Issue- DECEMBER 2013 FM DEC...DETERMINANTS BY PENDSE VISHWAS SHRINIWAS 39 5 CORPORATE GOVERNANCE IN INDIA BY PROF.DR.SHAILESH O. KEDIYA, MR.RUPESHR.DAHAKE, MR.SACHIN …

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D.M.I.E.T.R. Wardha D.M.I.E.T.R Wardha

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RTM Nagpur university, Nagpur

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Associate Professor

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Prof. B. M. Mujumdar

Former Director,

DAMS, G.S.College of Commerce, Wardha


Sr.No. Title of The Paper Page No.

1

TESTING OF WEAK FORM OF EFFICIENT MARKET HYPOTHESIS WITH

RESPECT TO COMMODITY FUTURES MARKET BY DR. KANCHAN

NAIDU & VISHAL MEHTA

6

2

―EVALUATION OF THE WORKING OF INVESTMENT BANKING IN

INDIA WITH REFERENCE TO IDBI & ICICI BANKS‖BY 1 PROF.

KRUNAL PAREKH & *2 DR. D. S. JAGNADE

20

3 INDIAN RURAL BANKING SECTOR - CHALLENGES & OPPORTUNITIES

BY PROF. SANDESH R. KEDIA 27

4 HOUSEHOLD BUDGET PROVISIONS OF INVESTMENT AND ITS

DETERMINANTS BY PENDSE VISHWAS SHRINIWAS 39

5

CORPORATE GOVERNANCE IN INDIA BY PROF.DR.SHAILESH O.

KEDIYA, MR.RUPESHR.DAHAKE, MR.SACHIN S. PANCHABHAI

51

INDEX


TESTING OF WEAK FORM OF EFFICIENT MARKET

HYPOTHESIS WITH RESPECT TO COMMODITY FUTURES

MARKET

Dr. Kanchan Naidu

Asst.Prof., Department of Management Technology,

Shri Ramdeobaba College of Engineering and Management, Nagpur

Vishal Mehta

Asst.Prof., Department of Management Technology

Shri Ramdeobaba College of Engineering and Management , Nagpur

Abstract: The Commodity Futures market has emerged as a very important market and the investors have

always been trying to get better returns. The returns would improve only if they are able to outperform the

market. This study has been done to try and find out whether the markets are efficient in the weak form. The

study has been done using basic tools like RUNS test and Auto Correlation. The data has been taken from

www.mcxindia.com and the data for the years 2009 and 2010 have been considered. Based on the study it can

be concluded that the markets are independent and efficient in the weak form. The investors will not be able to

predict the prices based on the previous days’ prices.

Key Words: Auto Correlation, EMH , RUNS Test , Weak Form of Efficiency.

INTRODUCTION

Rational investors are those who select assets based on their risk return profile. Experience and various studies

have revealed that this may not necessarily be true. Whether it is the stock market or the commodity derivatives

market the fact remains that a certain amount of cognitive biases do creep in and out goes the rationality. But

ultimately the entire process gets corrected. So, it would not be wrong if we say that the market is more or less

rational within some limits.

Whenever a layman talks in terms of the movement of prices he does his calculations on the basis of previous

prices. He does it because he does not know / understand anything else to base his calculations upon. Whether

his calculations are correct or not would depend upon the strength and appropriateness of the logic applied by

him.

The Efficient Market Hypotheses (EMH) states that the prices follow a random path. The prices of the stock

http://www.mcxindia.com/


depend on the level of information considered and the time taken by the market mechanism to make necessary

adjustment to the prices. Based on the above the EMH has given three forms of market efficiency namely the

Weak form, the Semi-Strong form and the Strong form. The weak-form EMH claims that prices on traded assets

(e.g., stocks, bonds, or property) fully reflect all historical information and hence any attempt to predict

prices based on historical price or information is totally futile as future price changes are independent of past

price changes. The semi-strong-form EMH claims both that prices reflect all publicly available information and

that prices instantly change to reflect new public information. The strong-form EMH additionally claims that

prices instantly reflect even hidden or "insider" information.

Market efficiency plays a great role in bringing equilibrium in the market. With so many players in the market

with their own set of perceptions about price and returns the market is in a state of dynamic equilibrium.

This paper would study the movement of Multi commodity index ( from Jan 2009 to Dec 2010 ) and try to

understand whether the movement is random or not and also try to find out whether the markets satisfy the

conditions of weak form of efficiency.

LITERATURE REVIEW:

There are numerous studies, both theoretical and empirical, that analyse the efficiency of futures markets in

developed countries like the US and the UK. Garbade and Silber (1983) tested the relationship between spot

and futures prices for seven commodities. Their goal was to test for efficiency in both functions of futures

markets: risk management and price discovery.

Mckenzie and Holt (1998) tested the efficiencies of the US futures markets for cattle, corn and soybean meal.

Their results indicate that futures markets for all these commodities are both efficient and unbiased in the long

run. Kellard, et al. (1999) examined the efficiency of several widely traded commodities in different markets,

including soybeans on the CBOT and live cattle on the Chicago Mercantile Exchange. The results show that the

long-run equilibrium condition holds, but again there was evidence of short-run inefficiency for most of the

markets studied.

Thomas and Karande (2001) examined efficiency of the castor-seed futures markets in India. The examination

included identifying the flow of information between futures and spot prices across two different markets, one

export-oriented and another production-oriented. They find that futures dominate spot prices, and that the

export-oriented market prices dominate the production-oriented market except in the harvest season when the

relation was reversed.

Swapan Sarkar ( 2013 ) examined the efficiency of Indian Stock Market – BSE. The examination included data

http://en.wikipedia.org/wiki/Assets

http://en.wikipedia.org/wiki/Stocks

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Information


till march 2011. He found that the markets are inefficient in weak form and it may be possible for investors to

earn above the normal return.

The reviewed literature does not speak much about the efficiency of the multi commodity future indices.

OBJECTIVE OF THE STUDY :

1) To assess the level of correlation between the price changes in years 2009 and 2010.

2) To assess whether the commodity futures market is efficient in weak form

HYPOTHESIS:

1. The commodity futures market is efficient in weak form.

LIMITATIONS OF THE STUDY :

1) This study is based on secondary data collected from mcxindia.com.

2) The study is based on the data of the year 2009 and 2010.

3) To test the weak form of market efficiency only the Runs Test and Auto Correlation test is being used.

RESEARCH METHODOLOGY:

The data that is collected for the study is entirely secondary data. This data is collected from the official website

of Multi Commodity Exchange (MCX).

Test: The study is conducted using the RUNS Test and Auto Correlation.

RUNS TEST :

It is a non-parametric statistical test that checks the randomness hypothesis for a two-valued data sequence.

More precisely, it can be used to test the hypothesis that the elements of the sequence are mutually independent.

It is one of the tests under the weak form.

In simple terms A ―run‖ is defined as ―a sequence of identical occurrences preceded and followed by different

occurrences or by none at all‖. For testing the randomness of the Index values we take a series of Futures index

values from the MULTI COMMODITY INDEX. Starting with first price, each price change will be assigned a

‗1‘ or ‗0‘ sign. The ‗1‘ would indicate that the index value under consideration has increased as compared to the

preceding value and the ‗0‘ sign would indicate the vice versa.

