jagran journal of commerce and economicsissn 2321-6522 jagran journal of commerce and economics...
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ISSN 2321-6522
JAGRAN JOURNALOF COMMERCE ANDECONOMICS
Published By :
Jagran College of Arts, Science and CommerceA Self Financing P.G. College Affiliated to C.S.J.M. University, Kanpur
Prof. B.P. SinghChairman, Delhi School of Professional Studies and Research, Delhi Formerly Professor, Head and Dean Faculty of Commerce and BusinessDelhi School of Economics, University of Delhi
Prof. Arun KumarProfessor and Chairman, Economic Studies and Planning Centre, JNU, New Delhi
Prof. Pramod Kumar SaxenaDean, Faculty of Commerce, HOD (Accountancy and Law) Dayalbagh Educational Institute, Agra
Prof. R.C. GuptaProfessor, (Commerce) and Director, Govt. M.L.B. College of Excellence, Gwalior.
Prof. O.P. ShuklaPrincipal, National Defence Academy, Pune
Prof. H.K. SinghVice Chancellor, MUIT, Lucknow
Prof H.M. MehrotraHead, Dept. of Economics, Christ Church College, Kanpur
Dr. Vimal KumarAsst. Professor, Dept. of Economics, IIT Kanpur
Editorial Advisory Board
Shri Yogendra Mohan Gupta
Chairman, Jagran Group and Jagran Education Foundation
Shri Mahendra Mohan Gupta
CMD, Jagran Prakashan Ltd., Former Member Rajya Sabha
Smt. Ritu Gupta
Vice Chairperson, Jagran Education Foundation
Dr. J.N. Gupta
CEO, Jagran Education Foundation
Our Patrons
�Law and order exist for the purpose
of establishing justice and when they fail
in this purpose they become the
dangerously structured dams that block
the flow of social progress� rightly said by
Martin Luther King, Jr.
This phenomenon is becoming
apparent in today's social and economic
scenario and therefore there is an urgent
need of overhauling in the system rather to rebuild it according
to the present needs and conditions. There has been massive
capital flight and lack of confidence in the nation which is a
matter of concern. The regulatory system is loosing its strength
and we must realize that the end of law is not to abolish or
restrain but to preserve and enlarge freedom but its very nddisappointing that India ranks 142 in terms of 'Ease of
doing business'. The government has been actively pursuing
the goal of making India a 'manufacturing hub' through its
'Make in India' initiative and invitation to foreign companies to
invest in India. Certain worth mentioning steps in this regard
are the subject matter of the present issue for example;
Company's Act 2013, ensuring better transparency and
Corporate Social Responsibility, Banking Sector Reforms,
Corporate Disclosure Practices, Forensic Accounting, Creative
Accounting, Business Ethics etc. help us to find the solution of
this problem in some way or the other.
Besides, there are also articles on Dividend Policy of
Public and Private Sector Banks. Development of Indian Capital
Market, Lifelong Learning etc. We are constantly deliberating on
issues that are contemporary and offer wide discussions in
order to find answer to the underlying problems because we
believe that democracy must be build through open societies
that share information. When there is information, there is
enlightment, when there is debate there are solutions.
JAGRAN JOURNAL OF COMMERCE AND ECONOMICSMarch 2015Vol. 2, Issue 4 ISSN 2321-6522
Co-Editors
Chief Editor
Publisher
DirectorJagran College of Arts, Science and CommerceMarch 31, 2015
INDEX
S.No. Name of the Paper and Authors Page No.
1. Comparative Study of Dividend Policy in 1Public and Private Sector Banks Dr. R. C. Gupta, Sarika Keswani and Vinay Gupta
2. Companies Act, 2013: A Ray of Hope for Corporate 8Social Responsibility (CSR) Practices in IndiaRadhagobinda Basak
3. Savings and Investments: Crucial for Economic Growth 14Dr. Pankaj Pandey and Atul Kumar Singh
4. The Study of Creative Accounting and its Implication 19Dr. Reshma Rajani and Saloni Gupta
5. Qualitative Aspects of Corporate Information on Corporate 25Disclosure Practices with Special Reference to Multinational Corporations and Indian Corporates Dr. Shilpi Srivastava
6. Growth and Development of Indian Capital Market 36Dr. Manisha Gupta
7. Banking Sector Reforms in India 45Dr. Akhilesh Kumar Dixit
8. Ethics of Accounting and Financial Principles 49Dr. Rajeev Nayan Singh and Dr. Meera Singh
9. Companies Act 2013: The Beginning of 57a New Era for Corporate IndiaShinu Vig and Sakshi Goel
10. Internet Marketing Management: 61�Upcoming Future Need in India and World�Ankit Gupta
11. A Perceptual Study on Chartered Accountant and 66Auditors towards Forensic Accounting in Indian Perspective Dr. Nandan Velankar, Dr. R.C. Gupta and Neha Velankar
12. Rural Marketing : Issues and Challenges 76Sonia Kaur
13. Lifelong Learning: It's Paramount Importance in Current Scenario 84Shraddha Ladia
14. Managing Business Ethics: Good Work Initiatives that Build a Better World 90Dr. Vidushi Sharma and Dr. Rupali Mishra
15. Foreign Exchange Market and its Impact on Indian Economy 97Deepa Kumari
1
*Dr. R. C. Gupta**Sarika Keswani
***Vinay Gupta
Introduction
Dividend policy is one of the most important financial policies, not only from the viewpoint
of the company, but also from that of the shareholders, the customers, the workers, regulatory bodies
and the Government. Shareholders' wealth is represented in the market price of the company's
common stock, which in turn, is the function of the company's investment, financing and dividend
decision. Shareholders would like to receive a higher dividend as it increases their current wealth.
But, for the company, retention of profits would be desirable as it provides funds for financing the
expansion and growth plans. Retained earnings are the most important internal source of finance.
The dividend policy must strike a happy balance between distribution and retention.
It should allocate the earnings between dividends and retained earnings in such a way that
the value of the firm is maximized. Hence, dividend policy is a crucial area of financial management.
The optimal dividend policy is the one that maximizes the company's stock price which leads to
maximization of shareholders' wealth and thereby ensures more rapid corporate growth.
Our study will focus on factors affecting dividend policy and comparison between dividend
policy of Public and Private Sector Banks.
Review of literature
Amidu and Abor (2006) conducted research; this study examines the determinants of
dividend payout ratios of listed companies in Ghana. The analyses are performed using data
derived from the financial statements of firms listed on the GSE during a six-year period. Ordinary
least squares model is used to estimate the regression equation. Major findings of the study were
that there is a positive relationship between dividend payout and profitability, cash flow, and tax.
The results suggest that, profitable firms tend to pay high dividend.
Chawla and Srinavasan (1987) studied the impact of dividend and retention on share
price. The objectives of their study were to estimate a model to explain share price, dividend and
retained earnings relationship, to test the dividend, retained earnings hypotheses and to examine
the structural changes in the estimated relations over time. As per the financial theories they
expected the coefficients of both dividend and retained earnings to be positive in the price
equation. Similarly in the dividend supply function also they expected a positive sign for current
earnings and previous dividend.
Olson and McCann (1994) have conducted a research on the linkage between dividend
and earnings. The purpose of this paper has been to empirically test the linkage, if any, between
dividends and earnings. The Granger causality test was used for two measures of dividends and
Comparative Study of Dividend Policy in Public and Private Sector Banks
*Professor, (Commerce) and Director M. L. B. Govt. College of Excellence, Lashkar, Gwalior **Assistant Professor, Jiwaji University, Gwalior***Research Scholar, Commerce, ITM University, Gwalior
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
earnings: the level of variables and deviations from expected values. An autoregressive model for
earnings was estimated and contrasted to a bi-variate model that included dividend information as
well as an autoregressive earnings series. The results of the study indicate that the inclusion of
the dividend data improves the predictability of earnings using both the level of the variables and
deviations from expected values measures.
Mahapatra and Sahu (1993) conducted research on determinants of corporate dividend
behaviour in India- an econometric analysis. The objectives of their study were to examine the
relative significance of some known dividend models in the Indian situation and to enquire into the
determinants of corporate dividend behaviour with the help of some regression models. Their study
was based on judgmental sample of 90 companies for the period 1977/78 to 1988/89. After using
various regression equations they found that dividend decision is primarily governed by cash flow,
a measure of company's capacity to pay and dividend paid in the previous year, in majority of the
sample companies. Among other determinants, investment demand has been found having
significant impact on the dividend decision of electrical goods and chemical industries.
Pandey and Bhatt (2007) examined the dividend behaviour of Indian companies. Do Indian
firms follow stable dividend policies? How do the monetary policy restrictions affect the dividend
payouts of the firm? They used the Lintner's (1956) model to test dividend stability of firms in India.
They used the GMM estimator, which accounts for heterogeneity and is most suitable in a dynamic
setting. Their results establish the validity of the Lintner model in the emerging Indian market, and
prove the underlying dynamic relationship between current dividends as dependent variable and
current earnings and past dividends as independent variables. Further, their results also show that
the Indian firms have lower target payout ratios and higher adjustment factors.
Pradhan (1990) made a study on stock market behaviour of Nepal which was based on the
data collected for 17 enterprises from 1986 through 1990. The objectives of this study were to assess
the stock market behaviour in Nepal and to examine the relationship of market equity, market value to
book value, price-earnings, and dividends with liquidity, profitability, leverage, assets turnover, and
interest coverage. Some findings of this study, among others, were that higher the earnings on
stocks, larger the ratio of dividends per share to market price per share. Dividend per share and
market per share was positively correlated. There is positive relationship between the ratio dividend
per share to market price per share and interest coverage.
Objectives
To know the impact of Profitability on dividend payout ratio in banking sector in India.
lTo know the impact of Net worth on dividend payout ratio in banking sector in India.
lTo know the impact of EPS on dividend payout ratio in banking sector in India.
lTo know the impact of DPS on dividend payout ratio in banking sector in India.
lTo know the impact of MVPS on dividend payout ratio in banking sector in India.
lTo know the difference between Dividend Payout of public and private sector banks in
India.
l
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Profitability
Net Worth
EPS
DPS
MVPS
Dividend PayoutRatio
The Research Model
Type of study
The study on the topic �Comparative Study of Dividend Policy in Public and Private
Sector Banks� is empirical in nature to find out the impact of profitability, net worth, EPS, DPS and
MVPS on dividend payout ratio.
Sample design and size
lDividend policy having at least ten years track record are only considered for the study. The
time period chosen for the study is 10 years (1st April 2003 to 31st March 2012).
lAll twelve banking companies listed in NSE in India have been selected in study.
lOut of twelve banks seven are of public sector and five are of private sector.
lRandom sampling has been used for this purpose.
lTo know the impact of various factors on dividend policy following variable has been taken
to analyze impact.
Dependent variable: Dividend Payout Ratio
Independent variables :
lProfitability
lNet Worth
lEPS
lDPS
lMVPS
Statistical analysis and techniques
lMultiple Regression has been applied to assess the degree of impact of Profitabity, Net
Worth, EPS, DPS, MVPS on Dividend Payout Ratio.
lT-test was conducted to compare the performance of Dividend policy among public and
private sector bank.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Instruments (tools of data collection)
l
lOther relevant data was obtained from the website of selected banks of public and
private sector.
Hypothesis :- Following Hypothesis will be tested at 5% significance level of the multiple regression.
l
l
l
l
l
l
Analysis and Interpretation
Regression
Model Summary
All the data is secondary and was obtained from NSE website.
Hypothesis :
There is no significant impact of Profitability on dividend payout ratio in the banking sector
in India.
There is no significant impact of Net worth on dividend payout ratio in the banking sector
in India.
There is no significant impact of EPS on dividend payout ratio in the banking sector in India.
There is no significant impact of DPS on dividend payout ratio in the banking sector in India.
There is no significant impact of MVPS ratio on dividend payout ratio in the banking sector in
India.
There is no significant difference between dividend payout of public and private sector banks in
India.
Model R R SquareAdjusted R SquareStd. Error of the Estimate
1 1.000(a) .999 .997 .31242
a. Predictors: (Constant): Net Profit, Net Worth, EPS, DPS, Market Price Per Share.
ANOVA (b)
Model Sum of Squares F
1Regression
Residual
Total
df Mean Square Sig.
340.873
.293
341.166
8
3
11
42.609
.098
436.543.000(a)
a. Predictors: (Constant): Net Profit, Net Worth, EPS, DPS, Market Price Per Share.
b. Dependent Variable: Dividend Payout Ratio
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Coefficients (a)
Model
Constant
Net Profit
Net Worth
EPS
DPS
Market Price perShare
UnstandardizedCoefficients
StandardizedCoefficients t Sig.
29.188
.002
.000
-.881
5.370
.008
BStd. Beta
.439
.000
.000
.039
.182
.000
.511
-.829
-4.410
5.063
2.069
66.437
3.781
-7.800
-22.484
29.545
16.048
.000
.032
.004
.000
.000
.001
a. Dependent Variable: Dividend Payout Ratio
T-Test One-Sample Statistics
Model
Public Sector Bank
Private Sector Bank
N MeanStd.
DeviationStd. Error
Mean
7
5
20.1543
23.2160
1.42447
8.68531
.53840
3.88419
One-Sample Test
Model
Public Sector Bank
Private Sector Bank
tSig.
(2-tailed)Mean
Difference95% Confidence
Interval of the Difference
37.434
5.977
Test Value = 0
df
Lower Upper
6
4
0.000
0.004
20.1543
23.2160
18.8369
12.4318
21.4717
34.0002
l There is no significant difference between dividend payout of public and private sector
banks.
l The null hypothesis has not been accepted (because p<0.05, 0.000, 0.004) in this study.
There is significant difference between dividend payout of public and private sector
banks.
SUMMARY OF THE HYPOTHESES TEST
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
1. There is no significant impact of Profitability on dividend payout ratio Not Accepted
2. There is no significant impact of Net worth on dividend payout ratio Not Accepted
3. There is no significant impact of EPS on dividend payout ratio Not Accepted
4. There is no significant impact of DPS on dividend payout ratio. Not Accepted
5. There is no significant impact of MVPS ratio on dividend payout ratio. Not Accepted
Not Accepted6. There is no significant difference between dividend payout of public and private sector banks.
S/N HYPOTHESES STATUS
Findings
has not been accepted ( p<0.05, 0.032) in this study. There is significant impact of
has not been accepted (because p<0.05, 0.004) in this study. There is significant impact of
has not been accepted (because p<0.05, 0.000) in this study. There is significant impact of
has not been accepted (because p<0.05, 0.000) in this study. There is significant impact of
has not been accepted (because p<0.05, 0.001) in this study. There is significant impact of
The null hypothesis �There is no significant difference between dividend payout of public and private sector banks� has not been accepted (because .p<0.05, 0.000, 0.004) in this study. There is significant difference between dividend payout of public and private sector banks.
The null hypothesis has not been accepted (because p<0.05, 0.000, 0.004) in this study. There is significant difference between dividend payout of public and private sector banks.
Conclusion
Throughout the study objectives were to find out the impact of , , achieve the goal, this paper
gathered secondary data of banking listed companies traded in National Stock Exchange (NSE)
lThe null hypothesis �There is no significant impact of Profitability on dividend payout ratio in banking sector�
Profitability on dividend payout ratio in banking sector.
lThe null hypothesis �There is no significant impact of Net worth on dividend payout ratio in banking sector�
Net worth on dividend payout ratio in banking sector
lThe null hypothesis �There is no significant impact of EPS on dividend payout ratio in banking sector�
EPS on dividend payout ratio in banking sector.
lThe null hypothesis �There is no significant impact of DPS on dividend payout ratio in banking sector�
DPS on dividend payout ratio in banking sector
lThe null hypothesis �There is no significant impact of MVPS on dividend payout ratio in banking sector�
MVPS on dividend payout ratio in banking sector
l
l
ProfitabilityNet worth, EPSDPS and MVPS on dividend policy of banking firms. In order to
because
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
and used some statistical tools to analyze all the financial information. This paper investigated the dividend policy of the firms listed in the banking industry and comparative study of dividend policy of public and private banks in India, their dependence on the accounting variables and found that the profitability Net worth, EPS. DPS and MVPS on dividend policy of banking firms have significant impact on the value of firm in banking industry and also there is difference between the dividend policy of public and private sector bank.
References
l
Central Library, Kirtipur.
lAdhikari Samita (2008) �A Comparative study of Dividend Policy in Commercial Banks� Nepal Commerce Campus Library.
lAryal, H.R. (1997), �Dividend Policy Comparative study between Nepal Arab Bank Limited and Nepal Grindlays Bank Limited�, Unpublished Masters Degree Thesis, T.U Central Library, Kirtipur.
lBasu, A.K. (1982), �Fundamentals of Banking Theory and Practices�, Calcutta: A.K. Mukherjee Publication.
lBrigham, Eugene F. and Gapenski, Louis C. (1985), �Intermediate Financial Management,� New York: The Dryden Press.
lBhattacharya, N. (2007), �Dividend policy: A review�, Retrieved January 25, 2008, from www.emeraldinsight.com
lChawla, D. & Srinivassan, G. (July-September 1998), �Impact of Dividend and Retention on Share Price � An Economic Study Decision� Vol.14 No.3 pp. 137-140
lCotter, R. & Smith, G. (1976), Commercial Banking New Jersey: Prentice Hall Inc.
lEndi Consultants Research Group, Nepalese Company Act - 1997, Nepal for Profitable Investment. Kathmandu: Shree Star Printing Press Baghbazar.
lFrancis, J.C. (1972), �Investments: Analysis and Management�, New Delhi: Tata McGraw Hill Publishing Company Limited.
lFriend, I., & Puckett, M. (September 1964), �Dividends and Stock Prices� The American Economic Review, Vol. LIV: 656-682
lGautam, R.R. (October 1996), �Dividend Policy in Commercial Banks: A Comparative Study of NGBL, LBL & SBL�, Unpublished Masters Degree Thesis, Shanker Dev Campus T.U.
lGhimire, P.K. (July 2002) �Dividend Policy of Listed Companies (with ref. to Banks, Finance & Insurance Companies)�, Unpublished Master's Degree Thesis, Shanker Dev Campus T.U
Adhikari, N.R. (1999), �Corporate Dividend Practice in Nepal�, Unpublished Masters Degree Thesis. T.U.
8
*Radhagobinda Basak
* Assistant Professor, Dept, of Commerce, Maharani Kasiswari College, University of Calcutta, Kolkata, West Bengal
Recently in India, the Companies Act, 2013 has been enacted and its provisions have already come into stforce since the 1 day of April, 2014. Moreover, the Ministry of Corporate Affairs issued the Companies (Corporate
thSocial Responsibility Policy) Rules, on 27 February 2014. One of the most notable features of the said Act is
its provisions regarding the CSR practices by Indian companies. The present study attempts to highlight those
provisions and secondly to estimate what will be the amount that is to be spent by some selected Indian companies,
both public and private sector, on CSR during the F.Y. 2014-15 as per the provisions of the said Act. Further the present
status of those selected companies regarding CSR has also been considered.
Key words: Corporate Social Responsibility, Sustainable Development, Provisions, Norms,
Stakeholders, Capital Profit/Loss, Net Worth, Profit Before Tax.
Introduction
Nature of the problem
The Indian Corporate sector was mainly governed by the Companies Act, 1956. Unfortunately
there were no provisions on CSR reporting in that Act though the concept of CSR is not a new
one in India. Even it was present in the five-fold debt system as described in Upanishads. To
overcome this problem, in Companies Act, 2013, some provisions on CSR expenditure and
reporting were added. Thus the study attempts to highlight whether those provisions can open a
new horizon for CSR practices in India or not?
Objective of the study
1.To throw light on CSR provisions of the Companies Act, 2013.
2.To estimate the probable amount of CSR expenditure of some selected Indian
companies for the F.Y. 2014-15.
3.To discuss the present scenario of CSR practices of those selected companies.
Research Methodology
For the collection of data we depended on the websites of the Ministry of Corporate
Affairs and that of the respective companies. For concept building we have taken help of some
books on the topic. We have presented the data through some tables. For analyzing the data,
simple arithmetical techniques like average, percentage, etc., have been used. No specific sampling
technique has been used. Companies have been selected keeping in mind two things. The
companies having a sound coverage in the market in terms of production and sale in the concerned
industry. Secondly, availability of published CSR report is another important yardstick.
Literature Review
The following articles were reviewed in this respect:
�Implications of Companies Act, 2013-Corporate Social Responsibility� by Grant Thornton
India LLP;
�India: Corporate Social Responsibility: Mandating Companies to Contribute towards
Society� by Megha Kapoor;
l
l
Companies Act, 2013: A Ray of Hope for Corporate Social Responsibility (CSR) Practices in India
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
l
l
l
l
l
l
l
l
�Corporate Social Responsibility (CSR) under New Company Law� by Mr. Ankit Singh;
�Notification of provisions relating to Corporate Social Responsibility under the Companies
Act, 2013� by KPMG, an Indian registered partnership.
Conceptual Framework : CSR
As a part of the society, each business house specially which has been incorporated under
a particular act has some responsibilities towards the society. Corporate Social Responsibility
(CSR) refers to the company's obligation to meet the needs of all stakeholders of the company in an
ethical way to ensure that the operations made by the company are sustainable.
Analysis and Finding
CSR provisions of the Companies Act, 2013thOn 27 February, 2014, the Central Government issued by notification the Companies
(Corporate Social Responsibility) Rules, 2014 to come into force the CSR provisions of the stCompanies Act, 2013 and those rules came into force on and from 1 April, 2014.
Applicability
Every company having net worth of rupees five hundred crore or more, or turnover of
rupees one thousand crore or more or a net profit of rupees five crore or more during
any financial year will be under the grip of the rules.
Each such company shall constitute a Corporate Social Responsibility Committee of the
Board consisting of three or more directors, out of which at least one director shall be an
independent director. However the private companies are exempted from appointing the
independent / third director.
The said committee shall formulate and recommend to the Board, a CSR policy indicating
the activities to be undertaken by the company as specified in schedule VII of the Companies
Act, 2013; recommend the amount of expenditure to be incurred on CSR activities; and
monitor the CSR policy of the company from time to time.
The Board of every company shall after taking into account the recommendations made
by the CSR Committee, approve the CSR policy and disclose the contents of such policy
in its report and also display it on its website; and ensure that the company spends, in every
financial year, at least two percent of the average net profits of the company made during
the three immediately preceding financial years (sec.198), in pursuance of its CSR
policy.
Net profits will be taken before tax and capital profit or loss such as profit or loss arising
out of acquisition of a company or sale of fixed assets, etc., will not be taken into
consideration.
Profit from foreign branches and dividend received from other companies which are
complying the CSR provisions will also not be taken into consideration. The companies of
same group can establish a registered trust or can take joint CSR projects to comply
CSR policy.
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lFormat for the annual report on CSR activities to be included in the Board's report. Average
net profit of the company for last three financial years and the prescribed CSR expenditure i.e.
two percent of that average are to be mentioned at first. Then the amount spent is to be shown
in the following manner:
SL.No.
CSR project or activity identified
Sector in which the project is covered
Projects or programs (1) Local area or other (2) Specify the state and district where
projects or programs
were undertaken
Amount outlay
(budget) project or program wise
Amount spent on projects or programs sub-heads: (1) Direct
expenditure on projects or programs (2) Overheads
Cumulative expenditure up to the reporting period
Amount spent:
Direct or through
implementing agency*
1 2 3 4 5 6 7 8
1
2
3
TOTAL
*Details of implementing agency:
In case the company has failed to spend the prescribed CSR amount, the company shall provide the reasons for not spending the amount.
CSR Activities Specified in Schedule VII of the Act
lEradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water.
lPromoting education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects.
lPromoting gender equality, empowering women, setting up homes and hostels for women and orphans.
lSetting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
lEnsuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water.
lProtection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
lMeasures for the benefit of armed forces veterans, war widows and their dependents.
lTraining to promote rural sports, nationally recognised sports, paraolympic sports and Olympic sports.
lContribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, Other Backward Classes, Minorities and Women;
lContributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government.
lRural development projects.
We have to remember what CSR means and includes but is not limited to the activities specified in above schedule VII. The company shall give preference to the local area and areas around its operation. Activities exclusively for the benefit of the employees of the company and contribution to the political parties will not be considered as CSR activities.
Estimation of Probable Amount of CSR Expenditure of Some Selected Indian Companies Rs. in crore
Tata Steel Steel Ltd.
Reliance Oil and 27,72726,207 25,740 26,558531.16Industries PetroleumLtd.(RIL)
Infosys Information 14,00212,274 11,096 12,457.33249.15Ltd. Technology
Hindustan Consumer 4,695.784,225.823,305.944,075.8581.52Unilever GoodsLtd.(HUL)
9,409.437,811.789,281.828,834.34176.69
Name of
the
company
Sector it
belongs to
Net Profit (calculated as per
the provisions of sec.198)
2013-14
(Rs.)
2012-13
(Rs.)
2011-12
(Rs.)
Average
Net Profit
(Rs.)
CSR
obligation
for F.Y.
2014-15
(Rs.)
Larsen & Engineering Toubro Ltd. and (L&T) Construction
National Power 13,904.6514,894.5212,326.1613,708.44274.17Thermal GenerationPower Corporation Ltd.(NTPC)
Oil and OIL and 32,431.9430,544.3133,502.0132,159.42643.19Natural Gas Natural GasCorporation Ltd.(ONGC)
5,812.165,088.285,791.145,563.86111.28
Name of
the
company
Sector it
belongs to
Net Profit (calculated as per
the provisions of sec.198)
2013-14
(Rs.)
2012-13
(Rs.)
2011-12
(Rs.)
Average
Net Profit
(Rs.)
CSR
obligation
for F.Y.
2014-15
(Rs.)
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
A discussion on the present scenario of CSR practices of the selected companies:
lTata steel is one of the pioneer companies in publishing CSR report in India. Its last report is for the year 2012-13. In that year it spent Rs.429.6 crore on CSR which is sufficiently better than the amount to be spent in 2014-15.
lRIL spent Rs.711.72 crore in CSR in 2013-14 and it is also higher than its CSR obligation in 2014-15.
lInfosys has not given the data on their CSR expenditure fully. They said their community investment had been 1.48 million US Dollar (more or less Rs.9 crore) which is not satisfactory at all.
lIn the year 2013-14, HUL spent 2% of average net profit of three immediately preceding financial years calculated as per the provisions of Companies Act, 2013. So they are at par with the standard.
lL&T spent 1.40% of profit after tax, i.e., Rs. 76.90 crore for CSR which is much lower than their target in 2014-15.
lNTPC spent Rs.190.64 crore for social and environmental causes in the year 2012-13 which is little less than 2% of the profit before tax of that year. CSR report for 2013-14 is yet to come.
lONGC's expenditure for environment and community for the year 2012-13 was Rs. 852 crore whereas they have to spend Rs.643.19 crore in the year 2014-15. So it can be expected that they will continue to perform their social duties in such a good way.
Conclusion and Recommendation
Two of our selected corporate giants have not contributed sufficiently towards CSR. As till 2013-14 there were no legal bindings on it, most of the Indian companies did it voluntarily. They were
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not under any obligation to disclose it. So it was an area of mystery to us. Now with the enforcement of the Companies Act, 2013, the qualified companies must disclose their CSR report in specified format. So it will surely open a new horizon for CSR practices and reporting in our country. As there are enough number of companies which will come under the area of the act, it can be expected that a huge amount of community investment will be taking place each year which will lead India to be a developed country from a developing country. However the Act is silent regarding the consequences in case a company fails to comply with the CSR norms. The government should consider immediately otherwise the bad fishes may go out of the net. Still we hope for the best.
