issue- december 2013 fm dec...determinants by pendse vishwas shriniwas 39 5 corporate governance in...
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ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 1
DMIETR
www.dmietr.edu.in ISSN- 2277 8675
ISSN 2277 8683 DMIETR International Journal on Marketing Management
International Journal on
Financial Management
DECEMBER 2013
Volume- 3
.;
1
Department of Business Management (MBA)
Datta Meghe Institute of Engineering,
Technology & Research.
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 2
ISSN 2277 8675
DMIETR International Journal on Financial Management (ejournal)
Volume 2
Issue- DECEMBER 2013
DMIETR, Wardha
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 3
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ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 4
Prof. Shailesh Kediya,
Chief Editor
HOD-MBA D.M.I.E.T.R
Managing Editors
Prof. Atul Kharad Prof. Rupesh Dahake
Faculty, Faculty,
D.M.I.E.T.R. Wardha D.M.I.E.T.R Wardha
EDITORIAL ADVISORY BOARD EDITORIAL BOARD
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Principal Chairman,
D.M.I.E.T.R. Business Management Board,
RTM Nagpur university, Nagpur
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Research, Nagpur
Dr. Vinayak Deshpande Associate Editor
Professor & Director,
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G.S. College of Commerce, Wardha
Dr. Sujit Metre Associate Editor
Director, DMIMS, Nagpur
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Head of Commerce Dept
Associate Professor
Lok Mahavidyalaya, Wardha
Prof. B. M. Mujumdar
Former Director,
DAMS, G.S.College of Commerce, Wardha
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 5
Sr.No. Title of The Paper Page No.
1
TESTING OF WEAK FORM OF EFFICIENT MARKET HYPOTHESIS WITH
RESPECT TO COMMODITY FUTURES MARKET BY DR. KANCHAN
NAIDU & VISHAL MEHTA
6
2
―EVALUATION OF THE WORKING OF INVESTMENT BANKING IN
INDIA WITH REFERENCE TO IDBI & ICICI BANKS‖BY 1 PROF.
KRUNAL PAREKH & *2 DR. D. S. JAGNADE
20
3 INDIAN RURAL BANKING SECTOR - CHALLENGES & OPPORTUNITIES
BY PROF. SANDESH R. KEDIA 27
4 HOUSEHOLD BUDGET PROVISIONS OF INVESTMENT AND ITS
DETERMINANTS BY PENDSE VISHWAS SHRINIWAS 39
5
CORPORATE GOVERNANCE IN INDIA BY PROF.DR.SHAILESH O.
KEDIYA, MR.RUPESHR.DAHAKE, MR.SACHIN S. PANCHABHAI
51
INDEX
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 6
TESTING OF WEAK FORM OF EFFICIENT MARKET
HYPOTHESIS WITH RESPECT TO COMMODITY FUTURES
MARKET
Dr. Kanchan Naidu
Asst.Prof., Department of Management Technology,
Shri Ramdeobaba College of Engineering and Management, Nagpur
Vishal Mehta
Asst.Prof., Department of Management Technology
Shri Ramdeobaba College of Engineering and Management , Nagpur
Abstract: The Commodity Futures market has emerged as a very important market and the investors have
always been trying to get better returns. The returns would improve only if they are able to outperform the
market. This study has been done to try and find out whether the markets are efficient in the weak form. The
study has been done using basic tools like RUNS test and Auto Correlation. The data has been taken from
www.mcxindia.com and the data for the years 2009 and 2010 have been considered. Based on the study it can
be concluded that the markets are independent and efficient in the weak form. The investors will not be able to
predict the prices based on the previous days’ prices.
Key Words: Auto Correlation, EMH , RUNS Test , Weak Form of Efficiency.
INTRODUCTION
Rational investors are those who select assets based on their risk return profile. Experience and various studies
have revealed that this may not necessarily be true. Whether it is the stock market or the commodity derivatives
market the fact remains that a certain amount of cognitive biases do creep in and out goes the rationality. But
ultimately the entire process gets corrected. So, it would not be wrong if we say that the market is more or less
rational within some limits.
Whenever a layman talks in terms of the movement of prices he does his calculations on the basis of previous
prices. He does it because he does not know / understand anything else to base his calculations upon. Whether
his calculations are correct or not would depend upon the strength and appropriateness of the logic applied by
him.
The Efficient Market Hypotheses (EMH) states that the prices follow a random path. The prices of the stock
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depend on the level of information considered and the time taken by the market mechanism to make necessary
adjustment to the prices. Based on the above the EMH has given three forms of market efficiency namely the
Weak form, the Semi-Strong form and the Strong form. The weak-form EMH claims that prices on traded assets
(e.g., stocks, bonds, or property) fully reflect all historical information and hence any attempt to predict
prices based on historical price or information is totally futile as future price changes are independent of past
price changes. The semi-strong-form EMH claims both that prices reflect all publicly available information and
that prices instantly change to reflect new public information. The strong-form EMH additionally claims that
prices instantly reflect even hidden or "insider" information.
Market efficiency plays a great role in bringing equilibrium in the market. With so many players in the market
with their own set of perceptions about price and returns the market is in a state of dynamic equilibrium.
This paper would study the movement of Multi commodity index ( from Jan 2009 to Dec 2010 ) and try to
understand whether the movement is random or not and also try to find out whether the markets satisfy the
conditions of weak form of efficiency.
LITERATURE REVIEW:
There are numerous studies, both theoretical and empirical, that analyse the efficiency of futures markets in
developed countries like the US and the UK. Garbade and Silber (1983) tested the relation- ship between spot
and futures prices for seven commodities. Their goal was to test for efficiency in both functions of futures
markets: risk management and price discovery.
Mckenzie and Holt (1998) tested the efficiencies of the US futures markets for cattle, corn and soybean meal.
Their results indicate that futures markets for all these commodities are both efficient and unbiased in the long
run. Kellard, et al. (1999) examined the efficiency of several widely traded commodities in different markets,
including soybeans on the CBOT and live cattle on the Chicago Mercantile Exchange. The results show that the
long-run equilibrium condition holds, but again there was evidence of short-run inefficiency for most of the
markets studied.
Thomas and Karande (2001) examined efficiency of the castor-seed futures markets in India. The examination
included identifying the flow of information between futures and spot prices across two different markets, one
export-oriented and another production-oriented. They find that futures dominate spot prices, and that the
export-oriented market prices dominate the production-oriented market except in the harvest season when the
relation was reversed.
Swapan Sarkar ( 2013 ) examined the efficiency of Indian Stock Market – BSE. The examination included data
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till march 2011. He found that the markets are inefficient in weak form and it may be possible for investors to
earn above the normal return.
The reviewed literature does not speak much about the efficiency of the multi commodity future indices.
OBJECTIVE OF THE STUDY :
1) To assess the level of correlation between the price changes in years 2009 and 2010.
2) To assess whether the commodity futures market is efficient in weak form
HYPOTHESIS:
1. The commodity futures market is efficient in weak form.
LIMITATIONS OF THE STUDY :
1) This study is based on secondary data collected from mcxindia.com.
2) The study is based on the data of the year 2009 and 2010.
3) To test the weak form of market efficiency only the Runs Test and Auto Correlation test is being used.
RESEARCH METHODOLOGY:
The data that is collected for the study is entirely secondary data. This data is collected from the official website
of Multi Commodity Exchange (MCX).
Test: The study is conducted using the RUNS Test and Auto Correlation.
RUNS TEST :
It is a non-parametric statistical test that checks the randomness hypothesis for a two-valued data sequence.
More precisely, it can be used to test the hypothesis that the elements of the sequence are mutually independent.
It is one of the tests under the weak form.
In simple terms A ―run‖ is defined as ―a sequence of identical occurrences preceded and followed by different
occurrences or by none at all‖. For testing the randomness of the Index values we take a series of Futures index
values from the MULTI COMMODITY INDEX. Starting with first price, each price change will be assigned a
‗1‘ or ‗0‘ sign. The ‗1‘ would indicate that the index value under consideration has increased as compared to the
preceding value and the ‗0‘ sign would indicate the vice versa.
Mean is calculated as follows:
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And
Variance is calculated as follows:
For testing the independence of the index values the following were calculated:
Total number of Runs : r
Number of positive index value changes : n1 i.e., N+
Number of negative value changes : n2 i.e., N-
Once we got the above figures the Mean and Standard Deviation were calculated by using the formulae given
above.
The upper and lower limits were calculated at 2 levels of significance 5 % and 10 % namely. Then we checked
whether the number of runs observed from the index values falls within the limits. If it was within the limits it
was concluded that the values are independent of each other, otherwise not.
AUTO CORRELATION :
Auto correlation refers to the correlation of a time series with its own past and future values.
Autocorrelation is also sometimes called ―lagged correlation‖ or ―serial correlation‖, which
refers to the correlation between members of a series of numbers arranged in time. Positive
auto correlation might be considered a specific form of ―persistence‖, a tendency for a system to remain in the
same state from one observation to the next.
A positive and significant correlation will indicate that the returns in a period are likely to move in the same
direction as in the prior period. If the correlation is zero or near zero then we can infer that the price changes are
independent of the past movements and indicate that the market is efficient in weak form.
The level of correlation has been studied using auto correlation method. Under auto correlation, price changes
have been considered and to improve the analysis further the daily returns over two different periods have also
been compared.
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REASONS FOR CARRYING OUT THE STUDY USING THE WEAK FORM:
a. The behavior of the market participants is driven by their sentiments rather than the historical prices and
returns.
b. Prices adjust to the market information even though they may be late in doing so.
The above reasons were responsible for the belief that WEAK FORM would be the best as the basic tenets of
the form would help in carrying out the study better.
DATA PROCESSING AND INTERPRETATION
The data was collected from the official website of Multi-Commodity Exchange. The Multi Commodity Futures
Index values from Jan to Dec 2009 and 2010 were used for the study.
Results from the Runs Test
2009 2010
No of runs 136 130
The number of
positive daily price
change
166 185
The number of
negative daily price
change
135 111
Mean 149.29 139.75
Variance 73.4 64.78
Std dev 8.56 8.04
Table 1.
The same results were tested at 5 % and 10 % level of significance to see whether the prices are independent
or not. The results are as follows:
In the year 2009 : At 5 % level of significance : At α = 0.05, Z = 1.96
lower limit : µ - Z x σ = 132.5 ; upper limit : µ + Z x σ = 166.0867
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 11
Since, the observed no of runs ( 136 ) falls within the lower and upper limits , we conclude that the prices are
independent at 5 % level of significance and at this level the hypothesis holds true.
In the year 2009 At 10 % level of significance : At α = 0.10, Z = 1.65
lower limit : µ - Z x σ = 135.15 ; upper limit : µ + Z x σ = 163.43
Since, the observed no. of runs ( 136 ) falls within the lower and upper limits , we conclude that the prices are
independent at 10 % level of significance and at this level also the hypothesis holds true.
In the year 2010 : At 5 % level of significance : At α = 0.05, Z = 1.96
lower limit : µ - Z x σ = 123.97 ; upper limit : µ + Z x σ = 155.53
Since, the observed no of runs ( 130 ) falls within the lower and upper limits , we conclude that the prices are
independent at 5 % level of significance and at this level the hypothesis holds true.
In the year 2009 At 10 % level of significance : At α = 0.10, Z = 1.65
Lower limit : µ - Z x σ =126.468 ; Upper limit : µ + Z x σ = 153.03
Since, the observed no. of runs ( 130 ) falls within the lower and upper limits , we conclude that the prices are
independent at 10 % level of significance and at this level also the hypothesis holds true.
AUTO CORRELATION TEST :
Correlation between the price changes of the two years was found to be 6.30 % while the correlation between the
rate of returns was found to be 6.86 %. Since, the value of correlation is very close to zero or in other words
statistically insignificant we can conclude that the price movement is independent and the past prices do not
influence the current prices. Thus, we may conclude that the market is efficient in weak form.
CONCLUSION:
Based on the tests done we can conclude that the commodity futures market in India was independent and
satisfied the conditions of weak form of efficiency in the year 2009 and 2010. It can also be concluded that it
would not have been possible to predict the price changes based on the past movements. The results of both the
Runs Test and Auto Correlation have helped to arrive at the above conclusions.
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 12
Bibliography:
Garbade, K.D. and Silber, W.L. (1983): ―Price Movements and Price Discovery in Futures and Cash
Markets‖, Review of Economics and Statistics, 64,
Kellard, N., P. Newbold, T. Rayner, C. Ennew (1999), ―The Relative Efficiency of Commodity Futures
Markets‖, Journal of Futures Markets, Volume 19, Issue 4, 413-432.
McKenzie, A.M. and Holt, M.T. (2002), ―Market Efficiency in Agricultural Futures Markets‖, Applied
Economics, 34, 1519-32.
Thomas, S. and K. Karande (2001), ―Price Discovery across Multiple Markets‖, Technical report, IGIDR,
Bombay, India.
Swapan Sarkar (2013 ) , ―Testing Weak Form Efficiency of Indian Stock Market – An Empirical Study on
BSE‖, The Management Accountant , March 2013 , Vol.48 No.3.
