Capital Structure

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1. Some of the key trends in the capital structure of India Inc. are as follows: Key observations:
* Indian corporate employ substantial amount of debt in their capital structure in terms of the debt-equity ratio as well as total debt to total assets ratio. * As a result of debt-dominated capital structure, the Indian corporate are exposed to a very high degree of total risk as reflected in high degree of operating leverage and financial leverage and, consequently, are subject to a high cost of financial distress * The foreign controlled companies in India use less debt than the domestic companies * The dependence of the Indian corporate sector on debt as a source of finance has declined over the years particularly since the mid-nineties * The corporate enterprises in India seem to prefer long-term borrowings over short-term borrowings * The foreign controlled companies use more long-term loans relatively to the domestic companies Priority order of source of financing in Indian corporate:

* Retained earnings are the most favoured source of finance. There is significant difference in the use of internally generated funds by the highly profitable corporate relative to the low profitable firms * The low profitable firms use different forms of debt funds more than the highly profitable firms * Loan from financial institutions and private placement of debt are the next most widely used source of finance * Small sized companies relies more on debt capital as compared to large sized companies. * The average debt-equity ratio of small sized companies were found to be more than 3:1 whereas in case of large sized companies it is 1:1. This shows that the large sized companies followed a strict conservative policy while deciding the debt equity mix * The hybrid securities are the least popular source of finance amongst corporates * They are more likely to be used by low growth firms

* Preference shares are used more by public sector units and low growth corporate * Equity capital as a source of fund is not preferred across the board * Indian companies prefer more to raise funds from internal sources as compared to external sources * Study revealed that an average of 60.54% of the total funds was raised from internal sources whereas external sources contribute only 39.46% of the total funds of Indian companies Other key observations:

* The average debt-equity ratios of manufacturing companies were more than double of the average debt-equity ratio of service sector companies. It indicates that service sector companies relies more on the equity and less on the debt, and vice versa in case of manufacturing companies * Although the size of the firm, its age, the region to which it belongs and industry classification contribute to the existing variation in capital structure across industry classes but nature of the industry seems to dominate the capital structure decision

2. Capital Structure determinants for corporates:
* Age: Trade-off theory predicts that with passage of time firms establish a historical record of honouring the financial obligations and this reputation increases the debt capacity of firms * In line with pecking order hypothesis, one can say that mature firms should tend to use the capital market for equity relatively more compared to younger firms * Size: Larger firms tend to be more diversified, and hence less risky and less prone to bankruptcy. Further, if maintaining control is important, then it is likely that firms achieve larger size through debt rather than equity financing * Thus, control considerations also support positive correlation between size and debt * Studies suggest size of the firm to be positively related to long term debt and negatively related to equity * Asset structure: The ratio of fixed assets to total assets represents the degree of assets...
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