References:
l
lBanerjee, Bhabatosh and Chatterjee, Kanika and Dandapat, Dhrubaranjan. (2008). �Corporate Social Responsibility�, Department of Commerce, University of Calcutta.
l Bhattacharya, Jayanta. (2007). �Corporate Social Responsibility: Ethical and strategic choice�, Asim Books, Delhi.
lHawkins, David, E. (2006). �Corporate Social Responsibility : Balancing tomorrow's sustainability and today's profitability�, Palgrave Macmillan, New York.
l Hopkins, Michael. (2008). �Corporate Social Responsibility and International Development - Is Business the solution?� Earthscan, London.
lJatana, Renu and Crowther, David. (2007). �Corporate Social Responsibility : Theory and practice with case studies�, Deep & Deep Publications, New Delhi.
l www.mca.gov.in
lwww.tatasteel.com
lwww.tatasteelindia.com
lwww.ril.com
lwww.infosys.com
lwww.hul.co.in
lwww.larsentoubro.com
lwww.ongcindia.com
lwww.ntpc.co.in
Agarwala, Sanjay, K. (2008). �Corporate Social Responsibility in India�, Response Books, New Delhi.
14
*Assistant Professor, V.S.S.D. College, Kanpur**Research Scholor
Savings and Investments: Crucial for Economic Growth
*Dr. Pankaj Pandey **Atul Kumar Singh
Introduction
The total amount of savings and investments plays a decisive role in determining the growth
and development of an economy. In a developing nation like India the role and importance of
savings and investments becomes more crucial keeping in view the present condition of the basic
infrastructural facilities available in the country. Since savings and investments are the two pillars which
form the basis for the much needed capital formation every economy is striving hard for formulating
such policies so as to strengthen the state of capital and increase the amount of capital formation. In a
country like India saving and investment is more a social and psychological phenomena rather than
an economic phenomena. It is followed as a tradition in India. In fact the traditional nature of savings
of the people of the country helped the Indian economy and the government to face the severe
challenges resulting out of the economic crises that took place in United State of America few years
back. In a country like India with huge amount of fiscal deficit and adverse balance of payments,
savings forms the basis for credit creation by commercial banks as well as to fulfill the capital
requirements of the industrial sector. Thus it becomes essential to assess and evaluate as to how
far savings contribute to economic growth and development of India.
Savings
Saving can be understood as that part of a nation's income which is not spent on the
consumption of goods and services. Lord Keynes defined it as �the excess of income over consumption
is known as savings�. According to him what ever amount of the total income is left after expenditure
is called as savings. Thus, according to the above definition savings can be calculated with the
following formula:
S = Y � C, where S = saving
Y = Income C = Consumption
Investment and capital formation
Investment means that part of saving which is spent on the purchase of capital goods
such as equipments, plants and machinery and the purchase of shares, bonds, and debentures
which already exists in the market. However, this is just a financial investment because in this case
money and ownership moves from one hand to another and there is no increase in employment.
According to Keynes investment which results in the increase in employment and creation of
demand for factors of production is actual investment. This actual or real investment leads to capital
formation. Capital formation takes place when there is a real increase in the amount of real
production assets in an economy. In a true sense capital formation means an increase in the
present stock of capital as a result of increase in investment.
Trends of saving in India
It is clear that domestic savings forms the basis of capital formation. A high rate of saving
leads to higher amount of capital formation which is so crucial for economic growth and prosperity.
In India the role of savings is calculated as the percentage of gross domestic product. The trends of
savings in India are presented in the table depicted ahead.
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Table 1: Ratio of Saving to GDP (percent at current prices)
1950-51 6.2 0.9 1.8 8.9
1960-61 7.3 1.7 2.6 11.6
1970-71 10.1 1.6 2.9 14.6
1980-81 13.8 1.6 3.5 18.9
1990-91 19.3 2.7 1.1 23.1
2000-01 21.0 4.3 (-)1.9 23.4
2004-05 23.6 6.6 2.3 32.4
2005-06 23.5 7.5 2.4 33.5
2006-07 23.2 7.9 3.6 54.6
2007-08 22.5 9.4 5.0 36.9
2008-09 23.8 7.9 0.5 32.2
2009-10 25.2 8.4 0.2 33.7
2010-11 23.5 7.9 2.6 34.0
2011-12 22.3 7.2 1.3 30.8
YearHousehold
Sector SavingsPrivate Corporate Sector Savings
Public Sector Savings
Gross Domestic Savings
The following inferences can be drawn from the above table:-
lThe period from 1950-51 to 1970-71 was a low saving phase in which domestic saving
rate increased from 8.9% in 1950-51 to 14.6% in 1970-71.
lThe rate of saving was almost stagnant between 1990-91 and 2000-01.
lThere was a remarkable growth in the domestic rate of savings after 2000-01. It was a
phase where there was an increase in the GDP and hence saving also increased.
lThe rate of savings which was 23.4% in 2000-01 increased to 33.7% in 2009-10. During
the same period the national income increased from Rs. 17,62,358 cr. to Rs. 53,95,687 cr.
The rate of savings however, declined slightly to 30.80% in 2011-12.
lThe contribution of household sector in gross domestic savings increased from 69.70%
in 1950-51 to 72.40 in 2011-12. The share of private corporate sector savings increased
from 10% to 23.30% and that of the public sector declined from 20.40% to 4.3% during
the same period.
The 30 percent rate of gross domestic savings is a healthy indicator keeping in view the
social and economic condition of Indian population. In a country where majority of the population lives
in villages and around 40% of the population comes below poverty line, the savings trends gives
a positive indication of economic growth and development. However, since Indian economy is in a
developing state, the rate of savings can be increased through:
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
l
MNREGA in order to increase income level.
lProvide agricultural assistance to improve agricultural productivity.
lExtension of banking facilities in rural areas to enhance saving practices.
lExtension of insurance and provident fund facilities to mobilize saving of low income group
people.
lFormulate policies so as to put a check over inflationary trend and ensure stability in
prices
Investment - Capital Formation
Capital formation plays a predominant role in determining the level of income, employment
and production in an economy. A higher level of investment enhances the production capacity leading
to increase in the level of total demand and supply of goods and services. This helps in achievement
of the objective of long term growth and development of an economy. Higher amount of capital
formation helps in solving the problem of adverse balance of payments because higher level of
production leads to import substitution.
Trends of capital formation in India
Though availability of resources, technological innovation, efficient man power and government
support is vital in economic development but capital formation has its own importance because in
absence of abundance amount of capital formation all other resources lose their importance and
efficiency. The trends of capital formation in India have been depicted in the following table.
Table 2: Trends of Capital formation in India
Creation of employment opportunities in rural areas through programmes such as
.
YearRate of Capital Formation/Rate of Gross Domestic Capital Formation
(in percentage)
1950-51 850 8.4
1960-61 2,433 14.0
1970-71 6,965 15.1
1980-81 28,975 19.9
1990-91 1,48,206 26.0
2000-01 5,11,788 24.3
2004-05 10,57,618 32.7
2005-06 12,70,648 34.3
2006-07 13,43,773 35.7
2007-08 16,41,515 38.1
2008-09 17,88,803 37.5
2009-10 20,16,186 36.5
2010-11 26,92,031 36.8
2011-12 31,81,423 35.0
Gross Domestic Capital Formation at Current Price (Rs. in crore)
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The study of the above table shows the trends of investment and capital formation reveals the following conclusion:
lThe rate of capital formation in India was very low during the initial planning phase.
lThe planned phase (five year plans) led to the increase in national income and hence forth the rate of capital formation.
lThe rate of capital formation increased slowly from 8.4% in 1950-51 to 19.9% in 1980-81.
lThe gross rate of capital formation then picked up and increased from 26% in 1990-91 to 35% in 2011-12.
lThe gross domestic capital formation at current prices which was Rs. 850 crore in 1950-51 increase to Rs. 31,81,423 crore.
The sectoral variations in gross domestic investment or capital formation can be clearly understood through the table given below.
Table 3: Sectoral Variations in Gross Domestic Investment (GDI in India)
(in percentage)
Gross Domestic Capital Formation 32.734.335.7 38.134.535.0
· Public sector 7.4 7.9 8.4 8.99.57.9
· Private sector 23.825.326.4 27.624.624.9
· Corporate sector 10.313.514.5 16.112.710.6
· Household sector 13.511.811.9 11.512.214.3
2004-052005-062006-072007-082008-092011-12
As provided in the table it is evident that in the year 2004-05 the gross domestic capital
formation was 32.7% in which the contribution of public sector, private sector, corporate sector and
household sector were 7.4%, 23.8%, 10.3% and 13.5% respectively. The same figure in the year
2011-12 were 7.9%, 24.9%, 10.6% and 14.3% respectively.
Impact upon the Economy
Savings and investments determine the rate of capital formation in an economy. The
amount and extent of capital formation in turn plays a crucial role in determining the rate of
economic growth and development especially in a developing country like India. Inspite of the
limitations there has been a remarkable increase in the amount of savings and investments in
India which reflects in form of positive advancement in several economic and non-economic
indicators in the Indian economy. The rising amount of capital formation has the following impact
upon the Indian economy:
lThe national income at current prices which was Rs. 9,464 Cr. in 1950-51 increased to
around Rs. 83,68,571 Cr. in 2012-13. During the same period the per capita income increased
from Rs. 264 to Rs. 69,497.
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l
Rs. 29 Cr. In the year 2011 the number of public enterprises increased remarkably to 260
and the total capital invested was Rs. 6,68,848 Cr.
lIn the year 2010-11 as per the statistical outline of India the contribution of 248 operating
public enterprises to the central exchequer was Rs. 1,56,121 Cr.
lAs a result of increased capital formation the number of private sector companies increased
from 30,461 in 1971 to 1,38,300 in 2009-10.
lThere were 71.3 lakh workers employed in the private sector in the year 2009-10. In the
same year the private sector contributed to about 80% of NNP.
lThe trends of saving and investments highly facilitated the growth and development of stbanking and insurance sector in India. Till 31 March 2010 there were 160 commercial
banks out of which there were 78 scheduled banks and 82 RRB.
lIn 1969 the nationalised banks in India granted loans to the extent of Rs. 3,275 Cr. which
increased to Rs. 18,43,102 Cr. in 2010-11. The deposits of these banks amounts to
Rs. 25,83,716 Cr. in 2010.
lThe insurance industry has invested amount to the extent of Rs. 1,10,000 Cr. all the stsectors of the economy till 31 March 1998. The Life Insurance Corporation has provided
Rs. 14,667 towards the development of basic infrastructural facilities such as electricity,
water, housing and transportation. The insurance industry has invested Rs. 21,176 Cr. in
shares and debentures of industrial and commercial concerns.
Conclusion
India is a developing economy with huge prospects for development and growth. The
GDP has declined in the recent years due to declining trends particularly in the fields of agriculture
and industry. The non-availability of sufficient amount of capital to fund industrial and commercial
requirements gives impetus to the declining trend. The adverse balance of payments and deficit
budget poses serious challenges before the economy and hampers growth and development. The
prevalence of high rate of unemployment is also the result of unbalanced growth. The dependence on
outside source of funds goes to increase foreign debt which again may cause unwanted financial
burden over the already over burdened economy. Thus, at this point of time capital generated through
increased domestic savings and investment has a important role to play in achieving economic
goals and pave the way for overall growth and development.
References
Sinha V.C., Business Environment, SBPD Publishing House, Agra, 2014, PP. 484.
lSingh S.K., Business Environment, Sahitya Bhawan Publications , Agra, 2014, PP. 392.
lJain T.R. Trehan Mukesh Trehan Ranju, Business Environment, V.K. Global Publications Pvt. Ltd. New Delhi,2014,
PP. 484.
lVishnoi R.K., Principles of Insurance , SBPD Publishing House, Agra, 2014, PP. 432.
lJain T.R. Grover M.L. Money and Financial Systems, V.K. Global Publications Pvt. Ltd. New Delhi,2014, PP. 228.
lSinha V.C., Nature and Problems of Indian Economy, SBPD Publishing House, Agra, 2011-12, PP 372.
lMamoriya C.B. , Indian Economy, SBPD Publishing House, Agra, 2013-14, PP. 679.
In the year 1951 there were 5 public enterprises in India with a total capital investment of
l
Financial statements should depict the true and fair view of the companies. In today's
competitive environment companies are trying their best to enhance their earnings and create
goodwill and confidence amongst the stakeholders. Companies desire to present the reports
with the profits growing steadily have led to numerous accounting scandals over the past
decades such as Enron, Anglo-Irish Bank, Satyam Computer Services, Lehman Brother, Autonomy
Corp. This reveals that at least some accountants can be extremely creative with their finances
they control. Such practice adversely affects the decision of different users of the financial
statements. Creative accounting has emerged as a new way of manipulating financial statements
of the companies. Certain loopholes in Indian Accounting Standards are facilitating the companies
to indulge in such malfeasance to earn huge profits or save taxes. Account manipulation attempts
to show different financial results than what they actually are. The research paper consists of the
study which has been conducted to identify the different motives of creative accounting and to
find various measures to prevent such malpractice. Our exploratory study examined and reviewed
historical facts and past literature. To address this issue a questionnaire was administered to
30 respondents. The study revealed that all the respondents were aware about the creative
accounting practice but the detection of creative accounting is difficult as it is practiced within
the framework of accounting system. This problem is not only confined to India but is present in all
the international companies too. The study concludes that there is need for stronger enforcement
and monitoring mechanism for International Financial Reporting Standards in India. Streamlining
the accounting and auditing system and enhancing the practice of corporate governance appears
to be the engines to make the accounting more objective and transparent.
Keywords- creative accounting, financial statements, manipulation, accounting standards.
Introduction
Accounting is a business language. Accounting information includes income statement, financial statement, budgeting, strategic planning, cost analysis, auditing, income tax preparation, cash flow statement, performance measurements, evaluation, control and preparing managerial reports for decision making. Accounting helps in communicating these statements, viz. the proprietor, management, owners, creditors, debtors, bankers, employees, government etc. for forecasting, planning, comparing and evaluating the earnings capacity and financial position of the business. Hence, it is necessary that the accounting information must be clear, simple and easy to understand and analysis and representation consists desirable information that is trustworthy. However there have been many accounting frauds in the past. In some cases they have reached to the tune of billions of dollars. In 2002, big accountancy firms like Arthur Anderson, Ernest and Young, Price Waterhouse Coopers etc. were drag into court or they admitted negligence in their duties. These companies were held responsible for preventing the publication of bogus financial reports. Due to their carelessness, their clients were able to publish reports which were misleading and gave a completely different impression of the client's company financial status. In the United States of America the impact of Enron collapse was great as it was closely followed by the bankruptcy of World Com Company. Then a series of similar scandals, Ahold Royal in the Netherlands and Equitable Life insurance company in the UK, all these showed that this was not just a U.S. phenomenon and the accounting and auditing practices have been widely condemned (Dana SimonaGherai and Diana Elisabeta
19
The Study of Creative Accounting and Its Implication
*Dr. Reshma Rajani**Saloni Gupta
*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur**Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur
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Balacin, 2011). Following this scandal and many more by companies like Adelphia, Tyco International, etc. the Sarbanes Oxley Act was enacted as a U.S Federal Law in July 2002 to safeguard the investors. In India the need for corporate governance has been highlighted because of the scams occurring frequently such as Harshad Mehta Scam(1992), Ketan Parikh Scam(1995), Satyam Scam (2007) etc. Ramalinga Raju the Chairman of Satyam Computers was alleged for funding the accounts of the company cash and bank balances. Scams like Satyam have decreased investor's confidence and have raised questions on all large companies which were directly and indirectly related with it. This reveals that at least some accountants can be extremely creative with their finances they control. Such creativity can include the misdirecting or misuse of funds, understating expenses, overstating revenues, understating liabilities and overstating corporate asset values, thereby misrepresenting the financial state of a company. Certain loopholes in Indian Accounting Standards are facilitating the companies to indulge in such malfeasance. Such practice of window dressing can be referred as creative accounting or innovative accounting. Thus this paper attempts to identify the different motives behind the practice of creative accounting and providing strong measures in preventing such malpractice.
Definition and Concept of Creative Accounting
Kamal Naser (1993), offers this definition of creative accounting which presenting an academic view: creative accounting is the transformation of financial accounting figures from what they actually are to what preparers' desire by taking advantage of the existing rules and/or ignoring some or all of them.'
'Creative accounting is the process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business' (Amat, O. et al., 1999).
Methods of Creative Accounting
Following are the frequently used methods of creative accounting.
lOff-Balance Sheet financing such as deliberately failing to disclose financial liabilities.
lUnder depreciating fixed assets or changing the method of depreciation.
lIncome smoothing to reduce sales volatility.
lOverstating the business stock or inventory to show higher profits and increasing current assets.
lBusinesses that are involved in long term contract can manipulate profits by recognizing revenue too early.
lWindow dressing for instance reporting next year's financial sales in the current year or hiding or ignoring current year expenses.
lCapitalization of costs such as interest and expenditure on research and development
lAt the time of mergers, amalgamation, acquisitions writing off goodwill against reserves.
lPre � acquisitions write down and deferred consideration on acquisition.
lBrand accounting � capitalization of assets.
lContingent liabilities
lCurrency mismatch between borrowing and deposition.
Thus Creative Accounting is used to present assets and liabilities, income and expenditure in a complicated way to incur huge profits. The frequency of large scale creative accounting fraud is seldom, but is carried out with the support of key executives in a company, and may even rely on the
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co-operation of officials in other corporation or affiliated companies. The officials present the assets and liabilities in a very clever way with motive of saving tax money or increasing the market share value. Creative Accounting can also be used to manipulate the value of publicly traded company's shares for financial gains.
Literature Review
Creative accounting has been the subject of research, discussion and even controversy in many countries these years. Much has been written on the topic in recent years. Numerous articles have appeared looking at the different perspectives of the techniques companies use to 'make statements what they want them to be' (Jon S. 1998). (Dilip2006) argues that the real incentive of creative accounting is the conflicts of interest among different interest groups. (Stolowy and Breton, 2000) suggest three broad objectives for earnings management: minimization of political costs; minimization of the cost of capital and maximization of managers' wealth. (Naser and Pendlebury, 1992) questioned senior corporate auditors about their experience of creative accounting. They were able to conclude that a significant proportion of all categories of companies employ creative accounting techniques to some extent. Many research studies examine a particular aspect or technique of creative accounting. According to Price Waterhouse senior partner's observation (Conner 1986), fraudulent reporting normally occurs among those above management level in which effective internal control are designed. Financial statement are commonly used to generate the delusion that company is in better condition than it actually is by misapplication of the accounting principles to cover the economic realities. There is a substantial literature on creative accounting, much of it originating in, and concerned with, the United States. However, the US literature offers valuable insights into creative accounting in any country with a reasonably highly developed capital market. A recent comprehensive review of the US literature is provided by (Healy and Wahlen,1999) there has been a growth in the volume of literature discussing creative accounting issues.
Objectives of the study
The study aims to achieve the following objectives-
lTo find out whether the creative accounting practice affects the financial reporting system.
lTo examine the reasons for creative accounting practices.
lTo provide valuable suggestions to prevent such malpractices.
Research Hypotheses
Based on the above mentioned objectives, the following hypotheses have been formulated-
lHo.1 - Creative accounting practices has no significant effect on the financial reporting system.
lHo.2 - Implementation of International financial reporting standards do not have significant effect in preventing creative accounting practices.
Research Methodology
The survey method of research design was adopted in this study and non-probability convenience sampling technique was used. The sample constituted of 30 respondents including 10 professional chartered accountants, 10 CA/CS students and 10 academicians of commerce department of different colleges in Kanpur. In order to accomplish the purpose of the research a questionnaire was made with 15 questions. For the response 5 point Likert Scale was used where 1 indicates strongly agree, 2- agree, 3- neutral, 4- disagree, 5- strongly disagree. The data generated for
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this study were presented in a table and analyzed using mean scores. The stated hypotheses were statistically tested using chi-square test.
Research analysis and findings
The hypotheses were tested using the chi-square test. The contingency table is given below -
Table 1
Ho.1 - Creative accounting practices has no significant effect on the financial reporting system.
Strongly Agree 9 6 3 9
Agree 21 6 15 225
Neutral 0 6 -6 36
Disagree 0 6 -6 36
Strongly Disagree 0 3 -6 36
30 342
ResponsesObserved (O)Expected (E) (O-E) 2(O-E)
Implication -
The calculated value of (57) is greater than the tabulated value of = 9.48 at 5% level of
signficance. Hence, we reject the null hypothesis (Ho.1) and accept the alternative hypothesis (H1). This
indicates that creative accounting has significant effect on the financial reporting system.
Table 2
Ho.2 - Implementation of International Financial Reporting Standards does not have significant
effect in preventing creative accounting practices.
2 2X X
2 2Calculation of X = (O - E)/E
= 342/6
= 57
å
Source - Field Survey
Degree of Freedom df = n - 1
= 5 - 1
= 4
Strongly Agree 8 6 2 4
Agree 15 6 9 81
Neutral 4 6 -2 4
Disagree 3 6 -3 9
Strongly Disagree 0 6 -6 36
30 134
ResponsesObserved (O)Expected (E) (O-E) 2(O-E)
Source - Field Survey
2 2Calculation of X = (O - E)/E
= 134/6
= 22.33
å Degree of Freedom df = n - 1
= 5 - 1
= 4
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Implication-2 2The calculated value of X (22.33) is greater than the tabulated value of X = 9.48. Hence, we
reject the null hypothesis (Ho.2) and accept the alternative hypothesis (H2). This indicates that implementation of International Financial Reporting Standards have significant effect in preventing creative accounting practices.
Table 3
Factors motivating the creative accounting practices (where - 1-highest and 5-lowest score)
Encourage investors to buy company stocks 2.47 2.26
Increase firm's market value of shares 1.70 1.51
Avoid taxes 2.07 1.86
Easy availability of finances at low interest rates 3.57 3.25
Healthy managerial performance 4.46 4.08
Factors for rating MeanWeighted
Average Mean
Source - Field Survey
Implication
In the Table 3, the mean and weighted average mean of various motives were calculated to
find out the main aim behind creative accounting. As the highest score is 1 and lowest is 5, the
mean score which is near to 1 is the highest rated option. Hence, it is clear from the table that the
key objective of creative accounting is to increase the firm's market value of shares in market (with the
mean score of 1.70) following with the practice to avoid taxes (2.07). Attracting new investors and
retain the existing ones(2.47) also motivated companies to practice window dressing. Easy availability
of finance at low rate of interest (3.57) has been rated fourth and healthy managerial performance
(4.46) rated as the last drive to practice creative accounting.
Major findings of the study
lIn present scenario only 43% of the respondents agreed that the financial statements depict
the true and fair view of the companies and 60% of the respondents agreed that creative
accounting practice cannot be easily identified.
lAll the respondents strongly agreed that independent auditors appointed should follow the
auditing standards.
l73% of the respondents strongly agreed that public company should review the internal
financial reports time to time and enforce control to prevent losses.
l70% of the respondents strongly agreed that financial reports must be certified by CEO's and
CFO's.
l50% of the respondents strongly agreed that several legal and criminal penalties should be
imposed who indulge in such malpractices.
l50% of the respondents strongly agreed and 40% agreed that familial relationship among the
leaders of the company and board of directors puts the company at creative accounting risks.
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l
players (CA/CS/Auditors/Accountants) have significant role in cooking the books of accounts.
l53% of the respondents agreed that companies practice of corporate governance.
lOnly 20% of the respondents agreed that the financial players follow ethical accounting.
Recommendations
The following suggestions can be made in line with the above findings-
lThe government should provide adequate environment for business so that the entrepreneurs
do not indulge in fraudulent practices.
lThere should be more than one auditor in the company and that should be rotated periodically
so that informal relationships do not affect the authenticity of the financial statements.
lRole of independent directors should be enhanced.
lThe financial statements of the companies entering the Indian market through mergers,
acquisitions or any other mode should be checked by two or more independent auditors under
the government supervision.
lTransactions which are changed in special circumstances should be closely examined.
lRewarding and motivating employees in disclosing any manipulation going in the company.
lEncouraging the new generation of accounting professionals to be honest and ethical in their
behaviour and accounting both.
Conclusion
Creative accounting has posed severe challenge to the accounting profession. The problem
is not only confined to India but is present in all the international companies too. The study concludes
that there is need for stronger enforcement and monitoring mechanism for International Financial
Reporting Standards in India. Streamlining the accounting and auditing system and enhancing
the practice of corporate governance appears to be the engines to make the accounting more
objective and transparent.
References
l
lConner, 1986, 'Enhancing public confidence in the accounting profession', Journal of Accountancy.
lDana, S.G and Diana, E.B, 2011, 'From Creative Accounting Practices and Enron Phenomenon to the Current Financial
Crisis.
lDilip, K.S, 2006, 'Creative Accounting in Bangladesh and Global Perspectives'.
lHealy, P.M and Wahlem, J.M, 1999, 'A review of the Creative Accounting literature and its Implication for Standards
Setting', Accounting Horizon.
lHervey Stolowy and Gaeton Breton, 2003, 'Account Manipulation: A literature review and proposed Conceptual
Framework'.
lJon, S, 1998, 'Why do companies use Creative Accounting?'
lNaser, K, 1993, 'Creative Financial Accounting: Its Nature and Use', HemelHempstead.
lNaser, K and Pendlebury, M, 1992, 'A note on the use of Creative Accounting', British Accounting Review.
40% of the respondents strongly agreed and 47% of the respondents agreed that the financial
Amat,O et al., 1999, 'The Ethics of Creative Accounting', Journal of Economic Literature Classification.
25
*Assistant Professor, V.S.S.D. College, Kanpur
*Dr. Shilpi Srivastava
Qualitative Aspects of Corporate Information on Corporate Disclosure Practices with Special Reference to Multinational Corporations and Indian Corporates
A review of relevant literature relating to the area of accounting and finance reveals
that inspite of the efforts on the part of company management; there is an increasing
dissatisfaction among the users with regard to the overall quality and quantity of disclosure
expressed in the published annual reports of companies. Users of annual reports expect
the management to explain the problems the company is encountering and its game-plan to
tackle the same. However companies are often scared of discussing these issues. There
is a wide gap between expectation and reality. Investors have suffered on account of
unscrupulous management of companies which have raised capital from the market at high
valuations and have performed much worse than the reported figures; leave alone the financial
professions at the time of raising money. In some cases, the management does not wish
to even accept that it grossly miscalculated the success of the venture.
The present research has focused on the evaluation of corporate reporting practices
in India after the initiation of the economic reforms in the year 2001. Domestic corporate
sector is fast forwarding itself into adopting the best of the corporate governance
practices.
Introduction
The present research work has focused on the evaluation of corporate reporting practices
in India after the initiation of the economic reforms in the year 2001. These reforms and
structural changes have led to the emergence of MNC's on the Indian soil.
Information reported by companies should possess some qualitative characteristics.
These are those desirable attributes which make information reported by companies useful to the
participants. These characteristics provide guidelines for selection, evaluation and communication
of the information item.
A number of desirable characteristics of accounting information have been discussed for
a long time by various professional accounting bodies in the form of pronouncements.
The most comprehensive description is statement from financial accounting concept
(SFAC) No. 2 issued by FASB, the USA (SFAC No. 2 1990). The attribute implies presenting that
information to users, which may help them in decision making. The statement exhibits that in order
to be useful for decision making, accounting information should possess two primary qualities
of relevance and reliability.
Domestic companies have been communicating information on their operation and
financial status once a year through their annual reports. These annual reports provide an important
benchmark that has the benefit of being independently audited it is inherently less timely. Though
the corporate sector, of late, has started communicating the operating performance more
frequently. Accounting Standard (AS-25) has made it mandatory for corporate to report results on a
quarterly basis as per the latest regulation on corporate reporting. However, the detailed information
pertaining to the varied factors are conspicuously absent in these quarterly performance results.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Therefore, annual reports are still the most exhaustive source of information that the investors and
other users do not utilize the other source for the information needed by them.
The extent of information disclosed in annual reports varies a lot amongst sample companies.