Security Analysis – Icfai University Publication
Annexure 1
Data From www.mcxindia.com
Date Closing Figure Date
Closing Figure
01-01-2010 2762.32 01-01-2009 1874.07
01-02-2010 2787.43 02-01-2009 1883.93
01-04-2010 2789.63 03-01-2009 1897.55
01-05-2010 2807.34 05-01-2009 1953.06
01-06-2010 2784.03 06-01-2009 1874.21
01-07-2010 2780.42 07-01-2009 1830.4
01-08-2010 2784.91 08-01-2009 1823.13
01-09-2010 2768.34 09-01-2009 1830.37
01-11-2010 2736.83 10-01-2009 1789.03
01-12-2010 2736.03 12-01-2009 1800.42
1/13/2010 2731.9 13-01-2009 1768.74
1/14/2010 2719.48 14-01-2009 1736.44
1/15/2010 2715.68 15-01-2009 1764.58
1/16/2010 2717.38 16-01-2009 1769.41
1/18/2010 2723.7 17-01-2009 1751.23
1/19/2010 2689.95 19-01-2009 1760.17
1/20/2010 2659.48 20-01-2009 1763.24
1/21/2010 2644.54 21-01-2009 1746.82
1/22/2010 2640.16 22-01-2009 1823.74
1/23/2010 2648.1 23-01-2009 1841.52
1/25/2010 2606.09 24-01-2009 1830.28
1/27/2010 2576.27 27-01-2009 1817.4
1/28/2010 2568.24 28-01-2009 1830.07
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1/29/2010 2557.62 29-01-2009 1846.77
1/30/2010 2594.14 30-01-2009 1841.27
02-01-2010 2630.84 31-01-2009 1819.34
02-02-2010 2615.31 02-02-2009 1816.16
02-03-2010 2539.29 03-02-2009 1835.62
02-04-2010 2504.53 04-02-2009 1842.58
02-05-2010 2536.93 05-02-2009 1861.71
02-06-2010 2534.72 06-02-2009 1866.43
02-08-2010 2564.7 07-02-2009 1867.65
02-09-2010 2567.05 09-02-2009 1852.36
02-10-2010 2597.11 10-02-2009 1834.58
02-11-2010 2575.52 11-02-2009 1818.22
02-12-2010 2581.5 12-02-2009 1816.03
2/13/2010 2589.66 13-02-2009 1814.06
2/15/2010 2640.22 14-02-2009 1792.44
2/16/2010 2640.22 16-02-2009 1795.73
2/17/2010 2641.11 17-02-2009 1781.29
2/18/2010 2656.58 18-02-2009 1802.11
2/19/2010 2680.38 19-02-2009 1800.53
2/20/2010 2687.5 20-02-2009 1818.49
2/22/2010 2671.82 21-02-2009 1801.03
2/23/2010 2644.58 23-02-2009 1822.63
2/24/2010 2650.74 24-02-2009 1876.91
2/25/2010 2635.44 25-02-2009 1904.66
2/26/2010 2667.55 26-02-2009 1926.81
2/27/2010 2671.3 27-02-2009 1925.11
03-01-2010 2664.06 28-02-2009 1903.09
03-02-2010 2698.22 02-03-2009 1898.82
03-03-2010 2705.56 03-03-2009 1944.75
03-04-2010 2699.26 04-03-2009 1960.47
03-05-2010 2707.88 05-03-2009 1968.78
03-06-2010 2713.99 06-03-2009 1986.98
03-08-2010 2700.46 07-03-2009 1980.08
03-09-2010 2700.75 09-03-2009 1962.42
03-10-2010 2682.05 10-03-2009 1927.07
03-11-2010 2689.32 11-03-2009 1959.75
03-12-2010 2678.05 12-03-2009 1967.16
3/13/2010 2677.48 13-03-2009 1965.66
3/15/2010 2657.99 14-03-2009 1979.86
3/16/2010 2685.27 16-03-2009 2004.6
3/17/2010 2696.67 17-03-2009 1965.39
3/18/2010 2689.15 18-03-2009 2029.15
3/19/2010 2689.15 19-03-2009 2045.04
3/20/2010 2657.42 20-03-2009 2049.9
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 14
3/22/2010 2659.25 21-03-2009 2072.33
3/23/2010 2667.58 23-03-2009 2058.87
3/24/2010 2646.74 24-03-2009 2064.95
3/25/2010 2647.38 25-03-2009 2082.77
3/26/2010 2642.32 26-03-2009 2058.73
3/27/2010 2647.34 27-03-2009 2066.71
3/29/2010 2681.05 28-03-2009 2022.48
3/30/2010 2681.77 30-03-2009 2020.62
3/31/2010 2694.02 31-03-2009 2011.11
04-01-2010 2726.26 01-04-2009 2066.29
04-03-2010 2739.97 02-04-2009 2078.89
04-05-2010 2743.13 03-04-2009 2084.58
04-06-2010 2733.65 04-04-2009 2031.09
04-07-2010 2745.97 06-04-2009 2035.85
04-08-2010 2721.55 07-04-2009 2053.32
04-09-2010 2720.18 08-04-2009 2069.44
04-10-2010 2723.14 09-04-2009 2086.99
04-12-2010 2729.7 11-04-2009 2098.71
4/13/2010 2730.78 13-04-2009 2075.5
4/14/2010 2747.68 14-04-2009 2085.21
4/15/2010 2747.76 15-04-2009 2065.75
4/16/2010 2698.17 16-04-2009 2077.82
4/17/2010 2699.42 17-04-2009 2080.97
4/19/2010 2682.57 18-04-2009 2045.24
4/20/2010 2696.97 20-04-2009 2030.59
4/21/2010 2701.51 21-04-2009 2031.96
4/22/2010 2697.3 22-04-2009 2042.35
4/23/2010 2724.32 23-04-2009 2070.12
4/24/2010 2738.62 24-04-2009 2078.83
4/26/2010 2739.35 25-04-2009 2062.02
4/27/2010 2718.68 27-04-2009 2048.81
4/28/2010 2730.57 28-04-2009 2071.06
4/29/2010 2731.53 29-04-2009 2106.74
4/30/2010 2744.19 01-05-2009 2111.34
05-03-2010 2763.89 02-05-2009 2143.73
05-04-2010 2705.52 04-05-2009 2131.57
05-05-2010 2669.54 05-05-2009 2185.22
05-06-2010 2660.69 06-05-2009 2185.82
05-07-2010 2666.76 07-05-2009 2204.91
05-08-2010 2667.48 08-05-2009 2202.54
05-10-2010 2667.79 11-05-2009 2225.27
05-11-2010 2683.42 12-05-2009 2226.26
05-12-2010 2692.29 13-05-2009 2204.33
5/13/2010 2686.82 14-05-2009 2181.01
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5/14/2010 2637.03 15-05-2009 2172.19
5/15/2010 2634.61 16-05-2009 2143
5/17/2010 2595.75 18-05-2009 2157.24
5/18/2010 2596.8 19-05-2009 2164.37
5/19/2010 2592.14 20-05-2009 2137.4
5/20/2010 2581.63 21-05-2009 2140.45
5/21/2010 2594.06 22-05-2009 2140.25
5/22/2010 2607.6 23-05-2009 2152.88
5/24/2010 2616.45 25-05-2009 2172.35
5/25/2010 2616.45 26-05-2009 2200.69
5/26/2010 2657.98 27-05-2009 2238.25
5/27/2010 2685.62 28-05-2009 2252.55
5/28/2010 2674.64 29-05-2009 2271.32
5/29/2010 2673.41 30-05-2009 2303.22
5/31/2010 2673.14 01-06-2009 2314.84
06-01-2010 2688.75 02-06-2009 2255.41
06-02-2010 2670.09 03-06-2009 2318.42
06-03-2010 2650.17 04-06-2009 2307.14
06-04-2010 2631.16 05-06-2009 2302.57
06-05-2010 2617.87 06-06-2009 2302.69
06-07-2010 2631.02 08-06-2009 2327.66
06-08-2010 2632.86 09-06-2009 2343.26
06-09-2010 2661.91 10-06-2009 2394.23
06-10-2010 2668.25 11-06-2009 2368.67
06-11-2010 2663.43 12-06-2009 2369.29
06-12-2010 2665.53 13-06-2009 2329.26
6/14/2010 2669.11 15-06-2009 2338.81
6/15/2010 2695.31 16-06-2009 2341.99
6/16/2010 2702.37 17-06-2009 2356.84
6/17/2010 2682.46 18-06-2009 2334.82
6/18/2010 2678.38 19-06-2009 2325.63
6/19/2010 2680.99 20-06-2009 2279.87
6/21/2010 2664.82 22-06-2009 2306.91
6/22/2010 2676.1 23-06-2009 2329.77
6/23/2010 2673.6 24-06-2009 2368.59
6/24/2010 2681.79 25-06-2009 2347.68
6/25/2010 2721.72 26-06-2009 2357.5
6/26/2010 2733.64 27-06-2009 2374.89
6/28/2010 2727.36 29-06-2009 2329.68
6/29/2010 2679.54 30-06-2009 2328.81
6/30/2010 2683.15 01-07-2009 2302.31
07-01-2010 2645.2 02-07-2009 2269.73
07-02-2010 2628.45 03-07-2009 2276.15
07-03-2010 2629.37 04-07-2009 2260.38
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07-05-2010 2626.92 06-07-2009 2250.24
07-06-2010 2633.44 07-07-2009 2210.74
07-07-2010 2658 08-07-2009 2195.52
07-08-2010 2670.35 09-07-2009 2188.19
07-09-2010 2669.9 10-07-2009 2187.72
07-10-2010 2681.23 11-07-2009 2180.07
07-12-2010 2668.37 13-07-2009 2196.22
7/13/2010 2684.48 14-07-2009 2230.21
7/14/2010 2691.41 15-07-2009 2226.62
7/15/2010 2685.22 16-07-2009 2279.18
7/16/2010 2673.54 17-07-2009 2277.51
7/17/2010 2675.2 18-07-2009 2286.54
7/19/2010 2675.2 20-07-2009 2286.57
7/20/2010 2703.7 21-07-2009 2303.04
7/21/2010 2715.94 22-07-2009 2315.26
7/22/2010 2745.49 23-07-2009 2333.35
7/23/2010 2750.64 24-07-2009 2344.9
7/24/2010 2750.64 25-07-2009 2356.76
7/26/2010 2753.19 27-07-2009 2342.89
7/27/2010 2717.52 28-07-2009 2295.1
7/28/2010 2725.43 29-07-2009 2349.43
7/29/2010 2746.35 30-07-2009 2370.98
7/30/2010 2746.88 31-07-2009 2384.09
7/31/2010 2755.37 01-08-2009 2435.33
08-02-2010 2791.98 03-08-2009 2445.4
08-03-2010 2800.64 04-08-2009 2472.57
08-04-2010 2808.65 05-08-2009 2464.04
08-05-2010 2803.77 06-08-2009 2466.38
08-06-2010 2787.96 07-08-2009 2461.46
08-07-2010 2795.06 08-08-2009 2454.05
08-09-2010 2799.32 10-08-2009 2439.18
08-10-2010 2784.34 11-08-2009 2459.33
08-11-2010 2776.4 12-08-2009 2489.68
08-12-2010 2757.8 13-08-2009 2437.22
8/13/2010 2748.02 14-08-2009 2420.16
8/14/2010 2752.52 17-08-2009 2435.95
8/16/2010 2753.91 18-08-2009 2468.06
8/17/2010 2772.45 19-08-2009 2449.13
8/18/2010 2753.08 20-08-2009 2468.29
8/19/2010 2739.19 21-08-2009 2473.32
8/20/2010 2714.21 22-08-2009 2494.51
8/21/2010 2716.37 24-08-2009 2477.12
8/23/2010 2703.05 25-08-2009 2486.89
8/24/2010 2689.64 26-08-2009 2497.84
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8/25/2010 2707.91 27-08-2009 2537.94
8/26/2010 2730.36 28-08-2009 2538.15
8/27/2010 2758.55 29-08-2009 2496.65
8/28/2010 2781.92 31-08-2009 2487.65
8/30/2010 2758.95 01-09-2009 2486.12
8/31/2010 2746.56 02-09-2009 2509.54
09-01-2010 2761.71 03-09-2009 2502.84
09-02-2010 2764.44 04-09-2009 2501.32
09-03-2010 2765.03 05-09-2009 2502.48
09-04-2010 2772.36 07-09-2009 2549.88
09-06-2010 2778.9 08-09-2009 2550.38
09-07-2010 2784.53 09-09-2009 2542.48
09-08-2010 2796.54 10-09-2009 2504.34
09-09-2010 2764.82 11-09-2009 2506.26
09-10-2010 2764.82 12-09-2009 2509.66
9/13/2010 2794.04 14-09-2009 2544.53
9/14/2010 2794.17 15-09-2009 2574
9/15/2010 2784.34 16-09-2009 2571.72
9/16/2010 2775.83 17-09-2009 2557.27
9/17/2010 2756.1 18-09-2009 2547.54
9/18/2010 2761.94 19-09-2009 2517.9
9/20/2010 2765.72 21-09-2009 2550.3
9/21/2010 2746.4 22-09-2009 2524.14
9/22/2010 2747.14 23-09-2009 2462.73
9/23/2010 2772.9 24-09-2009 2457.1
9/24/2010 2789.12 25-09-2009 2460.56
9/25/2010 2802.85 26-09-2009 2410.33
9/27/2010 2787.62 28-09-2009 2403.16
9/28/2010 2811.49 29-09-2009 2450.75
9/29/2010 2814.69 30-09-2009 2435.67
9/30/2010 2829.18 01-10-2009 2429.07
10-01-2010 2853.63 03-10-2009 2504.42
10-04-2010 2856.2 05-10-2009 2503.12
10-05-2010 2895.47 06-10-2009 2489.1
10-06-2010 2903.89 07-10-2009 2525.31
10-07-2010 2872.04 08-10-2009 2521.37
10-08-2010 2893.38 09-10-2009 2531.9
10-09-2010 2916.09 10-10-2009 2552.57
10-11-2010 2916.09 12-10-2009 2543.21
10-12-2010 2924.87 13-10-2009 2550.59
10/13/2010 2958.53 14-10-2009 2565.48
10/14/2010 2956.51 15-10-2009 2598.5
10/15/2010 2931.79 16-10-2009 2606.72
10/16/2010 2940.63 17-10-2009 2618.44
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10/18/2010 2960.09 19-10-2009 2624.06
10/19/2010 2916.48 20-10-2009 2670.38
10/20/2010 2929.31 21-10-2009 2661.64
10/21/2010 2902 22-10-2009 2663.87
10/22/2010 2918.8 23-10-2009 2666.89
10/23/2010 2935.01 24-10-2009 2651.79
10/25/2010 2953.6 26-10-2009 2648.68
10/26/2010 2983.09 27-10-2009 2630.87
10/27/2010 2959.54 28-10-2009 2669.23
10/28/2010 2979.72 29-10-2009 2623.23
10/29/2010 2972.93 30-10-2009 2626.67
10/30/2010 2987.58 31-10-2009 2629.42
11-01-2010 3003.24 02-11-2009 2684.06
11-02-2010 3012.11 03-11-2009 2696.03
11-03-2010 3005.02 04-11-2009 2687.2
11-04-2010 3053.54 05-11-2009 2648.85
11-05-2010 3073.86 06-11-2009 2652.78
11-06-2010 3091.07 07-11-2009 2664.66
11-08-2010 3122.99 09-11-2009 2642.43
11-09-2010 3170.82 10-11-2009 2656.15
11-10-2010 3131.49 11-11-2009 2632.21
11-11-2010 3142.35 12-11-2009 2623.37
11-12-2010 3082.58 13-11-2009 2621.93
11/13/2010 3087.12 14-11-2009 2677.27
11/15/2010 3099.55 16-11-2009 2694.92
11/16/2010 3030.15 17-11-2009 2699.76
11/17/2010 3016.62 18-11-2009 2694.17
11/18/2010 3050.34 19-11-2009 2690.03
11/19/2010 3054.57 20-11-2009 2711.5
11/20/2010 3062.26 21-11-2009 2727.86
11/22/2010 3051.53 23-11-2009 2702.9
11/23/2010 3073.16 24-11-2009 2739.3
11/24/2010 3106.38 25-11-2009 2749.96
11/25/2010 3117.01 26-11-2009 2692.57
11/26/2010 3112.35 27-11-2009 2703.11
11/27/2010 3115.32 30-11-2009 2816.8
11/30/2010 3148.72 01-12-2009 2804.18
12-01-2010 3176.37 02-12-2009 2804.18
12-02-2010 3186.09 03-12-2009 2771.21
12-03-2010 3206.79 04-12-2009 2767.95
12-04-2010 3225.06 05-12-2009 2719.47
12-06-2010 3220.54 07-12-2009 2693.38
12-07-2010 3217.25 08-12-2009 2637.7
12-08-2010 3217.25 09-12-2009 2626.29
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12-09-2010 3219.56 10-12-2009 2631.37
12-10-2010 3195.41 11-12-2009 2626.71
12-11-2010 3186.81 12-12-2009 2633.77
12/13/2010 3217.26 14-12-2009 2644.33
12/14/2010 3217.26 15-12-2009 2685.91
12/15/2010 3223.7 16-12-2009 2669.99
12/16/2010 3208.42 17-12-2009 2684.67
