India, Himalaya Publishing House,
Bombay,p.2
4. Daniel Creamer, Sergei P. Dobrovolsky and Israel Borenstein, (1960) : Capital in
Manufacturing and Mining-Its Formation and Financing, Princeton University press,
Princeton.
5. Simons Kuznets,(1961): Capital in the American Economy : Its Formation and
Financing, Princeton University press, Princeton,.
6. Robert Lindsay and Arnold W. Sametz,( 1963) : Financial Management- An
analytical Approach,: Richard D.Irwin, Inc., Home wood, Illinois,pp.328-360
7. Arnold W.Sametz, (1970): Business Investment Demand, in Financial Markets and
Institutions, (Ed) Murray E. Polakaff et al., Houghton Mifflin Co., Boston,pp. 265-
276
8. Van Horne,J.C., (1979): Financial Management and Policy, Prentice- Hall of India
Private Limited., New Delhi,, P.544
9. Van Horne,J.C., Financial Management and Policy, Op-cit P, 578.
10. Rristein, N.M., (1970): Corporation Finance, , Barnes and Noble, Newyork, Inc,
P.69.
11. Keown, A.J., et al.,( 1985) : Basic Financial Management, Prentice- Hall, , P.649.
12. Gupta, L.C., (1975) : Preference Shares and Company Finance, IFMR,. Also refer to
Keown, A.J., op.cit., pp.638-43.
13. Srivastsava, R.M., (1979) : Fundamentals of Corporation Finance, Wisdom
Publications, Allahabad, p.165
14. Ibid., p.165
15. Rao, D.C., (1980): “The Strucutre of Corporate Finance and Some Related Policy
Issues”, (Vol.I, No.2, December ), Reserve Bank of India, Occasional Papers, , p.143
16. Kuchhal, S.C., (1984) : Financial Management: An Analytical and Conceptual
Approach , Chaitanya Publishing House, Allahabad, p.569
17. Ojha, P.D., “ Capital Market-Emerging Trends”, Reserve Bank of India Monthly
bulletin, op.Cit., p.16
18. Prasad.G., (1987) : Corporation Finance in India , Sai publications, Guntur, p.106.
19. Prasad.G., Corporation Finance in India, op.cit., p.108
20. Gupta, L.C., (1969) : The Changing Structure of Industrial Finance in India., Oxford
University Press, London, P.21
21. Srivastava, R.M.,( 1979-1980) : Management of Banks, Pragati Prakasam, Meerut ,
P.96.
22. Gupta L.C., (Ed). (1978): Banking and Working Capital Finance, Lac Millian,
Calcutta, P.289.
23. Howard B. and Upton M.( 1953): Introduction to Business Finance, Mc Grawhill
Book Company, New york, Inc, p.324.
24. Solomon Ezra and Pringle, John.J., (1978): An Introduction to Financial
Management, Prentice Hall of India Pvt Ltd., Delhi, p.151
25. Since November 1965, Credit Authorization Scheme has been in operation as a part
of the Reserve Bank’s credit policy to regulate the end use of credit. At the end of
June 1978, the number of parties covered under the scheme increased to 979 from
890 at the end of June 1977. on the whole scheme has been found useful not only as
an instrument of overall credit control, but also a method of regulating the sectoral
flow of credit. See: Report on Currency and Finance, 1977-78, Vol.I, Bombay,
Reserve Bank of India, pp.95-111
26. Report of the study Group on the Extent to which credit needs of the Industry and
Trade are likely to be inflated and how such trends could be checked Bombay :
Reserve Bank of India, 1969 .
27. Report of the Study group to Frame Guidelines for Follow-up of Bank Credit,
(Bombay : Reserve Bank of India , 1975)
28. Report of the Study Group to Review the Operation of Cash Credit System, (Bombay
: Reserve Bank of India, 1981).
29. Sarma, T.A., and Chauhan, S.D.S., Industrial Economics, Op.Cit., P.301
30. Braj Kishore, “ Corporate Internal Finance- A Study of Overall Trends and
Retentions”, op.Cit, P.186
31. Ibid., P.186
32. Ibid., P.186
33. Kishor Braj, Corporate Capitalisation in India, op.cit., p.67
34. Krishna Murthy, k. and Sastry, D.U., (1975) : Investment and Financing in the
Corporate Sector in India, Tata McGrawHill Publishing Company Ltd., New Delhi: ,
pp.68-70
35. Rao, G.N. amd Sharma, Y.S.R.,( 1971) : “Dividend and Retained Earnings of Public
and Private Limited Companies in India : 1955-1956 to 1965-1966; Econometric
Analysis”, Reserve Bank of India Bulletin, June
36. An early attempt was made by Kishori, C.Shaw on the “Pattern of Corporate Savings
and Investments” under the guidance of distinguished Professor C.N.Vakil.
37. Kulkarinin, P.V.,( 1983) : Financial Management, Bombay, Himalaya Publishing
House, Ramdoot, Dr.Bhalerao Marg, Bombay, P.567
38. Dr. D.Dakshina Murthy and Dr.G.Prasad, “ Changing Structure of Corporate Finance
in India”. (Vol.XXXIV, Part II, No.127, June), The Indian Journal of Commerce,
1981, PP 54-66.
39. Kulkarini.P.V,Financial Management, Op.cit., P.567.
40. Bhagwati Prasad B.,( 1975) : ‘Impact of Corporate Taxation on Financial Policies of
Companies’, (volxxviii, Part-II, No.103; June ), The Indian Journal of Commerce, ,
P.25.
41. Vijayanagar, R.L.N.,( 1978) : Diversion of Funds: Myth or Reality, Bombay,
P.P.S.I., 15, Abubekar Mansion, Shahid Bharat Singh Road, Colaba, , p.1.
42. Prasad.G and DakshinaMurhty, D., (1981) : ‘Replacement Cost- A Basis for
Computing Depreciation”, Capital, August 17, , p.27
43. Dean, Joel,( 1978) : Managerial Economics, Prentice Hall of India pvt Ltd., New
Delhi, p.17
44. I.Bid., p.18.
45. The most Commonly used methods for calculating
Depreciation are Straight Line Method, Diminishing Balance Method Sum-of the
Years Digits Method, Units of Production Method, etc., See Davidson, Sidney,
(1970) :Hand book of Modern Accounting, NewYork: McGrawHill Book Company, ,
p.189
46. Chitale, S.C., Financial Management, Op.Cit., P.567
47. Dr.Srivastava, R.M, Fundamentals of Corporation Finance, Op.Cit, P.32.
48. Brain Ogleay, (1981) : Business Finance , Longman Inc, New York ,P.431.