Mean is calculated as follows:

http://en.wikipedia.org/wiki/Non-parametric_statistic

http://en.wikipedia.org/wiki/Statistical_hypothesis_testing

http://en.wikipedia.org/wiki/Statistical_independence

http://en.wikipedia.org/wiki/Mean


And

Variance is calculated as follows:

For testing the independence of the index values the following were calculated:

Total number of Runs : r

Number of positive index value changes : n1 i.e., N+

Number of negative value changes : n2 i.e., N-

Once we got the above figures the Mean and Standard Deviation were calculated by using the formulae given

above.

The upper and lower limits were calculated at 2 levels of significance 5 % and 10 % namely. Then we checked

whether the number of runs observed from the index values falls within the limits. If it was within the limits it

was concluded that the values are independent of each other, otherwise not.

AUTO CORRELATION :

Auto correlation refers to the correlation of a time series with its own past and future values.

Autocorrelation is also sometimes called ―lagged correlation‖ or ―serial correlation‖, which

refers to the correlation between members of a series of numbers arranged in time. Positive

auto correlation might be considered a specific form of ―persistence‖, a tendency for a system to remain in the

same state from one observation to the next.

A positive and significant correlation will indicate that the returns in a period are likely to move in the same

direction as in the prior period. If the correlation is zero or near zero then we can infer that the price changes are

independent of the past movements and indicate that the market is efficient in weak form.

The level of correlation has been studied using auto correlation method. Under auto correlation, price changes

have been considered and to improve the analysis further the daily returns over two different periods have also

been compared.

http://en.wikipedia.org/wiki/Variance


REASONS FOR CARRYING OUT THE STUDY USING THE WEAK FORM:

a. The behavior of the market participants is driven by their sentiments rather than the historical prices and

returns.

b. Prices adjust to the market information even though they may be late in doing so.

The above reasons were responsible for the belief that WEAK FORM would be the best as the basic tenets of

the form would help in carrying out the study better.

DATA PROCESSING AND INTERPRETATION

The data was collected from the official website of Multi-Commodity Exchange. The Multi Commodity Futures

Index values from Jan to Dec 2009 and 2010 were used for the study.

Results from the Runs Test

2009 2010

No of runs 136 130

The number of

positive daily price

change

166 185

The number of

negative daily price

change

135 111

Mean 149.29 139.75

Variance 73.4 64.78

Std dev 8.56 8.04

Table 1.

The same results were tested at 5 % and 10 % level of significance to see whether the prices are independent

or not. The results are as follows:

In the year 2009 : At 5 % level of significance : At α = 0.05, Z = 1.96

lower limit : µ - Z x σ = 132.5 ; upper limit : µ + Z x σ = 166.0867


Since, the observed no of runs ( 136 ) falls within the lower and upper limits , we conclude that the prices are

independent at 5 % level of significance and at this level the hypothesis holds true.

In the year 2009 At 10 % level of significance : At α = 0.10, Z = 1.65


Since, the observed no. of runs ( 136 ) falls within the lower and upper limits , we conclude that the prices are

independent at 10 % level of significance and at this level also the hypothesis holds true.

In the year 2010 : At 5 % level of significance : At α = 0.05, Z = 1.96


Since, the observed no of runs ( 130 ) falls within the lower and upper limits , we conclude that the prices are

independent at 5 % level of significance and at this level the hypothesis holds true.

In the year 2009 At 10 % level of significance : At α = 0.10, Z = 1.65

Lower limit : µ - Z x σ =126.468 ; Upper limit : µ + Z x σ = 153.03

Since, the observed no. of runs ( 130 ) falls within the lower and upper limits , we conclude that the prices are

independent at 10 % level of significance and at this level also the hypothesis holds true.

AUTO CORRELATION TEST :

Correlation between the price changes of the two years was found to be 6.30 % while the correlation between the

rate of returns was found to be 6.86 %. Since, the value of correlation is very close to zero or in other words

statistically insignificant we can conclude that the price movement is independent and the past prices do not

influence the current prices. Thus, we may conclude that the market is efficient in weak form.

CONCLUSION:

Based on the tests done we can conclude that the commodity futures market in India was independent and

satisfied the conditions of weak form of efficiency in the year 2009 and 2010. It can also be concluded that it

would not have been possible to predict the price changes based on the past movements. The results of both the

Runs Test and Auto Correlation have helped to arrive at the above conclusions.


Bibliography:

Garbade, K.D. and Silber, W.L. (1983): ―Price Movements and Price Discovery in Futures and Cash

Markets‖, Review of Economics and Statistics, 64,

Kellard, N., P. Newbold, T. Rayner, C. Ennew (1999), ―The Relative Efficiency of Commodity Futures

Markets‖, Journal of Futures Markets, Volume 19, Issue 4, 413-432.

McKenzie, A.M. and Holt, M.T. (2002), ―Market Efficiency in Agricultural Futures Markets‖, Applied

Economics, 34, 1519-32.

Thomas, S. and K. Karande (2001), ―Price Discovery across Multiple Markets‖, Technical report, IGIDR,

Bombay, India.

Swapan Sarkar (2013 ) , ―Testing Weak Form Efficiency of Indian Stock Market – An Empirical Study on

BSE‖, The Management Accountant , March 2013 , Vol.48 No.3.