12/17/2010 3210.32 18-12-2009 2683.27
12/18/2010 3212.79 19-12-2009 2662.09
12/20/2010 3223.32 22-12-2009 2692.8
12/21/2010 3234.81 23-12-2009 2720.75
12/22/2010 3232.87 24-12-2009 2736.57
12/23/2010 3243.75 26-12-2009 2760.91
12/24/2010 3256.62 28-12-2009 2755.71
12/27/2010 3262.57 29-12-2009 2734.12
12/28/2010 3292.43 30-12-2009 2730.72
12/29/2010 3292.43 31-12-2009 2754.68
12/30/2010 3273.37
12/31/2010 3294.63
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“EVALUATION OF THE WORKING OF INVESTMENT BANKING
IN INDIA WITH REFERENCE TO IDBI & ICICI BANKs”.
*1 Prof. Krunal Parekh
*1 Faculty & Head: Admission & Alumni Cell, Datta Meghe Institute of Management
Studies, Nagpur, Email – [email protected], Cell: - +91-9823433306
*2 Dr. D. S. Jagnade.
*2 Dr. D.S.Jagnade: Hon. Director, RTMNU, Sub-Centre-Gadchiroli., Cell: - +91-
9422135834
ABSTRACT
―In modern competitive business world finance is the key store of each and every operation activities of the
business. No business can be started without adequate financial resources nor can it be succeed. Micro, Small,
Medium and Large Enterprises are lauded the world over as prime drivers of growth with equity and contribute
9% to the GDP of the country and 45% of the total manufacturing output arises from the MSME and 36%
of the India’s total export provide 100 million employment opportunities through its 46 million units across
the country. There are certain areas which need to be exploited like major one is IT sector, there will be large
room for entrepreneurs to render their services and will decide the altitude with empowering SME through latest
ICT tools to enhance competitiveness and productivity of business. There are various development banks that
provide loans to MSME like, IDBI, ICICI and Reliance etc. Encouragement to right type of industries by
granting loans (particularly medium & long term), the banks can provide financial resources to the right type of
industries to secure necessary competitive requirement In a planned economy, this research will help in its
necessity that the banks should formulate their loan policies in accordance with the broad objectives & strategy
of industries as adopted in the plan. This will promote right type of industries in the economy & grow
IT-enabled SMEs in India.
KEYWORDS: ICT Tools, Services, Altitude, Loan policies.
1. BACKGROUND
Micro, Small, Medium and Large Enterprises are lauded the world over as prime drivers of growth with equity
and contribute 9% to the GDP of the country and 45% of the total manufacturing output arises from the
MSME and 36% of the India’s total export provide 100 million employment opportunities through its 46
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million units across the country. The small resources of entrepreneurs make them more vulnerable to these
forces within India as well relationships with big businesses, rules and regulations, inspections and finance pose
considerable problems quite different from the problems arising from globalization.
In order to compete with foreign organisations producing goods at lower labour costs, Indian small and
medium-sized enterprises (SMEs) need to improve their productivity. This can be done by cutting the input
costs like time, material and labour of the products and services they sell. The fastest, most efficient approach to
competing successfully in this area is to adopt Digital Technology.
2. INTRODUCTION
The Indian population is well ahead of many developed nations in adopting Digital technology in their personal
lives. However, Indian SMEs lag behind in adopting it for their businesses. MSME must take a leading role in
accelerating digital technology toward increasing enterprises productivity and profitability. IT adoption in the
manufacturing sector is strong empirical evidence that IT usage by Indian business would lead to greater
profitability and employment. In this IDBI Bank and ICICI bank plays important role as they have the banks
who have first focused in industrial growth and financing to MSME for development of industries as well
economy of India.
3. OBJECTIVES OF STUDY
1) To Study and understand the ICT Access and Use by SMEs.
2) To understand the method of lending (credit policies) of IDBI & ICICI:
Analyzing system of lending & horizontal & vertical issues such as grant/loan blending.
4. ABOUT MSMES IN INDIA
Indian SMEs represent the model of socio-economic policies of Government, which emphasize job creation at all
levels of income stratum and diffusion of economic power in the hands of few thereby discouraging monopolistic
practices of production and marketing; and in all prospects contributing to growth of economy and foreign
exchange earning with low import-intensive operations.
Indian SMEs also play a significant role in Nation development through high contribution to Domestic Production,
Significant Export Earnings, Low Investment Requirements, Operational Flexibility, Location Wise Mobility,
Low Intensive Imports, Capacities to Develop Appropriate Indigenous Technology, Import Substitution,
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 22
Contribution towards Defense Production, Technology – Oriented Industries, Competitiveness in Domestic and
Export Markets thereby generating new entrepreneurs by providing knowledge and training.
Despite their high enthusiasm and inherent capabilities to grow, SMEs in India are also facing a number of
problems like sub-optimal scale of operation, technological obsolescence, supply chain inefficiencies, increasing
domestic and global competition, fund shortages, change in manufacturing strategies and turbulent and uncertain
market scenario. To survive with such issues and compete with large and global enterprises, SMEs need to adopt
innovative approaches in their operations. SMEs that are innovative, inventive, international in their business
outlook, have a strong technological base, competitive spirit and a willingness to restructure themselves can
withstand the present challenges and come out successfully to contribute 22% to GDP.
Description INR USD($)
Micro Enterprises upto Rs. 25Lakh upto $ 62,500
Small Enterprises above Rs. 25 Lakh & upto Rs. 5
Crore above $ 62,500 & upto $ 1.25 million
Medium Enterprises above Rs. 5 Crore & upto Rs. 10
Crore
above $ 1.25 million & upto $ 2.5
million
Figure 1 Manufacturing Enterprises – Investment in Plant & Machinery
Description INR USD($)
Micro Enterprises upto Rs. 10Lakh upto $ 25,000
Small Enterprises above Rs. 10 Lakh & upto Rs. 2 Crore above $ 25,000 & upto $ 0.5 million
Medium Enterprises above Rs. 2 Crore & upto Rs. 5 Crore above $ 0.5 million & upto $ 1.5 million
Figure 2 Service Enterprises – Investment in Equipments
Source: SME Chamber of India.
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Figure 3 Top drivers for IT adoption among SMEs.
Source: IDC
In the above statistics we can see that with the help of ICT and SMEs can improve in various domain like
Strong Communication within organisation, fast linkage between Customers and suppliers and can give the
leverage of competition.
5. CURRENT USAGE OF ICT IN MSME:
In India, technology is viewed as a means to save time and effort, as well as stay updated, but only tech
adopter‘s credit technology with providing a competitive edge and a path towards business innovation.
Figure 4 ICT Usage by Indian MSMEs.
Source: CII
Series1, Reduction in
inventory, 69%
Series1, Creating and
delivering
products and services, 78%
Series1, Remain Relevant/Comp
etitive, 83%
Series1, Future Growth and
Expansion, 84%
Series1, To get Edge over
Competition,
87%
Series1, Linkages with
Customers and
Suppliers, 89%
Series1, Improve
communciation
within organization,
89%
Series1, HR and Administration,
75%
Series1, Finance and Accounting,
83%
Series1, After Sales & Service,
45%
Series1, marketing & Sales, 68%
Series1, Outbound
Logistics, 45%
Series1, Production/Ma
nufacturing,
64%
Series1, Inbound
Logistics, 40%
ICT Usage By Indian MSMEs
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Small businesses widely use basic software for accounting and designing documents like Invoices and orders.
Similarly a majority of small businesses report low internet usage, limiting it to email, search functions etc. only
small number of tech users use internet to promote activities via portals a digital commerce platform of market
places like just dial etc.
According to IMRB report only 4% of MSMEs who are aware of the cloud computing has adopted the
technology.
Figure 4 Adoptions and Awareness by Indian MSMEs.
Source: IMRB
6. CHALLENGES TO SME SECTOR
Despite its commendable contribution to the Nation's economy, SME Sector does not get the required support
from the concerned Government Departments, Banks, Financial Institutions and Corporate, which is a handicap
in becoming more competitive in the National and International Markets.
SMEs face a number of problems - absence of adequate and timely banking finance, limited capital and
knowledge, non-availability of suitable technology, low production capacity, ineffective marketing strategy,
identification of new markets, constraints on modernization & expansions, non-availability of highly skilled
labour at affordable cost, follow-up with various government agencies to resolve problems etc.
7. COMMON CHALLENGES FOR ADOPTION
Due to fragmented nature of the sector, challenges differ from one enterprise to the next driven by differences in
Awareness, Manufacturing ,
15%
Awareness, BFSI, 15%
Awareness, Media, 17%
Awareness, Travel & Trade,
18%
Awareness, Education, 36%
Awareness, IT, 14%
Adoption
Awareness
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size, location, nature of product/service. SMEs share many emerging challenges that limit their ability to
compete with larger and more established player in the market. Due to this factor there is no perspective
development for long term planning which gives challenge of
1. Credit Hurdles: - lack of availability, high cost, poor accessibility etc.
2. Poor Infrastructure: No basic infra.
3. Adoption: - ICT application is very expensive but now a day it comes in very low monthly subscription
cost.
4. Penetration: Availability of electricity is still challenge and broadband connectivity.
5. Shortage of skilled labor that has the basic know-how to work on ICT tools like computer.
8. COMMON CHALLENGES FOR ADOPTION
Public policy is the tool by which governments and various banks can help to create an environment and
remove the barriers for businesses for that keeping in mind IDBI and ICICI bank Development banks are
expected to formulate their lending policies & direct their general operations in accordance with the broad
socio-economic objectives of the country. Must actively participate in the realization of these objectives.
In view of certain instrumental not only in establishing a well-developed, diversified and efficient industrial and
institutional structure but also adding a qualitative dimension to the process of industrial development in the
country What special scheme for new technologies, collaterals and Guarantees, rate of interest granted also
has played a pioneering role In fulfilling its mission of promoting industrial growth through financing of
medium and long-term projects, in consonance with national plans and priorities Fill the necessary gap in the
industrial development in respect of industrial finance.