It is revealed by the empirical results analyzed. These variations in the extent of disclosure may be
due to different company specific characteristics. It is generally argued (Cerf. 1961; Buzby, 1975;
Cook, 1989) that knowledge of the relationship between corporate characteristics and the level of
disclosure facilitates appropriate policy formulations. To quote Buzby (1975), 'To the degree that
the extent of disclosure in some, if not all, annual reports is considered inadequate, some purposeful
action must be taken knowledge of the relationship between the extent of disclosure and company
characteristics could play a role in selecting a proper course of action."
To support this view, the relationship between the extent of information reported through
corporate annual reports and three company characteristics has been analysed in this study. The
company characteristics considered are as follows:
1.Size of a company (TA) � Measured by average total assets.
2.Profitability (ROI) - Measured in terms of the average rate of return on investment.
3.Nature of industry- to which a company belongs.
These attributes/characteristics are assumed to be truly associated with the extent of
disclosure.
1.Size of company
There is a well presumptive positive relationship between the size of the company and the
extent of its disclosure. Large companies are generally expected to report more information than
smaller companies due to various reasons which are as follows:
lThe management of larger company is more likely to realize the possible benefits of better
disclosure such as easier marketability of securities and greater ease in financing.
lThe larger the firm, the more is its ability to attract highly skilled individuals to manage
sophisticated information systems designed to generate and report on an extensive array
of information.
lLarge size companies are better known to the public. In order to build a positive public
image and prevent further regulation of their operations, these companies disclose more
information as compared to smaller companies.
lLarger companies are more complex entities with multi products and multi location plants;
their operation necessitates additional information required for the internal managers of
the companies. This in term implies ready availability of some types of information for
incorporation in annual reports.
lThe cost of accumulation and dissemination of additional information through annual reports is relatively higher for smaller companies. Moreover, smaller companies are more likely to fear that better disclosure of information could endanger their competitive position in the market. Therefore, a large company should report more information than a smaller company. Finally, because of regular interaction with the financial community, larger companies are probably more aware of user's informational requirements.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
The size of a company can be measured in a number of ways. In the past, research studies have used a number of variables to define and measure the size of a company. In the present study size has been used as a sum of total assets. Total assets include Net fixed assets, Net current asset and investments. To measure the relationship between extent of disclosure and size, Average Total Assets Size and Average Disclosure Score Percentage for each company of sample has been calculated.
Importantly, the general finding of past studies Cerf (1961), Signhvi and Desai (1971), Buzby (1975), Lal (1985), Chow ant Wang-Bom (1987), Cook (1989, 1992), Vasal (1992) has been that larger firm tend to disclose more, that is, size is an important explanatory variable in exploring the inter corporate difference in disclosure.
To measure relative disclosure score an index based on items has been designed. By using modified dichotomous approach in which an item scores one if it is disclosed and Zero otherwise, Unweighted disclosure scores have been computed for respective sample companies in two groups (i) MNCs (ii) Corporates belonging to Indian group houses (Domestic Corporates)
Index = Actual disclosure / Total possible disclosure,
å=M
i-1
di / åN
i-1
di
Where d=1 if item di is disclosed and 0 if item di is not disclosed M=number of item disclosed
and N = maximum number of disclosure item possible.
The index is a ratio comparing the actual level of disclosure and the possible level.
0
10
20
30
40
50
60
70
80
90
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
D.S
core
%
Years
Bata India Limited Hindustan Lever Limited Glaxo India Limited (GSK) Cipla Limited Honda Siel Power Products Limited
Fig. 1 : Disclosure Score : Multinational Corporations
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
0
10
20
30
40
50
60
70
80
90
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
D.S
co
re %
Years
Apollo Tyres Ltd. Associated Cement Company Ltd. Dabur India Ltd.
Larser and Toubro Ltd. Surya Roshni Ltd.
Fig. 2 : Disclosure Score : Domestic Corporations
Tata Engineering and Locomotive Company Ltd.
In the present research, an in-depth analysis of the impact of size of company (measured
by its total assets) on the disclosure score provides an interesting observation. It has been found
that the size of the companies in terms of total assets has no relationship with that of the extent
of disclosure. It dispels the common perception that a big sized company shall have a tendency
to disclose more. Time-series analysis of the assets size of selected MNC's from the year
2003-2012 reveals that some of the MNC's like Bata India Limited, Hindustan Lever Limited, Glaxo
India Limited (GSK), CIPLA Limited and Honda SIEL Power Products limited have been building up
their assets size reflecting a growth in their operations. Correspondingly the disclosure score too
has been on the rise (Table 1.1)
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Table 1.1
Assets size Vs Disclosure Score: Multinational Corporations
Bata India 11569.00 64.15 15397.00 64.15 18770.00 64.15 17821.00 70.75 18061.40 70.75Limited
Hindustan 53357.10 58.49 50088.99 59.43 86236.16 59.43 97605.94 61.32 142915.09 65.09Lever Limited
Glaxo India 17068.18 59.43 18961.46 62.26 22436.05 62.26 27486.57 61.32 28296.48 61.32Limited (GSK)
Cipla Limited 9523.20 51.89 11635.70 51.89 15545.90 52.83 19781.50 52.83 31272.20 52.83
Honda Siel 3819.63 48.11 3719.53 48.11 3548.41 50.00 3875.29 50.94 4565.03 50.94Power Products Ltd.
Name of Corporations
2003 2004 2005 2006 2007
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Bata India 35600.35 69.81 35143.28 70.75 36446.82 70.75 40243.63 73.58 37611.94 74.53Limited
Hindustan 144807.74 65.09 197733.88 65.09 228053.12 66.98 259983.27 68.87 312743.04 77.35Lever Limited
Glaxo India 32120.68 61.32 34372.09 62.26 38125.46 65.09 42953.64 70.75 51708.29 72.64Limited (GSK)
Cipla Limited 29640.80 52.83 38291.90 53.77 49602.30 55.66 59508.00 55.66 74868.80 61.32
Honda Siel 5781.00 50.00 7608.57 49.05 9002.27 51.89 10624.85 52.83 12102.89 63.20Power Products Ltd.
2008 2009 2010 2011 2012
Table 1.2
Average Assets Size Vs Average Disclosure Score Multinational Corporation
Bata India Limited 266663.44 69.33
Hindustan Lever Limited 157352.42 64.71
Glaxo India Limited (GSK) 31352.89 63.86
Cipla Limited 33967.03 54.15
Honda Siel Power Products Ltd. 6464.74 51.50
Name of Corporations Average Asset Size (Lakh) Average Disclosure. Score (%)
Name of CorporationsAsset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Table 1.3
Assets Size Vs Disclosure Score: Domestic Corporate
Apollo Tyres 30160.66 52.83 34826.42 52.83 35298.99 53.77 39160.09 58.49 51560.53 55.66Limited
Associated 68299.00 57.07 93221.00 57.07 110947.00 57.07 134898.00 61.32 1558234.00 62.26Cement Company Ltd.
Dabur 10961.99 57.55 12207.05 58.49 22732.64 58.49 28285.35 59.43 35577.63 59.43India Limited
Larsen and 143262.00 64.15 169480.00 64.15 202861.00 65.09 277712.00 66.03 401338.00 65.09Toubro Ltd.
Surya Roshni 13264.12 56.60 16207.06 55.66 20585.88 57.55 26793.68 56.60 36061.44 56.60Limited
Tata 178796.00 60.37 220862.00 58.49 224932.00 58.49 257601.00 64.15 369679.00 64.15engineering and Locomotive Company Ltd.
Name of Corporations
2003 2004 2005 2006 2007
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Asset Size(Lakh)
D. Score(%)
Apollo Tyres 53976.83 55.66 56736.00 56.60 60900.00 56.60 73868.00 57.55 78391.00 65.09Limited
Associated 194740.00 63.21 247573.00 65.09 246313.00 71.69 262018.00 74.52 287070.00 76.41Cement Company Ltd.
Dabur India 41674.49 60.38 49888.93 56.60 55643.86 57.50 60905.62 69.21 55830.01 71.70Limited
Larsen and 509048.00 65.09 624128.00 65.09 706497.00 65.09 783792.00 74.53 826280.00 74.53Toubro Ltd.
Surya Roshni 40337.74 56.60 46793.64 59.43 50543.69 62.26 50365.50 62.26 50687.95 62.26Limited
Tata 618474.00 66.03 706392.00 66.03 720618.00 66.03 675838.00 66.98 625266.00 70.75engineering and Locomotive Company Ltd.
2008 2009 2010 2011 2012Name of CorporationsAsset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)Asset Size
(Lakh)D. Score
(%)
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Table 1.4Average Assets Size vs. Average Disclosure Score Domestic Corporate
Apollo Tyres Limited 51487.85 56.50
Associated Cement Company Limited 180331.3 64.57
Dabur India Limited 37370.75 60.94
Larsen and Toubro Limited 464439.80 66.88
Surya Roshni Limited 35164.07 58.58
Tata engineering and Locomotive Company Limited 246989.10 64.14
Name of Corporations Average Asset Size (Lakh) Average Disclosure. Score (%)
This may be construed as a strong positive correlation between size and the disclosure,
but the average tell us different story. For example, the average assets size of Glaxo India Limited
is almost as big as the average assets size of Cipla Limited (Table-1.2) but there is a wide
difference between the average disclosure scores of both of these MNC's i.e. the average
disclosure score of Glaxo India Limited is 63.86%. Whereas it is only 54.15% in case of Cipla
Limited. On the other hand time series analysis of Domestic Corporate show a positive relationship
between disclosure scores of a company and its assets-size. From Table 1.3 it is apparent that
for the entire sample corporate (except for Telco and Dabur India Limited) the disclosure score
percentage increases with their assets sized through out the sample period. These results support
the common belief that a big sized company shall have a tendency to disclose more. While analysing
the Average (Table 1.4) we found that the enhancement in the disclosure over a period of time
may be due to the reasons other than increase in assets size of the Corporate. For instance,
though there is a wide difference between the average asset size Telco and Larsen and Toubro but
the disclosure score of Larsen and Tourbro on the average of ten years is 66.88% while Telco's ten
years average disclosure score is 64.14%. It may be noticed from the table 1.4 that compared to this
Telco's disclosure score of 64.14% is as good as that of the Associated Cement Company
Limited (ACC) which is less than the size of assets of Telco. Similarly, the size of Appollo Tyres assets
is far higher than Surya Roshni, whilst the average disclosure score of Surya Roshni is 58.58%
compared to 56.50% of Appollo Tyres.
An in-depth analysis of the impact of size of the companies (measured by its total assets)
on the disclosure score provides an interesting observation in both. It has been found that the size
of the assets has no relationship with that of the extent of disclosures. It dispels the common
perception that a big sized company shall have a tendency to disclose more. Although the Time-
series analysis of the Asset Size of various corporate reveals that majority of the corporate has been
building up their assets size reflecting a growth in their operations. Correspondingly the disclosure
score too has been on the rise. This may be construed as a strong positive correlation, but the
averages tell us a different story. It may be stated that the enhancement in the disclosure score
over a period of time may be accounted for by the increase in the disclosure norms over a
period of time and increased stringency in the compliance regulations of varied authorities.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
2. Profitability
To some extent, profitability could be taken as another factor for explaining the differences in the level of disclosure of various companies. Some of the possible reasons for expecting such behaviour are:
Firstly, higher profitability implies more successful and stable operations of a company. It is an indicator of the strong position of a company vis-a-vis its competitors. Thus, the competitively strong position of a company may induce it to convey the message of its strengths by resorting to more information reporting. Whereas companies with lower profitability may not be interested in disclosing much information owing to the fear that greater disclosure may further erode their competitiveness in the market. Moreover, 'nobody wants to wash dirty liner in public' applies aptly in the stake of eroded profitability.
Secondly, when profitability is high, the management of a company might disclose more information to support continuance of its position. On the other hand, when profitability is low, the management may decide to disclose less information in order to cover up or camouflage the reasons for losses or eroding profitability.
Finally, a company with higher profitability may disclose more information because of its capacity to absorb increased cost arising out of additional information disclosures.
In the literature of Accounting and Finance, Return on Total Assets has been recognized as the prime indicator of overall profitability. Therefore, in the present study profitability (ROI) is taken as an indicator of overall profitability. It has been measured as the ratio of Net after tax profit (NAT) to Total assets (TA) i.e.
Difference in the level of disclosure could be explained to some extent, by differences in the profitability position of the company. To measure the relationship between the extent of average disclosure score and Average Return On Investments the following regression model is used in the present study:
Y=+2
Where,
Y=Average disclosure score
a=intercept (constant)
b=Coefficient of ROI and 2
X= ROI= Profitability i.e. 2
Y = a + b x22
ROI = x 100NAI
TA
x 100Net Profit after Tax
Total Assets
Regression Equation for Multinational Corporations2D. Score = 62.466 + 0.144 x ROI, R=9.5%
Table 1.5
Industry-wise Analysis of Disclosure Score
Cipla Limited 54.15 Dabur India 60.94 Honda Siel 51.50Limited Power Product Limited
Limited
Glaxo India 63.83 Hindustan 64.71 Larsen & 66.88 Bata India 69.33Limited Lever Limited Toubro Limited Limited
Surya Roshni 56.31 The Associated 64.52Limited Cement Co.
Limited
Teleco 64.14
Apollo Tyres 56.60
Name ofCompany
Average %DisclosureScore
Name ofCompany
Average %DisclosureScore
Name ofCompany
Average %DisclosureScore
Name ofCompany
Average %DisclosureScore
Pharmaceutical Fast Moving Consumer GoodsElectrical / Engineering Others
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Regression Equation for Domestic Corporates.2D. Score = 61.106 + 0.07045 x ROI. R=0.3%
The result of Regression analysis establishes the fact that for both groups of corporates 2 (MNCs as well as domestic corporates) Ris insignificant. It is 0.3% in case of Domestic Corporates
and 9.5% in case of MNCs. There exist no relationship between Average disclosure score and average ROI in both types of corporates. These results do not support the research findings revealed by previous researchers � that the extent of disclosure increases with higher rate of return on total assets.
Nature of Industry
Varying degrees of competition existing in different industries may cause difference in the
extent of corporate disclosure. In case of acute competition in an industry, companies concerned
may hesitate to provide more detailed information in their Annual reports. They might fear that
greater disclosure may weaken their competitive position and could provide benefits to their business
rivals. In addition, there may be some historical reasons characterizing differences in the level of
disclosure in the level of disclosure in different industries.
In the present study, in order to examine the possible effects of industry on the level of
disclosure scores, companies have been classified into four industry groups namely,
1. Pharmaceutical Industry
2. Fast moving consumer goods industry
3. Electrical/Engineering Industry
4. Others
This classification has been carried out on the basis of their dominant operations. For each
type of Industry average disclosure percentage (of average disclosure percent as various companies)
has been computed. Finally, the disclosure percentage of one type of industry is compared with the
disclosure percentage of the other type of industry to determine whether the industries have any
influence on the extent of disclosure. (Table-1.5), Fig.3
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Conclusion
Regarding the impact of company characteristics viz., asset size, profitability and type of
industry the following overall conclusions have been drawn:
1. Asset size has been determined by adding net fixed assets, net current assets and investment. It has
been found that the disclosure score of companies has increased with the increase in
the asset size of domestic corporate, whereas, asset-size of a company has been found to have no
influence on the disclosure score of multinational corporations.
2. Profitability as measured by Return on investment has been found to have no impact on the extent of
disclosure in both the groups of corporates. Some corporates with lower rate of profitability have been
found to be disclosing more information than corporates with higher rates of profitability and vice-
versa.
Cipl
im
ited
aL
Gla
xo In
dia
Lim
ited
Du
nda
Lie
abrI
im
itd
Hin
dust
an
eve
imite
d
LrL
Hon
da S
el
owr
r
dut L
mi
d
iP
ePo
ci
te
Lars
e
Tb
Lim
i
n&
ou
ro
ted
Sury
Ros
hini
Lim
ited
a
Tele
co
Ts
Apollo
yr
e L
imite
dBa
t n
da
Lim
ited
aI
i
T
iti
Ce
Le
he A
ssoc
aon
men
t Co.
imit
d
54.15%
63.83%60.94%
64.71%
51.50%
66.88%
56.31%
64.14%
56.60%
69.33%
64.52%
0
10
20
30
40
50
60
70
80
Aver
age
% D
iscl
osur
e Sc
ore
Pharmaceutical Fast MovingConsumer Goods
Electrical / Engineering Others
Fig. 3 : Industry-Wise Analysis of Disclosure Score
Average % Disclosure Score
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
3. The type of industry in which a particular corporate operates has also been found to
significantly influence the disclosure score. This is because average disclosure scores of
companies belonging to different industries have been found to be significantly different.
It implies that the size of the company is an important factor for the disclosure
score but profitability has no influence on the disclosure score of the corporates.
References
lDisclosure practices of corporate sector "Influence of company characteristics on corporate disclosure" P. 141.
lThis contribution to final reports is based on a total of is 8 interviews conducted by mainly in Bombay between
April 1998 and January 2000.
lDFIS put on M&A vigil "Economic Times: 30 December 1997.
lDisclosure practices of corporate sector "Influence of company characteristics on corporate disclosure" p. 161.
lDisclosure practices of corporate sector "Influence of company characteristics on corporate disclosure", p. 158.
lGerold S. Backman, "The new Audit committee Rules," Securities regulation laow journal 28 (2000).
lB.R., Cheffins, "Corporate Governance in the UK: Lessons for Canada", Canadian Business Law Journal, 28, 1997.
36
*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur
*Dr. Manisha Gupta
Growth and Development of Indian Capital Market
Capital market is the barometer of the economy. This statement truly brings out the
importance of the capital market from the macro-economic angle of any country. �The capital
market discloses the future� this is true. The state of the capital market does not reflect the past
or present but it reflects the future of the economy of any country. In the long run it is true measure
of the health of any economy. The capital market in a developing country or economy has to facilitate
the main stream of command over capital to the point of the highest yield. By doing so it enables
control over resources to pass into hands of those who can employ them most effectively thereby
increasing productive capacity and swelling the national dividend.
The Indian capital market was not properly developed before independence. After
independence the Indian capital market started to enlarge its activity with increase in the volume
of saving and investment in the economy, particularly since 1951, and has shown steady
improvement. All types of encouragement and tax relief exist in the country to promote savings.
The volume of investment has also grown significantly in recent years. Another important indicator
of the growth of capital market is the significant growth of public borrowings for investment
purposes.
During the last three decades Indian capital market has attained considerable degree
of development. There was a sharp increase in the volume of capital market transactions and the
functioning of the market that has also been diversified, through merchant houses, venture capital
funds etc. Thus Indian capital market has witnessed a radical transformation in a period of over
one decade. During the early part of 1990s the ranking of Indian capital market with reference to
global standards of efficiency, safety, market integrity etc. was low and Indian capital market was
regarded as one of the worst. However, the scenario has now completely changed. Because of
extensive capital market reforms carried out over the period of the last one decade or so, the setting
up and extension of activities of NSE, and steps taken by SEBI the Indian capital market is now
ranked in the top league. In fact, it is now considered to be way ahead of many developed country's
capital market.
Key words: Macro, barometer, steady, merchant houses, venture capital funds, league.
Introduction
Capital market is the barometer of the economy. This statement truly brings out the
importance of the capital market from the macroeconomic angle of any country. There is an age
old saying that �the capital market discloses the future�. The state of the capital market does not
reflect the past or present but it reflects the future of the economy of any country. In the long run it is
a true measure of the health of any economy.
The capital market is the market for relatively long term financial instruments. It is having a
complex of institutions investment and practices with established links between the demand for
and supply of different types of capital gains.
Capital market may be defined as �an organized mechanism for effective and efficient
transfer of money capital or financial resources from the investing parties i.e. individuals or
institutional savers to the entrepreneurs (individuals/institutions) engaged in industry or commerce
in the business either in the private or public sectors of an economy�. It also refers to the facilities
and the institutional arrangements for borrowing and lending terms funds (medium term and long
term funds).
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Further more, the capital market in a developing country or economy has to facilitate
the main stream of command over capital to the point of the highest yield. By doing so it enables
control over resources to pass into hands of those who can employ them most effectively thereby
increasing productive capacity and swelling the national dividend. The capital market composed
of those who will demand the funds (borrowers) and those who will supply the funds (lenders). An
ideal capital market attempts to provide adequate capital at reasonable rate of return for any business
or industry which offers a prospective high yield, enough to make investment worthwhile. The
rapid expansion of the corporate and public enterprises since 1951 has necessitated the development
of the capital market in India. The major players in the capital market are Corporate Sector,
Banks, Financial Institutions and Mutual Funds etc.
The Indian capital market was not properly developed before independence. As there
were very few companies engaged in the trading in the stock market thus the growth of industrial
securities was very limited. Most of the British Companies in India had their base in London Capital
Market instead of Indian Capital Market. A large part of the capital market consisted of the gilt-edged
market for government and semi-government securities. The managing agency system had played
some role in the promotion, issue and underwriting of new capital issues.
After independence the Indian capital market started to enlarge its activity with increase in
the volume of saving and investment in the economy, particularly since 1951, and has shown
steady improvement. All types of encouragement and tax relief exist in the country to promote
savings. In the mean time, the Indian capital market has received a significant boost. One of the
important indicators of the growth of the Indian Capital market is the expansion and the growth of joint
stock companies or corporate enterprises. In 1951, there were about 28,500 companies both
public limited and private limited companies with a paid up capital of Rs. 775 crore. In 2000, there
were over 70,000 companies with paid up capital of over Rs. 200,000 crore.
The volume of investment has also grown significantly in recent years. Another important
indicator of the growth of capital market is the significant growth of public borrowings for investment
purpose. During the last three decades, Indian capital market has attained considerable degree of
development. There was sharp increase in the volume of capital market transactions and the
functioning of the market that has also been diversified. Commercial banks are important component
of the Indian capital market, but their operations are very much restricted to the purchase and sale
of government securities and other trust securities. The holdings of industrial securities by the
commercial banks are in the form of shares and debentures of some special financial institutions. They
are also setting up financial subsidiaries known as merchant houses, mutual funds, venture capital
companies etc. to mobilize funds for investment in industrial securities.
In 1887, the first organized stock exchange in India was started in Bombay when the 'Native
Share Stock Brokers Association�� known as the Bombay stock exchange was formed by the
brokers in Bombay. In 1894, the Ahmedabad Stock Exchange was started to facilitate dealings in the
shares of textile mills. The Calcutta Stock Exchange was started in 1908 to provide a market for
shares of plantation and Jute mills. The Second World War saw great speculative activity in the country
and the number of stock exchange rose from 7 in 1939 to 21 in 1995. Besides these organized
exchanges, there were a number of unorganized and unrecognized exchanges known as �Kerb
markets�, which did not have any set of rules and which could be enforced in courts of law. Under the
Securities Contract (Regulations) Act of 1956, the Government of India has so far 20 Stock
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Exchange at present time. Bombay is the premier exchange in the country and nearly 70 percent of
all transactions in the country are done in that exchange. NSE is next important after that Bombay
stock exchange, which accounted for rest of the transactions.
The role of non-banking financial institutions plays a crucial role in the development
of capital market. The first development bank was Industrial Finance Corporation of India (IFCI)
established in India. The State Financial Corporation (SFC) Act was passed in 1951. In 1955, the
Industrial Credit and Investment Corporation of India (ICICI) was established with the main object
to enlarge underwriting facilities for public issue of capital, foreign currency loans and direct
subscription to share and debentures. At the State level, after 1960, a number of state governments
set up SIDCs to undertake developmental and promotional activities. In 1964, the Industrial
Development Bank of India (IDBI) was established. Non-banking institutions like Unit Trust of India (UTI),
Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC), Investment
Companies, the finance and the leasing companies are also actively working in the capital market.
In order to promote the rural development, the National Bank for Agriculture and Rural Development
(NABARD) was established in 1982. The Export-Import Bank of India (Exim Bank) was also established
in 1982 to cater to the needs of the importers and exporters for financing international trade.
The need for reforms in the financial market has been evident for sometime over the last
couple of years. From 1990 onwards growth in listing, market capitalization, trading volumes and
investor's interest have all attained new heights. The reform measures initiated in the capital market
over the past years, starting with SEBI, repeal of Control of Capital Issues Act and the abolition of the
office of the Controller of Capital Issues have brought significant improvement in the functioning
and regulatory efficiency of the market. The intermediaries in the securities market such as merchant
banking, brokers, underwriters, registrars, portfolio managers etc. have been brought in the regulatory
framework of SEBI. SEBI has introduced a number of measures to reform India's capital market
in recent years. By improving market efficiency, enhancing transparency, preventing unfair trade
practices, it has succeeded to a considerable extent in bringing up the Indian market to international
standards. The important development can be highlighted as under:
lThe issuers complying with the eligibility criteria are allowed freedom to issue the securities
at market determined rates.
lThe secondary market has overcome the geographical barriers by moving to screen
based trading.
l All kinds of securities - debt and equity, government and corporate are traded on exchanges,
side by side.
lTrades enjoy counter party guarantee.
lThe trading cycle has been shortened to a day and trades are settled within 2 working
days.
lPhysical security certificates have almost disappeared.
lA variety of derivatives are permitted.
lThe confidence of international investors in the Indian securities market has increased
considerably and now more than 500 FITs are registered with SEBI.
Generally investments of long term funds are dealt in capital market. During the last ten years,
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the growth of volumes in capital market has been tremendous. Government and Corporate raise funds
from capital market for their expenditure or expansion. Supply of funds comes from surplus sector,
mainly households.
The Government securities are issued by Central, State Governments and Local bodies,
PSUs etc. are backed by the RBI. These securities have good liquidity and give a pre-determined yield.
These securities are generally held by banks to meet their SLR requirement. Others like insurance
companies, mutual funds hold government securities as risk free investments. A government security
is a marketable claim on the government and is a totally secured instrument.
Depending upon the issuing body such securities could be divided into five types:
lCentral Government Securities.
lState Government Securities
lSecurities guaranteed by Central Government for All India Financial Institutions like IDBI,
ICICI and IFCI etc.
lSecurities guaranteed by State Government for State Institutions like State Electricity
Boards and Housing Boards.
lTreasury bills issued by RBI.
The capital market is also classified into primary capital market and secondary capital market.
First we have discussed about the New Issue market or primary market. The general functions
of the New Issue Market are Origination, Underwriting of new issue and Distribution of new securities to
ultimate investors.
Next segment of the capital market is the Secondary Market means �Stock Exchange�.
According to the Securities Contract (Regulations) Act, 1956 defines �Stock Exchanges� as - �The
Stock Exchange has been defined as any body of individuals whether incorporated or not, constituted
for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities�. Secondary market development depends upon the number of factors that are called
selective indicators. The different factors of secondary market are-number of stock exchange,
number of brokers, number of listed companies their turnover, FIIs net investment, stock market
indices and P/E ratio.
There are 20 stock exchanges in the year 2010-11, including NSE, BSE, OTCEI and ICSE.
Three Stock Exchanges were de-recognized in the year 2007 as per order of the SEBI; they are
Saurashtra and Kutch Stock Exchange, Magadha Stock Exchange and Hyderabad Stock Exchange.
As the year ended on March 2014, Calcutta S.E. is working along with 9411 brokers and 51885
sub-brokers registered with SEBI as against 10128 brokers and 70178 sub-brokers in 2012-13.