Security Analysis – Icfai University Publication

Annexure 1

Data From www.mcxindia.com

Date Closing Figure Date

Closing Figure

01-01-2010 2762.32 01-01-2009 1874.07

01-02-2010 2787.43 02-01-2009 1883.93

01-04-2010 2789.63 03-01-2009 1897.55

01-05-2010 2807.34 05-01-2009 1953.06

01-06-2010 2784.03 06-01-2009 1874.21

01-07-2010 2780.42 07-01-2009 1830.4

01-08-2010 2784.91 08-01-2009 1823.13

01-09-2010 2768.34 09-01-2009 1830.37

01-11-2010 2736.83 10-01-2009 1789.03

01-12-2010 2736.03 12-01-2009 1800.42

1/13/2010 2731.9 13-01-2009 1768.74

1/14/2010 2719.48 14-01-2009 1736.44

1/15/2010 2715.68 15-01-2009 1764.58

1/16/2010 2717.38 16-01-2009 1769.41

1/18/2010 2723.7 17-01-2009 1751.23

1/19/2010 2689.95 19-01-2009 1760.17

1/20/2010 2659.48 20-01-2009 1763.24

1/21/2010 2644.54 21-01-2009 1746.82

1/22/2010 2640.16 22-01-2009 1823.74

1/23/2010 2648.1 23-01-2009 1841.52

1/25/2010 2606.09 24-01-2009 1830.28

1/27/2010 2576.27 27-01-2009 1817.4

1/28/2010 2568.24 28-01-2009 1830.07


1/29/2010 2557.62 29-01-2009 1846.77

1/30/2010 2594.14 30-01-2009 1841.27

02-01-2010 2630.84 31-01-2009 1819.34

02-02-2010 2615.31 02-02-2009 1816.16

02-03-2010 2539.29 03-02-2009 1835.62

02-04-2010 2504.53 04-02-2009 1842.58

02-05-2010 2536.93 05-02-2009 1861.71

02-06-2010 2534.72 06-02-2009 1866.43

02-08-2010 2564.7 07-02-2009 1867.65

02-09-2010 2567.05 09-02-2009 1852.36

02-10-2010 2597.11 10-02-2009 1834.58

02-11-2010 2575.52 11-02-2009 1818.22

02-12-2010 2581.5 12-02-2009 1816.03

2/13/2010 2589.66 13-02-2009 1814.06

2/15/2010 2640.22 14-02-2009 1792.44

2/16/2010 2640.22 16-02-2009 1795.73

2/17/2010 2641.11 17-02-2009 1781.29

2/18/2010 2656.58 18-02-2009 1802.11

2/19/2010 2680.38 19-02-2009 1800.53

2/20/2010 2687.5 20-02-2009 1818.49

2/22/2010 2671.82 21-02-2009 1801.03

2/23/2010 2644.58 23-02-2009 1822.63

2/24/2010 2650.74 24-02-2009 1876.91

2/25/2010 2635.44 25-02-2009 1904.66

2/26/2010 2667.55 26-02-2009 1926.81

2/27/2010 2671.3 27-02-2009 1925.11

03-01-2010 2664.06 28-02-2009 1903.09

03-02-2010 2698.22 02-03-2009 1898.82

03-03-2010 2705.56 03-03-2009 1944.75

03-04-2010 2699.26 04-03-2009 1960.47

03-05-2010 2707.88 05-03-2009 1968.78

03-06-2010 2713.99 06-03-2009 1986.98

03-08-2010 2700.46 07-03-2009 1980.08

03-09-2010 2700.75 09-03-2009 1962.42

03-10-2010 2682.05 10-03-2009 1927.07

03-11-2010 2689.32 11-03-2009 1959.75

03-12-2010 2678.05 12-03-2009 1967.16

3/13/2010 2677.48 13-03-2009 1965.66

3/15/2010 2657.99 14-03-2009 1979.86

3/16/2010 2685.27 16-03-2009 2004.6

3/17/2010 2696.67 17-03-2009 1965.39

3/18/2010 2689.15 18-03-2009 2029.15

3/19/2010 2689.15 19-03-2009 2045.04

3/20/2010 2657.42 20-03-2009 2049.9


3/22/2010 2659.25 21-03-2009 2072.33

3/23/2010 2667.58 23-03-2009 2058.87

3/24/2010 2646.74 24-03-2009 2064.95

3/25/2010 2647.38 25-03-2009 2082.77

3/26/2010 2642.32 26-03-2009 2058.73

3/27/2010 2647.34 27-03-2009 2066.71

3/29/2010 2681.05 28-03-2009 2022.48

3/30/2010 2681.77 30-03-2009 2020.62

3/31/2010 2694.02 31-03-2009 2011.11

04-01-2010 2726.26 01-04-2009 2066.29

04-03-2010 2739.97 02-04-2009 2078.89

04-05-2010 2743.13 03-04-2009 2084.58

04-06-2010 2733.65 04-04-2009 2031.09

04-07-2010 2745.97 06-04-2009 2035.85

04-08-2010 2721.55 07-04-2009 2053.32

04-09-2010 2720.18 08-04-2009 2069.44

04-10-2010 2723.14 09-04-2009 2086.99

04-12-2010 2729.7 11-04-2009 2098.71

4/13/2010 2730.78 13-04-2009 2075.5

4/14/2010 2747.68 14-04-2009 2085.21

4/15/2010 2747.76 15-04-2009 2065.75

4/16/2010 2698.17 16-04-2009 2077.82

4/17/2010 2699.42 17-04-2009 2080.97

4/19/2010 2682.57 18-04-2009 2045.24

4/20/2010 2696.97 20-04-2009 2030.59

4/21/2010 2701.51 21-04-2009 2031.96

4/22/2010 2697.3 22-04-2009 2042.35

4/23/2010 2724.32 23-04-2009 2070.12

4/24/2010 2738.62 24-04-2009 2078.83

4/26/2010 2739.35 25-04-2009 2062.02

4/27/2010 2718.68 27-04-2009 2048.81

4/28/2010 2730.57 28-04-2009 2071.06

4/29/2010 2731.53 29-04-2009 2106.74

4/30/2010 2744.19 01-05-2009 2111.34

05-03-2010 2763.89 02-05-2009 2143.73

05-04-2010 2705.52 04-05-2009 2131.57

05-05-2010 2669.54 05-05-2009 2185.22

05-06-2010 2660.69 06-05-2009 2185.82

05-07-2010 2666.76 07-05-2009 2204.91

05-08-2010 2667.48 08-05-2009 2202.54

05-10-2010 2667.79 11-05-2009 2225.27

05-11-2010 2683.42 12-05-2009 2226.26

05-12-2010 2692.29 13-05-2009 2204.33

5/13/2010 2686.82 14-05-2009 2181.01


5/14/2010 2637.03 15-05-2009 2172.19

5/15/2010 2634.61 16-05-2009 2143

5/17/2010 2595.75 18-05-2009 2157.24

5/18/2010 2596.8 19-05-2009 2164.37

5/19/2010 2592.14 20-05-2009 2137.4

5/20/2010 2581.63 21-05-2009 2140.45

5/21/2010 2594.06 22-05-2009 2140.25

5/22/2010 2607.6 23-05-2009 2152.88

5/24/2010 2616.45 25-05-2009 2172.35

5/25/2010 2616.45 26-05-2009 2200.69

5/26/2010 2657.98 27-05-2009 2238.25

5/27/2010 2685.62 28-05-2009 2252.55

5/28/2010 2674.64 29-05-2009 2271.32

5/29/2010 2673.41 30-05-2009 2303.22

5/31/2010 2673.14 01-06-2009 2314.84

06-01-2010 2688.75 02-06-2009 2255.41

06-02-2010 2670.09 03-06-2009 2318.42

06-03-2010 2650.17 04-06-2009 2307.14

06-04-2010 2631.16 05-06-2009 2302.57

06-05-2010 2617.87 06-06-2009 2302.69

06-07-2010 2631.02 08-06-2009 2327.66

06-08-2010 2632.86 09-06-2009 2343.26

06-09-2010 2661.91 10-06-2009 2394.23

06-10-2010 2668.25 11-06-2009 2368.67

06-11-2010 2663.43 12-06-2009 2369.29

06-12-2010 2665.53 13-06-2009 2329.26

6/14/2010 2669.11 15-06-2009 2338.81

6/15/2010 2695.31 16-06-2009 2341.99

6/16/2010 2702.37 17-06-2009 2356.84

6/17/2010 2682.46 18-06-2009 2334.82

6/18/2010 2678.38 19-06-2009 2325.63

6/19/2010 2680.99 20-06-2009 2279.87

6/21/2010 2664.82 22-06-2009 2306.91

6/22/2010 2676.1 23-06-2009 2329.77

6/23/2010 2673.6 24-06-2009 2368.59

6/24/2010 2681.79 25-06-2009 2347.68

6/25/2010 2721.72 26-06-2009 2357.5

6/26/2010 2733.64 27-06-2009 2374.89

6/28/2010 2727.36 29-06-2009 2329.68

6/29/2010 2679.54 30-06-2009 2328.81

6/30/2010 2683.15 01-07-2009 2302.31