BIBLIOGRAPHY
A} Books
1. Dr. R.R.Paul ―Monetory Economics‖- Kalyani Publication
2. Vasant Desai ―Banking Institutions and Practice‖.
3. Jordan and Natrajan ―Banking-Laws, Practice, Theory‖.
B} Magazines
1. Business World
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C} Journals
1. Vinod kumar Yadav, “Capital Budgeting in Small-Scale Industries,” Indian Finance journal, October, pp.5-12, 2013.
D} Online
1. www.rbibulletin.com
2. www.idbi.com
3. www.icici.com
4. http://indiasmeforum.org/index.php
5. http://www.cii.in/
6. http://www.smechamberofindia.com/
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 27
Indian Rural Banking Sector - Challenges & Opportunities
Prof. Sandesh R. Kedia
MBA, NET, NSE Certified Market Professional.
Assistant Professor
Department of Advanced Management & Studies, G.S. College of Commerce, Wardha.
Mobile+91 9822722763
E-mail id: [email protected]
Abstract:
Global economic growth has slowed from 3.9% in 2011 to 3.2% in 2012 we are not unaffected by what happens in
the rest of the world our economy too has slowed after 2010-11. In the current year CSO has projected a growth
estimation of 5% while the RBI has put it at 5.5%. As Shri Chidambaram our Finance Minister has rightly put it
“Whatever be the final estimate it will be below India’s potential growth rate of 8%, getting back to that growth
rate will be the challenge that faces the country”. This is clearly not feasible if large sections of society remain
marginalized and people who lack access to financial services from Institutional service providers are not
mainstreamed .The challenge of financial inclusion presents an inflexion point for Indian banking.
In the coming 10-15 years banks in India in particular would realign their position in the pecking order based on
their ability to convert financial inclusion into a viable business opportunity. Banks which are able to craft
appropriate business and delivery models to tap the large excluded sections of society would come on top. The
triad of financial inclusion, financial literacy and financial stability would be extremely relevant in the
foreseeable future. The depth and breadth of banking in the country would determine financial stability.
Keywords:
Financial Inclusion, Financial Inclusion Plan, Financial Literacy, Priority sector lending, Regional Rural
Banks.
ISSN 2277 8675 DMIETR International Journal on Financial Management (ejournal) Page 28
Indian Rural Banking Sector - Challenges & Opportunities
The global financial crisis and the current Euro zone crisis have affected the banks in the advanced economies; the
spillover is ricocheting on banks in emerging economies including India. Issues of financial stability, economic
growth and managing inflation are the major challenges confronting regulators in advanced economies and are
equally important for emerging economies like ours. Global economic growth has slowed from 3.9% in 2011 to
3.2% in 2012 we are not unaffected by what happens in the rest of the world our economy too has slowed after
2010-11. In the current year CSO has projected a growth estimation of 5% while the RBI has put it at 5.5%. As
Shri Chidambaram our Finance Minister has rightly put it ―Whatever be the final estimate it will be below India‘s
potential growth rate of 8%, getting back to that growth rate will be the challenge that faces the country‖. This is
clearly not feasible if large sections of society remain marginalized and people who lack access to financial
services from Institutional service providers are not mainstreamed .The challenge of financial inclusion presents
an inflexion point for Indian banking.
The biggest challenge for next decade or more to banks in the country is to capture the banking business of over
50% population of this country of over 120 billion people. The contemporary challenges facing Indian Rural
Banking are Priority Sector Lending, Regional Rural Banks, Financial Inclusion, Financial Literacy and
Education. Aptly Dr. Subbarao, (former RBI Governor) terms Financial Inclusion as the supply side of the
equation and Financial Literacy the demand side.
(i) Priority sector lending
The definition of priority sectors has evolved over a period of time and at present, priority sectors are broadly
taken as those sectors of the economy which in the absence of inclusion in the priority sector categories would not
get timely and adequate finance. Typically, these are small loans to small and marginal farmers for agriculture and
allied activities, loans to Micro and Small Enterprises, loans for small housing projects, education loans and other
small loans to people with low income levels. Presently, the target for aggregate advances to the priority sector is
40 per cent of the Adjusted Net Bank Credit ANBC or the credit equivalent of Off Balance sheet Exposure (OBE),
whichever is higher for domestic banks. Foreign banks with 20 or more branches in the country are being brought
on par with domestic banks for priority sector targets in a phased manner over a five year period starting from
April 1, 2013. For foreign banks with less than 20 branches the overall target is fixed at 32 per cent.
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The domestic banks, i.e, public and private sector, could not achieve the target of 40 percent for the year 2012 as
can be evidenced from the table below.
Priority Sector Lending by Banks (Amount in Rs. billion)
As on the Last
Reporting Friday of
March
Public Sector Banks Private Sector Banks Foreign Banks
2011 10,215
(41.0)
2,491
(46.7)
667
(39.7)
2012 11,299
(37.4)
2,864
(39.4)
805
(40.8)
Notes: Figures in parenthesis are percentage to ANBC or credit equivalent of off balance sheet
exposure (OBE), whichever is higher, in the respective groups.
Source: RBI Annual Report 2012
As per 59th NSS Survey, households with 2 hectare or less land accounted for 84% of all farmer households. The
percentages of such small and marginal famers who have access to credit is only 46.3%. A large section of farmers
is still dependent on moneylenders for their financial needs.
Shares in Total debt of Cultivator Households
Source of debt 1951 1961 1971 1981 1991 2002
Institutional 7.3 18.7 31.7 63.2 66.3 61.1
Non-Institutional 92.7 81.3 68.3 36.8 30.6 38.9
Money Lenders 69.7 49.2 36.1 16.1 17.5 26.8
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source: All India Debt and Investment Survey, GoI, various rounds.
The major challenge is to bring all farmers into the institutionalcredit framework. To boost the credit to
agriculture sector, apart from a host of initiatives, the Kisan Credit Card (KCC) Scheme was introduced in the
year 1998-99 to enable farmers to purchase agricultural inputs and draw cash for their production needs. In 2004,
NABARD revised the Model KCC Scheme to provide adequate and timely finance for meeting the
comprehensive credit requirements of farmers under single window, with flexible and simplified procedure,
adopting whole farm approach. The scheme now covers term credit as also working capital for agriculture and
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allied activities and a reasonable component for consumption needs. During 2011-12, public sector banks have
issued 68,03,051 KCCs with sanctioned limits aggregating to Rs. 69,51,768.45 lakh. Since inception of the
scheme, the number of KCCs issued by public sector banks stood at 5,47,49,373.00 till March 2012 with
sanctioned limits aggregating to Rs. 3,53,14,527.11 lakh. RBI have recently revised the guidelines on Kisan
Credit Card scheme. Margin /security norms are waived for loans up to Rs.1 lakh to enhance the flow and easy
delivery of bank loans to small agricultural borrowers.
The revised priority sector guidelines lay emphasis on direct delivery of credit to the poor beneficiaries i.e.
without the involvement of intermediaries, which will ensure better management of risks and also reduction in
transaction, delivery and administrative costs for these loans, which being essentially small ticket, low value high
volume loans, do generate profits translating to a stable low cost deposit stream for banks and to the fortune at the
bottom of the pyramid.
To make priority sector lending viable for the banks, RBI has removed the interest rate ceiling on all types of loans
including small loans by linking it to Base Rate of the banks with effect from April 1, 2010. Thus, there is no
preferential rate of interest for priority sector loans. Thus priority sector lending is competitive and commercially
viable.
Why have RBI removed caps on pricing? The cost of absence of bank lending to poor and vulnerable sections of
the society is heavy, as the poor have no option but to borrow from the unorganized sector, the informal or
alternative channels at usurious price. There is a need for reorienting the approach of banks to look at priority
sector areas. The challenges in priority sector can be overcome only if banks consider priority sector lending as
part of normal business operations of the banks and not as an obligation. Rural untapped market offers a big
business opportunity to the banks. Banks need to innovate new products which cater to the needs of farmers,
weaker sections and other vulnerable sections of the society, develop new delivery channels and embrace
technological developments which will reduce the delivery costs. Priority sector must be treated as a viable
business proposition.
(ii) Regional Rural Banks
Regional Rural Banks (RRBs) were established in the year 1976 as a low cost financial intermediation structure in
the rural areas to ensure sufficient flow of institutional credit for agriculture and other rural sectors. RRBs were
expected to have the local feel and familiarity of the cooperative banks with the managerial expertise of the
commercial banks. RRBs are jointly owned by GoI, the concerned State Government and Sponsor Banks, the
issued capital of a RRB is shared by the owners in the proportion of 50 percent, 15 percent and 35 percent
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respectively. In practice they borrowed the politicization in lending, rampant in cooperative Banks, with the worst
form of unionism replicated from the commercial banks. The low cost structure was also washed away after the
Obul Reddy report which brought parity of pay scales with Commercial Banks.
Several RRBs suffered humongous losses. Government of India and RBI initiated several measures to improve
the financial health of RRBs. During a review carried out by GOI in the year 2009 it was found that the Capital
Risk Weighted Assets Ratio (CRAR) of the RRBs were too low. Dr. K.C Chakrabarty committee suggested
bringing the CRAR of RRBs to at least 9 percent in a sustainable manner. The Committee inter-alia recommended
recapitalization support to the extent of Rs. 2,200 crore, to 40 RRBs in 21 States, out of which Rs.1,100 crore was
to be contributed by Central Government. The recapitalization process which started in 2010-11 has been
extended till 2013-14. Several Committees looked into issues of viability finally amalgamation of RRBS on
grounds of contiguity in a particular region was adopted. Initially, there were 196 RRBs working in the country.
After the second phase of amalgamation, which started w.e.f. October 1, 2012, 34 RRBs have been amalgamated
to form 14 new RRBs. After a massive consolidation and merger exercise to strengthen the RRBs, the number of
RRBs operating in the country today has come down to 62.
The number of sustainably viable RRBs (i.e. RRBs making net current profit and having no accumulated losses)
has increased to 60 as on March 31, 2012 as compared to 58 as on March 31, 2011.
(iii) Financial Inclusion
For Banking penetration and branch building a massive exercise has been taken up by RBI and this is being done
through the lead bank scheme channel. RBI advised banks in November 2009 to draw up a roadmap to provide
banking services through a banking outlet in every village with a population of more than 2000 and the target date
was March 2012. Banks were advised that such banking services need not necessarily be extended through a brick
and mortar branch but could be provided through any of the various forms of ICT-based models including through
BCs. Under the roadmap for providing banking outlets in villages with population above 2000, banking outlets
have been opened in hitherto 74199 unbanked villages comprising 2493 branches, 69374 Business
Correspondents (BCs) and 2332 through other modes like ATMs, mobile van, etc.
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How do RBI plan to provide banking services to villages having population less than 2000? As per the
announcement in the Annual policy Statement 2012-13, State Level Bankers' Committees (SLBCs) were advised
by RBI to prepare a roadmap covering all unbanked villages of population less than 2000 and notionally allot
these villages to banks for providing banking services in a time bound manner, especially, to start with, EBT
services. The objective is to provide a bank account to every household/person throughout the country. To start
with, banks have been advised to provide door step services to EBT beneficiaries to facilitate transfer of all State
benefits including MGNREGA wages and various cash subsidies to beneficiaries by direct credit to the bank
accounts, through regular visits of BCs to the allocated villages and over a period of time, provide all kinds of
banking services viz. remittances, recurring deposit, entrepreneurial credit in the form of KCC and GCC,
insurance (life and non- life) and other banking services to all the residents of the village through a mix of brick
and mortar branch and BC network. RBI have also emphasized planning of sufficient number of brick and mortar
branches so that there is a brick and mortar branch to provide support to a cluster of BC units, i.e., about 8-10 BC
units at a reasonable distance of 3-4 kilometers. As per the Roadmap drawn about 484000 villages with
population less than 2000 have been allotted to various banks for provision of banking services in next 3 years.
Financial Inclusion Plan
Financial Inclusion (FI) is the process of ensuring access to appropriate financial products and services needed by
all sections of the society in general and vulnerable groups such as weaker sections and low income groups in
particular at an affordable cost in a fair and transparent manner by mainstream institutional players. Reserve Bank
has adopted a bank- led model for financial inclusion which seeks to leverage on technology. In January 2006, the
Reserve Bank permitted banks to utilise the services of non-governmental organizations (NGOs), micro-finance
institutions (other than Non-Banking Financial Companies) and other civil society organisations as intermediaries
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in providing financial and banking services through the use of business facilitator and business correspondent (BC)
models. The BC model allows banks to do ‗cash in - cash out‘ transactions at a location much closer to the rural
population, thus addressing the last mile problem.
Reserve Bank has been furthering financial inclusion in a mission mode through a combination of strategies
ranging from relaxation of regulatory guidelines, provision of new products and other supportive measures to
achieve sustainable and scalable Financial Inclusion. A structured and planned approach was followed under
financial inclusion wherein all banks were advised in January 2010 to prepare Board approved Financial Inclusion
Plans (FIPs) congruent with their business strategies and comparative advantage for three year period extending
up to 2013. The implementation of these plans was closely monitored by the Reserve Bank through quantitative &
qualitative reporting formats and through review meetings held with CMDs/CEOs and other senior officials of
banks.
Performance of banks under the first three year Financial Inclusion Plan period (2010-13)
The Financial Inclusion Plan (2010-13), introduced in April 2010 has concluded in March 2013. The penetration
of baking services in the rural areas has increased to a great extent.
A snapshot of the progress made by banks, upto December 31 2012, under FIP for certain key parameters is given
below:-
i. Banking connectivity has been extended to 2,11,234/- villages from 67,694 at the beginning of the plan period.
5694 rural branches have been opened during the period.
ii. Numbers of Business Correspondents have increased from 34,532 to 1,52,328.
