GROWTH OF CORPORATE SECTOR

INTRODUCTION

Until the early 90s, corporate financial management in India was a relatively drab and placid activity.
There were not many important financial decisions to be made for the simple reason that firms were given
very little freedom in the choice of key financial policies. The Government regulated the price at which firms
could issue Equity, the Rate of Interest which they could offer on their Bonds, and the Debt Equity Ratio that
was permissible in different industries. Moreover, most of the Debt and a significant part of the Equity was
provided by public sector institutions.

Working capital management was even more constrained with detailed regulations on how much
inventory the firms could carry or how much credit they could give to their customers. Working capital was
financed almost entirely by banks at interest rates laid down by the central bank What is more, the
mandatory consortium arrangements regulating bank credit ensured that it was not easy for large firms to
change their banks or vice versa.

Volatility was not something that most finance managers worried about or needed to. The exchange
rate of the rupee changed predictably and almost invisibly. More worrisome were the regulatory changes
that could alter the quantum of credit or the purposes for which credit could be given. In that era, financial
genius consisted largely of finding one’s way through the regulatory maze, exploiting loopholes wherever
they existed and above all cultivating relationships with those officials in the banks and institutions who had
some discretionary powers.

The last 18 years of financial reforms have changed all this beyond recognition. Corporate finance
managers today have to choose from an array of complex financial instruments; they can now price them
more or less freely; and they have access to global capital markets.

On the other hand, they now have to deal with a whole new breed of aggressive financial
intermediaries and institutional investors; they are exposed to the volatility of interest rates and exchange
rates; they have to agonize over capital structure decisions and worry about their credit ratings. If they
make mistakes, they face retribution from an increasingly competitive financial marketplace, and the
retribution is often swift and brutal.

KEY REFORMS IN THE CORPORATE SECTOR

1) Deregulation: Economic reforms have not only increased growth prospects, but they have also made
markets more competitive. This means that in order to survive, companies will need to invest continuously
on a large scale.

2) Disintermediation: Financial sector reforms have made it imperative for firms to rely on capital
markets to a greater degree for their needs of additional capital. As long as firms relied on directed credit,
what mattered was the ability to manipulate bureaucratic and political processes; the capital markets,
however, demand performance.

3) Globalisation: The past few years have witnessed a silent revolution in Indian corporate performance
where managements have woken up to the disciplining power of financial markets. Globalization of our
financial markets has exposed issuers, investors and intermediaries to the higher standards of disclosure and
corporate governance that prevail in more developed capital markets.

4) International Accounting Standards: In the last few years, Indian companies have voluntarily
accepted International Accounting Standards though they are not legally binding. They have voluntarily gone
for greater disclosures and more transparent governance practices than are mandated by law. They have
sought to cultivate an image of being honest with their investors and of being concerned about shareholder
value maximization.

5) Empowered Investors: Investors can bring the discipline of capital markets to bear on companies by
voting with their wallets. They can vote with their wallets in the primary market by refusing to subscribe to
any fresh issues by the company. They can also sell their shares in the secondary market thereby depressing
the share price. The most powerful impact of voting with the wallet is on companies with large growth
opportunities that have a constant need to approach the capital market for additional funds.

6) Institutionalization: Simultaneously, the increasing institutionalization of the capital markets has

7) Tax reforms: Tax reforms coupled with deregulation and competition have tilted the balance away
from black money transactions.

GLOBALISATION & CORPORATE GROWTH

Globalization has many meanings depending on the context & on the person who is talking about. The
process of globalization not only includes opening up of world trade, development of means of communication,
internationalization of financial markets, growing importance of MNCs, population migrations & more generally
increased mobility of persons, goods, capital, data & ideas but also infections, diseases & pollution.

The term Globalization refers to the integration of national economy with that of global economy
through unrestrained trade and financial flows, as also through mutual exchange of technology and
knowledge. Ideally, it also contains free inter-country movement of labor.

In context to India, this implies:

 Opening up the economy to Foreign Direct Investment by providing facilities to Foreign Companies to
invest in different fields of economic activity in India.

 Removing constraints and obstacles to the entry of MNCs in India.

 Allowing Indian companies to enter into foreign collaborations and also encouraging them to set up
joint ventures abroad.

 Carrying out massive import liberalization programs by switching over from quantitative restrictions to
tariffs and import duties, therefore globalization has been identified with the policy reforms of 1991 in India.

FEATURES OF GLOBALISATION IN CONTEXT OF INDIA

∞ Integrating the Indian economy with the world economy.