07-01-2010 2645.2 02-07-2009 2269.73

07-02-2010 2628.45 03-07-2009 2276.15

07-03-2010 2629.37 04-07-2009 2260.38


07-05-2010 2626.92 06-07-2009 2250.24

07-06-2010 2633.44 07-07-2009 2210.74

07-07-2010 2658 08-07-2009 2195.52

07-08-2010 2670.35 09-07-2009 2188.19

07-09-2010 2669.9 10-07-2009 2187.72

07-10-2010 2681.23 11-07-2009 2180.07

07-12-2010 2668.37 13-07-2009 2196.22

7/13/2010 2684.48 14-07-2009 2230.21

7/14/2010 2691.41 15-07-2009 2226.62

7/15/2010 2685.22 16-07-2009 2279.18

7/16/2010 2673.54 17-07-2009 2277.51

7/17/2010 2675.2 18-07-2009 2286.54

7/19/2010 2675.2 20-07-2009 2286.57

7/20/2010 2703.7 21-07-2009 2303.04

7/21/2010 2715.94 22-07-2009 2315.26

7/22/2010 2745.49 23-07-2009 2333.35

7/23/2010 2750.64 24-07-2009 2344.9

7/24/2010 2750.64 25-07-2009 2356.76

7/26/2010 2753.19 27-07-2009 2342.89

7/27/2010 2717.52 28-07-2009 2295.1

7/28/2010 2725.43 29-07-2009 2349.43

7/29/2010 2746.35 30-07-2009 2370.98

7/30/2010 2746.88 31-07-2009 2384.09

7/31/2010 2755.37 01-08-2009 2435.33

08-02-2010 2791.98 03-08-2009 2445.4

08-03-2010 2800.64 04-08-2009 2472.57

08-04-2010 2808.65 05-08-2009 2464.04

08-05-2010 2803.77 06-08-2009 2466.38

08-06-2010 2787.96 07-08-2009 2461.46

08-07-2010 2795.06 08-08-2009 2454.05

08-09-2010 2799.32 10-08-2009 2439.18

08-10-2010 2784.34 11-08-2009 2459.33

08-11-2010 2776.4 12-08-2009 2489.68

08-12-2010 2757.8 13-08-2009 2437.22

8/13/2010 2748.02 14-08-2009 2420.16

8/14/2010 2752.52 17-08-2009 2435.95

8/16/2010 2753.91 18-08-2009 2468.06

8/17/2010 2772.45 19-08-2009 2449.13

8/18/2010 2753.08 20-08-2009 2468.29

8/19/2010 2739.19 21-08-2009 2473.32

8/20/2010 2714.21 22-08-2009 2494.51

8/21/2010 2716.37 24-08-2009 2477.12

8/23/2010 2703.05 25-08-2009 2486.89

8/24/2010 2689.64 26-08-2009 2497.84


8/25/2010 2707.91 27-08-2009 2537.94

8/26/2010 2730.36 28-08-2009 2538.15

8/27/2010 2758.55 29-08-2009 2496.65

8/28/2010 2781.92 31-08-2009 2487.65

8/30/2010 2758.95 01-09-2009 2486.12

8/31/2010 2746.56 02-09-2009 2509.54

09-01-2010 2761.71 03-09-2009 2502.84

09-02-2010 2764.44 04-09-2009 2501.32

09-03-2010 2765.03 05-09-2009 2502.48

09-04-2010 2772.36 07-09-2009 2549.88

09-06-2010 2778.9 08-09-2009 2550.38

09-07-2010 2784.53 09-09-2009 2542.48

09-08-2010 2796.54 10-09-2009 2504.34

09-09-2010 2764.82 11-09-2009 2506.26

09-10-2010 2764.82 12-09-2009 2509.66

9/13/2010 2794.04 14-09-2009 2544.53

9/14/2010 2794.17 15-09-2009 2574

9/15/2010 2784.34 16-09-2009 2571.72

9/16/2010 2775.83 17-09-2009 2557.27

9/17/2010 2756.1 18-09-2009 2547.54

9/18/2010 2761.94 19-09-2009 2517.9

9/20/2010 2765.72 21-09-2009 2550.3

9/21/2010 2746.4 22-09-2009 2524.14

9/22/2010 2747.14 23-09-2009 2462.73

9/23/2010 2772.9 24-09-2009 2457.1

9/24/2010 2789.12 25-09-2009 2460.56

9/25/2010 2802.85 26-09-2009 2410.33

9/27/2010 2787.62 28-09-2009 2403.16

9/28/2010 2811.49 29-09-2009 2450.75

9/29/2010 2814.69 30-09-2009 2435.67

9/30/2010 2829.18 01-10-2009 2429.07

10-01-2010 2853.63 03-10-2009 2504.42

10-04-2010 2856.2 05-10-2009 2503.12

10-05-2010 2895.47 06-10-2009 2489.1

10-06-2010 2903.89 07-10-2009 2525.31

10-07-2010 2872.04 08-10-2009 2521.37

10-08-2010 2893.38 09-10-2009 2531.9

10-09-2010 2916.09 10-10-2009 2552.57

10-11-2010 2916.09 12-10-2009 2543.21

10-12-2010 2924.87 13-10-2009 2550.59

10/13/2010 2958.53 14-10-2009 2565.48

10/14/2010 2956.51 15-10-2009 2598.5

10/15/2010 2931.79 16-10-2009 2606.72

10/16/2010 2940.63 17-10-2009 2618.44


10/18/2010 2960.09 19-10-2009 2624.06

10/19/2010 2916.48 20-10-2009 2670.38

10/20/2010 2929.31 21-10-2009 2661.64

10/21/2010 2902 22-10-2009 2663.87

10/22/2010 2918.8 23-10-2009 2666.89

10/23/2010 2935.01 24-10-2009 2651.79

10/25/2010 2953.6 26-10-2009 2648.68

10/26/2010 2983.09 27-10-2009 2630.87

10/27/2010 2959.54 28-10-2009 2669.23

10/28/2010 2979.72 29-10-2009 2623.23

10/29/2010 2972.93 30-10-2009 2626.67

10/30/2010 2987.58 31-10-2009 2629.42

11-01-2010 3003.24 02-11-2009 2684.06

11-02-2010 3012.11 03-11-2009 2696.03

11-03-2010 3005.02 04-11-2009 2687.2

11-04-2010 3053.54 05-11-2009 2648.85

11-05-2010 3073.86 06-11-2009 2652.78

11-06-2010 3091.07 07-11-2009 2664.66

11-08-2010 3122.99 09-11-2009 2642.43

11-09-2010 3170.82 10-11-2009 2656.15

11-10-2010 3131.49 11-11-2009 2632.21

11-11-2010 3142.35 12-11-2009 2623.37

11-12-2010 3082.58 13-11-2009 2621.93

11/13/2010 3087.12 14-11-2009 2677.27

11/15/2010 3099.55 16-11-2009 2694.92

11/16/2010 3030.15 17-11-2009 2699.76

11/17/2010 3016.62 18-11-2009 2694.17

11/18/2010 3050.34 19-11-2009 2690.03

11/19/2010 3054.57 20-11-2009 2711.5

11/20/2010 3062.26 21-11-2009 2727.86

11/22/2010 3051.53 23-11-2009 2702.9

11/23/2010 3073.16 24-11-2009 2739.3

11/24/2010 3106.38 25-11-2009 2749.96

11/25/2010 3117.01 26-11-2009 2692.57

11/26/2010 3112.35 27-11-2009 2703.11

11/27/2010 3115.32 30-11-2009 2816.8

11/30/2010 3148.72 01-12-2009 2804.18

12-01-2010 3176.37 02-12-2009 2804.18

12-02-2010 3186.09 03-12-2009 2771.21

12-03-2010 3206.79 04-12-2009 2767.95

12-04-2010 3225.06 05-12-2009 2719.47

12-06-2010 3220.54 07-12-2009 2693.38

12-07-2010 3217.25 08-12-2009 2637.7

12-08-2010 3217.25 09-12-2009 2626.29


12-09-2010 3219.56 10-12-2009 2631.37

12-10-2010 3195.41 11-12-2009 2626.71

12-11-2010 3186.81 12-12-2009 2633.77

12/13/2010 3217.26 14-12-2009 2644.33

12/14/2010 3217.26 15-12-2009 2685.91

12/15/2010 3223.7 16-12-2009 2669.99

12/16/2010 3208.42 17-12-2009 2684.67

12/17/2010 3210.32 18-12-2009 2683.27

12/18/2010 3212.79 19-12-2009 2662.09

12/20/2010 3223.32 22-12-2009 2692.8

12/21/2010 3234.81 23-12-2009 2720.75

12/22/2010 3232.87 24-12-2009 2736.57

12/23/2010 3243.75 26-12-2009 2760.91

12/24/2010 3256.62 28-12-2009 2755.71

12/27/2010 3262.57 29-12-2009 2734.12

12/28/2010 3292.43 30-12-2009 2730.72

12/29/2010 3292.43 31-12-2009 2754.68

12/30/2010 3273.37

12/31/2010 3294.63


“EVALUATION OF THE WORKING OF INVESTMENT BANKING

IN INDIA WITH REFERENCE TO IDBI & ICICI BANKs”.

