Corporate Sector

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yahoo.comWP/04/64

Overview of the Indian Corporate Sector: 1989–2002
Petia Topalova

© 2004 International Monetary Fund

WP/04/64

IMF Working Paper Asia and Pacific Department Overview of the Indian Corporate Sector: 1989–2002 Prepared by Petia Topalova1 Authorized for distribution by Kalpana Kochhar April 2004 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

This paper uses firm-level data to examine the performance of India’s nonfinancial corporate sector since 1989 and evaluate its financial vulnerabilities. While promising trends in liquidity, profitability, and leverage of the sector emerged in the early 1990s, they experienced a reversal after 1996. Nonetheless, most indicators were still at comfortable levels, and there is evidence of improvement in 2002, the last year in our sample. However, a number of firms still face problems servicing their debt obligations, posing a risk to lenders. In particular, the aggregate interest coverage of the corporate sector indicates that potential nonperforming loans of the corporate sector remain high. This underscores the need for close monitoring of the corporate sector in the future. JEL Classification Numbers: G20, G30, O53 Keywords: Indian corporate sector, Indian financial sector Author’s E-Mail Address: petia@mit.edu

1

This paper was prepared while the author was a summer intern in the Asia and Pacific Department in 2003. The author is currently a Ph.D. candidate in economics at the Massachusetts Institute of Technology. I would like to thank David Cowen and Kalpana Kochhar for their guidance and overall support. Special thanks are due to Shawn Cole for his helpful comments.

-2Contents I. II. III. IV. V. Box 1. Page

Introduction..............................................................................................................3 Overview of the Corporate Sector ...........................................................................4 Financial Performance of the Corporate Sector.......................................................6 Corporate Governance in India..............................................................................24 Conclusion .............................................................................................................27 Legal and Regulatory Framework for the Corporate Sector Prior to the 1991 Reforms....................................................................................5

Figures 1. Share of External Finance of Indian Companies .....................................................7 2. Companies’ Leverage ..............................................................................................8 3. Distribution of Leverage of Companies.................................................................10 4. Companies’ Current Ratio .....................................................................................13 5. Distribution of Current Ratio of Companies..........................................................14 6. Companies’ Interest Coverage...............................................................................15 7. Distribution of Interest Coverage Ratio of Companies..........................................16 8. Measures of Nonperforming Loans .......................................................................18 9. Median Interest Rate by Ownership Category.......................................................18 10. Companies’ Profitability........................................................................................20 11. Distribution of Profitability of Companies ............................................................21 Tables 1. 2. 3. 4. 5. 6....
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