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iii. Total number of Basic Savings Bank Deposit Accounts (BSBDAs) have gone up from 73.45 million in 2010 to
171.43 million upto December 31 2012, Number of Kissan Credit Cards outstanding have gone up from 24.31
million in 2010 to 31.73 million upto December 31 2012 and Number of General Credit Cards outstanding have
gone up from 1.39 million in 2010 to 3.11 million upto December 31 2012.
iv.
v. The number of ICT based BC transactions though encouraging is still very low as compared to the increase in
the number of banking outlets. The focus on monitoring has, therefore, now shifted more towards the number and
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value of transactions in no-frills, credit and remittance accounts opened through BCs. In this direction, RBI have
now advised banks to disaggregate the FIP upto the branch level and RBI have involved the controlling offices of
respective banks as also the Regional Offices of RBI in all the States in the monitoring process.
Some of the major issues being faced by banks in pursuing and achieving the Financial Inclusion Plan
target
Efficient Business Model
Banks are yet to perceive FI as a profitable business model. Feedback received suggests that many banks are still
pursuing FI as a regulatory requirement rather than treating it as a business model. Banks have to realize that the
bankability of the poor holds a major opportunity for the banking sector in developing a stable retail deposit base
and in curbing volatility in earnings with the help of a diversified asset portfolio. The recent crisis has underscored
the need for reducing banks‘ reliance on wholesale deposits and borrowed funds and cultivating a retail portfolio
of assets and liabilities for financial stability. Two basic issues that need to be understood by banks while
implementing financial inclusion is that:-
Financial Inclusion programmes should be implemented on commercial lines and not on a charity basis. It
is important that banking with the poor is perceived and pursued as a sustainable and viable business
model.
While poor need not be subsidized, it is important to ensure that they are not exploited. The need is to
ensure that poor people who deserve credit are provided access to timely and adequate credit in a
non-exploitative manner.
BC Model - Viability Issues:
Business Correspondent model is still in the experimental stages and there are various challenges associated with
the model. The viability of BC model has remained a critical issue. Surveys have revealed that branch officials do
not visit BCs or customers and do not take any effort in introducing BCs to villagers. One primary reason cited by
branch officials are the scarcity of staff provided to them for carrying out such visits to villages. Further, most of
the accounts opened by BCs have remained non-operational. In order to ensure participation of all stake holders in
the financial inclusion process, RBI have advised banks to disaggregate the FIPs upto the Controlling Office and
branch level. This would ensure that bank officials at the ground level are aware of the banks objective under FI
and of the specific targets given to each Zone/branch for achieving the objectives.
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Technology Issues
Another bottleneck in achieving financial inclusion is the non-availability of physical and digital connectivity. For
the success of the ICT based model, resolving technology related issues is the key.
iv)Financial Literacy
Financial Inclusion and Financial Literacy are two sides of the equation. Financial Inclusion acts from supply side
by providing financial market/services that people demand whereas Financial Literacy stimulates the demand side
by making people aware of what they can demand. Therefore, access to financial services and Financial
Education must happen simultaneously. It must be continuous, an ongoing process and must target all sections of
the population.
Financial awareness has to be spread amongst the excluded masses that are illiterate and poor. For this, evolving
an appropriate Business Model & an Efficient Delivery Mechanism is the major challenge for banks. For
disseminating financial literacy and awareness, a National Level Coordination of all stakeholders like Banks,
Governments, Civil Societies, NGOs, etc. is required. In India, the need for financial literacy is even greater
considering the low levels of literacy and the large section of the population still out of the formal financial system.
To ensure effective coordination of the efforts made by all the financial regulators and other stakeholders, a
Technical Group on Financial Inclusion and Financial Literacy has been constituted under the aegis of Financial
Stability and Development Council.The technical group is headed by the Deputy Governor, RBI, Dr Chakrabarty
with members drawn from SEBI, PFRDA, IRDA, Government of India, State Governments, Central Educatio n
Board etc. The Group is in dialogue with NCERT/State Education Boards for inclusion of financial literacy in
CBSE/State curriculum.
A national strategy on financial education has been prepared which would cater to all sections of the population in
the country. Since the challenge is to link large number of financially excluded people to the formal financial
system, the focus of the strategy at the base level will be to create awareness of basic financial products through
dissemination of simple messages of financial prudence in vernacular language through large campaigns across
the country.
The Reserve Bank of India had launched Project Financial Literacy in March 2007 with a view to create
awareness, especially among the common persons, on matters relating to banking, finance and central banking.
Under Project Financial Literacy, several initiatives have been taken to achieve financial awareness and literacy
among various target groups, which included publication of comic books on banking and RBI; games on
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Financial Education; arranging school/college visits for creating financial awareness; participation in
exhibitions/fairs/melas at the State & District levels; conducting essay competitions and quizzes in schools to
create awareness about banking and RBI; outreach programmes undertaken by the Top Management and
Regional Offices; RBI‘s Young Scholars Scheme, etc.
Banks have been advised to setup Financial Literacy Centres (FLCs) in the 630 plus offices of the Lead District
Managers (LDMs). As at the end of December 2012, 658 FLCs were functioning and 1.5 million people were
educated during the period April to December 2012. Further, 35,000 rural branches of SCBs including RRBs have
been mandated to undertake outdoor financial literacy activities, at least once a month, with focus on financially
excluded population. In order to link the financially excluded segment with the banking system, a ‗Model‘ for
conduct of Literacy Camps to be held by banks has been designed, detailing the operational modalities to
culminate in effective financial access to the excluded people. Further, to ensure consistency in the financial
literacy material reaching the target audience in a simple and lucid manner, RBI has prepared a comprehensive
Financial Literacy Material consisting of a Financial Literacy Guide, Financial Diary and a set of 16 Financial
Literacy Posters (few posters have been displayed below).
v) Education
The scope of education has widened both in India and abroad covering new courses in diversified areas. Realizing
the importance of education for economic development and raising overall living standards, RBI, has classified
loans and advances granted to individuals for educational purposes, including vocational courses up to Rs. 10 lakh
for studies in India and Rs.20 lakh for studies abroad, under 'priority sector'. With a view to enable banks, the
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Indian Banks' Association has brought out a model scheme for educational loan in the year 2001, which facilitated
economically weaker sections of the society to avail educational loans from scheduled banks with modified easier
norms. The Scheme was revised by IBA subsequently, the latest being in September 2012. Loans for education
should be seen as an investment for economic development and prosperity, since knowledge and information
would be the principal driving force for economic growth in the coming years.
Findings & Conclusion
With the recently revised priority sector norms, focusing on small loans directly to small and marginal farmers,
micro and small enterprises low cost housing projects, student and people with low income the banks will see
priority sectors as viable business opportunity to reach financial excluded sections of the population. In the
coming 10-15 years banks in India in particular would realign their position in the pecking order based on their
ability to convert financial inclusion into a viable business opportunity. Banks which are able to craft appropriate
business and delivery models to tap the large excluded sections of society would come on top. The triad of
financial inclusion, financial literacy and financial stability would be extremely relevant in the foreseeable future.
The depth and breadth of banking in the country would determine financial stability.
The Banking sector has played a crucial role in developing the rural economy by providing credit and creating
financial awareness. But despite all the efforts, a huge section of the rural population is still out of the banking net.
Rural India has huge potential for development and it provides tremendous business opportunity for the banks.
Finance Ministers words Shir Chidambaram rightly said, ―Any economist will tell us what India can become as
we are the tenth largest economy in the world. We can become the eighth or perhaps the seventh largest by 2017.
By 2025 we could become a $5 trillion economy and among the top five in the world.‖ What we will become
depends on us and the choices that we make. As Swami Vivekananda, whose 150th birth anniversary we
celebrated recently, said "All the strength and succor you want is within yourself, therefore make your own
future‖.
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HOUSEHOLD BUDGET PROVISIONS OF INVESTMENT AND
ITS DETERMINANTS
PENDSE VISHWAS SHRINIWAS
Assistant Professor,
Padmashri Dr Vithalrao Vikhe Patil Foundation’s Institute of Business Management and Rural Development, Vilad Ghat,
Ahmednagar
Vadgoan Gupta (Vilad Ghat), PO-MIDC, Ahmednagar, 414111
Mobile-9860781595, [email protected]
Abstract:-
As the job of retirement planning becomes less of an institutional and more of an individual responsibility the
onus of congenial post retirement life shifts to an individual investor. Hence the study of savings, determinants
and its proportion by individual investors for a stress free retirement becomes more important. The savings in
the context include total income minus total expenditure and hence the budgetary provision on various expenses
and savings or investment was investigated. The 10 budgetary expenses were found to form three distinct groups
with decreasing priority for basic needs, necessities and amenities. The provision for investment in the budget
was found to be associated with income, occupation, education of households which when further inquired
revealed that the budgetary provision for investment was partially influenced by education and more directly by
income. The effect of education on budgetary provision expressed as a percentage of gross monthly house hold
income revealed a more indirect effect as compared to income which showed more predominant effect as
observed from plot of probabilities.
Key Words: Household Budget, Investment Budget, Priority of Budget
1. Introduction
Over the past retirement planning has become less of an institutional and more of an individual
responsibility. The reasons for this change are well known and include a shift from defined benefit to
defined contribution retirement programs, longer life spans, and growing uncertainty and even company
pensions. The responsibility for a ‗‗successful‘‘ old age rests with the individual (Ekerdt,2004).
Demographic changes, tight public budgets and reduced generosity of occupational pension plans shift the
responsibility for an adequate retirement provision towards the individua l (Oehler,2008). One of the
pressing issues before individuals and governments in post reforms era is the funding of individual
retirement accounts. The amount of savings or allocation of one‘s gross income periodically can help
resolve this issue. Also the savings and investment by individual households can contribute to a greater
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extent in national and personal development of a individual investor. Accordingly, considerable attention has
been given to understanding decision making underlying personal saving (e.g., Benartzi, Peleg, & Thaler,
2009; Benartzi & Thaler, 2007; de Graaf, Waan, & Naylor, 2005; Schor, 1998). Although recent decision
making studies have shown that people can be encouraged to save more money than they did before (e.g.,
Madrian & Shea, 2001; Thaler & Benartzi, 2004), it is still not clear how individuals decide how much
money to save and whether such estimates are sensitive to time frames. In this investigation the monthly
budget of respondent was inquired on 10 different items like food, grocery, clothing, house rent, fuel
expenses, entertainment and investment as a proportion or percentage of their gross monthly household
income. However, going beyond these particular assets, micro-level empirical studies of household savings
are relatively rare, presumably since such data are much less readily available than data on income or
consumption (Phipps, Woolley ,1987) The life cycle model predicts that age and income to be significant
predictors of savings, it does not deal with the amount of savings predetermined by the households as
percentage of their gross monthly household income. The present study intended to investigate the actual
budgetary provision of households and found that such provision was influenced by income and education
of respondent. The study confirms that people with higher incomes save more; indeed income is the
strongest and most significant predictor of saving.
2. Literature Review
The life-cycle model of savings is straightforward. Because people wish to smooth consumption over their
life-cycle, people will tend to save by spending less than they earn during their peak earning years, and dis
save by spending more than they earn during lower earning years (retirement). There are a number of
predictions that can be made purely from a life-cycle savings model. Income and age would be important
determinants of saving plan take-up. To the extent that home-ownership provides an alternative,
advantageously taxed, savings vehicle, we might expect to find an inverse relationship between home equity
and other savings plan take-up (holding total wealth constant). Given the extremely negative effect of
divorce on one‘s financial health, being previously married would have a predicted negative effect on
savings plan ownership. The number and age of children has an unclear effect on savings. Children are
expensive, leaving less available for saving. They increase desired bequests, motivating more sa vings.
Moreover, to the extent that children may look after parents in their old age, investing in children can be
thought of as an alternative means of savings—and one that is especially important for women. Given that
women on average marry men older than themselves and that on average women live longer than men,
women are more likely to be dependent upon their children for care in old age. A man is statistically more
likely to be able to rely on his wife for elder-care. ( Phipps, Woolley ,2008)
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Motives Behind Saving
Theoretical economic models have suggested various motives for saving, including retirement, bequest, and
for "rainy day" needs. Retirement as a motive for saving was suggested by the life-cycle hypothesis (Ando &
Modigliani, 1963; Modigliani & Brumberg, 1954).Savings are used to smooth out income flow between
stages of the life cycle. The bequest motive was inherent in Friedman's permanent income hypothesis (Bryant,
1990; Friedman, 1957). Uncertainty in life span, expenditures for health care (Kotlikoff, 1989, pp. 109-162),
or variations in income flow (Hanna, Chang, Fan, & Bae, 1993) were incorporated into the utility model to
examine consumer saving behavior.
Determinants of Family Savings
Hefferan (1982) found that both the decision to save and the level of savings were influenced by income,
wealth, and several other household characteristics. Davis and Schumm (1987) examined the saving behavior
of low- and high- income households and found that beyond a threshold level, savings rose very rapidly as
income increased. All these studies treated savings in an aggregate way. The amount of savings in each
category was not identified and analyzed.(Jing Joan 1997,).Xiao and Noting (1994) explored the relationship
between consumers' perceived motives for saving and household financial resources.They found that
low-income consumers were more likely to report saving for daily expenses, while the middle- income group
was more likely to report saving for emergencies, and the high- income group was more likely to report
saving for growth.
3. Method
Ahmednagar District is one of the largest districts in state of Maharashtra, was selected as a cohort for this
study. Data for this study were collected in Nov-Dec 2012. The district compromised of 14 tehesils. One
resource person from each tehesil was identified with whose reference 100 respondents from each tehesil
were selected as investors were believed to be skeptical about sharing their personal information especially
their financial information. Approximately 1000 questionnaires were distributed among 14 tehesils of
Ahmednagar District. On completion of questionnaire respondents returned it either through a contact person
or directly. Seven hundred and twenty two questionnaires were returned, resulting in return rates of 72.20%.