*1 Prof. Krunal Parekh

*1 Faculty & Head: Admission & Alumni Cell, Datta Meghe Institute of Management

Studies, Nagpur, Email – [email protected], Cell: - +91-9823433306

*2 Dr. D. S. Jagnade.

*2 Dr. D.S.Jagnade: Hon. Director, RTMNU, Sub-Centre-Gadchiroli., Cell: - +91-

9422135834

ABSTRACT

―In modern competitive business world finance is the key store of each and every operation activities of the

business. No business can be started without adequate financial resources nor can it be succeed. Micro, Small,

Medium and Large Enterprises are lauded the world over as prime drivers of growth with equity and contribute

9% to the GDP of the country and 45% of the total manufacturing output arises from the MSME and 36%

of the India’s total export provide 100 million employment opportunities through its 46 million units across

the country. There are certain areas which need to be exploited like major one is IT sector, there will be large

room for entrepreneurs to render their services and will decide the altitude with empowering SME through latest

ICT tools to enhance competitiveness and productivity of business. There are various development banks that

provide loans to MSME like, IDBI, ICICI and Reliance etc. Encouragement to right type of industries by

granting loans (particularly medium & long term), the banks can provide financial resources to the right type of

industries to secure necessary competitive requirement In a planned economy, this research will help in its

necessity that the banks should formulate their loan policies in accordance with the broad objectives & strategy

of industries as adopted in the plan. This will promote right type of industries in the economy & grow

IT-enabled SMEs in India.

KEYWORDS: ICT Tools, Services, Altitude, Loan policies.

1. BACKGROUND

Micro, Small, Medium and Large Enterprises are lauded the world over as prime drivers of growth with equity

and contribute 9% to the GDP of the country and 45% of the total manufacturing output arises from the

MSME and 36% of the India’s total export provide 100 million employment opportunities through its 46

mailto:[email protected]


million units across the country. The small resources of entrepreneurs make them more vulnerable to these

forces within India as well relationships with big businesses, rules and regulations, inspections and finance pose

considerable problems quite different from the problems arising from globalization.

In order to compete with foreign organisations producing goods at lower labour costs, Indian small and

medium-sized enterprises (SMEs) need to improve their productivity. This can be done by cutting the input

costs like time, material and labour of the products and services they sell. The fastest, most efficient approach to

competing successfully in this area is to adopt Digital Technology.

2. INTRODUCTION

The Indian population is well ahead of many developed nations in adopting Digital technology in their personal

lives. However, Indian SMEs lag behind in adopting it for their businesses. MSME must take a leading role in

accelerating digital technology toward increasing enterprises productivity and profitability. IT adoption in the

manufacturing sector is strong empirical evidence that IT usage by Indian business would lead to greater

profitability and employment. In this IDBI Bank and ICICI bank plays important role as they have the banks

who have first focused in industrial growth and financing to MSME for development of industries as well

economy of India.

3. OBJECTIVES OF STUDY

1) To Study and understand the ICT Access and Use by SMEs.

2) To understand the method of lending (credit policies) of IDBI & ICICI:

Analyzing system of lending & horizontal & vertical issues such as grant/loan blending.

4. ABOUT MSMES IN INDIA

Indian SMEs represent the model of socio-economic policies of Government, which emphasize job creation at all

levels of income stratum and diffusion of economic power in the hands of few thereby discouraging monopolistic

practices of production and marketing; and in all prospects contributing to growth of economy and foreign

exchange earning with low import-intensive operations.

Indian SMEs also play a significant role in Nation development through high contribution to Domestic Production,

Significant Export Earnings, Low Investment Requirements, Operational Flexibility, Location Wise Mobility,

Low Intensive Imports, Capacities to Develop Appropriate Indigenous Technology, Import Substitution,


Contribution towards Defense Production, Technology – Oriented Industries, Competitiveness in Domestic and

Export Markets thereby generating new entrepreneurs by providing knowledge and training.

Despite their high enthusiasm and inherent capabilities to grow, SMEs in India are also facing a number of

problems like sub-optimal scale of operation, technological obsolescence, supply chain inefficiencies, increasing

domestic and global competition, fund shortages, change in manufacturing strategies and turbulent and uncertain

market scenario. To survive with such issues and compete with large and global enterprises, SMEs need to adopt

innovative approaches in their operations. SMEs that are innovative, inventive, international in their business

outlook, have a strong technological base, competitive spirit and a willingness to restructure themselves can

withstand the present challenges and come out successfully to contribute 22% to GDP.

Description INR USD($)

Micro Enterprises upto Rs. 25Lakh upto $ 62,500

Small Enterprises above Rs. 25 Lakh & upto Rs. 5

Crore above $ 62,500 & upto $ 1.25 million

Medium Enterprises above Rs. 5 Crore & upto Rs. 10

Crore

above $ 1.25 million & upto $ 2.5

million

Figure 1 Manufacturing Enterprises – Investment in Plant & Machinery

Description INR USD($)

Micro Enterprises upto Rs. 10Lakh upto $ 25,000

Small Enterprises above Rs. 10 Lakh & upto Rs. 2 Crore above $ 25,000 & upto $ 0.5 million

Medium Enterprises above Rs. 2 Crore & upto Rs. 5 Crore above $ 0.5 million & upto $ 1.5 million

Figure 2 Service Enterprises – Investment in Equipments

Source: SME Chamber of India.


Figure 3 Top drivers for IT adoption among SMEs.

Source: IDC

In the above statistics we can see that with the help of ICT and SMEs can improve in various domain like

Strong Communication within organisation, fast linkage between Customers and suppliers and can give the

leverage of competition.

5. CURRENT USAGE OF ICT IN MSME:

In India, technology is viewed as a means to save time and effort, as well as stay updated, but only tech

adopter‘s credit technology with providing a competitive edge and a path towards business innovation.

Figure 4 ICT Usage by Indian MSMEs.

Source: CII

Series1, Reduction in

inventory, 69%

Series1, Creating and

delivering

products and services, 78%

Series1, Remain Relevant/Comp

etitive, 83%

Series1, Future Growth and

Expansion, 84%

Series1, To get Edge over

Competition,

87%

Series1, Linkages with

Customers and

Suppliers, 89%

Series1, Improve

communciation

within organization,

89%

Series1, HR and Administration,

75%

Series1, Finance and Accounting,

83%

Series1, After Sales & Service,

45%

Series1, marketing & Sales, 68%

Series1, Outbound

Logistics, 45%

Series1, Production/Ma

nufacturing,

64%

Series1, Inbound

Logistics, 40%

ICT Usage By Indian MSMEs


Small businesses widely use basic software for accounting and designing documents like Invoices and orders.

Similarly a majority of small businesses report low internet usage, limiting it to email, search functions etc. only

small number of tech users use internet to promote activities via portals a digital commerce platform of market

places like just dial etc.