The number of listed companies on BSE and NSE as the year ended April 2014 were
5336 and 1688 as against 5211 and 1666 respectively in the year 2012-13. Equity market witnessed
significant uptrend during 2009-10 to downward trend in 2008-09. It was due to domestic markets
that reflected the uncertainties in international financial market during the financial year. It increased
the investors by giving five years best return in 2009-10. The BSE Sensex increased at 22386 point
on March 31, 2014 as against 18836 March 31, 2013. The S & P CNX Nifty also increased at 6704
points at the end of March, 2014 as against 5683 points at the end of March 2013. This was mainly
driven by higher growth rate, positive sentiments in market better global environment and FIIs inflows. E
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The turnover of BSE and NSE in 2013-14 is Rs. 521664 Cr. in 2013-14 as compared to Rs. 548774 Cr.
in 2012-13 and Rs. 2808488 Cr. in 2013-14 as against Rs. 2708279 Cr. in 2012-13. BSE and
NSE together contributed 99.9% of the turnover in which NSE accounted for 74.9% and BSE
accounted for 24.9% of the total. At the end of March 2014 the P/E ratio of BSE sensex and S & P CNX
Nifty were 18.3 and 18.9 respectively as compared to 16.9 and 17.6 respectively as on March, 2013.
The P/E ratio of Indian indices witnessed significant increases in May, 2009 after the results of
Union Government elections were declared and continued increased thereafter. The next important
indicator is FIIs; the total net inflow of FIIs was Rs. 51649 Cr. in 2014 as against Rs. 168367 Cr. in 2012-
13 declined by 43.1% from the previous year.
Several important changes were brought for the smooth and effective functioning of
stock exchanges from time to time by the SEBI. Some of those initiatives that have taken place in the
secondary market are overall administration, supervision and control of the stock exchanges,
membership of the stock exchange, listing of securities, public issues, price bands, trading and
settlement cycle, investor protection fund, dematerilization of securities, implementation of STP,
corporate governance, securities transaction tax etc.
The NSE since 1994 has drastically changed the method of trading and settlement in this
country. From open outcry system to electronic trading and settlement on computer screens, the
Indian Capital Markets have come a long way. Regional Stock Exchanges lost their relevance due to
their own investor unfriendly practices and the change in regulatory approach in the years following
the creation of the NSE. The reasons for the failure of the RSEs are technological changes,
disintermediation, Satellite Based Trading, Management and operational practices, commercial
failure, Depository operations etc. Some of the measures to overcome the problems of Regional
Stock Exchanges are to float the membership, to convince the management of unlisted companies,
to spread the information, to educate the investors, to upgrade the skills of market operators, to
monitor the compliances etc.
Investors are the backbone of the securities market. Protection of their interest is very
important. They are expected to be alert and active at the time, after and even continue to make an
investment. The investment is made generally in shares, securities, bonds, and debentures etc., either
purchased from Primary or Secondary Market. Therefore, a number of regulatory authorities in the
financial market such as Department of Company Affairs, Company Law Board, Ministry of Finance,
Securities & Exchange Board of India, Reserve Bank of India etc. are functioning towards investor's
protection and developing number of measures, specially giving stress upon disclosure provisions
of the securities in Indian capital market. The disclosures generally made by issuers, intermediaries
and overseeing authorities (SEBI).
Following steps taken by SEBI to educate the Investors are-Internet based response
system, Securities Market Awareness Campaign (SMAC) that includes workshop, advertisement,
audio- visual clip, investor websites etc.
Financial intermediaries are firms that provide services and products that customers may
not be able to get more efficiently by themselves in financial markets. Thus it includes all kinds of
organisations which intermediate and facilitate financial transactions of both individuals and
corporate customers. The key financial intermediaries in India are Commercial Banks (Public, Private
and Foreign Banks), financial institutions (IDBI, IFCI, SFC, EXIM), insurance companies (LIC, GIC),
mutual funds, non-banking financial companies (HDFC, ILFs, Kotak Mahindra Finance) and non-
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banking financial service companies (merchant banks, credit rating agencies, depositories)
Regulation is an absolute necessity in the face of the growing importance of capital market
through out the world. The development of a market economy is dependent on the development of
the capital market that involves the regulations of securities; these rules enable the capital market to
function more efficiently and impartially.
The Companies Act, 1956, covers both the financial and non-financial aspects of the working
of the corporate sector. It aims at developing an integrated relationship between promoters, investors
and company management. It seeks to protect the interest of share holders, and to promote their
effective participation and control of companies.
Controller of Capital Issues Act, 1947 was repealed by Capital Issues (control) Repeal Act,
1992. Its provisions have now become the powers and functions of the SEBI. This act mostly
regulated the primary or new issue market for securities. The Act required companies to obtain prior
approval or consent for issues of capital to the public, for pricing of public and rights issues.
It empowered the government to regulate all aspects relating to the new issues.
The Securities Contracts (Regulation) Act is to regulate the working of Stock Exchanges with
a view to prevent undesirable transactions or speculations in securities. It empowers the Government
of India to recognise and de-recognise the Stock Exchanges to stipulate laws and bye-laws for
their functioning and to make the listing of securities on Stock Exchanges by Public Limited Companies.
The SEBI, its over all objective is to protect the interest of investors in securities, to promote the
development of and to regulate the securities market. It protects the rights and interests of investors,
particularly individual investors and guides/educates them. The Depositories Act, 1996 defines
�Depository as an organisation where securities of a shareholder are held in the form of electronic
accounts in the same way as bank holds money. The importance of depository system are - it reduces
the cost of issue and transfer of securities by the issuer, reduces the scope for theft forgery damage to
securities certificates etc. The investors can trade in securities immediately on allotment without
waiting for receipt of security certificates.
The Indian capital market has witnessed a radical transformation in a period of over one
decade. During the early part of 1990s the ranking of Indian capital market with reference to global
standards of efficiency, safety, market integrity etc. was low with reference to the risk indices in
particular, the Indian Capital Market was regarded as one of the worst as it figured almost at the bottom
of the league. However, the scenario has now completely changed. Because of extensive Capital
Market reforms carried out over the period of the last one decade or so, the setting up and extension
of activities of NSE, and steps taken by SEBI, the Indian Capital Market is now ranked in the top league.
In fact it is now considered to be way a head of many developed country capital market.
A significant feature of the primary market activity after abolition of capital control has been
that the corporate attempted to diversify the range of instruments. A wide variety of innovative/
hybrid instruments were introduced to suit varied needs of investors and issues/borrowers. Some of
the instruments which become quite popular were Secured Premium Notes (SPN) with detachable
warrants, non-convertible, debentures with detachable equity warrants etc. Despite setback in some
years due to stock market scams, the sentiments look positive due to revival of retail investor interest
in the market following encouraging corporate performance in recent period. However, what continues
to be a matter of concern is the fact that it is the Foreign Institutional Investors (FIIs) that call the shots
in the Indian Capital market due to the vast amount of resources at their command and, as correctly
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pointed out by R.H. Patel, �The operations of the FITs in India are often sporadic as their buying
and selling decisions are governed by global strategies in which the Indian market continues to be a
marginal player�.
Therefore, external shocks can destabilize the Indian capital market at any time and it is
necessary to take adequate precautionary steps to avoid/prevent this possibility.
Suggestions
Following suggestions are made for a better performance of the India Capital Market :-
lThe absence of wide spread branch network of the credit rating agencies should be modified
so it may overcome the limit in its skill rating.
lThe burden of inexperienced, unskilled or overloaded staff should be minimised because it may
not justify to their job as the resulting ratings may not be perfect.
lThere should be more concentration on time factor as time factor affects ratings and gives
misleading conclusions. A company which experiences adverse conditions temporarily will be
given a low rating on the basis of temporary phenomenon.
lSince the rating agencies receive a sizeable fee from the companies for awarding ratings, a
tendency to inflate the rating, may develop. It should be rectified by fixing a justified fee for rating
process for all companies to avoid inflation in rating process.
lThe investor should be aware before investing in any company because rating is not permanent
but deemed to changes, the agencies can not give any guarantee for the investors.
lAt present, commercial paper, bonds and debentures with maturities exceeding 18 months
and fixed deposits of large non- banking companies registered with RBI are a required to be
compulsorily rated, but there are number of areas where rating agencies will have to cover new
ground in the coming years. The ratings of municipal board, State Government borrowing,
commercial banks and public sector undertaking etc. will be covered in the near future. So, the
outlook for the credit rating industry is positive. The suitability of rating methods and models
formulated in well developed market in the west is highly doubtful in Indian conditions. So the
rating agencies in India have to evolve their own methodologies within the context of macro
economic environment.
lInvestors money has to be kept separate at all levels and is permitted to be used only against
the liability of the investor and is not available to the trading member or any other investor.
lThe trading member is required to provide every investor with a risk disclosure document which
will disclose the risk associated with the derivatives trading so that investors can take a
conscious decision to trade in derivatives.
lInvestors would get the contract note duly time stamped for receipt and execution of the order.
The order will be executed with the identity of the client and without client ID order will not be
accepted by the system. The investor could also demand the trade confirmation slip with his ID
in support of the contract note. This will protect him from the risk.
lIn the derivative market, all money paid by the investor towards margins on all open position is kept in trust with the clearing house and in the event of default of the trading member; the amounts paid by the client towards margins are separated and not utilized towards the default of the member. However, in the event of a default of a member, losses suffered by the investor, if
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any on settled/closed out position are compensated from the investor protection fund as per the rules, bye-laws and regulations of the derivative segment of the exchange.
Though quite a good work has been done in the direction of reporting secondary capital market. There are areas requiring further actions. The RBI closely monitored developments in the stock market and provided liquidity to banks for meeting their payment obligations including any intra day requirements. These developments suggest that the following and many more measures are required on a long term basis to make stock exchanges more efficient and in tune with economic fundamentals:-
lAccording to SEBI that stock exchanges should be headed by a non-broker as chairman, instead of continuing with the prevailing system of elected brokers acting as presidents SEBI should accept the committee's recommendation. As a result, broker, presidents of stock exchanges would not be able to interfere in the functions of executive directors on a daily basis in most of the stock exchanges.
lShare transfer process has become antiquated and requires transformation so as to operate without interference from the company management. A procedure should be evolved which should provide for prosecution of company officials in case they do not transfer shares lodged with them without specifying the reasons. For reducing problems of bad delivery and speeding up shares transfers, the signature guarantee process which is based on a guarantee given by stock brokers, regarding the validity of shares and the identity of the shareholder may be involved.
lSEBI should device procedure so that speedier and effective action is taken against companies defaulting or delaying dividend payment, payment of interest, repayment of debt shares transfer etc. After all investor's confidence largely depends on the market safety and several reform measures should be available to them against corporate defaults.
lThere were cases when the interest of the company and the general shareholders is compromised in setting such deals. It is necessary to implement ways and means of imparting greater transparency and fairness in bulk or negotiated deals.
lSEBI should set up working group to find out ways and means to promote delivery based turnover because at present delivery based turnover is only at a small percentage of total turnover of most stock exchanges.
lFor development of a truly national capital market with a free flow of funds nation-wide, it is necessary to integrate Regional Stock Exchanges.
lSEBI should focus an improving transparency of mutual funds besides reducing transaction fee for investors. This will increase investment in equity and debt.
Though demat system is a very safe system, in some rare cases of frauds towards the need for caution by the investors. Investors themselves should take the following precautions so that their demat accounts are not misused by others:-
lInvestor should keep delivery slips securely and should not sign blank delivery instructions. Delivery instructions are the paper slips to be submitted by investors after selling a security on the stock exchange.
lInvestors should verify the demat account statement on a regular basis. In case of any discrepancy the investor should immediately approach the depository and depository
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participants (DP). Their complaints are taken up very seriously.
lInvestors should also attend investor awareness programmes conducted by depositories and various information published by them.
lInvestors should give power of attorney (POA) to DPs and brokers in advance of a transaction. POA should be given for delivery of shares and money only after a trade has been done and not for buying and selling.
lInvestor should check genuineness of trades is confirmed by the depository whether CDSL or NSDL.
lInvestor should access to the internet to register for all services of depositories.
lSEBI has undertaken public awareness programmes to popularise the concept of demat trading, it should be initiated at broad level so that it may reach general public.
lTo increase the volume in demat segment for the foreign institutional investors and banks the limit of minimum portfolio of securities should be increased upto/above Rs. 10 crore.
lIt is suggested that the guidelines issued by the Accounting Standard Board and various regulatory bodies should be followed by the corporate enterprises. This lead to full disclosures of information by the corporations, which help the investors to invest in the capital market.
lIt is also suggested that all the companies should make available various annual reports and disclose the material information on their website.
lThe disclosure of information and the preparation of annual reports should be timely transparent and reliable so that various stock holders use such information and make investment in time.
References :
l
lDatta Arun K.: "Government, Finance and Capital Market, P.G. Book Market, Calcutta, p. 17.
lDutt Ruddar and Sundharam K.P.M.: "Indian Economy", S. Chand and Company, 2004. P. 880.
lGokarm, S.: "Indian Capital Market Reforms", 1992. 96, Economic and Political weekly, April 13, 1996, p. 956.
lGupta S.K. and others: "Financial Institutions and Markets", Kalyani Publishers, New Delhi, 2004, p. 31.
lReddy Gadam Naresh: "Changing of Capital Markets in India", Cyber Tech. Publication, New Delhi pg. 1.
lSEBI, Annual Report, 2012-13 & 2013-14.
lShashi K. Gupta, Nisha Agarwal, Neeti Gupta: "Financial Institutions and Markets, Kalyani Publishers, New Delhi" P. 5.21-5.22.
"Securities Laws and Regulation of Financial Market" The Institute of Company Secretaries of India, P. 44.
45
*Dr. Akhilesh Kumar Dixit
Banking Sector Reforms in India
The Indian financial system in the pre-reform period (i.e., prior to Gulf crisis of 1991), essentially
catered to the needs of planned development in a mixed-economy framework where the public sector
had a dominant role in economic activity. The strategy of planned economic development required huge
development expenditure, which was met through Government's dominance of ownership of banks,
automatic monetization of fiscal deficit and subjecting the banking sector to large pre-emption � both in
terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and cash reserve
ratio (CRR). Besides, there was a complex structure of administered interest rates guided by the social
concerns, resulting in cross-subsidization. These not only distorted the interest rate mechanism but also
adversely affected the viability and profitability of banks by the end of 1980s. There is perhaps an element
of commonality of such a 'repressed' regime in the financial sector of many emerging market economies.
It follows that the process of reform of financial sector in most emerging economies also has significant
commonalities while being specific to the circumstances of each country. A narration of the broad
contours of reform in India would be helpful in appreciating both the commonalities and the differences in
our paths of reforms.
Introduction and Background of Reforms
Reform measures were initiated and sequenced to create an enabling environment for
banks to overcome the external constraints � related to administered structure of interest rates, high
levels of pre-emption in the form of reserve requirements, and credit allocation to certain sectors.
Sequencing of interest rate deregulation has been an important component of the reform process
which has imparted greater efficiency to resource allocation.
One of the major objectives of banking sector reforms has been to enhance efficiency
and productivity through competition. Guidelines have been laid down for establishment of new banks
in the private sector and the foreign banks have been allowed more liberal entry. Since 1993, twelve
new private sector banks have been set up.
Consolidation in the banking sector has been another feature of the reform process. This
also encompassed the Development Financial Institutions (DFIs), which have been providers of long-
term finance while the distinction between short-term and long-term finance provider has increasingly
become blurred over time. The complexities involved in harmonizing the role and operations of
the DFIs were examined and the RBI enabled the reverse-merger of a large DFI with its commercial
banking subsidiary which is a major initiative towards universal banking. The effective institutional
and legal reforms have been undertaken in relation to the banking sector. In 1994, a Board for
Financial Supervision (BFS) was constituted comprising selected members of the RBI Board with a
variety of professional expertise to exercise 'undivided attention to supervision'. The BFS, which
generally meets once a month, provides direction on a continuing basis on regulatory policies
including governance issues and supervisory practices. It also provides direction on supervisory
actions in specific cases. The BFS also ensures an integrated approach to supervision of commercial
banks, development finance institutions, non-banking finance companies, urban cooperatives
banks and primary dealers. A Board for Regulation and Supervision of Payment and Settlement
Systems (BPSS) has also been recently constituted to prescribe policies relating to the regulation
* Assistant Professor, Economics, Armapore P.G. College, Kanpur
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and supervision of all types of payment and settlement systems, set standards for existing and
future systems, authorize the payment and settlement systems and determine criteria for
membership to these systems.
There have been a number of measures for enhancing the transparency and disclosures
standards. Illustratively, with a view to enhancing further transparency, all cases of penalty imposed
by the RBI on the banks as also directions issued on specific matters, including those arising out
of inspection, are to be placed in the public domain.
And lately the regulatory framework in India, in addition to prescribing prudential guidelines
and encouraging market discipline, is increasingly focusing on ensuring good governance through
"fit and proper" owners, directors and senior managers of the banks. Transfer of shareholding of five
per cent and above requires acknowledgement from the RBI and such significant shareholders are
put through a f̀it and proper' test. Banks have also been asked to ensure that the nominated and
elected directors are screened by a nomination committee to satisfy f̀it and proper' criteria.
Performance of Banking Sector and Banking Reforms of India
Bank profitability levels in India have trended upwards and gross profits stood at 2.0 per
cent during 2005-2006, 2.2 per cent during 2004-2005 and net profits trending at around 1 per cent
of assets. Available information shows that for developed countries, at end-2005, gross profit ratios
were 2.1 per cent for the US and 0.6 per cent for France. The extent of penetration of Indian banking
system in country as measured by the proportion of bank assets to GDP has increased from 50 per
cent in the second half of nineties to over 80 per cent a decade later. The revenue of Indian banks
grew four-fold from US$ 11.8 billion to US$ 46.9 billion, whereas the profit after tax rose nearly nine-fold
from US$ 1.4 billion to US$ 12 billion over 2001-10. Operating expenses of banks in India are also
much more aligned to those prevailing internationally, hovering around 2.1 per cent during 2004-2005
and 2005-2006.The proportion of net NPA to net worth, sometimes called the solvency ratio of
public sector banks has dropped from 57.9 per cent in 1998-1999 to 50 percent in 2012 in both
priority and non priority sector however 42.9 percent in priority sector and 57.1 percent in non priority
sector in 2013 and 41 percent NPA in priority sector and 59 percent in non priority sector of all SCBs
in 2013.
Indian banks record high growth in the second quarter of 2007-2008 As per ASSOCHAM
Eco Pulse (AEP) Study, of the Scheduled Commercial Banks (SCBs) have substantially increased
their net profits with average rise of 30 per cent on the back of strong growth in deposits and fee
based income in the second quarter of the financial year 2007-2008. The ASSOCHAM Study on
�Banking Sector Performance in Second Quarter� based on the quarterly results declared by the
17 major scheduled commercial banks has revealed that banks continued to maintain a strong
momentum in both earnings growth as well as growth across all its core businesses, such as treasury
income, fee based income and interest income. Major Scheduled Commercial Banks (SCBs) saw a rise
of about 23.82 per cent in its treasury income in Second Quarter of the financial year 2007-2008. Fee
based income of the banks registered a robust growth of 40.80 per cent in while the interest
income posted a growth of 35.48 per cent in the quarter ending September 2007. Other banks, which
saw significant profits, includes viz; Indian Bank (46.34 per cent), followed by Union Bank (42.04 per
cent), HDFC Bank (40.14 per cent), State Bank of India (36.04 per cent), Centurion Bank of Punjab
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(33.76 per cent), ICICI Bank (32.79 per cent), Vijaya Bank (23.80 per cent), Allahabad Bank (14.17
per cent), IDBI Bank (12.23 per cent), ING Vysya Bank (11.09 per cent), Canara Bank (11 per
cent), Syndicate Bank (10.98 per cent), Punjab National Bank (6.63 per cent) and Andhra Bank (3.26
per cent).
We assess the performance of India's leading banks on key metrics, such as credit
portfolio size, net interest margins (NIM) and non performing assets (NPA) ratio. The State Bank of
India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BOB) had the first, second and third
largest credit portfolios, respectively. HDFC emerged as among the best performers with a strong
NIM ratio and the lowest NPA ratio, whereas, ICICI (with the fourth largest credit portfolio) reported a
high NPA ratio in 2011 The private sector banks continue to have higher pace of growth in their
bottom lines with average 40 per cent growth as compared to 24 per cent growth recorded by public
sector banks. While Yes bank, HDFC Bank, Centurion Bank of Punjab was the best performers in the
private sector, Axis bank, Indian Bank, Union Bank and State Bank of India remained at top among
the PSBs.
Impact of Reforms in the Banking Sector in India
The implementation of reforms in the banking sector in India has lead to improve access to
credit through newly established domestic banks, foreign banks and bank-like intermediaries.
Government debt markets have developed, enabling greater operational independence in monetary
policy making. The growth of Government debt markets has also provided a benchmark for private
debt markets to develop. It shows significant improvements also in the information infrastructure.
The accounting and auditing of intermediaries and information on small borrowers has improved
and information sharing through operationalisation of credit information bureaus has helped to
reduce information asymmetry. The technological infrastructure has developed with modern-day
requirements in information technology and communications networking (www.eac.gov.in). The
primary beneficiaries of the announced reforms are the state-owned banks, which control over
three-quarters of total assets in the financial system. In the year 2005, the Central Government
gave State-run banks significantly greater operational and managerial freedom, including the rights
to: establish overseas branches or subsidiaries; exit non-profitable ventures; set human resource
policies; and acquire domestic and foreign banks. Government of India removed limits on banks
Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) requirements, and gave the central
bank greater flexibility to set the limits. In the first phase, between March 2005 and 2009, foreign
banks were allowed to establish a wholly owned subsidiary or to convert existing operations into a
subsidiary. The RBI has raised the limit of Foreign Direct Investment in private banks to 74 percent
from 49 percent. Before 2009, foreign banks will only be allowed to acquire up to 74 percent ownership
of distressed private banks identified by the RBI for restructuring, After March 2009, foreign banks
may be allowed to acquire any private bank, depending on a review of the outcome of the first
phase .
Conclusion
A further challenge which banks face in this regard is to ensure that they derive maximum
advantage from their investments in technology and avoid wasteful expenditure which might arise on
account of uncoordinated and piecemeal adoption of technology; adoption of inappropriate/ the top
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inconsistent technology and adoption of obsolete technology. According to the top consulting firms,
the growth of Indian banks, especially in the public sector, can be optimised through increasing
productivity and efficient human resource management. Banks need to hire employees with both core
and specialist skills, while simultaneously working to control attrition. Further, banks need to optimise
the time and cost of performing non consumer activities with the help of special tools and revamping
existing knowledge processes. In the current scenario, banks are constantly pushing the frontiers of
risk management. Compulsions arising out of increasing competition, as well as agency
problems between management, owners and other stakeholders are inducing banks to look at
newer avenues to augment revenues, while trimming costs. At this stage of socio-economic
development consolidation, competition and risk management are no doubt critical to the future
of banking but governance and financial inclusion would also emerge as the key issues for a country
like India. Sustained government support and a careful re-evaluation of existing business strategies
can set the stage for Indian banks to become bigger and stronger, thereby setting the stage
for expansions into a global consumer base.
References
lAnil Patrick R, �The new face of Banking�, www.networkmagazineIndia.com.
lBimal Jain �Indian Banking and Finance: Managing New Challenges�, www.bimaljalan.com.
lGlobal Financial Stability Report (GFSR), September 2006.
lRamasastri A.S. and Achamma Samuel (2006), Banking Sector Developments in India, 1980-2005: What the Annual
Accounts Speak: Reserve Bank of India Occasional Papers; Vol. 27, No. 1 and 2, pp.177-205.
lImpact of reforms on banking sector of India- www.rbi.org.in.
lBanking Sector Reforms in India an Overview- www.rbi.org.in
lMonetary Policy and banking sector reforms � www.financial express.com
49
Ethics of Accounting and
Financial Principles
Accounting ethics is primarily a field of applied ethics, the study of moral values and judgment
as they apply to accountancy. It is an example of professional ethics. Accounting ethics were
first introduced by Luca Pacioli, and later expanded by government groups, professional
organizations, and independent companies. Ethics are taught in accounting courses at higher
education institutions as well as by companies training accountants and auditors.
Due to the diverse range of accounting services and recent corporate collapses,
attention has been drawn to ethical standards accepted within the accounting profession. These
collapses have resulted in a widespread disregard for the reputation of the accounting profession. To
combat the criticism and prevent fraudulent accounting, various accounting organizations and
government have developed regulations and remedies for improved ethics among the accounting
profession. The nature of the work carried out by accountants and auditors requires a high level
of ethics. Shareholders, potential shareholders and other users of the financial statement rely
heavily on the yearly financial statements of a company as they can use this information to make an
informed decision about investment. They rely on the opinion of the accountant who prepared the
statements, as well as the auditors who verified it, to present a true and fair view of the company.
Knowledge of ethics can help accountants and auditors to overcome ethical dilemmas, allowing for
the right choice that, although it may not benefit the money, will benefit the public who relies on the
accountant/auditor's reporting.
Introduction
Finance and accounts is perhaps the only business function which accepts responsibility to
act in public interest. Hence, a finance and accounting professional's responsibility is not restricted
to satisfy the needs of any particular individual or organization while acting in public interest, it
becomes imperative that the finance and accounting professional adheres to certain basic ethics in
order to achieve his objective.
�Accountants and the accountancy profession exist as a means of public service: the
distinction which separates a professional from a mere means of livelihood is that the profession
is accountable to standards of the public interest, and beyond the compensation paid by clients� -
Robert H. Montgomery, describing ethics in Accounting
Until recently, various surveys conducted globally has ranked finance and accounting
professionals very high in terms of professional ethics. However, various accounting scandals
witnessed during the past few years have put a serious question mark on the role of the finance and
accounting professional in providing the right information for decision making, both within and outside
their respective organizations. In companies such as Enron, World Com, Tyco, Global Crossing,
Adelphia, Quest, Xerox and most of the late dotcoms, the accounting information used by the finance
department was false and manipulative.
What was the role of finance and accounting professionals in all these high profile failures? Of
course there were few professionals who were directly involved in fraudulent activities, however, the
majority, at most of the times, refused to challenge what they had already known.
Enron is a classic example of such behaviour. When Enron Corp. declared its bankruptcy, an
*Asst. Professor, Dept. of Commerce, Jagran College of Arts, Science and Commerce, Kanpur**Asst. Professor, Dept. of Commerce, Uday Pratap Autonomus College, Varanasi
* Dr. Rajeev Nayan Singh ** Dr. Meera Singh
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employee of the name of Sherron Watkns sent the company's top executive (Kenneth Lay) a message
which had detailed information of the accounting hoax in the form of now famous 'Off the Book
Liabilities'. However, instead of taking note of what was mentioned in the message, the management of
the company demoted Sherron. It is well known now, that, like Sherron, hundreds of finance and
accounting employees knew about the happenings but preferred to remain silent. Hence, most
of them did not lie, but neither did they disclose the truth nor did they attempt to correct the misleading
and confusing information. Shouldn't they have blown the whistle the way Sherron did? Was the
behaviour of these employees unethical? Cases like Enron exist in plenty. World Com, Global Crossing,
Xerox, Qwest and many other companies have been known to have created accounting entries with
the sole purpose of making their financial statement look attractive thereby inviting further investments
from unsuspecting individual and organizations.
For a finance and accounting professional working as consultant or auditor
Finance and accounting professional in public practice should take reasonable steps to identify
circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to
compliance with the fundamental principles. For example, a threat to objectivity may be created when
a professional accountant in public practice completes directly with a client or has a joint venture or
similar arrangement with a major competitor of a client. More examples of such threats are discussed
later.