The respondents were contacted on convince basis and mostly were familiar to the interviewer or the contact
person. A structured questionnaire was administered to respondents which was prepared in the local language
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‗Marathi‘ or else was read to illiterate respondents. The respondents were asked to express their provision for
various expenditure heads such as grocery, clothing, monthly fuel, traveling, entertainment, education, health,
bills (telephone, electricity, etc), house rent or accommodation expenses and provision for investment or
savings. The amount on these expenses was expressed as a percentage of their gross monthly household
income i.e. aggregate income from all sources earned by all members of household. The r espondents could
choose one of the following categories depending on their expense on each item and investment from
investment code 1) below 5%, 2) 5% to 10%, 3) 10% to15%, 4) 15% to 20%, 5) 20% to 25%, 6) 25% to 30%,
7) 30% to 35% and 8) above 35% of their gross monthly house hold income. If the respondent does not
choose any code for either of the head of expenditure or investment, it is coded as ‗0‘.
4.Results and Discussions
The sample of 722 respondents consisted of 384(53.2%) belonging to age group 55-65 years, 145(20.1%) of
35-45 years, 90(12.5%) and 39(5.4%) above 65 years of age. The sample was dominated by 663 (91.80%)
males, which can be attributed to the fact that in rural Indian household males are the primary decision
makers. Enough care has been taken to incorporate respondents having various educational background with
each class been represented. As sample consisted of respondents living in rural and semi urban area the level
of education and occupation has been diverse ranging from illiterate to post graduate. As expected farmers
constituted the largest respondent group with 25% reported farming as their primary occupation. Also 55% of
the respondents have reported income up to 25000 which again is subject to limitation as it is self reported
figure. The family budgeted expenditure in terms of percentage of total income on accounts like grocery,
clothing, education, fuel, health, travel, bills including electricity, telephone, house rent, entertainment and
investment was collected from respondents. The different accounts were analyzed by using Principal
Component Analysis in order to form different groups of account according to importance level. The four
principal components or group of accounts are given below according to descending order o f importance
level.
Group One: Grocery and Clothing
Group Two: House Rent
Group Three: Bills, Entertainment, Investment
Group Four: Education, Fuel, Health care
The above grouping is consistent with the Maslow's (1954) theory assumes that human needs are hierarchical.
People will attempt to fulfill a higher-level need after their lower-level needs have been met. The theory
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categorizes human needs as being of two types: a deficit or lower-level need (Group I and II) and a growth
need ( Group III and IV) that is at a higher level. People will first pursue deficit needs; the more they get, the
less they want. When their deficit needs are met, people will pursue their growth needs; here the more they
get, the more they want (Alderfer, 1989; Maslow, 1955).The mini tab output of Principal component analysis
when only four components are extracted is given in table 1
Table 1. Principal Component Analysis of Monthly Household budget
Eigen analysis of the Correlation Matrix
Eigen value 3.6562 1.2237 1.1145 0.8475 0.6656 0.6378
Proportion 0.366 0.122 0.111 0.085 0.067 0.064
Cumulative 0.366 0.488 0.599 0.684 0.751 0.815
Eigen value 0.5335 0.4930 0.4368 0.3914
Proportion 0.053 0.049 0.044 0.039
Cumulative 0.868 0.917 0.961 1.000
Table 1: Principal Component Analysis of Budgeted Items
Variable PC1 PC2 PC3 PC4
Grocery -0.374 0.002 -0.268 0.186
Clothes -0.349 -0.193 -0.279 -0.328
Education -0.310 -0.271 -0.334 -0.423
Fuel Expense -0.312 0.186 0.093 -0.468
Health care -0.375 0.045 -0.233 0.401
Travel -0.348 0.175 -0.155 0.496
Bills -0.209 -0.417 0.492 0.106
House rent -0.057 -0.748 0.137 0.178
Entertainment -0.349 0.225 0.415 0.004
Investment -0.338 0.194 0.468 -0.101
Source: Data Analysis using Principal component analysis
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Highlights of Lower level Expenditure provision
In group one 39.61% respondents have 5-10% budgeted expenditure on grocery and cloth each. Even 7.2%
respondents spend 10 %to 15% of their gross monthly house hold income on grocery and 5% to 10% on
clothing. The percentage respondents spending 10% to 15% on grocery and clothing are 6.51%. There are
very less percentage of respondents spending 20% or more of their gross monthly household income on
these two accounts.
It is found that 27.4% respondents spend 5% to 10% of their gross monthly household income on house
rent. There are also 63.02% respondents spending 10% to 15% of their gross monthly house hold income on
house rent. Even nearly 10% respondents have not given any response to budgeted expenditure on group
two items as this might may be because they have owned houses. None of the respondents communicated
that their monthly budgeted expenditure on house rent is more than 15% of their gross monthly house hold
income.
Highlights for Growth Need Expenditure
It is observed that 21.6% respondents spend 5% to 10% of their gross monthly house hold income on
different bills such as light, electricity etc. There are 11.50% respondents spending 10% to 15% on
different bills. These respondents have not mentioned any budgeted expenditure on entertainment and
investment. There are 9.14% respondents having budgeted expenditure of 5% to 10% of their gross monthly
house hold income on each of three accounts in group three. The number of respondents spending 10% to 15%
on bills and 5% of gross monthly house hold income on entertainment and investment each are 6.99%.
Even there are 6.09% respondents having their budgeted expenditure of 10% to 15% of their gross monthly
house hold income on each of these three accounts. None of the respondents communicated that their
monthly budgeted expenditure on either or all three accounts is more than 15% of their gross monthly house
hold income.
The percentage respondents with 5% to 10% expenditure on education, health and travel of their gross
monthly household income are 15.24%. The expenditure of 6.09% respondents on education, health, travel
and fuel is 5% each of their gross monthly household expenditure. The percentage of respondents spe nding
20% or more of their gross monthly household income on fuel is incurred by 2.63% respondents. On health
5.40% respondents incurs 20% or more of their gross monthly household income. Even 12.74% respondents
incur expenditure of 20% or more of their gross monthly household income on travel.
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Highlights for budgetary provision on investment
The respondents planning to have 5% to 10% of their gross monthly household income on investment per
month are 26.32%. Even 18.84% respondents also plan 10% to 15% of their gross monthly household
income on investment. Majority of respondent (54.85%) do not conveyed any response on budgetary
provision of investment.
Association between demographics and budgetary investment provision.
The association between age, gender, marital status, education, occupation, income, family type, number of
employed family member, number of dependent family member, secondary source of income and gross
monthly household income with investment budgetary provision using Chi square test of independence is
discussed.
Table2. Factors affecting investment provisions
FACTOR Group Number Chi Square
P value
Speramen
R
P value
Gender Male 663 0.406 0.077 0.080 0.333
Female 59
Age 25-35 64 31.915 0.278 -0.118 0.001*
35-45 145
45-55 90
55-65 384
Above65 39
Education Illiterate 52 91.088 0.000**
0.214 0.000**
SSC 196
HSC 162
ITI 20
Diploma 123
Computer 3
Graduate or PG
Occupation Govt Service 106 152.452 0.000**
-0.161 0.000**
Pvt Employ 177
Business 130
Labor 68
Self Employed 8
Housewife 11
Farmer 184
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Retired 13
Other 25
GMHI Upto 25,000 400 181.86 0.000** 0.288 0.000**
25,000-35,000 157
35,000-45,000 76
45,000-55,000 34
Above 55,000 25
Source: Data Analysis using Chi square analysis
From above table it can be observed that apart from gender every other variable including age, occupation,
income and education were observed to be associated with proportion of budgetary provision for investment.
Income and education may be proxy for occupation and hence multinomial logistic regression was
conducted to estimate the various probabilities for provision of investment in monthly budget. The summary
of the regression estimate is as follows
Budgetary Provision of Investment= f( Age, Income, Education)
The intercept for age was not found significant and hence new revised model was proposed as
Budgetary Provision of Investment= f (Income, Education)
π(x)= e β0+β1* x
------------------------------
1+ e β0+β1* x
is binomial probability estimation based on education of respondents to set aside a predetermined
amount ranging from no allocation to above 30% of the gross monthly house hold income
π(y)= e β0+β1* y
------------------------------
1+ e β0+β1* y
are binomial probability estimation based on income
Table 3. Probability estimation based on education
Education No
response
0-5% 5-10% 10-15% 15-20% 20-25% 25-30% Above
30%
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Illiterate 0.44 0.31 0.12 0.04
0.08 0.02 0 0
SSC 0.32 0.33 0.15 0.09
0.06 0.03 0.01 0.03
HSC 0.17 0.4 0.23 0.12
0.02 0.03 0.02 0
ITI 0.1 0.4 0.25 0.15
0.1 0 0 0
Diploma 0.08 0.38 0.20 0.12
0.09 0.08 0.04 0
Computer 0 0.33 0.33 0.33
0 0 0 0
Graduate
or PG
0.14 0.36 0.20 0.14
0.03 0.08 0.03 0.01
Source: Primary Data Analysis
From the above table it can be observed that a illiterate respondent has shown the highest probability of
skipping the above question which might be due to the fact that he has no such provision in his monthly
budget for savings or investment. The budgetary provision on investment of 5% to 10% increases up to a
certain threshold beyond which it increases. The probability of respondents having higher provision on
investment ie more than 30% and above is very minimal in each education class. The plot of investment
provisions and their respective probabilities are shown with help of a 3 D wired mesh plot in following
figure.
The investment codes ranges from 0 to 7 which denote budgetary provision in various categories ranging
from less than 5% to above 35% of gross monthly household income.
Figure 1. Probability estimation of investment provision
Source: Data Analysis using MINITAB
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The probabilities of different investment provision with respect to various income groups using multiple
logistic regressions are shown in table 4
Table 4. Probabilities of investment provision for various income groups
Income No
response
0-5% 5-10% 10-15% 15-20% 20-25% 25-30% > 30%
Upto 25,000 0.23 0.45 0.17 0.08 0.03 0.02 0.01 0.01
25,000-35,000
0.15 0.3 0.27 0.15 0.04 0.08 0.02 0
35,000-45,000
0.14 0.16 0.21 0.17 0.2 0.09 0.01 0.01
45,000-55,000
0.09 0.35 0.12 0.24 0 0.06 0.15 0
Above 55,000
0.2 0.08 0.32 0.08 0.12 0.04 0.08 0.08
Source: Data Analysis using Binomial Logistic regression analysis
From above table it can be seen that respondents having monthly household income up to Rs 25,000/- have the
highest probability of reporting the minimum provision for investment whereas the high income group
respondents have maximum probability of reporting one fourth of their gross household income as savings or
investment provision. The variation in budgetary provision for investment seems to fluctuate to a greater extent
as compared to education in various income groups. The plot o probabilities found out using multiple logistic
regression is done using 3D wire mesh plot with various budgetary investment provisions and different income
categories. The plot for the same is shown in figure 2
Figure 2. Probabilities of investment provision with respect to income groups
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5. Conclusion
The house hold budget is a true picture of savings and investment provision made by an individual or a house
hold considering its various long term and short term goals. The various factors such as age, gender, occupation,
income may affect such provision. The attempt to understand the budgeted expenditure of households on
expenditure heads categories such as grocery, education, health and other heads revealed 4 principal
components which basically fall into two groups of Maslow‘s need theory. The budgetary provision on
investment was associated with education, income and occupation of respondent. As occupation could act as a
proxy for income and education the multiple logistic regression for income and education was plotted. The
effect of education on budgetary provision expressed as a percentage of gross monthly house hold income
revealed a more indirect effect as compared to income which showed more predominant effect as observed from
plot of probabilities.
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tests. American Economic Review, 53, 55-84.
Bryant, W. K. (1990). The economic organization of the household. New York: Cambridge University
Press
Davis, E. P., & Schumm, W. R. (1987). Savings behavior and satisfaction with savings: A comparison of
low- and high- income groups. Home Economics Research Journal,15, 247-256.
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Ekerdt, D. J. (2004). Born to retire: The foreshortened life course. The Gerontologist, 44, 3–9 quoted by
Hershey etal (2007) in Psychological Foundations of Financial Planning for Retirement, Journal of
Adult Devlopment (2007) 14:26–36.
Friedman, M. (1957). A theory of the consumption function. Princeton: Princeton University Press.
Hanna, S., Chang, Y. R., Fan, X, J., & Bae, M. K. (1993). Emergency fund levels of households: Is
household behavior rational? In T. Mauldin (ed.), The Proceedings of the 39th Annual Conference of the
American Council on Consumer Interests, (pp.215-222), Columbia, MO: American Council on Consumer
Interests.
Hefferan, C. (1982). Determinants and patterns of family saving. Home Economics Research Journal, 11,
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Shares, Journal of Family and Economic Issues, Vol. 18(4), Winter 1997, 333-356,1987
Kotlikoff, L. J. (1989). What determines savings? Cambridge: MIT Press.
Maslow, A. H. (1955). Deficiency motivation and growth motivation. In M. R. Jones (ed.), Nebraska
symposium on motivation, Vol. 3. (pp. 1-30). Lincoln: University of Nebraska Press.
Modigliani, P., & Brumberg, R. (1954). Utility analysis and the consumption function: An interpretation
of cross-section data. In K. Kurihara (ed.), Post Keynesian economics (pp. 388-436). New Brunswick:
Rutgers University Press.
Oehler,A, Werner C,( 2008), Saving for Retirement—A Case for Financial Education in Germany and
UK? An Economic Perspective, Journal of Consumer Policy (2008) 31:253–283, Published online: 19
July 2008, Springer Science and Business Media, LLC 2008.