According to IMRB report only 4% of MSMEs who are aware of the cloud computing has adopted the

technology.

Figure 4 Adoptions and Awareness by Indian MSMEs.

Source: IMRB

6. CHALLENGES TO SME SECTOR

Despite its commendable contribution to the Nation's economy, SME Sector does not get the required support

from the concerned Government Departments, Banks, Financial Institutions and Corporate, which is a handicap

in becoming more competitive in the National and International Markets.

SMEs face a number of problems - absence of adequate and timely banking finance, limited capital and

knowledge, non-availability of suitable technology, low production capacity, ineffective marketing strategy,

identification of new markets, constraints on modernization & expansions, non-availability of highly skilled

labour at affordable cost, follow-up with various government agencies to resolve problems etc.

7. COMMON CHALLENGES FOR ADOPTION

Due to fragmented nature of the sector, challenges differ from one enterprise to the next driven by differences in

Awareness, Manufacturing ,

15%

Awareness, BFSI, 15%

Awareness, Media, 17%

Awareness, Travel & Trade,

18%

Awareness, Education, 36%

Awareness, IT, 14%

Adoption

Awareness


size, location, nature of product/service. SMEs share many emerging challenges that limit their ability to

compete with larger and more established player in the market. Due to this factor there is no perspective

development for long term planning which gives challenge of

1. Credit Hurdles: - lack of availability, high cost, poor accessibility etc.

2. Poor Infrastructure: No basic infra.

3. Adoption: - ICT application is very expensive but now a day it comes in very low monthly subscription

cost.

4. Penetration: Availability of electricity is still challenge and broadband connectivity.

5. Shortage of skilled labor that has the basic know-how to work on ICT tools like computer.

8. COMMON CHALLENGES FOR ADOPTION

Public policy is the tool by which governments and various banks can help to create an environment and

remove the barriers for businesses for that keeping in mind IDBI and ICICI bank Development banks are

expected to formulate their lending policies & direct their general operations in accordance with the broad

socio-economic objectives of the country. Must actively participate in the realization of these objectives.

In view of certain instrumental not only in establishing a well-developed, diversified and efficient industrial and

institutional structure but also adding a qualitative dimension to the process of industrial development in the

country What special scheme for new technologies, collaterals and Guarantees, rate of interest granted also

has played a pioneering role In fulfilling its mission of promoting industrial growth through financing of

medium and long-term projects, in consonance with national plans and priorities Fill the necessary gap in the

industrial development in respect of industrial finance.

BIBLIOGRAPHY

A} Books

1. Dr. R.R.Paul ―Monetory Economics‖- Kalyani Publication

2. Vasant Desai ―Banking Institutions and Practice‖.

3. Jordan and Natrajan ―Banking-Laws, Practice, Theory‖.

B} Magazines

1. Business World


C} Journals

1. Vinod kumar Yadav, “Capital Budgeting in Small-Scale Industries,” Indian Finance journal, October, pp.5-12, 2013.

D} Online

1. www.rbibulletin.com

2. www.idbi.com

3. www.icici.com

4. http://indiasmeforum.org/index.php

5. http://www.cii.in/

6. http://www.smechamberofindia.com/

http://www.rbibulletin.com/

http://www.idbi.com/

http://www.icici.com/

http://indiasmeforum.org/index.php

http://www.cii.in/

http://www.smechamberofindia.com/


Indian Rural Banking Sector - Challenges & Opportunities

Prof. Sandesh R. Kedia

MBA, NET, NSE Certified Market Professional.

Assistant Professor

Department of Advanced Management & Studies, G.S. College of Commerce, Wardha.

Mobile+91 9822722763

E-mail id: [email protected]

Abstract:

Global economic growth has slowed from 3.9% in 2011 to 3.2% in 2012 we are not unaffected by what happens in

the rest of the world our economy too has slowed after 2010-11. In the current year CSO has projected a growth

estimation of 5% while the RBI has put it at 5.5%. As Shri Chidambaram our Finance Minister has rightly put it

“Whatever be the final estimate it will be below India’s potential growth rate of 8%, getting back to that growth

rate will be the challenge that faces the country”. This is clearly not feasible if large sections of society remain

marginalized and people who lack access to financial services from Institutional service providers are not

mainstreamed .The challenge of financial inclusion presents an inflexion point for Indian banking.

In the coming 10-15 years banks in India in particular would realign their position in the pecking order based on

their ability to convert financial inclusion into a viable business opportunity. Banks which are able to craft

appropriate business and delivery models to tap the large excluded sections of society would come on top. The

triad of financial inclusion, financial literacy and financial stability would be extremely relevant in the

foreseeable future. The depth and breadth of banking in the country would determine financial stability.

Keywords:

Financial Inclusion, Financial Inclusion Plan, Financial Literacy, Priority sector lending, Regional Rural

Banks.


Indian Rural Banking Sector - Challenges & Opportunities

The global financial crisis and the current Euro zone crisis have affected the banks in the advanced economies; the

spillover is ricocheting on banks in emerging economies including India. Issues of financial stability, economic

growth and managing inflation are the major challenges confronting regulators in advanced economies and are

equally important for emerging economies like ours. Global economic growth has slowed from 3.9% in 2011 to

3.2% in 2012 we are not unaffected by what happens in the rest of the world our economy too has slowed after

2010-11. In the current year CSO has projected a growth estimation of 5% while the RBI has put it at 5.5%. As

Shri Chidambaram our Finance Minister has rightly put it ―Whatever be the final estimate it will be below India‘s

potential growth rate of 8%, getting back to that growth rate will be the challenge that faces the country‖. This is

clearly not feasible if large sections of society remain marginalized and people who lack access to financial

services from Institutional service providers are not mainstreamed .The challenge of financial inclusion presents

an inflexion point for Indian banking.

The biggest challenge for next decade or more to banks in the country is to capture the banking business of over

50% population of this country of over 120 billion people. The contemporary challenges facing Indian Rural

Banking are Priority Sector Lending, Regional Rural Banks, Financial Inclusion, Financial Literacy and

Education. Aptly Dr. Subbarao, (former RBI Governor) terms Financial Inclusion as the supply side of the

equation and Financial Literacy the demand side.

(i) Priority sector lending

The definition of priority sectors has evolved over a period of time and at present, priority sectors are broadly

taken as those sectors of the economy which in the absence of inclusion in the priority sector categories would not

get timely and adequate finance. Typically, these are small loans to small and marginal farmers for agriculture and

allied activities, loans to Micro and Small Enterprises, loans for small housing projects, education loans and other

small loans to people with low income levels. Presently, the target for aggregate advances to the priority sector is

40 per cent of the Adjusted Net Bank Credit ANBC or the credit equivalent of Off Balance sheet Exposure (OBE),

whichever is higher for domestic banks. Foreign banks with 20 or more branches in the country are being brought

on par with domestic banks for priority sector targets in a phased manner over a five year period starting from

April 1, 2013. For foreign banks with less than 20 branches the overall target is fixed at 32 per cent.


The domestic banks, i.e, public and private sector, could not achieve the target of 40 percent for the year 2012 as

can be evidenced from the table below.

Priority Sector Lending by Banks (Amount in Rs. billion)

As on the Last

Reporting Friday of

March

Public Sector Banks Private Sector Banks Foreign Banks

2011 10,215

(41.0)

2,491

(46.7)

667

(39.7)

2012 11,299

(37.4)

2,864

(39.4)

805

(40.8)

Notes: Figures in parenthesis are percentage to ANBC or credit equivalent of off balance sheet

exposure (OBE), whichever is higher, in the respective groups.