For a finance and accounting professional working as an employee
Finance and accounting professional has a professional obligation to comply with certain
fundamental principles. There may be times, however, when their responsibilities to an employing
organization and the professional obligations to comply with the fundamental principles are in
conflict. Ordinarily, finance and accounting professional should support the legitimate and ethical
objectives established by the employer and the rules and procedures drawn up in support of those
objectives. Nevertheless, where compliance with the fundamental principles is threatened, finance
and accounting professional must consider a response to the circumstances. As a consequence
of responsibilities to an organization, finance and accounting professional may be under pressure
to act or behave in ways that could directly or indirectly threaten compliance with the fundamental
principles. Such pressure may be explicit or implicit; it may come from a supervisor, manager, director
or another individual within the organization. Finance and accounting professional may face
pressure to:
lAct contrary to law or regulation.
lAct contrary to technical or professional standards
lFacilitate unethical or illegal earning management strategies.
lLie or otherwise intentionally mislead (including misleading by remaining silent) others, in
particulars:
lThe auditors of the organization; or regulators.
lIssue or otherwise be associated with, a financial or non-financial report that materially
misrepresent the facts, including statement in connection with, for example; the financial
statements; tax compliance; legal compliance; or reports required by securities regulators.
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Ethical Environment
In light of the various corporate scandals mentioned above, the following three points need to
be addressed for creating a sound ethical environment in any company. They are,
lEnsuring that employees are aware of their legal ethical responsibilities.
Ethical organizations have policies to train and motivate employees toward ethical behaviour.
This would require initiation from the top. A number of companies, both in the West and in India have
been known for their quality and soundness of their ethics programs. Companies like Raytheon make
ethics training compulsory for everyone. Similarly Texas Instrument has a well drafted ethics program
from as long as 1961. In India Wipro was amongst the pioneers to establish an organized set of beliefs
which would guide business conduct. This was done as early as 1970s. In the process the company has
established an integrity manual which helps employees take ethical decision when faced with choices.
lProviding a communication system between the management and the employees so
that any one in the company can report about fraud and mismanagement without the
fear of being reprimanded.
Ethical organizations need to provide facilities for employees through whom they could
communicate with responsible positions for reporting frauds, mismanagement or any other form of non
routine detrimental behaviour. In India Wipro has introduced a helpline comprising of senior members of
the company who are available for guidance on any moral, legal or ethical issues that an employee of the
company may face.
lEnsuring fair treatment to those who act as whistle blowers.
This is perhaps the most important and sensitive issue. When Sherron has raised questions at
Enron, she was demoted. Similar fate would have met all those who had followed Sherron. Fair
treatment to whistle blowers is a basic necessity to check fraud. It is reassuring that two of the three
persons of the year, selected by the popular Time magazine were accountants from Enron and World
Com who had dared to blow the whistle, however, needless to say that the appreciation is much more
needed from within the company rather than outside.
Unethical Behaviour
A creation of a proper ethical environment requires a proper understanding of the reasons
which lead to unethical behavior. Four such reasons are discussed below:
lEmphasis on short term results. This is one of the primary reasons which have led to the
downfall of many companies like Enron and WorldCom. Manipulating accounting entries to
depict good profitability can help companies raise further capital from the market.
lIgnoring small unethical issues: It is a known fact that most of the compromises we make
start are small however they lead us to large problems. Similarly, companies need to develop an
environment where small ethical lapses are taken seriously so that they do not repeat in the
future. Otherwise, toleration of such small lapses could lead to larger problems.
lEconomic cycles: When Enron was doing well, no one had bothered to understand its actual
financial position. There were no question mark on its financial statements. However, when the
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economy took a downward turn, finance and accounting managers took decision which was
compromise over the established code of conduct. This was done to reflect a financial position
which would keep the investors in the market satisfied. All this resulted in a huge crisis and the
ultimate fall of this US Giant. Hence, to prevent disclosure of ethical problems in times of
depression, company need to be extremely careful and vigilant during good times.
l In the era of globalization and massive cross border flow of capital,
accounting rules are changing faster than ever before. The rules have become more complex
and it is difficult to identify deviations from these complex set of requirements. The complexity of
these principles and rules and the difficulty associated with identifying abuse are reasons which
may promote unethical behaviour.
Threats
The dynamic environment in which businesses operate today may usher a broad range of
circumstances because of which compliance with the fundamental principles may potentially be
threatened. Such threats may be classified as follows:
lSelf-interest threats, which may occur as a result of the financial or other interests of finance
and accounting professional or of an immediate or close family member.
lSelf-review threats, which may occur when a previous judgment needs to be revaluated by
the finance and accounting professional responsible for that judgment.
lAdvocacy threats occur when a professional promotes a position or opinion to the point
that subsequent objectivity may be compromised.
lFamiliarity threats occur when finance and accounting professional has close relationship in
the work environment and such relationship impairs his selfless attitude towards work.
lIntimidation threats occur when a professional may be prohibited from acting objectively by
threats, actual or perceived.
Circumstances leading to the actual happening of the various threats are given below:
Self interest threat for finance and accounting professional working as consultants or auditors
lA financial interest in a client or jointly holding a financial interest with a client.
lUndue dependence on total fees from a client.
lHaving a close business relationship with a client.
lConcern about the possibility of losing a client.
lPotential employment with a client.
lContingent fees relating to an assurance engagement.
Self interest threat for finance and accounting professionals working as an employee
lFinancial interests, loans and guarantees in the company the professional is working.
lIncentive compensation arrangements.
lInappropriate personal use of corporate assets.
lConcern over employment security.
Accounting rules:
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l
lCommercial pressure from outside the employing organization.
Self review threat for finance and accounting professionals working as consultants or
auditors
lThe discovery of a significant error during a re-evaluation of the finance and accounting
professional.
lReporting on the operation of financial systems after being involved in their design or
implementation.
lHaving prepared the original data used generates records that are the subject matter of the
engagement.
lA member of the assurance team being, or having recently been, a director or officer of that
client.
lA member of the assurance team being, or having recently been, employed by the client in a
position to exert direct and significant influence over the subject matter of the engagement.
Self review threat for finance and accounting professional working as an employee
Such threats occur when business decision or data is subjected to review and justification is
required to be given by the same professional who was responsible for taking such decisions or
preparing that data.
Advocacy threat for finance and accounting professionals working as consultants or auditors
lPromoting shares in a listed entity when that entity is a consultancy or a financial statement
audit client.
lActing as an advocate on behalf of an assurance client in litigation or disputes with third parties.
Advocacy threat for finance and accounting professionals working as an employee
The legitimate goals and objectives of the organizations employing finance and accounting
professionals may promote the organization's positions, provided any statement made is neither false
nor misleading. Such actions generally would not create an advocacy threat.
Familiarity threats for finance and accounting professionals working as consultants or auditors
lA member of the engagement team having a close or immediate family relationship with a
director or officer of the client.
lA member of the engagement team having a close or immediate family relationship with an
employee of the client who is in a position to exert direct and significant influence over the
subject matter of the engagement.
lA former partner of he firm being a director or officer influence over the subject matter of the
engagement.
lAccepting gifts or preferential treatment from a client, unless the value is clearly insignificant.
lLong association of senior personnel with the assurance client.
Commercial pressure from outside the employing organization.
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Familiarity threats for finance and accounting professional working as an employee
l
reporting or business decisions having an immediate or close family member who is in a
position to benefit from that influence.
lLong association with business contacts influencing business decisions.
lAcceptance of a gift or preferential treatment, unless the value is clearly insignificant.
Intimidation threat for finance and accounting professionals working as consultants or
auditors
lBeing threatened with dismissal or replacement.
lBeing threatened with litigation.
lBeing pressured to reduce inappropriately the extent of work performed in order to reduce fees.
Intimidation threat for finance and accounting professionals working as employees
lThreat of dismissal or replacement of the finance and accounting professional or a close or
immediate family member over a disagreement about the application of a accounting principle
or the way in which financial information is to be reported for external use as well as for decision
making purposes.
lA dominant personality attempting to influence the decision making process, for example with
regard to the exclusion of irrelevant costs from projected cost estimates.
Safeguards
It is important to have safeguards which may increase the likelihood of identifying or deterring
unethical behavior. Such safeguards, which may be created by the finance and accounting profession,
legislation, regulation or an employing organization, shall ensure an ethical environment. Safeguards
that may eliminate or reduce the above mentioned threats to an acceptable level fall into two broad
categories:
a.Safeguards created by the professional, legislation or regulation; and
b.Safeguards in the work environment.
a.Some of the Safeguards created by the profession, legislation or regulation are as follows
lEducational, training and experience requirements for entry into the profession.
lContinuing professional development requirement.
lCorporate governance regulations.
lProfessional standards.
lProfessional or regulatory monitoring and disciplinary procedures.
lExternal review by a legally empowered third party of the reports, returns, communions or
information produced by concerned Professionals.
A finance and accounting professional, in a position to influence financial or non financial
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b.Safeguards in the work environment are as follows
l
lThe employing organization's ethics and conduct programs.
lRecruitment procedures in the employing organization emphasizing the importance of
employing high caliber competent staff.
lStrong internal controls.
lAppropriated disciplinary processes.
lLeadership that stresses the importance of ethical behavior and the expectation those
employees will act in an ethical manner.
lPolicies and procedures to implement and monitor the quality of employee performance.
lTimely communication of the employing organization's policies and procedures, including any
changes to all employees and appropriate training and education on such policies and
procedures.
lPolicies and procedures to empower and encourage employee to communicated to senior
levels within the employing organization any ethical issues that concern them without fear of
retribution.
Conclusion
While evaluating compliance with the fundamental principles, finance and accounting
professional may be required to resolve a conflict in the application of fundamental principles. The
following are to be considered, either individually or together with others, during a conflict resolution
process.
lRelevant facts,
lEthical issues involved,
lFundamental principles related to the matter in question,
lEstablished internal procedure, and
lAlternative courses of action.
Having considered these issues, finance and accounting professional should determent the
appropriate course of action that is consistent with the fundamental principles identified. The
professional should also weight the consequences of each possible course of action. If the matter
remains unresolved, the professional should consult with other appropriate persons within the firm or
employing organization for help in obtaining resolution. During times where a matter involves a conflict
with or within an organization, finance and accounting professional should also consider consulting
with those charged with governance of the organization, such as the board of directors.
It may be in the best interests of the professional to document the substance of the issue
and detains of any discussions held or decision taken, concerning that issue.
The employing organization's systems of corporate oversight or other oversight structures.
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If a significant conflict cannot be resolved, a professional may wish to obtain professional
advice from the relevant professional body or legal advisors and thereby obtain guidance on ethical
issues without breaching confidentiality. If, after exhausting all relevant possibilities, the ethical conflict
remains unresolved, a professional should, where possible, refuse to remain associated with the matter
creating the conflict. The professional may determine that, in the circumstances, it is appropriate to
withdraw from the team or specific assignment or to resign altogether from the firm or the employing
organization.
References
l
1.Business Law, Ethics and Communication,
2.Ethics in Accounting and Finance.
lProfessional Accounting Bodies Perceptions of Ethical Issues by Barry J. Cooper
lJournal of Business Ethics.
lAccounting Ethics by Duska, Ronald F.; Brenda Shay Duska.
lAccounting Students Perceptions of Business and Professional Ethics by Sellers, James H.
The Institute Chartered Accountants of India
57
*Assistant Professor, Amity Business School, Noida**Assistant Professor, Jagran College of Arts, science and Commerce, Kanpur
*Shinu Vig**Sakshi Goel
Companies Act 2013: The beginning of a New Era for Corporate India
With the increasing globalization foreign investors are looking towards India as an
attractive destination for investment. Also the companies in India are moving beyond domestic
territory to plunge into the huge pool of finance and human capital available in the international
market. In this scenario the new Companies Act 2013 has come as a harbinger of new hope. The
Companies Act of 1956 had become inefficient in addressing the challenges of the growing corporate
sector in India. Thus there was a need for a modern regulation which enables business. The new
Companies Act is a landmark piece of legislation which envisages comprehensive changes in the
existing corporate governance regime by providing for more transparency and enhanced
disclosures. Some of the new provisions introduced include appointment of female and resident
directors, class action suits, mandatory CSR, cross border restructuring, rotation of auditors and
establishment of serious frauds investigation office. All these provisions would have far reaching
implications for the corporate sector in India and lead to adoption of the best corporate governance
practiced world wide. The paper examines the implications of the new provisions introduced in the
Companies Act 2013 for the corporate sector.
Introduction
The corporate sector in India has been growing at a mounting pace. There are close to 1 million
registered companies in India. The Indian economy is integrating into the world economy. The current
economic and regulatory environment in India is also on the brink of a major change. With the increasing
globalization foreign investors are looking towards India as an attractive destination for investment. Also
the companies in India are moving beyond domestic territory to plunge into the huge pool of finance and
human capital available in the international market. In this scenario strong company legislation is
imperative. The Companies Act of 1956 had become inefficient in addressing the challenges of the
growing corporate sector in India. Thus there was a need for a modern regulation which is aimed at
simplification of the existing legal system to ensure that it is easy to understand, implement and also
enables business. Therefore, last year in December the new Companies Act 2013 was enacted. The
objective of the new act is to make company regulation more meaningful in terms of investor protection
and corporate governance.
Importance of corporate governance in the capital market
Good corporate governance is critical for the integrity of corporations, financial institutions and
markets and has a significant impact on the constant growth and stability of any economy. In the past
decade, India has made a significant leap in the area of corporate governance reforms, which has
enhanced public trust in the market. These reforms have been well received by the investors, including
the foreign institutional investors (FIIs). Gross FII portfolio investment has risen from US $ 2.7 billion in FY
1996 to US $ 166.2 billion in FY 2013. This growing interest of FIIs in the Indian market clearly
demonstrates the improvement in the governance standards.
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Figure The Linkage in Globalization, Corporate Governance and Foreign Investment
Above Figure shows that globalization of the capital markets has provided a momentum to the
Corporate Governance practices, which in turn have led to rising foreign investment. A very important
result of internationalization of Indian securities markets was a voluntary drive towards a more
rigorous corporate governance regime by the Indian industry itself. Firstly, in order to sell their
securities to the foreign investors, Indian companies making public offerings in India were forced to
comply with corporate governance norms that investors in the developed countries were familiar with.
Secondly, Indian companies listing abroad to raise capital were subject to stringent corporate
governance norms applicable to listing on those Exchanges. These companies also had to adhere to the
standards and practices of corporate governance applicable to markets where they listed their
securities. This resulted in an enormous improvement in the corporate governance standards in
India. The new Companies Act 2013 is a milestone in this direction.
Companies Act 2013
The Act has 470 clauses as against 658 Sections in the old Companies Act, 1956. The
entire Act has been divided into 29 chapters. The new Act is a major landmark in the history of
corporate India and can be seen as beginning of a new era for the corporate sector. It will
change the way the companies are governed in India. The new Act is a modern and progressive
piece of legislation which emphasizes on corporate democracy and investor protection. The Act
provides for business friendly corporate regulation, e-governance initiatives, Corporate Social
Responsibility (CSR), enhanced disclosure, stricter enforcement, audit accountability and better
framework for insolvency regulation. It also places greater responsibility and obligation on the
Board of Directors and Management. The Act has introduced some definitions for accounting
and auditing standards, financial statement, independent director, interested director, key
managerial personnel (KMP), etc. Following are the provisions in which major changes have
been introduced in the Companies Act, 2013.
lOne person company' (OPC) (Sec 2(62)): The Act introduces a new type of entity called
'one person company' (OPC) to the existing classes of companies. An OPC means a
company with only one person as its member. Only a natural person who is an Indian citizen
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and resident in India can incorporate an OPC or be a nominee for the sole member of an
OPC. OPC provides an opportunity to the individuals for carrying on a business with limited
liability.
l The Act introduces the concept of independent
director for the first time in company law and states that every listed company shall have
at least one-third of the Board as independent directors. The term has also been defined in
the Act.
lBoard of Directors (Sec 166): The new Act provides that the company can have a maximum
of 15 directors on the Board; appointment of more than 15 directors will require approval
from the shareholders. Further, the new Act prescribes both academic and professional
qualifications for directors. It states that the majority of members of Audit Committee
including its Chairperson should have the ability to read and understand the financial
statements. Further, the duties of directors have been defined in the Act. The Act has also
considerably enhanced the roles and responsibilities of the Board of Directors and has made
them more accountable.
lWoman Directors (Sec 149): Listed companies need to have at least one woman on their
board, according to the law. The deadline for their appointment varies from one year to three
years, depending on the size of the company.
lRelated Party Transactions (RPT) (Sec 188): The new Act requires that no company should
enter into RPT contracts pertaining to (a) sale, purchase or supply of any goods or materials; (b)
sale or dispose of or buying, property of any kind; (c) leasing of property of any kind; (d) availing
or rendering of any services; (e) appointment of any agent for purchase or sale of
goods, materials, services or property; (f) such related party's appointment to any office or
place of profit in the company, its subsidiary company or associate company. In case such
a contract or arrangement is entered into with a related party, it must be referred to in the
Board's Report along with the justification for entering into such contract or arrangement.
Further, any RPT between a company and its Directors shall require prior approval by a
resolution in general meeting.
lCorporate Social Responsibility (CSR) (Sec 135): The new Act has mandated the profit
making companies to spend on CSR related activities. Every company having net worth
of Rs 500 crore or more or turnover of Rs 1000 crore or more or net profit of Rs 5 crore or
more during any financial year shall constitute a CSR Committee of the Board, which shall
recommend a CSR policy. The Board of every such company shall ensure that the
company spends (in every financial year) at least 2 percent of the average net profits
of the company made during the three immediately preceding financial years. If the
company fails to spend it then the Board shall in its report state reasons for the same.
lAuditors (Sec 139): A listed company cannot appoint or reappoint (a) an individual as auditor
for more than one term of five consecutive years, or (b) an audit firm as auditor for more than
two terms of five consecutive years. The Act also states that an auditor cannot render
accounting and book-keeping services, internal audit, investment banking services,
investment advisory services, management services etc to the company. National Financial
Independent Directors (Sec 149 (5)):
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Reporting Authority (NFRA) has been designated to be the new regulator for Auditors and will have
powers to recommend, enforce and monitor compliance of accounting and auditing standards.
l In the new Act, there is significant transformation in
non-financial annual disclosures and reporting by companies as compared to the earlier
format in the Companies Act, 1956.
lSerious Fraud Investigation Office (SFIO) (Sec 211): The Act has proposed statutory
status to SFIO. Investigation report of SFIO filed with the Court for framing of charges shall be
treated as a report filed by a Police Officer. SFIO shall have power to arrest in respect of certain
offences of the Act which attract the punishment for fraud. Further, the new Act has a provision
for stringent penalty for fraud related offences.
lClass Action Suits (Sec 245): For the first time, a provision has been made for class action
under which it is provided that specified number of member(s), depositor(s) or any class of
them, may file an application before the National Company Law Tribunal (NCLT) seeking any
damage or compensation or demand any other suitable action against a company. This
clause will increase transparency within the organization and augment respect for the rights
of stakeholders in the functioning of the company.
lE-governance: The Companies Act 2013 provides for e-governance in various company
processes like maintenance and inspection of documents in electronic form, keeping the
books of accounts in electronic form, holding of board meetings through video-conferencing/
any other electronic means, voting through electronic means, etc. All these provisions will lead
to increased transparency and efficiency in the companies.
lSevere consequences for non compliance: The Act has significantly increased the penal
consequences, with a large number of sections reserving provisions for the prosecution of
directors, officers in default and key managerial personnel.
lCross-border Merger [Sec 234]: The Act permits merger of Indian company with foreign
company and vice-versa. Central Government will make necessary Rules in consultation with
RBI and notify permitted jurisdictions. Merger will be approved by NCLT and consideration can
be only in cash or Depositary Receipts.
Conclusion
The new Companies Act 2013 has definitely raised the bar on corporate governance in India. Its
provisions suit the demands of the modern times in the changing economic and business environment.
The Act is expected to have far-reaching effects on the corporate sector in terms of its growth and
development. It will also make the Indian corporate sector more transparent, simple and globally
acceptable.
Disclosure and Reporting (Sec 92):
61
*Ankit Gupta
*Assistant Professor, Dream Valley College, Gwalior (M.P)
Internet Marketing Management: Upcoming Future Need in India and World
In this modern world, organizations and customers, both are now equipped with computers
powered by high speed internet service. This technology change had created new gateways of
one-to-one relations and mass population reach. This mutual benefit has boomed internet marketing in
21st century.
Internet marketing covers all terms used for marketing a product or service on Internet. Importance
of Internet Marketing is now expanding, since the aim of every business starts and ends with three
purposes of generating revenue, maintaining customer relation and increasing customer's loyalty. Thus
this paper attempts to find out the importance of internet marketing in today's world and the
reasons why now a days companies are using it? The main concern of any organisation is reaching
the customer very easily and binding its customers for a long time. Internet is the best way to fulfil
these two aims. The study shows that there is a need of adding it into the present curriculum because
it will definitely become one of the essential requirements for each company in future. So that the
upcoming managers can be aware of it to avoid any problem in future, not only to become managers
but for being a good customer also they should be well acquainted with it.
This research clearly indicates the need of internet marketing to be practiced by professionals,
managers and also by the learners. We need pool of professional who are capable of marketing via
various modes of Internet marketing. Thus there is thrust on upcoming professionals and managers
to be prepared for the marketing strategies gained and practised on Internet in digital form. This paper
also attempts to suggest strong measures to adopt social media marketing for B2B business.
Introduction
Future of tomorrow's India is Internet. Internet is booming in India like anything. More
and more Indians are becoming friendly to internet use. This is a positive sign and even the statistical
data has revealed the fact that Internet is upcoming and prospective tool in India and world. Local
markets are at the verge of shattering and the hike is on internet. The thrust of present scenario is the
Internet. Internet is widely accepted because it is easy and user friendly. The E-commerce is the
area which has revolutionized the dimensions of the Internet. Internet finds wide acceptability.
Internet use ranges from online shopping to online banking, to online tutoring to online reservations.
Gone are the days when we used to stand in queues for bank services or for the reservations.
The technology has simplified the lives. Thus this research paper will deal with the fact that internet
marketing is becoming the most prominent way to advertise over large scale and it is in wide use
for the marketing over the internet in digital form with various means like banner, commercial
advertisements, pay per click and many other ways. It is clearly observed that it is becoming
necessary for the management studies to inculcate internet marketing in the curriculum.
Objectives of the Research Paper
This research paper will cover the following objectives:
1.To deal with the importance of internet marketing.
2.To analyze the need to introduce internet marketing in curriculum.
3.To analyze the internet marketing success.
4.To analyze the areas of internet marketing.
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In management studies, core focus lies on imparting knowledge to students and
making them skilful. Management talks about the entrepreneurship and the new dimension where
management studies should be extended, is the area of the Internet marketing. Internet marketing
is the prospective area where the business can be nourished. Internet is wide source of information.
Complex things and services on internet are just a click away from you. Internet marketing has
emerged as a powerful tool. Marketing on social networking sites, marketing on per click basis and
also the online marketing are powerful tools adopted widely by small, medium and large enterprises.
Internet marketing is all about the promotion of goods and services over internet. It involves the
showcasing of the goods, services and values over internet. It is thus termed as online marketing
or digital marketing. Internet marketing is broad term, it ranges from marketing through e-mail to
marketing through social networking sites. Digital customer data and electronic customer
relationship management systems are also often grouped together under internet marketing. Internet
marketing is the platform which brings the service providers from different countries to overcome
the barrier of regional boundaries and the clients and customer who need the services, goods
or products. Internet marketing uses the creativity for the advertisement over internet in digital
form. According to Cialdini there are 6 key principles of Internet Marketing:
lReciprocity
lCommitment and Consistency
lSocial Proof/Consensus
lAuthority
lLiking
lScarcity
Importance of Internet Marketing
Internet marketing strategy gives a measurable and definitive way to target market
and position of the business. Creating a successful online sales process can be accomplished by
representing and courting the visitor through the five levels of the sales process on the site. This
can be done by meeting the psychological needs that the visitor has. Networking is one of the
most effective ways to find clients for any consulting or professional services business (C. J.
Hayden). Marketing online offers many benefits that are not available in traditional marketing and
many companies are embracing those benefits during these tough economic times. Why is
internet marketing the most cost effective and efficient? It's the only marketing vehicle that allows
you to make tweaks and changes to your campaigns on the fly. When was the last time you ran a
marketing campaign and realized it wasn't pulling the results that you had hoped for? With the use of
internet marketing changes can be made at the first sign of failure. The changes could include
tweaking the text, modifying the graphic or strengthening the message. As discussed earlier, social
media consists of a wide range of sites and forums online, like chat rooms, video or music sharing
rooms, networking sites, company websites, company chat rooms, product rating websites
designed for the purpose of obtaining feedback from consumers, internet forums, threads and
discussion boards, mob logs (these are sites enabling image, audio and video sharing) and blog.
(Kaplan A. M; Nardi, B.A.). Social networking sites have infact altered the very way in which individuals
communicate, interact and collaborate with each other. Web usage or internet usage has taken on a
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new meaning and people are beginning to view it in an entirely different light, thanks to the growing
popularity of social networking websites. The nature of such networking websites is that it enables
people to easily take part in many socially interactive activities, urging people to open up and share their
opinions, content and cultural tastes with others around the world. Music, for instance, is in extensively
shared, discussed about and sampled across all kinds of online social networks. These social
networking sites make it easy for people to create and exchange with others content, and are very user
friendly.
Internet marketing tools
It can be broadly classified as:
lEmail Notification
lBanner Ads over Internet
lPer click Advertisement
lAd on Social Networking Site
lBlogs Creation
lWebsites
lMobile Ads
lSMS Ads
lAds on Search Listing
lAds on Google Ad words
lSearch Engine Optimization
lGoogle Ad Planner
lFacebook Ads Promotion or marketing of business over Facebook, LinkedIn, Twitter or
Blog Spot
lArticle Marketing over Internet
lVideo for promotion over You Tube
lEffective CRM building over Internet from users of different regions
lEffective Data Base for marketing
lUse of multimedia and links for the Marketing and Promotions
Business Models in Internet Marketing
E-commerce: In this model of business, goods are sold directly to consumers, businesses,
or from consumer to consumer electronically.
Websites based marketing: A strategy whereby an organization generates value by
acquiring sales leads from its website similar to walk-in customers in retail world. These prospects are
often referred to as organic leads.
Affiliate Marketing: A process wherein a product or service developed by one entity is
sold by other active sellers for a share of profits. The entity that owns the product may provide some
marketing material (e.g., sales letters, affiliate links, tracking facilities, etc.); however, the vast majority of
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affiliate marketing relationships come from e- commerce businesses that offer affiliate programs.
Local Internet marketing: A strategy through which a small company utilizes the Internet
to find and to nurture relationships that can be used for real-world advantages. Local Internet marketing
uses tools such as social media marketing, local directory listing, and targeted online sales promotions.
Findings and Analysis
Adopting social media marketing has been difficult for the B2B business. However a
recent study has revealed that 69% of B2B buyers use social media to assist them in business
development and decision making. Can B2B companies really afford to continue to dismiss
social media marketing techniques as an effective way to get the word out about their products and
services? The study clearly proves that in future if a company needs to retain its customers then it
should take a lot of efforts to improvise its advertising and marketing strategies. The companies
can create profiles in social networking websites and these profiles can contain links that redirect
the user to the company's website. According to Grant (1988), the companies should also create a
separate unit that actively participates in social communities and markets its goods in these sites. If
a separate unit is established then they can make sure to throw positive light on the products sold by
the company and thereby expand its customer base. Apart from this following recommendation can
be followed :
lThe companies can also provide videos that virtually demonstrate the functioning of a
product thereby assisting the user in understanding how a particular product works.
lThey can also provide features like free shipment of goods. Thus they should think of new
techniques to attract the customer.
lThe consumers should also be ensured that their personal information will be maintained
in a secure database and that their privacy will be maintained.
lThe company should also provide various post purchase services since customer
retention is very essential for the success of the company. Thus in future the company
should expand its marketing strategies in the internet to keep their customers happy
Sidney J. (1959).
Conclusion
The research has revealed the fact that upcoming requirement is the Internet marketing.
Internet marketing seems to be powerful tool for advertisement and promotion for today and in nearby
future. Effective internet marketing management is needed to be taught in curriculum of management
studies to make the future managers and entrepreneur aware of the scenario.