∞ Many producers from outside the country can sell their goods and services in India.

∞ India can also sell its goods and services to other countries.

∞ Globalisation facilitates those who have capital to establish enterprises in India, produce goods for sale
within the country or export them.

∞ Entrepreneurs from India also can go and invest in other countries.

∞ Not only the movement of capital but also the movement of people takes place.

∞ Exchange of capital, technology and experience take place between the various countries of the world.

∞ Government has removed restrictions on import of goods, reduced taxes on imported goods and
encouraged investors from abroad to invest in India.

LIBERALISATION & CORPORATE GROWTH

LIBERALISATION contains two components:

FEATURES OF LIBERALISATION IN CONTEXT OF INDIA

∞ Private sector has been allowed to produce all the goods except alcohol, cigarettes, hazardous
chemicals, industrial explosives, electronic aerospace and drugs and pharmaceuticals.

∞ Industries reserved for public sector has been reduced from 17 to 3.

∞ Private sector can also enter in to core industries like iron and steel, electricity, air transport,
shipbuilding, heavy machinery and some defense goods.

∞ The private sector has been freed from many regulations such as (a) licensing (b) permission to import
raw materials (c) regulation on price & distribution (d) restriction on investment by large business companies.

Though some economic reforms were introduced by the Rajiv Gandhi Government (1985-89), it was the
Narasimha Rao Government that gave a definite shape and start to the new economic reforms of
globalization in India. Presenting the 1991-92 Budget, Finance Minister Manmohan Singh said, "After
four decades of planning for industrialization, we have now reached a stage where we should
welcome, rather fear, foreign investment. Direct foreign investment would provide access to
capital, technology and market."

In the Memorandum of Economic Policies dated August 27, 1991 to the IMF, the Finance Minister
submitted in the concluding paragraph, "The Government of India believes that the policies set forth
in the Memorandum are adequate to achieve the objectives of the program, but will take any
additional measures appropriate for this purpose. In addition, the Government will consult with
the Fund on the adoption of any measures that may be appropriate in accordance with the
policies of the Fund on such consultations."

The Government of India affirmed to implement the economic reforms in consultation with the
International Bank and in accordance of its policies. Successive coalition governments from 1996 to 2004,
led by the Janata Dal and BJP, adopted faithfully the economic policy of liberalization. With Manmohan Singh
returning to power as the Prime Minister in 2004, the economic policy initiated by him has become the
lodestar of the fiscal outlook of the government.

THE OUTCOME OF GLOBALIZATION & LIBERALISATION

1) GDP Growth: The rate of growth of the Gross Domestic Product of India has been on the increase
from 5.6 % during 1980-90 to 7 % in the 1993-2001 period. In the last four years, the annual growth rate of
the GDP was impressive at 9 % (2005-06), 9.2 % (2006-07), 9 % (2007-08) and 6.7 % (2008-09).

2) Surge In FOREX Reserves: The foreign exchange reserves have improved, $ 107 billion (2003 - 04),
$ 145 billion (2005-06), $ 180 billion (in Feb 2007), $ 254 billion (2008), $280 billion (Sept 2009).

3) FDI Inflow: Investments from other countries (FDI) to produce goods & services in India has increased.
Total FDI into India since the onset of the liberalisation process is nearly US$ 110 billion till May 2009.

4) Global Markets: There is an International market for companies and for consumers there is a wider
range of products to choose from. Increase in flow of investments from developed countries to developing
countries, which can be used for economic reconstruction.

ROLE OF THE CORPORATE SECTOR IN ECONOMIC GROWTH

Economic liberalization has increased the responsibility and role of the corporate sector. At the same
time, it has reduced the control of the government on economy affairs.

Economic Reforms have resulted in:

∞ Greater and faster flow of information between countries and greater cultural interaction has helped to
overcome cultural barriers.

∞ Technological development has resulted in reverse brain drain in developing countries.

∞ Better services in the communication sector, such as telephone facilities, availability of electronic goods
such as TV etc at low prices.

∞ India’s share in trade of goods and services in the world has increased.

∞ The price rise has slowly declined from 12% in 1990-91 to - 0.25 % in 2009.

∞ The new policies have generated employment to meet the increasing requirement of the Country.

It is expected that the reforms would liberalize the Indian economy enough to create a conducive
environment for rapid economic development. The reform process is on the slow track. The Government is
expected to reduce and finally give up its involvement in economic matters and play a major role in
providing the required socio-economic infrastructure.