Source: RBI Annual Report 2012

As per 59th NSS Survey, households with 2 hectare or less land accounted for 84% of all farmer households. The

percentages of such small and marginal famers who have access to credit is only 46.3%. A large section of farmers

is still dependent on moneylenders for their financial needs.

Shares in Total debt of Cultivator Households

Source of debt 1951 1961 1971 1981 1991 2002

Institutional 7.3 18.7 31.7 63.2 66.3 61.1

Non-Institutional 92.7 81.3 68.3 36.8 30.6 38.9

Money Lenders 69.7 49.2 36.1 16.1 17.5 26.8

Total 100.0 100.0 100.0 100.0 100.0 100.0

Source: All India Debt and Investment Survey, GoI, various rounds.

The major challenge is to bring all farmers into the institutionalcredit framework. To boost the credit to

agriculture sector, apart from a host of initiatives, the Kisan Credit Card (KCC) Scheme was introduced in the

year 1998-99 to enable farmers to purchase agricultural inputs and draw cash for their production needs. In 2004,

NABARD revised the Model KCC Scheme to provide adequate and timely finance for meeting the

comprehensive credit requirements of farmers under single window, with flexible and simplified procedure,

adopting whole farm approach. The scheme now covers term credit as also working capital for agriculture and


allied activities and a reasonable component for consumption needs. During 2011-12, public sector banks have

issued 68,03,051 KCCs with sanctioned limits aggregating to Rs. 69,51,768.45 lakh. Since inception of the

scheme, the number of KCCs issued by public sector banks stood at 5,47,49,373.00 till March 2012 with

sanctioned limits aggregating to Rs. 3,53,14,527.11 lakh. RBI have recently revised the guidelines on Kisan

Credit Card scheme. Margin /security norms are waived for loans up to Rs.1 lakh to enhance the flow and easy

delivery of bank loans to small agricultural borrowers.

The revised priority sector guidelines lay emphasis on direct delivery of credit to the poor beneficiaries i.e.

without the involvement of intermediaries, which will ensure better management of risks and also reduction in

transaction, delivery and administrative costs for these loans, which being essentially small ticket, low value high

volume loans, do generate profits translating to a stable low cost deposit stream for banks and to the fortune at the

bottom of the pyramid.

To make priority sector lending viable for the banks, RBI has removed the interest rate ceiling on all types of loans

including small loans by linking it to Base Rate of the banks with effect from April 1, 2010. Thus, there is no

preferential rate of interest for priority sector loans. Thus priority sector lending is competitive and commercially

viable.

Why have RBI removed caps on pricing? The cost of absence of bank lending to poor and vulnerable sections of

the society is heavy, as the poor have no option but to borrow from the unorganized sector, the informal or

alternative channels at usurious price. There is a need for reorienting the approach of banks to look at priority

sector areas. The challenges in priority sector can be overcome only if banks consider priority sector lending as

part of normal business operations of the banks and not as an obligation. Rural untapped market offers a big

business opportunity to the banks. Banks need to innovate new products which cater to the needs of farmers,

weaker sections and other vulnerable sections of the society, develop new delivery channels and embrace

technological developments which will reduce the delivery costs. Priority sector must be treated as a viable

business proposition.

(ii) Regional Rural Banks

Regional Rural Banks (RRBs) were established in the year 1976 as a low cost financial intermediation structure in

the rural areas to ensure sufficient flow of institutional credit for agriculture and other rural sectors. RRBs were

expected to have the local feel and familiarity of the cooperative banks with the managerial expertise of the

commercial banks. RRBs are jointly owned by GoI, the concerned State Government and Sponsor Banks, the

issued capital of a RRB is shared by the owners in the proportion of 50 percent, 15 percent and 35 percent


respectively. In practice they borrowed the politicization in lending, rampant in cooperative Banks, with the worst

form of unionism replicated from the commercial banks. The low cost structure was also washed away after the

Obul Reddy report which brought parity of pay scales with Commercial Banks.

Several RRBs suffered humongous losses. Government of India and RBI initiated several measures to improve

the financial health of RRBs. During a review carried out by GOI in the year 2009 it was found that the Capital

Risk Weighted Assets Ratio (CRAR) of the RRBs were too low. Dr. K.C Chakrabarty committee suggested

bringing the CRAR of RRBs to at least 9 percent in a sustainable manner. The Committee inter-alia recommended

recapitalization support to the extent of Rs. 2,200 crore, to 40 RRBs in 21 States, out of which Rs.1,100 crore was

to be contributed by Central Government. The recapitalization process which started in 2010-11 has been

extended till 2013-14. Several Committees looked into issues of viability finally amalgamation of RRBS on

grounds of contiguity in a particular region was adopted. Initially, there were 196 RRBs working in the country.

After the second phase of amalgamation, which started w.e.f. October 1, 2012, 34 RRBs have been amalgamated

to form 14 new RRBs. After a massive consolidation and merger exercise to strengthen the RRBs, the number of

RRBs operating in the country today has come down to 62.

The number of sustainably viable RRBs (i.e. RRBs making net current profit and having no accumulated losses)

has increased to 60 as on March 31, 2012 as compared to 58 as on March 31, 2011.

(iii) Financial Inclusion

For Banking penetration and branch building a massive exercise has been taken up by RBI and this is being done

through the lead bank scheme channel. RBI advised banks in November 2009 to draw up a roadmap to provide

banking services through a banking outlet in every village with a population of more than 2000 and the target date

was March 2012. Banks were advised that such banking services need not necessarily be extended through a brick

and mortar branch but could be provided through any of the various forms of ICT-based models including through

BCs. Under the roadmap for providing banking outlets in villages with population above 2000, banking outlets

have been opened in hitherto 74199 unbanked villages comprising 2493 branches, 69374 Business

Correspondents (BCs) and 2332 through other modes like ATMs, mobile van, etc.


How do RBI plan to provide banking services to villages having population less than 2000? As per the

announcement in the Annual policy Statement 2012-13, State Level Bankers' Committees (SLBCs) were advised

by RBI to prepare a roadmap covering all unbanked villages of population less than 2000 and notionally allot

these villages to banks for providing banking services in a time bound manner, especially, to start with, EBT

services. The objective is to provide a bank account to every household/person throughout the country. To start

with, banks have been advised to provide door step services to EBT beneficiaries to facilitate transfer of all State

benefits including MGNREGA wages and various cash subsidies to beneficiaries by direct credit to the bank

accounts, through regular visits of BCs to the allocated villages and over a period of time, provide all kinds of

banking services viz. remittances, recurring deposit, entrepreneurial credit in the form of KCC and GCC,

insurance (life and non- life) and other banking services to all the residents of the village through a mix of brick

and mortar branch and BC network. RBI have also emphasized planning of sufficient number of brick and mortar

branches so that there is a brick and mortar branch to provide support to a cluster of BC units, i.e., about 8-10 BC

units at a reasonable distance of 3-4 kilometers. As per the Roadmap drawn about 484000 villages with

population less than 2000 have been allotted to various banks for provision of banking services in next 3 years.