Phipps,S.,. Woolley, F.(2008) Savings and determinants,The Journal of Socio-Economics 37 (2008)
592–611).
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Counseling and Planning, 5, 25-44.
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Corporate Governance in India
Author: -Prof.Dr.Shailesh O. Kediya Assistant Professor (MBA Department)
Affiliation: -DattaMeghe Institute of Engineering Technology &Research, Sawangi Wardha Email: [email protected]
Mobile no: - 9890833172
Author: -Mr.RupeshR.Dahake AssistantProfessor (MBA Department)
Affiliation: -DattaMeghe Institute of Engineering Technology &Research, SawangiWardha Email: [email protected]
Mobile no: - 9371699986
Author: -Mr.Sachin S. Panchabhai
Assistant Professor (MBA Department) Affiliation: -Dr. Ambedkar Institute of Management Studies & Research, Nagpur.
Email: [email protected] Mobile no: - 9423407072
Abstract
Presently corporate governance is very important issue for every organization because its matter of trust, marketing strategy,
name of company, etc. To better understand the role of corporate governance in business today, it is important to consider how it
relates to fundamental beliefs about the purpose of business. Some organizations take the view that as long as they are
maximizing shareholder wealth and profitability, they are fulfilling their core responsibilities. Other firms, however, believe that
a business is an important member, even citizen, of society and therefore must assume broad responsibilities that include
complying with social norms and expectations. This paper discuss about on corporate governance concepts, issues and
imperatives & present scenario in India.
Keywords: Corporate Governance, corporate scams, Whistle Blower, Anglo-American "model”, corporate social
responsibility, Stakeholder.
Introduction
‗Corporate governance‘ has become one of the most commonly used phrases in the current global business vocabulary. This
raises the question, ‗is corporate governance a vital component of successful business or is it simply another fad that will fade
away over time?‘ The notorious scam of saytam in 2009, one of India‘s biggest IT Company, has focused international attention
on company failures and the role that strong corporate governance needs to play to prevent them. Nations around the world are
instigating far-reaching programmes for corporate governance reform, as evidenced by the proliferation of corporate
governance codes and policy documents, voluntary or mandatory, both at the national and supra-national level. We believe that
the present focus on corporate governance will be maintained into the future and that, over time, corporate governance issues
will grow in importance, rather than fade into insignif icance. The importance of corporate governance for corporate success as
well as for social welfare cannot be overstated. Recent examples of massive corporate collapses resulting from weak systems of
corporate governance have highlighted the need to improve and reform corporate governance at an international level. In the
wake of Enron, satyam and other similar cases, countries around the world have reacted quickly by pre-empting similar events
domestically.The phenomenal growth of interest in corporate governance has been accompanied by a grow ing body of academic
research. As the discipline matures, far greater definition and clarity are being achieved concerning the nature of corporate
governance.
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What is corporate governance?
Corporate governance is a central and dynamic aspect of business. The term ‗governance‘ derives from the Latin gubernare,
meaning ‗to steer‘, usually applying to the steering of a ship, which implies that corporate governance involves the function of
direction rather than control. There are many ways of defining corporate governance, ranging from narrow definitions that focus
on companies and their shareholders, to broader definitions that incorporate the accountability of companies to many other
groups of people, or ‗stakeholders‘.
The process of supervision and control intended to ensure that the company’s management acts in accordance with the interests
of shareholders (Parkinson, 1994).
The structures, process, cultures and systems that engender the successful operation of the organization (Keasey and Wright,
1993).
The system by which companies are directed and controlled (The Cadbury Report, 1992)
Why India Need Good CORPORATE GOVERNANCE:-
A corporation is a congregation of various stakeholders, namely customers, employees, investors, vendor partners, government
and society. In this changed scenario an Indian corporation, as also a corporation elsewhere should be fair and transparent to its
stakeholders in all its transactions. This has become imperative in today‘s globalized bus iness world where corporations need to
access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner
with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and
demonstrates ethical conduct, it will not be able to succeed. Corporations need to recognize that their growth requires the
cooperation of all the stakeholders; and such cooperation is enhanced by the corporations adhering to the best Corporate
Governance practices. In this regard, the management needs to act as trustees of the shareholders at large and prevent
asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the
shareholders. The following are the top 4 corporate fraud cases had happen in India.
India's top 4 corporate scams cases:-
1. SATYAM (2009)
Protagonist – B RamalingaRaju& others
Amount – Rs. 7,200 Cr
What was it about? –
An accounting scandal where RamalingaRaju confessed to having cooked up the accounts of Satyam Computers
and inflated its bank balances. He has, along with his family members, also been accused of laundering money
through a mesh of hundreds of companies.
Status:
Out of jail, on bail! Raju walked out in late November 2011 after spending 32 months behind bars after the CBI
failed to charge him on time and the ED delayed launching criminal prosecution because of lack of clarity on
which court will hear the matter. Not just Raju, but all the 10 co-conspirators are also out on bail. The CBI is is
believed to be nearing completion of the case. But with the ED chargesheet, which includes 37 other individuals
apart from the 10 prime accused and 166 companies, just being filed, it could take more time before there is
closure to this case.
2 – KETAN PAREKH SECURITIES SCAM (2001)
Protagonist – Ketan Parekh
Amount – Rs. 1,250 Cr
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What was it about? –
Parekh was involved in circular trading and stock manipulation through 1999-2001 in a host of companies. Like his mentor
Harshad Mehta, Parekh too borrowed from banks like Global Trust Bank and Madhavpura Mercantile Co-operative bank,
and manipulated a host of stocks popularly known as K-10 stocks.
Status:
Parekh has spent only 1 year in jail but has been banned from trading in the Indian stock markets till 2017. His name though,
continues to haunt the street as he has been accused of pulling the strings from the backstage. An IB (Intelligence Bureau)
report last year alleged that Parekh and his associates were still engaged in circular and insider trading through front entities,
but it was very difficult to establish his complicity because these were largely benami transactions.
3 – SPEAK ASIA SCAM (2011)
Protagonists: HarenderKaur, Manoj Kumar Sharma, TarakBajpai& others
Amount – Rs. 2000 + Cr
What was it about? –
An online business survey firm that collected thousands of crores of rupees from over 24 lakh investors, asking them to fill
surveys and guaranteeing to quadruple their income in one year, Speak Asia was accused of running a Ponzi scheme. A
criminal case was registered against the firm in 2011, some accounts frozen and its business shutdown.
Status:
The Economic Offences Wing (EOW) despite promising to file a watertight case hasn‘t yet filed a chargesheet in the case,
even with the Bombay High Court rapping it for clubbing all the cheating cases together, leading to a delay. Speak Asia‘s
panelists have still not been refunded their money (Over Rs 2,000 Cr is due according to some media reports) and its key
management personnel are absconding, with no convictions made till date.
4 - SARADHA CHIT FUND SCAM (April 2013)
Protagonist – SudiptaSen
Amount – Rs. 2060 – 2400 Cr
What was it about? –
One of the biggest Ponzi schemes in West Bengal that enjoyed political patronage and lured millions of investors to deposit
money with the promise of abnormally high returns including fancy holidays etc. The chit fund eventually collapsed leading
to defaults after a crackdown by SEBI and the Reserve Bank of India. The default, apart from leaving small depositors high
and dry, also led to 10 media outlets owned by Saradha being forced to wind up, leaving 1000 journalists jobless.
Status:
Various agencies including ED and SFIO are probing the misappropriation of funds. SudiptoSen, the Chairman and
managing director of the Saradha Group was arrested earlier this year and the Enforcement Directorate has been granted his
custody for interrogation to probe money laundering. Suspended TMC MP KunalGhosh, who was accused by Sen for being
involved in the scam has been called for questioning by SFIO, but not arrested yet. The state had set up a fund of Rs 500
crore for compensating poor depositors. Of Saradha‘s 1.7 million investors, only 1000 depositors were indemnified in
September and about 1 lakh were expected to be compensated before durga puja.
According to report on corporate governance: Changing paradigm in India Survey findings by Ernest and
young research company finding is most of the fraud find in Banking & NBFC followed by Real Estate
industry.
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Literature Review:-
A comprehensive study by Chakrabarti, Megginson, and Yadav" has traced the evolution of the Indian
corporate governance system and examined how this system has both supported and held back Indias ascent to
the top ranks of the world's economies. The authors of the study have found that while on paper, the framework
of the country's legal system provides some of the best investor protection in the world.('"Chakrabarti, Rajesh;
Yadav, Pradeep K. and Megginson, William L., "Corporate Governance in India", Journal of Applied
Corporate Finance, Forthcoming, Available at SSRN: hffp://ssrn.com/abstract=1012222)
Gupta and Parua" attempted to find out the degree of compliance of the Corporate Governance (CG) codes by
private sector Indian companies listed in the Bombay Stock Exchange (BSE). Data regarding 1245 companies
for the year 2004-2005 was taken for the study from the CG reports (which are included in the Annual Reports)
of these companies and 21 codes (of which 19 are mandatory and 2 non-mandatory) were selected for study.("
Gupta, Arindam and Parua, Anupam, An Enquiry into Compliance of Corporate Governance Codes By
the Private Sector Indian Companies (18 December 2006). Tenth Indian institute of Capital Markets
Conference Paper. Available at <SSRN: htfp://ssm.com/abstract=962001)
Khanna's" analysis suggests that enforcement is important to the growth of stock markets, but the active civil
enforcement of corporate laws may not always be critical to their initial development.(Khanna, Vikramaditya,
Law Enforcement and Stock Market Development: Evidence from India (January 2009). Paper prepared
for the Law and Economy in India Project at the Centre on Democracy Development, and The Rule of
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Law. Freeman Spogli institute for International Studies Stanford University; Available at:
<http://cddrl.stanford.edu>.
(Corporate Governance in India: Disciplining the Dominant Shareholder - Jayanth Rama
Varmapaper-Indian Institute of Management, Bangalore , in which the paper was first published
(October- December 1997, 9(4), 5-18) This paper has discussed the role of two such forces – the regulator (the
company law administration as well as the securities regulator) and the capital market.the key to better
corporate governance in India today lies in a more efficient and vibrant capital market. Over a period of time, it
is possible that Indian corporate structures may approach the Anglo-American pattern of near complete
separation of management and ownership. At that stage, India too would have to grapple with governance issues
like empowerment of the board. Until then, these issues which dominate the Anglo-American literature on
corporate governance are of peripheral relevance to India.
(Corporate Governance is Key to Better Corporate Image: A Study in the Banking Sector in India Dr.
Suresh Chandra Bihari published in IJMBS Vol. 2, Issue 4, Oct - Dec 2012 )The development of norms and
guidelines are an important first step in a serious effort to improve corporate governance. There is a need for a
strong culture of compliance at the top of the organization and it will be necessary to consider how management
can respond appropriately to ethical or reputation concerns that come to their knowledge. The bigger challenge
in India, however, lies in the proper implementation of those rules at the ground level. Corporate governance
does not end with commercial banks. It is imperative to extend the above principles of good corporate
governance practices to cooperatives, PDs, NBFCs and other financial institutions. Even the most prudent
norms can be hoodwinked in a system plagued with widespread corruption. Nevertheless, with industry
organizations and chambers of commerce themselves pushing for an improved corporate governance system,
the future of corporate governance in India promises to be distinctly better than the past.
Objective of the Study:-
To know the corporate governance & its importance in current scenario.
To study current scenario of corporate governance in India
To find the issue & imperatives of corporate governance.
To study global corporate governance model.
Research design:-
The report has been developed based on quantitative. Data and information collected from various web sites,
various corporate governance report etc.
Methodology:-
1. Desk research: A detailed review of relevant literature for the Indian corporate governance was conducted at
this stage.
2. Collation and analysis of information: All data and information gathered through secondary data was
collated and analyzed forthe purpose of developing the research paper.
Corporate governance models around the world:-
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There are many different models of corporate governance around the world. These differ according to the
variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the
interests of shareholders. The coordinated or Multistakeholder Model associated with Continental Europe and
Japan alsorecognizes the interests of workers, managers, suppliers, customers, and the community. A related
distinction isbetween market-orientated and network-orientated models of corporate governance and the United
Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom,the CEO
generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the
norm,despite major misgivings regarding the impact on corporate governance.
European Union
The EU‘s approach to corporate governance matters is principle-based. It seeks to ensure the adoption of certain
key specific standards throughout the EU, while leaving it to Member States and market participants to
determine how to best apply these standards. The EU corporate governance framework, which consists of a mix
of binding and nonbinding rules, has as its cornerstone the ‗comply or explain‘ principle. Every listed EU
company is under an obligation to make an annual statement indicating which Code of corporate governance it
applies and declaring whether it complies with all the provisions of that Code. If that company does not comply
with some provision of the Code, it must state to what extent and give a justification. Alongside the corporate
governance statement, the Commission has adopted two non-binding recommendations on the remuneration of
directors and on the role of independent directors, which contain key substantive standards. With these
measures, the Commission seeks to encourage national corporate governance codes to converge gradually. The
European Corporate Governance Forum, set up by the Commission and composed of fifteen high level experts,
seeks to reinforce this through exchanges of views on best practices to promote the convergence of national
corporate governance practices within the European Union.
China
In most companies now at least one-third of the board are independent directors and it is evident that they are
playing a more important role in corporate governance. A listed company is required to publish an audited
annual report as well as a semi-annual report. From 2002, listed companies are also required to publish
un-audited quarterly reports. The rules have recently been revised to simplify and streamline the format of these
reports so that they would be more readable and easily understood by investors. To better protect the rights and
interests of public investors, the CSRC issued The Provisions on Strengthening the Protection of Rights &
Interests of Public Shareholders (December 2004). According to the Provisions, listed companies‘ majo r
business decisions, such as rights issues and issuing additional new shares, and equity-for-debt plans, should
receive a majority of the votes from holders of tradable-shares present at the general shareholders meeting.