Thus, we see that there is ample possibility for thoughts and awareness to get converted
into action by means of social networking websites. Social networking websites are in a way the
latest medium of interaction and communication for people. They are also dependable for the purpose
of finding long lost acquaintances as well as making and maintaining new relationships. They are
also a cult phenomenon among the youth of today and hence very popular. It is the medium through
which people and especially youth look for information regarding latest sales, offers, exchange
schemes, discounts, etc., since more and more people are spending more time online each day
compared to even the time spent reading newspapers, where usually sales offers are advertised in the
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
traditional way. Even if exchange schemes, or offers are advertised in newspapers, they carry short
and precise information regarding the offer. Also, access to such in depth information may in fact
educate the customer about aspects of the offer that he was not even aware of by reading the limited
information offered in a newspaper advertisement or a thirty second television commercial. Online
medium of information about any product or information regarding its sales and promotion enables
a consumer to take his time to absorb all relevant information regarding the product at his leisure,
since this medium has neither timing restrictions like television commercials nor space restrictions
like newspaper advertisements.
References
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of Marketing Research, 23 (2), 184-188.
lHolman, Rebecca H. (1981), �The imagination of the future: a hidden concept in the study of consumer decision
making,� Advances in Consumer Research, 8 (1), 187-191.
lKrishnamurthi, Lakshman and S.P. Raj (1988), �A model of brand choice and purchase quantities price
sensitivities,� Marketing Science, 7, 1, 1-20.
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Quarterly Journal of Economics, 64 (2), 183-207.
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Research, 9 (1), 41-46.
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W Hesse. (2009) Social Media Use in the United States: Implications for Health Communication. J Med Internet
Res. 2009 Oct�Dec; 11(4): e48
lRogers, Everett M. and David G. Cartano (1962), �Methods of measuring opinion leadership,� Public Opinion
Quarterly, 26 (Autumn), 435-441.
lSchor, J. (2004) �Born to Buy: The Commercialized Child and the New Consumer Culture�.
lTurney, P.D. and Littman, M.L. (2003)?Measuring praise and criticism: inference of semantic orientation from
association , ACM Trans. Inf. Syst., Vol. 21 No. 4, pp. 315- 46. 12.
lValente, Thomas W., Beth R. Hoffman, Annamara Ritt-Olson, Kara Lichtman, and C.Anderson Johnson (2003),
�Effects of a social-network method for group assignment strategies on peer-led tobacco prevention programs
in schools,� American Journal of Public Health, 93 (November), 1837-1843.
lWeimann, Gabriel (1994), �The Influential's: People Who Influence People�, Albany, NY: State University of New
York Press
lWernerfelt, Birger (1990),�Advertising content when brand choice is a signal,� Journal of Business, 63 (1), 91-
98.
Childers, Terry L. (1986), �Assessment of the psychometric properties of an opinion leadership scale,� Journal
66
*Asst. Prof. Prestige Institute of Management, Gwalior **Prof. Commerce and Director � MBA Programme, Govt. M.L.B. College of Excellence, Gwalior ***TGT, St.Teresa S.S.School,Gwalior
A Perceptual Study on Chartered
Accountant and Auditors Towards
Forensic Accounting in Indian Perspective*Dr. Nandan Velankar
**Dr. R. C. Gupta***Neha Velankar
Forensic Accounting is of utilizing accounting, auditing and investigative skills to assist in legal
matters. It is the special practice area of accounting that describes engagements that result from
actual or anticipated disputes or litigation. Also there is a need for forensic Chartered Accountants
and Auditors to investigate the legal problems. In proposed study factors were determined for
the perception of chartered accountant and auditor's towards forensic accounting. The present
study is an attempt to check the perception of Chartered Accountant and Auditors towards
Forensic accounting. The study has been taken a sample of 100 respondents including Chartered
Accountants and Auditors of Gwalior region. The validity, reliability and explanatory factor analysis
test were applied to make this study more effective and trustworthy. Finally the significance of
the outcomes has been tested by t-test.
Key Words: Chartered Accountants and Auditors, Forensic Accounting, Perception,
Explanatory factor analysis
Introduction
Perception is closely related to attitude. According to Polanyi (1962) perceptions are our
interpretation of reality. Tradition, culture, expectation, need and experience all affect our perspective
of the world and its underlying realities. The perception of understanding is achieved through the
development of correlations between perceptions of experiences and the formation of higher
level concepts. From the perception of understanding a perception of certainty is attained.
This perception of certainty is the judgment and from the judgment the decision is made. In
this proposed study the perception of Chartered Accountants and Auditors towards forensic
accounting is evaluated to draft some decisions.
Chartered Accountant
An important phenomenon of recent times is the rapid growth of the accountancy
profession. The vast changes occurring in the economy of the country have been placing great
responsibilities on the Chartered Accountants. It also constitutes a challenge to the profession
to bring to bear their knowledge and skill in their specialised fields of activity. The types of functions
generally performed by the Chartered Accountant are varied.
C.As. play invaluable role in assisting business organisations to utilise resources
effectively, increase their efficiency and achieving their goals and objectives as management
consultants. C.As. render host of consulting sevices as under-
lDeveloping management information system.
lDesigning budgetary and control system.
lDetermining measures of the effective utilisation of capital.
lInstalling cost accounting system.
lAssisting the management in the efficient use of working capital as an aid to improve
productivity
lAdvising management on principles of organisation and methods for effective delegation
and planning of work.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
l
double taxation agreements etc.,
lReview of financial planning and policies for effective utilisation of resources.
lAdvising management on amalgamations, reconstructions, takeovers and expansion
schemes.
lAssist in finding solutions for specific business problems such as product mix decisions,
pricing decisions, making representation to Government on various matters etc.
lAppraisal of personnel policies and practices.
lActing investment counselor in respect of securities.
Auditor
Forensic Accounting
Forensic accounting, also called investigative accounting or fraud audit, is a merger of
forensic science and accounting. Forensic science according to Crumbley (2003) �may be
defined as application of the laws of nature to the laws of man�. He refers to forensic scientists
as examiners and interpreters of evidences and facts in legal cases that also offers expert opinions
regarding their findings in court of law. The science here refers to accounting science that is
the examination and interpretation of economic information.
Coenen (2005) stated that forensic accounting involves the application of accounting
concepts and techniques to legal problem. It demands reporting, where the accountability of
the fraud is established and the report is considered as evidence in the court of law or in the
administrative proceeding.
Literature Review
Zadeh and Ramazani (2012) in �Accountant's Perception of Forensic Accounting�
examined the extent of accountant's perception of forensic accounting and provided some
recommendation in order to enhance C.A. and Auditors' opinion towards it.
Mukoro Yamusa and Faboyede (2013) in �The Role of Forensic Accounting in Fraud
Detection and National Security� explained that to ascertain the relevance of forensic accounting
in curbing financial crime and corruption in the public sector by specifically examining the relevance
of forensic C.A. and Auditors investigating crime and corruption in the public sector, as well as
determining the roles and relevance of forensic C.A. and Auditors in litigations, support services,
documentation and reporting.
Asuquo (August-2012) in �Empirical Analysis of the Impact of Information Technology
on Forensic Accounting Practice in Cross River State Nigeria� described the impact of emerging
information technology on forensic accounting activities in cross river state. A survey, using self-
administered interview was conducted to achieve this objective. Forty (40) interviews were
conducted with various accounting professionals who were directly or indirectly linked to the
Rendering advice on international taxation matters, foreign collaborations, joint ventures,
Working in audit involves checking accounting ledgers and financial statements
of corporations and government, and is the basis of much of accountancy practice. Auditing
work is becoming increasingly computerised and can rely on sophisticated random sampling
methods. This area may involve considerable travel and allows you to work in a wide array of
sectors, to get a great understanding of how money is being made and managed.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
business of investigative accounting. Data collected were analyzed using ANOVA statistics. The
results of the study revealed that accounting professionals need to enhance their knowledge
and skills of computerized accounting systems for the purpose of planning, directing, supervising
and reviewing the work performed. Therefore, accounting professionals should better understand
and evaluate their computerized accounting systems to enable them carry out more effectively
the business of investigative accounting now and in the future.
Malusare (2013) in�The Effectiveness of Forensic Accounting in Detecting, Investigating,
and Preventing Frauds in India� clarified the uses of Forensic Accounting, how to control financial
frauds in companies and the effectiveness of forensic audit.
Wadhwa and Pal (2012) in �Forensic Accounting and Fraud Examination in India� explained
the uses of Forensic Accounting in India and the role of forensic accounting (techniques) in fraud
examination.
Murlidhar Lohana (2013) in �Forensic Accounting at Nascent Stage in India� elucidated
that Forensic Accounting is the tripartite practice that integrates accounting, auditing, and
investigative skills to conduct an examination into a company's financial statements. Though
forensic accounting is a new practice in India, prospects are growing fast in public as well private
organizations. This research article seeks to examine the meaning, nature, validation and
prospects in India.
Objective of the study
lTo design, develop and standardize the measure to evaluate Perception of Chartered
Accountants and Auditors towards Forensic Accounting.
lTo check the perception of Chartered Accountants and Auditors towards Forensic
Accounting.
lTo analyze the perception of Chartered Accountants and Auditors on gender basis
towards forensic accounting.
lTo open some new vistas for further researches.
Research Methodology
The study is exploratory in nature. It is aimed to check the perception of Chartered
Accountant and Auditors towards Forensic accounting. The study is done to analyze the relationship
in Indian context. Questionnaire survey method is applied to take the responses from respondents.
Population was Chartered Accountants and Auditors. Sampling frame was self employed and
salaried chartered accountants and auditors. Individual respondent was the sampling element.
Sample size was 100. To draw the sample non probability purposive sampling was used.
For the purpose of data collection, a self-designed questionnaire was utilized. The measure was
Likert-type 1 To 5 Scale,where 1 indicates the minimum agreement and 5 indicates maximum
agreement. Tools used for data analysis were:
lItem to total correlation was used to check the internal consistency of the
questionnaires.
lReliability test was applied to check the reliability of the questionnaire with the help
of Cronbach Alpha.
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Cronbach's Alpha
Cronbach's Alpha Based on Standardized Items
No. of Items
0.866 0.871 30
Reliability Statistics
It is considered that the reliability value more than 0.7 is good and it can be seen that reliability value(0.886) is quite higher than the standard value, so all the items in the questionnaire are highly reliable.
Consistency measure for CA and auditor towards forensic accounting Item -Total Statistics
VAR00001 110.3900 173.695 .542 .542 .858
VAR00002 110.2400 174.002 .553 .488 .858
VAR00003 110.2000 174.202 .534 .527 .858
VAR00004 110.3600 176.132 .466 .478 .860
VAR00005 110.2700 174.603 .472 .407 .860
VAR00006 110.2600 174.800 .516 .437 .859
VAR00007 110.1700 179.092 .385 .381 .862
VAR00008 110.3700 178.720 .404 .341 .862
VAR00009 110.4500 181.826 .238 .419 .866
VAR00010 110.8000 181.616 .168 .495 .869
VAR00011 110.0100 171.808 .599 .515 .857
VAR00012 110.3100 180.236 .306 .469 .864
VAR00013 110.1500 174.169 .451 .347 .860
VAR00014 110.0900 169.254 .664 .555 .854
VAR00015 109.9200 171.347 .619 .551 .856
VAR00016 110.0500 179.422 .398 .454 .862
VAR00017 110.3500 175.199 .511 .445 .859
VAR00018 110.7000 180.152 .232 .601 .867
VAR00019 110.1200 175.278 .562 .494 .858
VAR00020 109.9000 172.172 .595 .545 .857
VAR00021 110.3500 182.391 .195 .299 .867
Scale Mean if Item Deleted
Scale Varianceif Item Deleted
Corrected Item-Total Correlation
Squared Multiple Correlation
Cronbach's Alpha if Item Deleted
l
Chartered Accountants and Auditors towards Forensic Accounting.
lThe t-test was applied to compare the perception of Chartered Accountants and Auditors
on gender basis towards forensic accounting.
Empirical Analysis
Reliability, Validity and Consistency Measure:
Cronbach's Alpha method has been applied to calculate reliability of all items in the
questionnaire. Reliability test using SPSS software and the reliability test measure is given
below:
Factor analysis was applied to find out the underline factors to know the perception of
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It can be seen from item-total statistics that the dropping of any item do not increase
the reliability very significantly, so it was decided not to drop any question from the measure and it
was used as it is for further analysis.Validity was checked through face validity and found to be very
high.Item to total correlation was computed using SPSS and all the items in the measure were
accepted.
Factor Analysis
KMO and Bartlett's Test factor analysis for perception
Kaiser-Meyer-Olkin Measure of Sampling Adequacy
Bartlett's Test of Sphericity Approx. Chi-Square
0.761
950.031
435.0
.000
Df
Sig.
The KMO score is 0.761 which is quite higher than 0.5, thus it can be said that, sample is adequate for factor analysis. The degree of common variance among the thirty variables is "middling" bordering on �meritorious".
Chi-Square Value Df Sig
950.031 435.0 .000
Bartlett's Test of Sphericity is highly significant, becauce (P < 0.05) hence,corelation matrix
is not an identity matrix and therefore factor analysis is appropriate.
Principle component factor analysis with Varimax Rotation and Kaiser Normalization was
period details about factors, the factor name variable number and convergence and that Eigen
Values are given in the table which are as follows :
VAR00022 110.0900 181.133 .277 .362 .865
VAR00023 110.3100 174.984 .489 .600 .859
VAR00024 110.1200 176.369 .417 .397 .861
VAR00025 110.1200 179.440 .318 .397 .864
VAR00026 110.1600 180.277 .255 .527 .866
VAR00027 110.3200 183.311 .178 .284 .867
VAR00028 110.2000 177.960 .353 .432 .863
VAR00029 110.4400 185.986 .049 .441 .872
VAR00030 110.2300 181.431 .236 .367 .866
Scale Mean if Item Deleted
Scale Varianceif Item Deleted
Corrected Item-Total Correlation
Squared Multiple Correlation
Cronbach's Alpha if Item Deleted
Bartlett's Test of Sphericity has provided the following results:
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
Strong
Auditing
tools1.9916.638
Innovative
Practices1.8646.013
Financial
Security1.6185.393
Factor
Name
Eigen Value
Total % ofVariance
Variable Convergence / StatementLoading
Value
lI am aware with forensic accounting.
lForensic accounting is used as a fraud detection tool.
lForensic accounting has sound impact on internal control system.
lForensic accounting solely enough as a tool to detect suspicious transaction.
lForensic accounting is a tool to disclose actual financial status.
lForensic accounting is a tool to avoid manipulation in accounting.
lForensic accounting is a challenge for future accounting consultant.
lTo meet with the client and to obtain an understanding of the important facts is typical approach of forensic accounting.
lForensic accounting can improve security and secrecy of client.
lForensic accounting is measure to provide remedy for investigation..
lForensic accounting is useful in preventing financial crime.
lForensic accounting is costly for organization.
lForensic accounting is able to create transparency.
lForensic accounting is used in practice to investigate fraudulent acts.
lForensic accounting should be compulsory.
lForensic accounting is used as risk assessment process towards financial frauds.
lForensic accounting is a negative approach towards audit process.
Protection
towards
financial
frauds
7.13723.791
.686
.486
.714
.645
.448
.724
.508
.539
.625
.785
.486
.487
.489
.883
.785
.485
.747
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Practical Approach
1.4034.677
1.2401.134
Misreprese-ntation of financial statement
1.1213.738
Long lasting process
1.0533.508
Factor
Name
Eigen Value
Total % ofVariance
Variable Convergence / StatementLoading
Value
lForensic accounting is helpful in settling the disputes.
lForensic accounting is a detail oriented process.
lForensic accounting is a dynamic tool for combating corruption.
lForensic accountancy has not been recognized in bank and financial services industry.
lForensic accounting is a unique accounting approach.
lForensic accounting requires practical knowledge.
lForensic accounting has a sound impact on external audit.
lForensic accounting is an remedial practice towards creative accounting.
lForensic accounting can stop misrepresentation of financial statement.
lForensic accounting is a long lasting. process
Explicit accounting approach
1.4384.794
.718
.635
.606
.540
.667
.718
.714
.758
.885
.833
Remedial Practice
Description of Factors Analysis (Perception)
lProtection towards financial frauds:-The most important factor that come out of the study
�protection towards financial frauds� which comprise of 9 variables and explains 23.791% of
variance. Total Eigen value is 7.137. I am aware with forensic accounting (.686), forensic
accounting is used as a frauds detection tool (.486), forensic accounting has sound impact on
internal control system (.714), forensic accounting solely enough as a tool to detect suspicious
transaction (.645), forensic accounting is a tool to disclose actual financial status (.448),
forensic accounting is a tool to avoid manipulation in accounting (.724), forensic accounting is a
challenge for future accounting consultants (.508), to meet with the client and to obtain an
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
understanding of the important facts a is typical approach of forensic accounting (.539), forensic
accounting can improve security and secrecy of client (.625).
l The second important factor is �strong audit tools� which comprise of 4
variables and explains 6.638% of variance. Total Eigen value is 1.991. The included variables
are, 'forensic accounting is costly for organization� (.785), �forensic accounting is usefu tol
prevent financial crime.�(.486),�.forensic accounting is costly for organization�(.487), �forensic
accounting is able to create transparency �(.489).
lInnovative prentices:- The third important factor is �innovative prentices� which comprise of 2
variables and explains 6.013 % of variance. Total Eigen value is 1.864. The included variables
are �forensic accounting is used in practice to investigate fraudulent acts �(.883), �forensic
accounting should be compulsory �(.785).
lFinancial security:- The forth important factor is �financial security� which comprise of 2
variables and explains 5.393 % of variance. Total Eigen value is 1.618. The included variables
are �forensic accounting is used as risk assessment process towards financial frauds� (.485),
�forensic accounting is a negative approach towards audit process�(.747).
lExplicit accounting approach:- The fifth important factor is �explicit accounting approach�
which comprise of 3 variables and explains 4.794 % of variance. Total Eigen value is 1.438. The
included variables are �forensic accounting is helpful to settlement the disputes �(.718),
�forensic accounting is a detail oriented process �( .635), �forensic accounting is a dynamic tool
for combating corruption �(.606) .
lPractical approach:- The sixth important factor is �New Approach� which comprise of 3
variables and explains 4.677 % of variance. Total Eigen value is 1.403 The included variables
are. �Forensic accountancy has not been recognized in bank and financial services industry�
(.540) �Forensic accounting is an unique accounting approach �( .667). �Forensic accounting is
required practical knowledge ''(.718).
lRemedial practices:- The seventh important factor is �7 group� which comprise of 2 variables
and explains 1.134 % of variance. Total Eigen value is 1.240. The included variables are.
�Forensic accounting is an sound impact on external audit.� (.714). �Forensic accounting is an
remedial practice towards creative accounting�(.758).
lMisrepresentation of financial statement :- The eight important factor is �misrepresentation
of financial statement� which comprise of 1 variables and explains 3.738 % of variance.
Total Eigen value is 1.121. The included variables are. �Forensic accounting can stop
misrepresentation of financial statement �(.885).
lLong lasting process :- The nine important factor is �long lasting process� which comprise of
1 variables and explains 3.508 % of variance. Total Eigen value is 1.053. The included variables
are. �.forensic accounting is a long lasting process�( .833 )
Strong audit tools:-
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Independent T-Test
Independent T-Test is applied to compares the means between two unrelated groups on
the same continuous, dependent variable. Here we have applied the independent t-test to understand
the deference of mean between perception (dependent variable) and gender of respondents as
(independent variable).
H: There is no significant difference between perception of Chartered Accountants and auditors 0
towards forensic accounting on gender basis.
Group Statistics
Gender N Mean Std. DeviationStd. Error Mean
Male
Famale
75
25
93.1250
92.5192
11.34553
11.52539
1.15795
1.13016
Independent Samples Test
Levene's Test for Equality of Variances
Equal variances assumed
Equal variances not assumed
.227.637-.515
-.570
T- Test for Equality of Means
FSig. TDf Sig.(2-tailed)
.98
50.114
.608
.571
MeanDifference
Std. ErrorDifference
95% ConfidenceInterval of the Difference
-1.64000
-1.64000
3.18622
2.87491
Lower Upper
-7.96295
-7.41410
4.68295
4.13410
On the basis of independent sample t-test column labeled Levene's Test for Equality of Variances, which indicates the p value (.637) which is greater than standard value (.05) so, His not 0
rejected.Thus,
�There is no significant difference between perception of Chartered Accountants and auditors towards forensic accounting on gender basis�
Conclusion
The study performed necessary analysis to derive the research and �A Perceptual Study on Chartered Accountant and Auditors Towards Forensic Accounting in Indian Perspective� of Gwalior region. The questionnaires were filled by C.A. Auditors, Internship students and by applying test like; to test the validity, face validity test was applied and to check the reliability of the questionnaire, reliability test was applied with the help of Cronbach's Alpha. Factor analysis test was applied to find
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out the underlying factors to know the perception of chartered accountants and auditors towards forensic accounting. Many factors have came out from this study which promote the forensic accounting practices in indian perspective. Independent T- test was applied to compare the perception of Chartered Accountants and Auditors on gender basis towards forensic accounting. It has been concluded by testing the hypothesis and following results were obtained that, there is no significant difference between perception of Chartered Accountants and auditors towards forensic accounting on gender basis.
References
lAgbaje, O. (2012) Corruption in Nigeria. Business day Online. Wednesday, 09 May 2012.
lAyobami, O. O. (2011) Corruption Eradication in Nigeria: An Appraisal. Library Philosophy and Practice ISSN 1522-0222
lBalogna, G.J. and Robert, J.L. (1995). Fraud Auditing and Forensic Accounting: New tool and Techniques. New York: John Wiley and Sons.
lChariri, A. (2009) The Relevance of Forensic Accounting in Detecting Financial Frauds. Published by Centre for Accountability, Shariahand Forensic Accounting Studies.
lFederal Bureau of Investigation (2012) FBI Forensic Accountants: Following the Money. st
lIzedonmi, O. J. (2000) Introduction to Auditing (1 Edition) Amik Press, Benin City Jafar J.(201 1) Forensic Accounting Practice in Nigeria: A New Paradigm For Stakeholders.
lMarion Hecht and Mary Ellen Redmond (2010) Unveiling the Mystery of Forensic Accounting. Oregon Society of Certified Public Accountants.
lNye, J.(1967) Corruption and Political Development: A Cost-benefit Analysis, American political science review, Vol.16, No2, June 1967
lOguma, S. (201 1) Why We Train Our Members in Forensic Accounting. The Nigerian Accountant, April/June 2011 .Vol.22.N2 (p.1 5)
lOjo, M. (2012) Forensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert Witness.
lCoenen, T. L. (2005). �Forensic Accounting,� A new twist on been counting,�
lCrumbley, D. L. (2006). �Forensic Accountants Appearing in the literature,�
lDedrick, J. Gurbaxani,V.and Kraemer,K.L.(2003).�Information technology and Economic Performance: A Critical Review of the Empirical Evidence� Centre for Research on Information Technology and Organizations. University of California, Irvine.
lDixon, P. D. (2005). An overview of computer forensics. IEEE Potentials, 24(5), 710.
lElliott, R. K. (1998). Who are we as a profession and what must we become. Journals of Accountancy (February) pp 81-85
lGavish, A. (2007). The Hidden Costs of Computer Misconduct. Security.
lGolden, T. W; Skalak, S. L. and Clayton, M. M. (2006). A guide to forensic accounting investigation, New York: John Wiley and Sons.
lGranlund, M., and Mouristen, J., (2003). �Problematizing the relationship between management control and IT�, European Accounting Review, (12) (1), pp. 77-83.
lHinders, D. (2009). What is forensic Accounting?� Howard S. and Sheetz, M. (2006). Forensic Accounting and Fraud Investigation for non- Experts, New Jersey, John Wiley and Sons Inc.
lHuang, C. J. and Liu, C.J. (2005). �Exploration for the relationship between Innovation, IT and performance,� Journal of Intellectual Capital, vol. 6, no. 2:237- 252.
lIwata, E. (2003). 'Accounting Detectives in Demand,' USA Today, 27 February.
76
*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur
*Sonia Kaur
Rural marketing is a developing concept and as a part of any economy it has untapped potential;
marketers have realized the greater opportunity recently in this market. The heart of India lives in its villages
and the Indian rural market with its vast size and demand base offers great opportunities to marketers.
Any macro-level strategy for these markets should focus on availability, accessibility, affordability
and awareness.' Go rural' is the marketer's new slogan and they are looking at the opportunities,
which rural markets offer to them, it can be said that the future of rural market is very promising. Rural
Marketing is now a two-way marketing process. There is inflow of products into rural markets for
production or consumption and there is also outflow of products to urban areas. The rural market has
been growing steadily over the past few years and is now even bigger than the urban market. Rural
marketing is getting new heights in addition to rural advertising and various medium of communication,
television and radio have played prominent role in the rural India today. The development of the nation
largely depends upon the development of the rural population. Rural market witnesses a high demand
and it is the rural segment of market that contributes more profit than its urban counterpart. Along with
this some issues and challenges have also been associated with the rural marketing like low levels
of literacy, low per capita income, dispersed markets, cultural factors, communication problems,
traditional life etc. Apart from having so many issues and challenges in rural marketing the companies
have shown a considerable interest in the rural India and have tried to market themselves by using the
4A's model. The Government of India seeks to promote innovation and technology development in
rural and tribal areas of the country. The government also plans to form a committee that will study
these innovations and submit a report to the department or ministry concerned. Thus this paper
attempts to suggest the different marketing strategies to meet the challenges to be successful in rural
market.
Introduction
Rural marketing is a developing concept, and as a part of any economy it has untapped
potential; marketeers have realized the greater opportunity recently in this market. Any macro-level
strategy for these markets should focus on availability, accessibility, affordability and awareness.
Rural Marketing is now a two-way marketing process. There is inflow of products into rural
markets for production or consumption and there is also outflow of products to urban areas. The
urban to rural flow consists of agricultural inputs, fast-moving consumer goods (FMCG) such as
soaps, detergents, cosmetics, textiles, and so on. The rural to urban flow consists of agricultural
produce such as rice, wheat, sugar, and cotton. There is also a movement of rural products within rural
areas for consumption.
The rural market has been growing steadily over the past few years and is now even bigger
than the urban market. About 70 per cent of India's population lives in villages. 'Go rural' is the marketer's
new slogan which means how Indian companies go for rural marketing as larger percentage of
Indian population lived in rural areas. Indian marketers as well as multinationals, such as Colgate-
Palmolive, Godrej and Hindustan Unilever have focused on rural markets. Thus, looking at the
opportunities, which rural markets offer to the marketers, it can be said that the future is very promising
for those who can understand the dynamics of rural markets and exploit them to their best advantage.
Since ancient times, Indian villages had the concept of village markets popularly known as the village
haats. The haats are basically a gathering of the local buyers and sellers. The barter system was quite
Rural Marketing: Issues and Challenges
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March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics
prevalent, which still continues in a number of places even today. Haats are basically a weekly event
and are central to the village economy.stIn this 21 century, the rural markets have acquired significant place in the marketing
environment of India. The green revolution and the white revolution combined with the overall growth
of Indian economy have resulted in substantial increase in the purchasing power of the rural
communities. Rural marketing denotes flow of goods and services from rural producers to urban
consumers at all possible time with reasonable prices, and agricultural inputs and consumer goods
from urban to rural. It is of paramount importance in the Indian marketing environment as rural and
urban markets in India are so diverse in nature that urban marketing programmes just cannot be
successfully extended to the rural markets but also differ from that of the urban Indian markets. Further
the values, aspiration and needs of the rural people vastly differ from that of the urban population. Buying
decisions are highly influenced by social traditions and beliefs in the rural communities. As regards
the purchasing power, the urban markets are segmented according to income levels, but in rural
areas, the family incomes are grossly underestimated.