Middle East
In the Middle East the first Code of corporate governance was launched in Oman as early as 2002. Egypt has
published two corporate governance Codes, one for listed companies and one for State Owned Enterprises.
Egypt has sought to strengthen its listing rules and is focusing on implementation by launching the Egyptian
Institute of Directors and a series of training programs being conducted by the Egyptian Banking Institute for
bank directors. Bahrain, Morocco, Qatar, and Tunisia have facilitated the review of their legal and regulatory
framework and are in the process of preparing a corporate governance Code. Jordan is developing a model
corporate governance Code for listed companies. Lebanon has conducted a bank corporate governance survey
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and conducted a legal review followed by the Central Bank issuing a corporate governance regulation.
Additionally the Lebanese corporate governance Task Force has spearheaded the development of a Code of
corporate governance for non-listed companies and is working with Lebanese companies fo r voluntary
compliance. In the UAE, the Central Bank has drafted corporate governance guidelines for banks, and the
UAE‘s Securities and Commodities Authority has issued a corporate governance Code, setting a national
governance standard, for both the Dubai Financial Markets and the Abu Dhabi Securities Market. Similarly,
Saudi Arabia‘s Capital Market Authority launched corporate governance regulations for its listed companies,
and the banking sector is seriously looking at improving corporate governance standards. The West Bank/Gaza
is also in the process of developing a Code of Corporate Governance, after a series of corporate governance
awareness programs organized by business associations and regulatory authorities.
India
India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by
management of the inalienable rights of shareholders as the true owners of the corporation and of their own role
as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and
about making a distinction between personal & corporate funds in the management of a company." It has been
suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive
Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in
Anglo-American and most other jurisdictions.
United States, United Kingdom
The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It
relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by
shareholders. Because of this, it is also known as "the unitary system". Within this system, many boards include
some executives from the company (who are ex officio members of the board). Non-executive directors are
expected to outnumber executive directors and hold key posts, including audit and compensation committees. In
the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of
securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the
Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware,
which continues to be the place of incorporation for the majority of publicly traded corporations. Individual
rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.
Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate
bylaws.
Corporate governance initiatives in India and its Positive impact:-
There have been several major corporate governance initiatives launched in India since the mid-1990s. The first
was by the Confederation of Indian Industry (CII), India‘s largest industry and business association, which came
up with the first voluntary code of corporate governance in 1998. The second was by the SEBI, now enshrined
as Clause 49 of the listing agreement. The third was the Naresh Chandra Committee, which submitted its report
in 2002. The fourth was again by SEBI — the Narayana Murthy Committee, which also submitted its report in
2002. Based on some of the recommendation of this committee, SEBI revised Clause 49 of the listing
agreement in August 2003. Subsequently, SEBI withdrew the revised Clause 49 in December 2003, and
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currently, the original Clause 49 is in force.
Now recent change in corporate governance policy by SEBI is as follows:-Corporate Governance
norms in India for listed companies The Board has approved the proposals to amend the Listing Agreement with
respect to corporate governance norms for listed companies. The amendments, inter-alia, propose to align the
provisions of Listing Agreement with the provisions of the newly enacted Companies Act, 2013 and also
provide additional requirements to strengthen the corporate governance framework for listed companies in India.
The amendments shall be made applicable to all listed companies with effect from October 01, 2014.
Exclusion of nominee Director from the definition of Independent Director
Compulsory whistle blower mechanism
Expanded role of Audit Committee
Prohibition of stock options to Independent Directors
Separate meeting of Independent Directors
Constitution of Stakeholders Relationship Committee
Enhanced disclosure of remuneration policies
Performance evaluation of Independent Directors and the Board of Directors
Prior approval of Audit Committee for all material Related Party Transactions (RPTs)
Approval of all material RPTs by shareholders through special resolution with related parties abstaining
from voting
Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees
shall be independent.
At least one woman director on the Board of the company
It has been decided that the maximum number of Boards an independent director can serve on listed
companies be restricted to 7 and 3 in case the person is serving as a whole time director in a listed
company
To restrict the total tenure of an Independent Director to 2 terms of 5 years. However, if a person who has
already served as an Independent Director for 5 years or more in a listed company as on the date on which
the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more
term of 5 years only.
The scope of the definition of RPT has been widened to include elements of Companies Act and
Accounting Standards.
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Corporate Governance: Issues and Imperatives:-
India is driving major transformations in improving the corporate governance. In positive aspects itmatches
even the mature economies in regard to design of effective policies aimedtowards strengthening of governance
and compliance standards. It might be usefulrecapitulate a few of the major trends emerging in the Indian
corporate sector in regardto corporate governance as also important issues and imperatives.
Separation of Chairman and CEO
Separation of Chairman and CEO are increasingly recognized as a best practice that thecompanies should
absorb. Several companies now have separate Chairman and the CEOs.
An Independent Board
Given the importance of independence of the board, the scope of non-executive directorsand independent
directors assume great significance.
Lead Independent Directors
Big corporations are now designating lead independent directors who will coordinate thework of the
independent directors as also review the progress of the company and set itsbusiness agenda. The role of the
Lead Independent Director in one of the top Indiancompanies is defined as below:
• To preside over the meetings of Independent Directors
• To ensure that there is adequate and timely flow of information to Independent Directors
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• To liaise between the Chairman and Managing Director, the Management and Independent Directors
• To preside over meetings of the Board and Shareholders when the Chairman andManaging Director is not
present or where he is an interested party
• To perform such other duties as may be delegated to the Lead IndependentDirector by the
Board/Independent Directors.
It can be seen that companies are beginning to give more weightage to the scope andfunctions of the
independent directors and in this process identifying a Lead IndependentDirector, who could be a catalyst in
deriving the best from this process.Some companies have more than one Lead Independent Directors with
different directorslooking at different aspects of the governance and growth of the companies. For instance,in
one company, one Independent Director each is vested with the responsibilities of thedriving agenda for the
Board, improving board processes, corporate strategy, financial andinternal controls, risk management and
compliance and one independent directoridentified as the Chief Ombudsman for the Whistle Blower Policy of
the company.
Independent Directors
Independent Directors are the major instrument of the corporate governance in themodern corporates. Many
companies, excepting a few public sector have complied withthe requirement in regard to proportion of the
representation of the independentdirectors in the boards. Though big corporates find good quality independent
directorswith relative ease, the same is emerging as a major challenge for the mid and small capcompanies who
appear to be facing sizeable problem in finding right number of directorswith right qualities andqualifications.
At present, nominee directors are treated asindependent directors, but SEBI is proposing not to consider
nominee directors asindependent directors, in which case, the challenge becomes much tougher for a host
ofcompanies. In view of the representation of independent directors becoming a prominentaspect of the
corporate governance, it is important that companies take this aspect withgreater focus and seriousness.In
March 2007, the Union Cabinet of the central government gave its approval to theguidelines on Corporate
Governance for Central Public Sector Enterprises (CPSEs) as perwhich, the board of directors of a company
shall have an optimum combination ofexecutive and non executive directors with not less than 50 percent
comprising nonexecutive directors. On implementation, it would improve the compliance standards ofthe public
sector enterprises.
Board Committees
Companies are taking keen interest in constituting various subcommittees of the board inaddition to the
strengthening of the board. In addition to the mandated ones such as theaudit committee and investor grievances
committee and remuneration committee etc.,companies are found to set up a wide range of sub committees as
per their specificrequirements. Names of the few sub committees in the corporate analysed in the studyinclude;
project appraisal committee, ethics committee, human resources policycommittee, investment committee, safety,
health and environment committee, planningand projects committee, contracts committee, projects evaluation
committee,establishment committee, financial management committee, marketing strategycommittee,
technology committee, rural sector business committee, risk managementcommittee, directors committee,
asset- liability management committee, specialcommittee for monitoring large value frauds, board management
committee, creditapproval committee, customer service committee, management controls committee,science
committee, banking and organization committee, intellectual property rights committee.
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Meetings
Companies have shown good progress in respect of the number of meetings of the Boardand the Audit
Committee held in a year. The number of meetings held is normally higherthan the mandatory requirement in
most of the companies.
Periodic Evaluation of the Performance
Good governance requires periodic evaluation of the performance of the Board and AuditCommittees by an
internal process or an external agency. Though big corporations takeelaborate care and processes in
identification and selection of the members of the board, not all companies have a well defined process of
performance evaluation. Infosys has putin place, where in an annual performance evaluation exercise; each non
executive boardmember has tomake a presentation to the Board on the major contribution made by himleading
to an assessment that will determine the further scope of the membersparticipation in the board. Such structured
processes are not evident in a large number ofcompanies.
Related Party Transactions
OECD defines related party transactions as those that involve between a parent companyand subsidiary,
employees, an enterprise and its principal owners, management ormembers of their immediate families; and
affiliates (OECD Principles, IAS 24(9); FASBStatement No.57). Related party transactions can take various
forms including; transfer pricing, asset stripping, inter company loans and guarantees; sale of receivables
tospecial purpose vehicle; leasing or licensing agreement between a parent and a subsidiary.In view of the
extensive family holding of Indian companies, doubts exist on the accuracyand authenticity of the declarations
and statements made to the board on the relatedparty transactions. Officials of the board secretariats of several
companies expressed thescope for further refinement and reforms in the information pertaining to related
partytransactions.
Annual Reports
Annual Reports are important documents for assessing and analyzing the companyperformance in regard to
corporate governance standards and compliance. There is vastimprovement in the quality of content in the
Annual Reports, but scope exists forpresenting the data in a manner that is easy to locate and understand. Even
in respect ofthe corporate governance reports, though the number of aspects on which information isrequired to
be given is uniform, companies present information in different formatsmaking it rather cumbersome for the
readers who look at the documents of a number ofcompanies.
Corporate Governance Reports
Corporate Governance Reports are important part of the Annual Reports. Many companiesin addition to giving
the compliance on various parameters also sometimes discuss thephilosophy and objectives of the corporate
governance thus setting the background for thespirit and letter of governance that is reported.
Corporate Social Responsibility
It is also found that several leading Indian companies undertake corporate socialresponsibility, which they
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report in the annual reports in a separate section. It isinteresting to note several companies taking interest in
corporate social responsibility.
Statement of the Policies
Most of the disclosures that are found in the companies annual reports are mandatory innature. Many companies
tend to fulfill the regulatory or compliance norms rather thantaking a proactive initiative in discussing and
disclosing pertinent policies and procedureson a wide range of issues that the company deals with it.For the
purpose of an illustration a global major corporate, in its corporate governanced iscussed and disclosed the
following, which is not usually evident in Indian companies,unless those like Infosys or Wipro which have
global investor base or operations.
a. Board Reserves one full day per year to discuss strategic questions
b. Average duration of the Board Meetings
c. Average attendance at the Board Meeting
d. Working of the Compensation Committee.
e. Information Policy
f. Specific guidelines/ policy in regard to Dealing with the people,
a) Relationships with suppliers and customers,
b) Legal compliance,
c) Genderequality and empowerment,
d) Health and safety,
e) Environment and public good,
f) Conflict of interest
g) Protection of confidential information,
h) Use of companyfacilities,
i) Leading by example and
j) Buying and selling of company stock.
Promoter Holding
A recent report of the Moody‘s, quoted in the media showed that 17 of the 30 companies inthe Sensex are
family controlled. The report observed that family controlled companiesface corporate governance challenges in
the future. Family controlled companies faced criticism during the economic and financial crises in the South
East Asia, whereinproblems accentuated because of lesser disclosure standards prevalent in family ownedfirms.
Directors Training
Companies are found to disclose the importance of training for their directors and mentionthe same in the
corporate governance reports. While some companies explain the specificnature of training that is usually
imparted to the directors, some make a broad referenceto it. There is however no mention of the specific time
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spent by the directors on training.
Whistle Blower Policy
Being a non-mandatory disclosure, companies mention about the Whistle Blower policy inplace, but no record
of any specific activity or incidence. Some companiesput an independent director to look into the
implementation of the policy
Shortcomings in Compliance
Though the design of the corporate governance framework in India is considered matchingthat of the advanced
countries, on aspects of enforcement and quality of supervision,scope exists for significant improvements.
Conclusion:-
In this paper we studied how corporate governance is very important in present era. The scope and significance
of corporate governance in India increased generously in the Current scenario, particularly following the
financial sector reforms.The corporate governance mechanisms cannot prevent totally al the unethical activities,
but they can at least act as a means of detecting such activities beforeit is too late. So we find some of these
guideline if followed, they can make transparent system for stakeholders. In this paper we also studied corporate
governance practices adopted by Infosys and we found that the company give more emphasis on transparency
and ethical business Practices as well Company comply all national & international guideline and standard of
corporate governance.And the results we all know, company is most reputed trusted and most ethical company
in the world. It is found today most of the company giving more importance to corporate governance.
Reference:-
1. Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance , Gee, London,
December, 1992, p. 15
2. A study of corporate governance practices in leading corporates in India December 2007
3. Jill Solomon and ArisSolomon Corporate Governance and Accountability, 2004 John Wiley & Sons Ltd, The
Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England
4. Business ethics—Encyclopedias. 2. Social responsibility of business—Encyclopedias. I. Kolb, Robert W.,
1949-HF5387.E53 2008
5. Infosys Annual Report 2011-12
6. Report on corporate governance: Changing paradigm in India Survey findings by Ernest and young-2012