Farmers and rural artisans are paid in cash as well as in kind and sometimes they misrepresent
their purchasing power. For this reason, a marketer must therefore, make an attempt to understand
the rural consumer better before making any marketing plans. Rural markets in India have an untapped
potential and there are several difficulties confronting the effort to fully explore the rural markets.
The concept of rural markets in India is still in evolving shape and this sector involves a variety of
challenges. Distribution costs and non-availability of retail output are the major problems faced by
marketeers. Many successful brands have shown high note of failure in the rural markets because the
marketeers try to extend marketing plans that they use in urban areas. The unique consumption
pattern, tastes, and need of the rural consumers should be analysed at the product planning stage
so that they match the needs of the rural people.
Reason Why the Companies are Focusing on Rural Market
The main reason why the companies are focusing on rural market and developing effective
strategies is to tap the market potential that can be identified as follows:
lLarge and scattered population - About 70 per cent of India's population live in rural
areas. The rate of increase in rural population is also greater than that of urban population.
The rural population is scattered in over 6 lakhs villages. The rural population is highly
scattered, but holds a big promise for the marketeers.
lHigher purchasing capacity - Purchasing power of the rural people is on rise. Marketeers
have realized the potential of rural markets, and thus are expanding their operations in rural
India. In recent years, rural markets have acquired significance in countries like China and
India, as the overall growth of the economy has resulted in substantial increase in
purchasing power of rural communities.
lMarket growth - The rural market is growing steadily over the years. Demand for
traditional products such as bicycles, mopeds and agricultural inputs; branded products
such as toothpaste, tea, soaps and other FMCGs; and consumer durable such as
refrigerators, TV and washing machines has also grown over the years.
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l
construction of roads and transportation, communication network, rural electrification and
public service projects in rural India, which has increased the scope of rural marketing.
lTraditional outlook - The rural consumer values old customs and traditions. They do not
prefer changes. Gradually, the rural population is changing its demand pattern, and there is
demand for branded products in villages.
lMarketing mix - The urban products cannot be dumped on rural population; separate sets of
products are designed for rural consumers to suit the rural demands. The marketing mix
elements are to be adjusted according to the requirements of the rural consumers.
Rural Marketing Potential in India
The heart of India lives in its villages and the Indian rural market with its vast size and
demand base offers great opportunities to marketeers. Rural marketing is currently growing at about
20% every year and companies are spending approx Rs. 600 crore per years for promotional
budget. Rural marketing involves addressing over 700 million potential consumers and over 40 per
cent of the Indian middle income and the rural markets have been a vital source of growth for most
of the companies and for a number of FMCG companies in the country, more than half their annual
sales come from the rural market, the strategies of FMCG can be understood through its SWOT
analysis chart.
Development of infrastructure - There is development of infrastructure facilities such as
Strengths1. Low operational costs
2. Established distribution network in
both urban and rural areas,
3. Presence of well-known brands
in FMCGsector
Weakness1. Lower scope of investing in technology
and achieving economies of scale
2. Low exports levels.
3. Counterfeit Products
Opportunities1. Untapped rural market
2. Rising income levels
3. Large domestic market
4. Export Potential
5. High consumer goods spending
Threats1. Removal of import restrictions
2. Slowdown in rural demand
3. Tax and regulatory structure
SWOTAnalysis
(FMCG Sector)
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Rural marketing is gaining new heights in addition to rural advertising. Among various
mediums of communication, television and radio have played prominent role in the rural India today.
Due to globalisation, economic liberalisation, IT revolution, women empowerment, and improving
infrastructure, middle and rural India today has more disposable income than urban India.
Measurement Company Nielsen expects the FMCG market in rural India to top US$ 100
billion by 2025. Another report by McKinsey Global Institute predicts that by 2025, annual real
income per household in rural India will rise to 3.6 per cent from 2.8 per cent of the last 20 years. India
generates around half of the country's gross domestic product (GDP) and are home to about 70 per
cent of its population. This market is a combination of growing incomes and aspirations of about
850 million consumers who inhabit 650,000 villages across the country. Consumption patterns in
these areas are also gradually beginning to mirror those of their urban counterparts. Owing to this
changing trend as well as the size of the market, rural India provides a tremendous investment
opportunity for private companies. The Indian government has earmarked financial inclusion as
one of its foremost priorities. In August 2014, Prime Minister Mr Narendra Modi launched the
Pradhan Mantri Jan Dhan Yojana, the National Mission for Financial Inclusion. There is enough
evidence to suggest that financial inclusion is crucial to reducing poverty.
MANAGE, an extension management institution may provide extension services to rural
public in the form of price information, insurance, and credit information by using various media. �It is
often said that markets are made not found. This is especially true for the rural market like India.
Rural market is a market for a truly creative marketeer". Civilization always begins with the
development of villages; therefore, it needs high concentration.� -Mahatma Gandhi
Issues Related With the Rural Marketing
India is ingenious with a good degree of ethnic, cultural and regional diversity. Radio
reaches to the total population that resides in the rural areas and majority of them are dependent
upon agriculture for their subsistence. Agriculture contributes about 13.7% to the Gross Domestic
Product (GDP) of the country. It also contributes about 13.1% to the total Indian exports. This sector
provides employment to 50% of the country's workforce and livelihood to more than 650 million
people. Despite this fact, the condition of these people has not shown any significant improvement.
The development of the nation largely depends upon the development of the rural population.
Rural market witnesses a high demand and it is the rural segment of market that contributes more
profit than its urban counterpart. Rural marketing broadly involves reaching customers, understanding
their wants, supply of goods and services, and ultimately satisfying consumers, leading to more sales.
The general impression is that only agricultural inputs like seeds, fertilizers, pesticides, cattle feed and
agricultural machinery has a potential for growth in the rural market. However, there is a growing market
for consumer goods now. It has been estimated the rural market is growing at the rate of five times
its urban counterpart.
Problems Faced in Rural Marketing
lDeprived people and deprived markets - The number of people below the poverty line
has not decreased in any appreciable manner. Thus, poor people and consequently
underdeveloped markets characterize rural markets. A vast majority of rural people are tradition
bound, and they also face problems such as inconsistent electrical power, scarce infrastructure
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and unreliable telephone system, and politico-business associations that hinder development
efforts.
l Many rural areas are not connected by rail transport. Many roads have been
poorly surfaced and got severely damaged during monsoons. The use of bullock carts is
inevitable even today. Camel carts are used in Rajasthan and Gujarat in both rural and urban
sectors.
lMany languages and dialects - The languages and dialects vary from state to state, region
to region and probably from district to district. Since messages have to be delivered in the
local language, it is difficult for the marketers to design promotional strategies for each of
these areas. Facilities such as phone, telegram and fax are less developed in villages adding to
the communication problems faced by the marketers.
lDispersed markets - Rural population is scattered over a large land area. And it is almost
impossible to ensure the availability of a brand all over the country. District fairs are periodic and
occasional in nature. Manufacturers and retailers prefer such occasions, as they allow greater
visibility and capture the attention of the target audience for larger span of time. Advertising in
such a highly heterogeneous market is also very expensive.
lLow per capita Income - The per capita income of rural people is low as compared to the
urban people. Moreover, demand in rural markets depends on the agricultural situation, which
in turn depends on the monsoons. Therefore, the demand is not stable or regular.
lLow levels of literacy - The level of literacy is lower compared to urban areas. This again
leads to a problem of communication in these rural areas. Print medium becomes ineffective
and to an extent irrelevant, since its reach is poor.
lPrevalence of spurious brands and seasonal demand - For any branded product, there are
a multitude of local variants, which are cheaper and hence more desirable. Also, due to illiteracy,
the consumer can hardly make out a spurious brand from an original one. Rural consumers are
cautious in buying and their decisions are slow, they generally give a product a trial and only
after complete satisfaction they buy it again.
lDifferent way of thinking - There is a vast difference in the lifestyles of the people. The choice
of brands that an urban customer enjoys is not available to the rural customer, who usually has
two to three choices. As such, the rural customer has a fairly simple thinking and their decisions
are still governed by customs and traditions. It is difficult to make them adopt new practices.
lWarehousing problem - Warehousing facilities in the form of godowns are not available in
rural areas. The available godowns are not properly maintained to keep goods in proper
conditions. This is a major problem because of which the warehousing cost increases in
rural areas of India.
Challenges in Rural Marketing
lLack of Education - Rural people are not well educated in comparison to urban people.
lCommunication Problems - Facilities such as telephone, internet, fax and telegram are
rather poor in rural areas.
Transport -
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l
do not easily adapt new practices. For example, even rich and educated class of farmers
do not wear jeans or branded shoes.
l Career in Rural Market - While rural marketing offers a challenging career, a rural sales
person should require certain qualifications and specialized talent.
lBuying Decisions - Rural consumers are cautious in buying and decisions are slow and
delayed. They like to give a trial and only after satisfying personally, they buy the product.
lCultural Factors - Culture is a system of shared values, beliefs and perceptions that influence
the behaviour of consumers. There are different groups based on religion, caste, occupation,
income, age, education and politics and each group exerts influence on the behaviour of
people in villages. There is a belief among rural people that experience is more important than
formal education and they respect salespersons who can offer practical solutions to their
problems. Therefore, it is desirable that sales persons, especially those who have been brought
up in cities are given a thorough training consisting of both theory and practical aspects
of village life. The training will help these sales persons to align themselves with the market
retailers and settle down smoothly in their jobs.
Government Initiatives
The government plans to spend Rs 75,600 crore (US$ 12.22 billion) in the coming years
to supply electricity through separate feeders for rural and agricultural domestic consumption - an
initiative aimed at providing round-the-clock power to villages. This outlay is inclusive of expenditure
towards an integrated power development initiative which involves strengthening distribution and
sub-transmission systems. The Government of India also seeks to promote innovation and
technology development in rural and tribal areas of the country. The government plans to form a
committee that will study these innovations and submit a report to the department or ministry
concerned. The programme, Nav Kalpana Kosh aims to improve rural areas at all levels - governance,
agriculture and hygiene.
With the increasing demand for skilled labour, the Indian government plans to train 500
million people by 2022, and is looking out for corporate players and entrepreneurs to help in this
venture. Corporate, government, and educational organisations are joining in the effort to train,
educate and produce skilled workers.
Banks are working on establishing 'Rural ATMs' which will dispense currency notes of
smaller denominations. "We have encouraged banks to find a solution for bringing in rural ATMs...
banks will have to find an appropriate technology solution for a different type of ATM to care for the
needs of the rural people," as per Mr R Gandhi, Deputy Governor, Reserve Bank of India (RBI).
Rural Marketing Strategy
Rural marketing strategy is based on their 4A's � Availability, Affordability, Acceptability and
Awareness. The first 'A'-Availability emphasises on the availability of the product for the customers i.e.
it gives importance on effective distribution through efficient channels of distribution. The second
'A'- Affordability which focuses on product pricing i.e. it gives importance for smaller packages/
pouches easily affordable by families in the rural areas. The third 'A' � Acceptability focuses on
Traditional Life - Life in rural areas is still governed by customs and traditions and people
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convincing the customers to buy the product i.e. extending suitable promotional efforts to influence the
customers to buy the product. The fourth 'A'- Awareness emphasises that people should be properly
aware about the product. Marketeers need to understand the psychology of the rural consumers and
then act accordingly.
Rural marketing involves more intensive personal selling efforts as compared to the urban
marketing. Firms should refrain from pushing goods designed for urban markets to the rural areas and
effectively tap the rural market. This can be done by utilizing the various rural folk media to reach them in
their own language and in large number so that the brand can be associated with the myriad rituals,
celebration, festivals, fairs and weekly haats. The rural and urban market both contributes in the market
share of the country which makes the availability of food grains, clothing, durable goods and services to
the customers and making them aware about the product by using different modes of entertainment
programmes, this can be understood through the market share chart that how much these two market
have contributed in the growth and development of the country.
Source : NSSO 5th round; KPMG Analysis
Share of Market : Urban VS Rural
64 36
61 39
57 43
50 50
44 56
33 67
Food
Clothing & Footwear
Misc. Consumer Goods
Durables
Consumer Services
Entertainment
0 25 50 75 100
Rural Urban
Rural Distribution Strategy
One of the ways that would be using the company to deliver the goods and services to
the masses, which can serve two purposes � it can take the products to the customers in every nook
and corner of the market and it also enables the firm to establish direct contact with them and
thereby facilitate sales promotion. However, only the large manufactures can adopt this channel.
The companies with relatively fewer resources can go in for the syndicated distribution where a
tie-up between non-competitive marketers can be established to facilitate distribution. Some other
distribution strategies for the rural population are as under:
lThe general insurance companies may promote their policies of health insurance, crop
insurance and vehicle insurance through the existing co-operatives.
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l
smaller pouches.
lAll communication in the rural areas must be in the regional language and dialects
lMarkets need to develop innovative packaging technology which would be economic,
protective and improve shelf-life of goods.
lMarketeers need to place emphasis on retailers directly rather than depending on the
wholesalers for distribution in the rural market as this has not proved to be very effective
marketing channel.
lMarketeers targeting the rural market should be well aware about the seasonality of the
business. This means that business should view market research data that relies on yearly
aggregate statistics with caution.
lMarketeers must trade off the distribution cost with incremental market penetration.
Conclusion
In spite of having so many issues and challenges in rural marketing, the companies
have shown a considerable interest in the rural India and have tried to market themselves using
the 4A's model which says that the products marketed should be acceptable by the rural
population, the products should be easily available, they should be affordable and most importantly, an
awareness drive should be created to educate people about the products. The rural market is very
large in comparison to the urban market as well as it is a more challenging market. The consumer wants
those products which are long lasting, good, easy to use and cheaper. The income level of rural
consumers is not as high as the income level of urban consumers, that's why they want low price goods.
It is one of the reasons that the sale of sachet is much larger in the rural area in all segments. It is
necessary for all the major companies to provide those products which are easy to affordable to the
consumers. It is right that the profit margin is very low in the FMCG products, but at the same time the
market size is much larger in the rural area. The companies can reduce their prices by cutting the
costs on the packaging because the rural consumers don't need attractive packaging. Rural market
has an untapped potential but it is different from the urban market so it requires the different
marketing strategies and marketeer has to meet the challenges to be successful in rural market.
References
l
lR.S.N. Pillai & Bhagavathi, Marketing Management, S.Chand
lEconomic Times.indiatimes.com
lPradeep Kashyap and Siddharth Raut, Rural Marketing- Text and Cases
lRural Marketing in India- Strategies and Challenges � Ruchika Ramakrishnan
Marketeers may arrange more number of ware-houses for storage and re-packaging into
Philip Kotlar, Marketing Management,
84
stWe work in a fast moving world, where everyone is trying to shape 21 century transactions.
The challenges facing business today require that organizations be able to transform into flexible
and agile enterprises which respond to market driven opportunities. Staff and employee contributions
are fundamental to any organization's success, their lifelong learning and development embolden
companies to grow and change in response to the challenges and opportunities confronted by them.
In a continuously changing work environment, an employee's knowledge and skills quickly become
obsolete and they must continue to learn. This paper presents a review of current research and
practice of lifelong learning done in various organizations. The objective of the study is to find out the
need of continuous learning and strategies that can be adopted for creating that environment. The study
examined and reviewed historical facts and past literature. Organizations such as Infosys, Deloitte, TCS,
IIMs, etc were assessed. It was found that strategies for LLL are being used in the corporate community
so as to thrive in the marketplace. Results of the study also showed that training courses, action learning,
staff learning development program, online learning are some strategies that create a continued
learning environment.
Keywords: Lifelong Learning, Organization, Career, Learners, Skills
Introduction
Henry Fayol once said, �Anyone who stops learning is old, whether at 20 or 80. Anyone who
keeps learning stays young. The greatest thing in life is to keep your mind young.� Lifelong Learning is
the ongoing, voluntary, and self-motivated pursuit of knowledge for either personal or professional
reasons. Professional activity has become so knowledge intensive and fluid in content that learning
has become an integral and irremovable part of adult work activities. Learning is a new form of labour
(Zuboff, 1988). In the coming future, a person will be called educated in the society who is willing to
consider learning as a lifelong process. Lifelong learning is more than training or continuing education.
It must support multiple learning opportunities including exploring conceptual understanding as well
as narrowing to practical application of knowledge, ranging over different settings such as academic
education, informal lifelong learning, professional and industrial training (Gerhard Fischer).
Several environmental factors such as abundant access to information, rapid technology
changes, increased global interactions, industry shifts, as well as increasing entry level credentials and st skill requirement are driving the demand for lifelong learning in the 21century. The message seems
to be that employees who are valuable today maybe obsolete tomorrow, if they do not constantly
strive to keep their skills current. Thus, the need for continuous learning has been an important result
of the changes taking place in the corporate community. Employees are being encouraged to be
entrepreneurial and engage in lifelong learning in anticipation that they will change jobs and possibly
career paths many times during their working years (Gardiner, 2001). As organizations struggle to
survive and prosper in an increasingly competitive environment, continuous learning is becoming
an important strategy within an organization. The ability to learn and develop one's skills is becoming a
core career competency (Hall & Mirvis, 1995). Companies should focus on building a learning
Lifelong Learning: It's Paramount Importance
in Current Scenario*Shraddha Ladia
*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur
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architecture, integrating their technologies, driving a deeper focus on content and the learning
experience and driving a learning culture (Pessanha, 2013).
In this study, efforts have been put to find out the need of lifelong learning and what
strategies can be used to apply the theory of continued learning in this competitive era. To find the
answers the literature on individual learner attributes and workplace learning environments and the
strategies used by them have been reviewed. The search was conducted using company websites
and electronic databases such as ERIC, Project Muse, Talentlms, tompeters. To address the questions
above, the literature review will proceed as follows: defining lifelong learning; explaining the need for
lifelong learning at the individual and organizational level; briefly reviewing programs used by
different Organizations and elaborating other programs that can be conducted for LLL.
Literature Review
Lifelong Learning has been an integral part of our culture. Notwithstanding the gradual
modernization of society and the emergence of multiple channels of learning, the first formal recognition
of LLL came in 1966, when the Indian Education Commission (1964-66) made the following
observation-
Education does not end with schooling, but is a lifelong process. The adult needs an
understanding of the rapidly changing world and the growing complexities of society. Even those who
had the most sophisticated education must continue to learn, the alternative is obsolescence (Report
of Indian Education Commission, 1966).
Amartya Sen justifies the notion of economic empowerment of people through the
participation in continuing education until workforce attains certain levels of accuracy, understands
job specification and follows instructions. The utilization of knowledge resources can be habituated
and sensitized through the lifelong learning programs, which are available in the forms of workplace
learning, continuous professional development, refresher courses, orientation programs, open
learning and e-learning. Sessa and London (2006) suggest that all humans have the potential to
be continuous learners. However, learning cannot be forced. It can only be fostered and supported.
Learning depends on an individual's capacity and readiness to learn. The key to lifelong learning at all
levels is to provide support for learning and to provide measures and meaningful rewards for
participation.
There may also be discernible benefits to lifelong learning that are unrelated to employment
conditions in terms of improved life satisfaction, greater tolerance, interpersonal trust and more
participation in community and political activities (Feinstein & Hammond, 2004). Lifelong learning's
core values of learning, exploring and serving coupled with benefits for the mind, body and spirit
make it an incredibly powerful tool for personal transformation and enhancement. It leads to an
enriching life of self fulfillment. It helps us make new friends and establish valuable relationships.
Learning keeps us involved as active contributors of society (Nordstrom, 2006).
Need for Lifelong Learning
Various factors in business and organizational competitiveness highlight the need for ng are the
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Lifelong Learning at all levels of employment. These factors compel organizations to adjust quickly
and adopt new ways of operating to remain competitive and to survive and prosper in dynamic and
competitive environment (Mayo, 2000). Following are the needs for lifelong learning in the current
scenario:
lLifelong learning can enhance our understanding of the world around us, providing us with
much better opportunities and improve our quality of life.
lLifelong learning helps in one's personal and professional development.
lLearning makes us less risk averse and more adaptable to change when it happens.
lEmployers are nowadays looking for well balanced people with multi-skills. This includes the
ability to be able to demonstrate that one is eager to learn and develop.
lLearning gives option to change career path so as to attain self actualization.
lLifelong learning induces one to be motivated in work and to remain active in their respective
field.
lLifelong learning is the way to keep people afloat in their career by picking up new skills and
leverage new experiences.
lLifelong learning is important for preventing skill obsolescence of unemployed people.
lLearning is important for older unemployed individuals to increase the chances for
employability.
Lifelong Learning Programs Initiated by Various Organizations
According to Vishal Sikka, CEO of Infosys, at Infosys, �we will double down on learning and
education for all of us and indeed engage in lifelong learning�. Company offers a unique combination
of career mobility, learning and technological challenges to retain top and cream talent and try to
renew its manpower to diversity of every sort globally. Infosys has started a program called
'Murmuration'. This program aims at crowd sourcing ideas from employees. These ideas could
range from improvement in delivery, better processes to skill enhancement or changes that can
be brought in workplace. Through this, deeper relevance of each employee can be realized.
TCS started TCS Ignite Learning Space which is a learning ecosystem designed to impart
a culture of learning by doing, ownership and innovation at work. The core focus is on 'Learning to
Learn' and 'Learning by Doing'. Trainees have access to e-learning and ambient learning i.e. learning
from all sides, to enhance their lifelong learning skills.
Deloitte hosts events where lifelong learning is ensured by keeping up with industry trends
or regulatory changes that impact one's professional life. There are breakfast seminars and
educational sessions held in offices across the country. The Deloitte Learning Academy, largely geared
to audit professionals, offers learning in various formats that can go toward earning CPE credits.
Deloitte Dbrief Webcast series cover current trends, business issues, projections and innovations
across all industries and services.
Larsen and Toubro's Institute of Project Management (IPM) at Vadodra imparts interdisciplinary
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skills and experiential learning. Management Development Centre (MDC) of the company in Mumbai
is devoted to provide lifelong learning by ushering a key mantra in aspirants i.e. to learn, unlearn and
re-learn.
In the European Banking Sector, a number of employers and trade unions have agreed on
lifelong learning to facilitate joint initiatives and promote cooperation. Provision for study leave, the
reimbursement of expenses for Professional Qualifications and cultural study leave is there. Specific
training is provided to employees over the age of 40. Young employees are encouraged to participate
not only in internal training courses but also in those delivered by an external provider covering all
associated costs to support employee participation. Various seminars are run by Union of Bank
employees to teach them about relevant legislation that regulates work.
Tata Steel has in-house facilities for technical as well as management trainings. The training
needs of all the employees are identified in the form of Training Need Survey. Various programs
conducted for skill management and lifelong learning are mentors workshop, training program in foreign
and achievement orientation.
Johnsonville believes very strongly in the importance of lifelong learning because every
member should have the chance to grow. Continuous learning with the sky the limit, is almost a religion
at 'Johnsonville'. All workers take a sophisticated course in Economics. They are encouraged by
company to study anything, job related or not.
To encourage lifelong learning, Fuji Xerox has diversified learning opportunities to enhance
employee competencies. Companies learning resources include an in-house library, e-learning course
and comprehensive training via the staff professional development program. Staff can accumulate their
individual learning mileage points to exchange for ferry and flight tickets for overseas trip to Europe as a
reward of their achievements.
At Siemens, a German Company, in fiscal 2011, the company invested 251 million, or about
�608 per employee, in employee's training and continuing education. All around the world, company
has given its people at all levels the chance to fully develop their potential by providing International
Employee Development Program (IEDP) in Brazil, China, India, Italy, Mexico, The Czech Republic and
U.S.
Suggestions and Recommendations
After reviewing past literatures, company data and various articles written by eminent scholars,
we can say in explicit terms that Lifelong learning has become a necessity for employees and
companies to survive in this competitive era. Organizations should accentuate on programs to make
sure that continuous learning takes place. Following are certain programs that Organizations or
employees can initiate in order to inculcate lifelong learning atmosphere-
lOnline Learning: In 2012, massive Online Courses were one of the most talked about and
important trends in education technology (Watter, 2012). MOOC's are open e-learning
programs for higher education. Courseera, TED, iTunesU, You Tube Edu, Open Study, Khan
Academy, Duolingo etc are online classes providing knowledge in different fields.
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l
by the help of local professional networking events, or even on LinkedIn.
lConsider volunteering: Always grab an opportunity of taking an upcoming project or cross-
functional tasks. This helps in expanding your professional network.
lAsk for help: When something is not understood, don't hesitate in asking for help. Always try
new ways of doing things.
lApply what you learn: Practice what has been learnt. It will help you learn it more completely
and retain it longer.
lRead, read and read: Read all sorts of books. Recognize educational value in whatever
you read. Through reading you will never stop learning.
lTeach others: Teaching is a wonderful way to learn a subject better and improve your
understanding of it. Joseph Jouber once said that �To teach is to learn twice�.
lUndergo training: Companies should arrange for training of employees on regular basis.
Their training needs should be identified and multi-skill development should be made a core
objective of it. Employees should also have a curious mind to undergo training programs
wherever the opportunity arises.
lSabbaticals: Organizations should allow employees to take sabbaticals. This will help them
to undertake projects in their fields and thus, initiating a learning on their parts.
lGet out of your routine, expand possibilities: When you challenge yourself to think
outside the box, you open up the possibility for new and exciting opportunities, and learning
a new skill may even lead you to pursue a completely different career path. Even if you don't
have the time or energy to completely shift careers, at worst you'll go back to your old job with
a new perspective and a refreshed mindset that ultimately may lead to job satisfaction.
(Cooper, 2014).
Conclusion
From the above review, it is clear that continuous learning is linked to better organizational
performance, to a richer life and a better future for owners and their employees. Learning new things
can also stave off old-age ailments like Dementia and Alzheimer's. One study has shown that older
folks who stay cognitively active and curious about the world around them are 2-6 times less likely to
develop Dementia and Alzheimer's than those who let their minds lie fallow (www. Artofmanliness.com).
Instead of sitting lame, why not make one's life meaningful. Lifelong Learning creates a curious,
hungry mind and helps in raising one's wisdom. This research has provided readers with the insight
for the requirement of lifelong learning in our lives. E-Learning courses are widely used lifelong
learning programs by one and all around the globe. Other programs such as sabbatical practice
what you learn, reading, setting goals, etc can be used by organizations and individuals to foster the
culture of learning. A lifelong learner stays on top of their field so that when opportunities come knocking,
they answer immediately. The people who harness the potential of human mind and believe in
learning, they can look forward to active and meaningful lives instead of sitting around and watching
life pass by. The end result can be enriching and fulfilling world.
Learn from others: Try to connect yourself with others. You can seek out experts in your field,
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References
lAudrey Watter (2012), Top Ed-Tech Trends of 2012- MOOCs.
lD T Hall, P H Mirvis (1995), �The New Career Contract: Developing the Whole Person at middle and beyond�, 47(3),
269-289.
lFeinstein, L, & C. Hammond (2004), �The Contribution of Adult Learning to Health & Social Capital�, Oxford Review of
Education, 30: 199-221.
lGerhard Fischer, Lifelong Learning- �More than Training�.
lHelen P. Gardiner, Theresa J.B Kline (2007), �Development of the Employee Lifelong Learning Scale (ELLS)�, 16, 63-
72.
lMayo, A. (2000),�The Role of Employee Development in the Growth of Intellectual Capital�, 29(4), 521.
lNate Cooper (2014), �The Career Boosting Benefits of Lifelong Learning�.
lNordstrom N (2006), �Learning Later: Living Greater�, Sentient Publications, United States.
lNordstrom N (2008), �Top 10 Benefits of Lifelong Learning�, Published at
http://www.selfgrowth.com/articles/Top10_Benefits_of_Lifelong_Learning.html.
lReport of Indian Education Commission (1964-66), �Encyclopedia of Indian Adult Education�, New Delhi: National
Literary Mission.
lRubens Pessanha (2013), �Lifelong Learning: It's Part of Your Job Description�.
lSessa, V.I, & London, M (2006), �Continuous Learning in Organizations: Individual, Group and Organizational
Perspectives�.
lwww.artofmanliness.com
lwww.humanresourcesonline.net
90
*Dr. Vidushi Sharma** Dr. Rupali Mishra
*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur**Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur
Managing Business Ethics : Good Work Initiatives that Build a Better World
In the era of liberalization, privatization, and globalization (LPG) all the organizations as well as
the society have become mechanized and mechanistic and has forgotten the very basic factor of
their lives on which the concept of sustainability is depend i.e. Ethics. Owners of businesses
that routinely engage in unethical practices cannot help but pass those values and principles along
to the other people working in the business. Small businesses suffer even more, because unethical
behaviour and actions are easier for customers to take notice of. Today, more than ever before,
consumers pay a great deal of attention to corporate behaviour of owners because the marketplace
is flooded with numerous variations of the same businesses, promises must be fulfilled and the price
and quality of products must be equal to what is advertised. Therefore, a code of ethics � whether
unarticulated or formally documented is vital to ensuring that a business will succeed. The present
paper focuses attention towards the need of Ethical Management in today's business with
respect so as to be more stable in comparison to the near by competitors even in the time of any
danger.
Introduction
Leading a company to success is like steering a vehicle to your destination. Roadmaps
are being created and constantly updated in many business sectors in order to encompass the
broadening aspects of the modern business world. As corporate leaders steering your crew to your
destination, you must watch out for any new signposts along the road, detailing changes or challenges
in the external environment e.g. the globalization of market, the advancement of technology etc.
By mastering these changes well, successful leaders can transform challenges into opportunities
and enhance competitive edge of their companies. However, moving along the business highways,
strong leadership is very important ot avoid enticing short cuts and to stay steadily on the right route
to reach the ultimate destination of their companies. In today's modern business world, the road
to success requires more than merely technical skills, practical knowledge and a good product.
Business ethics, above all, are the guiding forces to achieve and sustain success. The public of today
has high demands of those behind the steering wheel of modern business. Greater accountability
and transparency, up to the minute market information, reliable financial and market data, etc.
are essential gauges for investment decisions. Business ethics become the fundamental building
blocks that link up all these expectations.
Ethics � An Overview
An ethical culture is a set of widely shared values and beliefs accepted by everyone
working within an organization. It involves a common understanding of what is right and wrong in
the course of business dealings and outlines the methods of resolving ethical problems encountered
at work. If an ethical culture forms the basis upon which everyone of a company makes business
decisions, the company's profitability can be enhanced and overall operational efficiency can be
improved.
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Need of Ethics in Current Scenario
Many organizations now implement the code of ethics in their company polices, which
they implement during induction and regular training. A Code of Ethics "is generally a more blanket
statement of values and beliefs that defines the organization or group" (Brandl and Maguire). It is
primarily for the following areas: Company's assets, funds and records.
lConflict of interest.
lManagement and employee practices.
lInformation on competition.
Following are a few ethical business practices that should be followed to build an honest
reputation and ensure smooth running of the organization.
Investors - Ensuring safety of their money and timely payment of interest.
Employees - Provision of fair opportunities in promotions and training, good working conditions and
timely payment of salaries.
Customers - Complete information of the services and product should be made available. Personal
information of the customers should not be used for personal gain.
Competition - Unscrupulous tactics and methods should be avoided while handling
competitors.
Government - Rules and regulations regarding taxes, duties, restrictive and monopolistic trade
practices and unlawful activities like corruption and bribing should be adhered to.
Environment - Polluting industries should ensure compliance with the government norms regarding air,
water and noise pollution.
For a company to develop an ethical culture, a long term commitment from top management
is required. This can be achieved by launching a well planned ethics training programme for staff at
all levels. Even though a comprehensive company code of conduct and an elaborate system of
controls are in place, appropriate training is also essential to the effective ethical development of
staff because it helps in:
lIncreasing all directors and employees understanding of the relevant legal requirements.
lEnabling them to understand the company's ethical standards and the management's
determination to include ethics as an integral part of the business practice to guard against
corruption and fraud.
lEnhancing their awareness of the ethical dilemmas that they may come across in the
workplace.
lEquipping them with the necessary analytical skills to handle the dilemmas properly.
lDrawing the management's attention to early warning signals of malpractice and relevant
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preventive measures.
A code of ethics in business is just as important as a sound marketing place a solid
financial strategy, and an organized business plan.
Objectives
A code of ethics must encapsulate the beliefs and values of the organization. Those beliefs
and values should become internalized by all employees and used regularly in all business
practices. Owners of businesses that routinely engage in unethical practices cannot help but pass
those values and principles along to the other people working in the business. Small businesses
suffer even more, because unethical behaviour and actions are easier for customers to take notice
of. When customers come to know about unethics of some business person then he goes
somewhere else.
Code of ethics varies among businesses and also from one country to another. When a
business grows large enough to expand its operations into other countries, it is critical to hire local
talent to assist in training existing personnel with regard to the integrity, understanding, responsibility,
and cultural norms of the country where the new operation is located. All employees must be treated
equally and any issues of inequality must be dealt with quickness.
Today, more than ever before, consumers pay a great deal of attention to corporate
governance and proper behaviour of businesses and their owners. Because the marketplace is
flooded with numerous variations of the same businesses, promises must be fulfilled and the price
and quality of products must be equal to what is advertised or another business will step into
deliver, therefore, a code of ethics � whether unarticulated or formally documented is vital.
A code of ethics that is both defined and acted upon is part of the business culture of
every successful business, and must become the mantra of every business owner. Growing a
flourishing business through the use of sound ethical principles will reap not only the benefits of
growth and prosperity, but also the satisfaction of being able to sleep soundly at night.
Strategies Needed to Perform
Cross boundary transactions have grown rapidly in the last decade. Following China's
accession to the World Trade Organization, vast business opportunities are emerging and cross
boundary transactions are racing to a new height. Under "one country two systems" principle,
Hong Kong business people need to be acquainted with the legal provision both Hong Kong and
the Mainland in order to avoid disputes, litigation and contravention of laws and regulations.
Both the Prevention of Bribery Ordinance (PBO) in Hong Kong and the Criminal Law of
the People's Republic of China (PRC) prohibit offering and accepting bribes in connection with
commercial transactions. In Hong Kong an agent abuses his official position by soliciting or accepting
an advantage in relation to his principal's permission will breach the PBO. Any person who offers
an advantage to an agent for the latter's showing favours, in his official capacity will also be guilty. In
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the Mainland, "corruption" and "bribery" are different offences under the Criminal Law of the PRC.
"Corruption" refers to any act whereby a person takes advantage of his office to appropriate,
steal, swindle or use other illegal means to acquire public money or property, whereas accepting
a bribe is the act of taking advantage of one's office to solicit or accept money or property from
another person illegally so seek benefits for such a person. While it has become a trend for Hong
Kong companies to base their operations in the Mainland to tap the advantages of cost and market
potential, managers are facing the challenges of monitoring operations from afar. The integrity and
experience of outpost staff are of vast importance. Management should monitor staff are of vast
importance. Management should monitor staff working across the boundary to detect any indication
of wrongdoing. Conducting random checks and constantly collecting feedback from the suppliers
will definitely be useful in detecting fraud or corruption.
Steps from Management Side
To drive along the business highways successfully business leaders should abide by the
laws and regulations when doing business, including the PBO and specific codes laid down by
relevant professional bodies and regulators. As those holding on the wheel, directors should also
assume the responsibilities to lead with integrity and put business ethics into practice.
A comprehensive ethics programme that can plug hidden threats and minimize corruption
risks comprises their main components. A summary of these three components is given below.
Set Up a Code of Conduct
A well established company code of conduct can help prevent corruption and fraud, as well
as build a company's reputation. Under the PBO, the principal of a commercial firm has the right
to decide whether a director or a staff member is allowed to accept an advantage in relation to the
company's business. The company's policy on the acceptance of advantages serves as legitimate
authority for a principal's approval. It is therefore your responsibility to lay down clear policies regarding
the scope and circumstances in which directors and employees are allowed to accept advantages
in relation to their official capacity. As a responsible manager, a person should ensure that the
code adopted by the company is enforceable, practical up to date and set in accordance with the
fair competition principle.
Strengthen System of Controls
Prudent system controls not only allow business to conduct in an orderly and controlled
manner, but also help detect and deter irregularities, thereby allowing the management to take swift
remedial measures at an early stage. Corruption loopholes in procurement, sales and marketing,
accounting, personnel and staff administration, inventory and stock control, and their corresponding
preventive measures are provide. Ten general principles that can be used by a company to evaluate the
adequacy of its internal control measures are:
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lClear company policies.
lClear work procedures.
lClear job responsibilities.
lSegregation of duties and functions.
lAdequate safeguards against tempering with sensitive information.
lEffective staff supervision.
lIndependent and active audit function.
lChannels for complaints and review.
lContinuous monitoring and review.
lPromoting a company wide ethical culture. Culture
Foster Ethical Culture
If an ethical culture forms the basis upon which everyone of a company makes business
decisions, the company's profitability can be enhanced and overall operational efficiency can be
improved. To develop an ethical corporate culture, a well planned ethics training programme for staff
at all levels should be launched. The purposes are to strengthen staff's knowledge on the basic legal
requirements, equip staff with the skills to handle ethical dilemmas that they may come across in the
workplace and develop a sense of ethics throughout the company. Management's awareness and
attention to early warning signals of malpractice can also be enhanced.
Benefits of Good Business Ethics
lIncrease in the social image.
lIncrease in production rate.
lIncrease in mutual understanding and trust among employees.
lIncrease in business stability.
lIncrease in business effectiveness in the market.
lIncrease in customers.
Positive Impact on Human Resource
For a business to achieve long term profits customer relationship is of utmost importance. To
gain a long � term relationship with customers and achieve customer return for the business the
business needs to be based on ethics. The trustworthiness of a business, its customer service, its
customer care, its way of dealing with customers and its urge to retain their old customers, is a part of
the business ethics.
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Most of the people are concerned about making money for the business. But seldom bother
to base business on ethics. At times, ethical duties of businessman and project managers could be
more abiding than even the business laws. Ethics is a far reaching concept and goes beyond the idea
of making money legally. Ethical values are way ahead of earning money. People who seek motivation
behind being ethical should understand that they are ethical by definition. Ethics is an integral part of
running a business and hence ethical values accompany business by default. Without following
certain ideals in business, one cannot become successful. Success that is attained without a
foundation of strong ethics is bound to be short lived.
The benefits given by the business organization should not be sued in an unfair manner.
The use of company resources for personal benefits and taking an undue advantage of business
resources is completely unethical. Using the wealth of the business for personal reasons is not
ethical. Using company funds for personal reasons is unethical. A thoughtful and a careful utilization of
company resources is a part of business ethics. Ethics is a vigilant and a prudent use of resources.
Accepting bribes or favouring important accepting bribes or favouring important clients is against
business ethics. The clients is against business is not just to maximize profits. It is rather to cater to the
needs of society.
Experts in business management and researchers have endorsed the need for businessmen
and company professionals to study ethics. They have asserted the importance of founding business
on ethical values and following them. They have urged management professionals to adhere to
ethics and accept it as a part of business. Ethics remain being important in business and strong
ethical values shall take the business a long way.
Recommendations
The fundamental rule is therefore to avoid any conflict of interest situation as far as possible
or in cases where such conflicts cannot be avoided a declaration should be made with transparency
and gaining public confidence. Whenever in doubt, the one involved in a conflict of interest should
declare the interest to demonstrate his impartiality. Management should be vigilant and give clear
guidelines on which kinds of conflicts need to be decelerated and set proper procedures on dealing
with the declarations.
A comprehensive training programme should include the following areas:
lLegal requirements regarding the legislation governing corruption and fraud.
lConduct requirements as expected by the company of its staff.
lSkills in handling situations of ethical dilemmas at work.
lPreventive measures for unethical practices, e.g. how to strengthen a system of controls and
develop skills in managing staff integrity.
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References
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Responsible Leadership and Governance in Global Business Northampton, MA: Edward Elgar.
lEtzioni, A. (1989), Are business schools brainwashing their MBAs? Business and Society Review, 70, 18 � 19.
lFerrel, OC and Linda, presentation to Hankamer School of Business Faculty, April 13, 2007.
lFulmer, R.M. (2005), What leaders and their organizations can do to develop ethical leaders. In J.P. Doh and S.A.
Stumpf (Eds.), Handbook on Responsible Leadership and Governance in Global issues, Northampton, MA:
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lGandz, J. and Hayes N. (1988), Teaching Business Ethics. Journal of Business Ethics, 7, 657-669.
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lNeubert, Mitchell Ethics Framework if Used.
lParks, S. (1993), Is it too late: Young adults and the formation of professional ethics?
lT. Piper, M. Gentile, and S.D. Parks (Eds.), Can Ethics Be Taught? (pp. 13-72), Boston
lPiper, T.R. (1993), Rediscovery of purpose ": the genesis of the leadership, ethics and corporate responsibility
initiative. In T. Piper, M. Gentile & S.D. Parks (Eds.), Can Ethics Be Taught? (pp. 1-12). Boston: Harvard Business
School.
lSalter, M.S. (2005), Innovation Corrupted: The Rise and Fall of Enron. Boston: Harvard Business School
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lSolberg, J., Strong, K.C., and McGuire, C. Jr. (1995), Living (not learning) Ethics, Journal of Business Ethics, 14,
71-81.
lThill, J.V., and Bovee, C.I. (2002), Excellence in Business Communication, Upper Saddle River, NJ: Prentice Hall.
Barnes, M.C. and Keleher, M. (2006), Ethics in Conflict. Business Communication Quarterly, 69 (2), 144-157.
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*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur
*Deepa Kumari
A foreign exchange transaction is an agreement between a buyer and a seller that a given amount of one currency is to be delivered at a specified rate for some other currency. The exchange rate of one currency versus the other is influenced by numerous fundamental and technical factors. These include relative supply and demand of the two currencies, economic performance, outlook for inflation, interest rate differentials, capital flows, technical support and resistance levels and so on. In the foreign exchange (forex) market, currency valuations move up and down as a result of many factors, including interest rates, supply and demand, economic growth and political conditions. Generally speaking, the more dependent a country is on a primary domestic industry, the stronger the correlation between the national currency and the industry's commodity prices. In general, there is no uniform rule for determining what commodities a given currency will be correlated with and how strong that correlation will be? However, some currencies provide good examples of commodity-forex relationships.
India's share of world trade is less than two per cent and makes up less than six per cent of the global economy. Yet it accounts for 25 per cent of the world's gold demand. Indeed, surging gold demand is fast becoming a problem for policy makers as imports of the yellow metal are beginning to weigh down the economy stock markets have remained out of reach for most of our population. Many of our fellow citizens are unaware of the stock market. There are many intricacies in dealing with our stock market and hence it is an unviable option for most of our citizens. Though stock markets have given better returns, Gold wins in terms of the consistency. If we draw a graph between stock and Gold, the growth of Gold will be more linear and stock market would be filled with crests and troughs.
R.B.I has to carefully assess taking a leap of faith call on the forward-looking inflation numbers and proceed with measures which ensure better liquidity at attractive cost. It is also necessary to ensure that the measure lead to effective monetary policy transmission. In the past, the R.B.I has shown a strong resolve in controlling inflation; now, with inflation beginning to get under control, it needs to show a similar resolve in boosting the economic growth to help India seize the momentum.
Introduction
Globally, operations in the foreign exchange market started in a major way after the breakdown of the Bretton Woods system in 1971, which also marked the beginning of floating exchange rate regimes in several countries. Over the years, foreign exchange market has emerged as the largest market. The foreign exchange market provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of exchange between currencies is determined, and foreign exchange transactions are physically completed. A foreign exchange transaction is an agreement between a buyer and a seller that a given amount of one currency is to be delivered at a specified rate for some other currency.
Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by numerous fundamental and technical factors. These include relative supply and demand of the two currencies, economic performance, outlook for inflation, interest rate differentials, capital flows, technical support and resistance levels, and so on. In general terms, a weaker currency will stimulate exports and make imports more expensive, thereby decreasing a nation's trade deficit (or increasing surplus) over time. Conversely, a significantly stronger currency can reduce export competitiveness and make imports cheaper, which can cause the trade deficit to widen further, eventually weakening the currency in a self-adjusting mechanism. India imports more goods (in value terms) than exports, which
Foreign Exchange Market and its Impact on Indian Economy
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results in a huge imbalance in trade, or what is called trade deficit. In 2011-12, India received foreign direct investment of more than $30bn, in addition to a net flow of $18bn from foreign institutional investors in stocks and bonds. But uncertainty about India's commitment to economic reforms, retrospective taxes, and policy paralysis within the government have forced foreigners to either postpone their investment decisions, or take money out of Indian stock markets. In this scenario, most foreigners as well as Indians tend to take money abroad, or keep it away from India.
Objectives of the Study
lTo find out the domestic reasons responsible for the decline of rupee during 2012.
lTo analyse the relationship among crude oil prices, gold prices and inflation with foreign
exchange.
lTo study the relationship between Indian rupee and dollar.
lTo evaluate the measures taken by RBI in this regard
Review of Literature
Subarna K. Samanta and Ali H. M. Zadeh (2012) examined the co-movements of selected
macro-variables (gold price, stock price, real exchange rate and the crude oil price) based on 21 years
data using econometric models for the periods from January 1989 to September 2009. The study
exposes that there is a co-integrated relationship between the variables.
S. Kaliyamoorthy and S. Parithi (2012) have made a study to examine the relationship between
gold price and stock market for the period from June 2009 to June 2010. They prove that there is no
relationship with the stock market and gold price and stock market is not a ground for rising gold price.
Le Thai-Ha et al (2011) have made a study to investigate the relationships between the prices of
two strategic commodities, that is, gold and oil in terms of index of US dollar by using monthly data from
January, 1986 to April, 2011 with the application of financial econometrics. Empirical results of the study
showed that there is a long-run relationship existing between the prices of oil and gold and the oil price
can be used to predict the gold price.
The conclusive sum of this review is that there is some contradictory view of different
researches made by different people.The subsistence of crude oil price, gold price and stock price
indices of stock market in India are hardly available.Therefore, the present study aspires to observe the
changes or increase in daily crude oil price, gold price and its impact on sensex in India.
Analysis and Findings
Oil and gold prices affect the currency exchange rate: In the foreign exchange (forex)
market, currency valuations move up and down due to many factors, including interest rates, supply and
demand, economic growth and political conditions. Generally speaking, the more dependent a country
is on a primary domestic industry, the stronger the correlation is between the national currency and the
industry's commodity prices. In general, there is no uniform rule for determining what commodities a
given currency will be correlated with and how strong that correlation will be. However, some currencies
provide good examples of commodity forex relationships. For example, if Canadian dollar is positively
correlated to the price of oil. Therefore, as the price of oil goes up, the Canadian dollar tends to
appreciate against other major currencies. This is due to the fact that Canada is a net oil exporter; when
oil prices are high, Canada tends to reap greater revenues from its oil exports, giving the Canadian dollar
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a boost on the foreign exchange market. Another good example comes from the Australian dollar, which
is positively correlated with gold. Because Australia is one of the world's biggest gold producers, its
dollar tends to move in unison with price changes in gold bullion. Thus, when gold prices rise
significantly, the Australian dollar will also be expected to appreciate against other major currencies.
The gold rush: India legally imports about 700 tonnes of gold a year and we don't have
estimates of smuggled gold. India's share of world trade is less than two per cent and makes up less
than six per cent of the global economy. Yet it accounts for 25 per cent of the world's gold demand.
Indeed, surging gold demand is fast becoming a problem for policy makers as imports of the yellow
metal are beginning to weigh down the economy.
Traditionally, Indians always have an affinity towards Gold Jewellery. In the recent years, we
have started moving from the concept of Gold Consumption (buying for Jewellery) towards Gold
Investment (buying for future benefits). In 2011-2012, 56% of Gold Imports happened through Banks. It
is said that Gold has been purchased more due to the high returns it offers. But if we compare the returns
between the period of April 2003 and March 2013, Rs.1000 investment would have given Rs. 5267 in
Gold, Rs. 6158 in Sensex, Rs. 5746 in Nifty (Bank deposit at 8% would have given Rs. 2337). So,
comparatively stock market has given more benefits. However recently gold as a commodity has lost its
sheen as the price correction and led to the loss of interest by investors in the glittering metal since mid-
March 2014.
Stock markets have remained out of reach for most of our population. Many of our fellow
citizens are unaware of the stock market. There are many intricacies in dealing with our stock market and
hence it is an unviable option for most of our citizens. Though stock markets have given better returns,
Gold wins in terms of the consistency. If we draw a graph between stock and Gold, the growth of Gold
will be more linear and stock market would be filled with crests and troughs.
Gold is considered more liquid compared to Real estate. It also doesn't require huge
investment. Typically, it is said Peasants are the largest consumers of Gold. It protects them from
Inflation. It is said to the best Hedge from uncertainties. It has been found that for every 1 % increase in
income, gold consumption increases by 1.5%. India's Golden period also happened between 2003 and
2010 when the GDP growth was spectacular and the per capita income increased tremendously. Also
the MNREGA scheme increased the income of Rural masses and their primary investment turned out to
be Gold. But the dark side of the whole story is that such huge demand for gold has resulted into:
Rising import bill: Gold is India's second most expensive import after crude oil. While oil
accounts for 35 per cent of the import bill, gold imports contribute 11 per cent to India's trade bill. Crude
is crucial for the Indian economy, but gold is a drain on resources. In simple words, the government has
to spend precious foreign exchange for a commodity that is of little industrial value. Terming gold
imports as "wasteful expenditure", Rajiv Takru, financial services secretary, said that India could not
afford the current levels of forex spending on gold imports.
Widening trade deficit: India is the world's biggest buyer of bullion. Gold imports by India
surged to 162 tonnes in May -- more than twice the monthly average in the record year of 2011. Rising
imports lead to current account deficit (exports minus imports), which is usually accompanied by
depletion in foreign-exchange assets. The Reserve Bank has described high CAD as the biggest risk to
Indian economy.
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Black money leads to inflation: There is a growing concern about the volume of �Black'
Money� or unaccounted money circulating in the system. Real estate has been a favourite parking
ground for unaccounted income because the large ticket size of assets allows for hefty lots of 'Black'
funds to be absorbed in each transaction.The real estate sector runs a well-oiled layered black money
system beginning from land transactions to the final stage of sale of apartments. Since consumers pay
in cash at the construction stage, vendors too are paid in cash. This helps them hide their real income.
But that is only the tip of the iceberg. The volume of Black money in real estate is purely because of the
sector size and informal structure, it is difficult to quantify.If the black money component can be brought
back into the national mainstream,our gross domestic product (GDP) growth rates would be much
higher.
RBI Measures
RBI Governor Raghuram Rajan kept key rates unchanged till december 2014 despite
rising pressure from the government and industry to soften rates in a bid to boost the economy.
However, he struck dovish tone, saying that rate cut can be expected early next year if the current
inflation trend continues. Following are some of the reasons that explore why the RBI did not cut rates:
lThe recent decline in inflation is partly due to the base effect but according to economists this is
likely to reverse early next year. Also, the Ministry of Agriculture has forecasted a lower kharif
output for cereals, pulses and oilseeds which could put some upward bias on inflation in the
coming months.
lSupply side issues in agriculture have still not been sorted out.
lInflation expectations still remain elevated.
lInterest rate cuts in India will reduce the interest rate differential with the US, which is expected
to raise rates next year, which might lead to capital outflows.
lAlthough crude oil prices have crashed from a peak of $115 to $70.15, approximately down
40%, rupee has depreciated from a low of 58.3350 to 62.0325, depreciating by some 6%,
negating some good effect of crashing of crude oil price as far as Indian crude oil imports are
concerned. There is strong likelihood that the dollar will appreciate more in the coming months
in light of interest rate hike to be implemented by the Fed probably in the second half of CY15.
Reasons for Rates Cut
The Reserve Bank of India reduced its repo interest rate by 25 basis points to 7.75 per cent in
a surprise move on 15 January 2015 making its first reduction since May 2013, probably because
inflation showed signs of slowing and the government was making efforts to curtail the fiscal deficit.
Cheering the move, stock markets zoomed and rupee appreciated. The move will bring relief to
borrowers and industry, boosting consumer demand. With the RBI reducing the benchmark repo rate,
the level at which it lends to commercial banks, home and auto loans are expected to get cheaper.
United Bank of India has already announced a reduction in base rate by 0.25 per cent from February 1.
Other banks are expected to cut their lending rates by 0.10 per cent to 0.25 per cent. Finance
Minister Arun Jaitley hailed the decision of RBI to cut the interest rate, saying it is positive for the Indian
economy and will certainly help in reviving the investment cycle the government is trying to restore.
Deputy Finance Minister Jayant Sinha said rate cut would mark an "inflection point" after a period of high
interest rates. Mr Sinha said the RBI decision was driven by declines in both actual and expected
inflation, and not by any concerns that India's economic recovery was losing traction. He also said that
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"The economy is picking up momentum,� Further cuts in interest in interest rate will depend upon
inflation and fiscal consolidation. Analysts expect the RBI to keep its lending rates steady at its next
month policy review. Sajjid Chinoy, Indian economist at JP Morgan, said Dr Rajan is likely to wait for
the government's budget before taking further monetary easing measures.
Conclusion
Currency moves can have a wide ranging impact not just on a domestic economy, but also on
the global one. Stock markets have remained out of reach for most of our population. Many of our fellow
citizens are unaware of the stock market. There are many intricacies in dealing with our stock market and
hence it is an unviable option for most of our citizens. Though stock markets have given better returns,
Gold wins in terms of the consistency. If we draw a graph between stock and Gold, the growth of Gold
will be more linear and stock market would be filled with crests and troughs. Investors can use such
moves to their advantage by investing in overseas or in U.S multinationals when the greenback is weak.
It may be best to hedge this risk through many hedging instruments available. Foreign capital will tend to
flow into countries that have strong governments, dynamic economics and stable curriencies. A nation
needs to have a relatively stable currency to attract investment capital from foreign investors. Rajan's
move to cut the repo rate by 0.25% is possibly taking into account the broader impact on India of a
potential global recession in 2015.Rupee ends higher at 62.06 as R.B.I cuts rates.
The recently announced reduction in the repo rate was a much awaited move. To quote Martin
Feldstein �Just as I want sound pilots on the planes that I fly, when it comes to monetary policy, I want to
think that there is someone with sound judgement at the controls.� The massive fall in global oil prices,
though surprising, augurs well for India. Initially, oil prices were expected to bounce back sharply. Now,
given the demand supply mismatch and growth concerns of the majority of the developed economies, it
seems increasingly likely that oil prices will remain subdued for a reasonable length of time. Most
commodity indices have drifted lower in the last six month (June 2014-Dec 2014). Against this backdrop
most of India's macroeconomic parameters, be it inflation, fiscal deficit or current account balance, will
look better for the current year and perhaps the one following. Growth in India is still languishing at lower
levels. Consumers are understandably cautious, having seen a difficult period of sustained high inflation.
R.B.I has to carefully assess taking a leap of faith call on the forward-looking inflation numbers
and proceed with measures which ensure better liquidity at attractive cost. It is also necessary to ensure
that the measure lead to effective monetary policy transmission. In the past, the R.B.I has shown a
strong resolve in controlling inflation; now,with inflation beginning to get under control, it needs to show a
similar resolve in boosting the economic growth to help India seize the momentum.
References
l
lBusiness Standard, 2015-01-28
lwww.NDTV Profit.com
lDainik Jagran newspaper, 15 Jan, 2015.
lJournals, web portal articles etc.
www.investopedia.com
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