Financial Inclusion Plan

Financial Inclusion (FI) is the process of ensuring access to appropriate financial products and services needed by

all sections of the society in general and vulnerable groups such as weaker sections and low income groups in

particular at an affordable cost in a fair and transparent manner by mainstream institutional players. Reserve Bank

has adopted a bank- led model for financial inclusion which seeks to leverage on technology. In January 2006, the

Reserve Bank permitted banks to utilise the services of non-governmental organizations (NGOs), micro-finance

institutions (other than Non-Banking Financial Companies) and other civil society organisations as intermediaries


in providing financial and banking services through the use of business facilitator and business correspondent (BC)

models. The BC model allows banks to do ‗cash in - cash out‘ transactions at a location much closer to the rural

population, thus addressing the last mile problem.

Reserve Bank has been furthering financial inclusion in a mission mode through a combination of strategies

ranging from relaxation of regulatory guidelines, provision of new products and other supportive measures to

achieve sustainable and scalable Financial Inclusion. A structured and planned approach was followed under

financial inclusion wherein all banks were advised in January 2010 to prepare Board approved Financial Inclusion

Plans (FIPs) congruent with their business strategies and comparative advantage for three year period extending

up to 2013. The implementation of these plans was closely monitored by the Reserve Bank through quantitative &

qualitative reporting formats and through review meetings held with CMDs/CEOs and other senior officials of

banks.

Performance of banks under the first three year Financial Inclusion Plan period (2010-13)

The Financial Inclusion Plan (2010-13), introduced in April 2010 has concluded in March 2013. The penetration

of baking services in the rural areas has increased to a great extent.

A snapshot of the progress made by banks, upto December 31 2012, under FIP for certain key parameters is given

below:-

i. Banking connectivity has been extended to 2,11,234/- villages from 67,694 at the beginning of the plan period.

5694 rural branches have been opened during the period.

ii. Numbers of Business Correspondents have increased from 34,532 to 1,52,328.


iii. Total number of Basic Savings Bank Deposit Accounts (BSBDAs) have gone up from 73.45 million in 2010 to

171.43 million upto December 31 2012, Number of Kissan Credit Cards outstanding have gone up from 24.31

million in 2010 to 31.73 million upto December 31 2012 and Number of General Credit Cards outstanding have

gone up from 1.39 million in 2010 to 3.11 million upto December 31 2012.

iv.

v. The number of ICT based BC transactions though encouraging is still very low as compared to the increase in

the number of banking outlets. The focus on monitoring has, therefore, now shifted more towards the number and


value of transactions in no-frills, credit and remittance accounts opened through BCs. In this direction, RBI have

now advised banks to disaggregate the FIP upto the branch level and RBI have involved the controlling offices of

respective banks as also the Regional Offices of RBI in all the States in the monitoring process.

Some of the major issues being faced by banks in pursuing and achieving the Financial Inclusion Plan

target

Efficient Business Model

Banks are yet to perceive FI as a profitable business model. Feedback received suggests that many banks are still

pursuing FI as a regulatory requirement rather than treating it as a business model. Banks have to realize that the

bankability of the poor holds a major opportunity for the banking sector in developing a stable retail deposit base

and in curbing volatility in earnings with the help of a diversified asset portfolio. The recent crisis has underscored

the need for reducing banks‘ reliance on wholesale deposits and borrowed funds and cultivating a retail portfolio

of assets and liabilities for financial stability. Two basic issues that need to be understood by banks while

implementing financial inclusion is that:-

Financial Inclusion programmes should be implemented on commercial lines and not on a charity basis. It

is important that banking with the poor is perceived and pursued as a sustainable and viable business

model.

While poor need not be subsidized, it is important to ensure that they are not exploited. The need is to

ensure that poor people who deserve credit are provided access to timely and adequate credit in a

non-exploitative manner.

BC Model - Viability Issues:

Business Correspondent model is still in the experimental stages and there are various challenges associated with

the model. The viability of BC model has remained a critical issue. Surveys have revealed that branch officials do

not visit BCs or customers and do not take any effort in introducing BCs to villagers. One primary reason cited by

branch officials are the scarcity of staff provided to them for carrying out such visits to villages. Further, most of

the accounts opened by BCs have remained non-operational. In order to ensure participation of all stake holders in

the financial inclusion process, RBI have advised banks to disaggregate the FIPs upto the Controlling Office and

branch level. This would ensure that bank officials at the ground level are aware of the banks objective under FI

and of the specific targets given to each Zone/branch for achieving the objectives.


Technology Issues

Another bottleneck in achieving financial inclusion is the non-availability of physical and digital connectivity. For

the success of the ICT based model, resolving technology related issues is the key.

iv)Financial Literacy

Financial Inclusion and Financial Literacy are two sides of the equation. Financial Inclusion acts from supply side

by providing financial market/services that people demand whereas Financial Literacy stimulates the demand side

by making people aware of what they can demand. Therefore, access to financial services and Financial

Education must happen simultaneously. It must be continuous, an ongoing process and must target all sections of

the population.

Financial awareness has to be spread amongst the excluded masses that are illiterate and poor. For this, evolving

an appropriate Business Model & an Efficient Delivery Mechanism is the major challenge for banks. For

disseminating financial literacy and awareness, a National Level Coordination of all stakeholders like Banks,

Governments, Civil Societies, NGOs, etc. is required. In India, the need for financial literacy is even greater

considering the low levels of literacy and the large section of the population still out of the formal financial system.

To ensure effective coordination of the efforts made by all the financial regulators and other stakeholders, a

Technical Group on Financial Inclusion and Financial Literacy has been constituted under the aegis of Financial

Stability and Development Council.The technical group is headed by the Deputy Governor, RBI, Dr Chakrabarty

with members drawn from SEBI, PFRDA, IRDA, Government of India, State Governments, Central Educatio n

Board etc. The Group is in dialogue with NCERT/State Education Boards for inclusion of financial literacy in

CBSE/State curriculum.

A national strategy on financial education has been prepared which would cater to all sections of the population in

the country. Since the challenge is to link large number of financially excluded people to the formal financial

system, the focus of the strategy at the base level will be to create awareness of basic financial products through

dissemination of simple messages of financial prudence in vernacular language through large campaigns across

the country.

The Reserve Bank of India had launched Project Financial Literacy in March 2007 with a view to create

awareness, especially among the common persons, on matters relating to banking, finance and central banking.

Under Project Financial Literacy, several initiatives have been taken to achieve financial awareness and literacy

among various target groups, which included publication of comic books on banking and RBI; games on


Financial Education; arranging school/college visits for creating financial awareness; participation in

exhibitions/fairs/melas at the State & District levels; conducting essay competitions and quizzes in schools to

create awareness about banking and RBI; outreach programmes undertaken by the Top Management and

Regional Offices; RBI‘s Young Scholars Scheme, etc.

Banks have been advised to setup Financial Literacy Centres (FLCs) in the 630 plus offices of the Lead District

Managers (LDMs). As at the end of December 2012, 658 FLCs were functioning and 1.5 million people were

educated during the period April to December 2012. Further, 35,000 rural branches of SCBs including RRBs have

been mandated to undertake outdoor financial literacy activities, at least once a month, with focus on financially

excluded population. In order to link the financially excluded segment with the banking system, a ‗Model‘ for

conduct of Literacy Camps to be held by banks has been designed, detailing the operational modalities to

culminate in effective financial access to the excluded people. Further, to ensure consistency in the financial

literacy material reaching the target audience in a simple and lucid manner, RBI has prepared a comprehensive

Financial Literacy Material consisting of a Financial Literacy Guide, Financial Diary and a set of 16 Financial

Literacy Posters (few posters have been displayed below).

v) Education

The scope of education has widened both in India and abroad covering new courses in diversified areas. Realizing

the importance of education for economic development and raising overall living standards, RBI, has classified

loans and advances granted to individuals for educational purposes, including vocational courses up to Rs. 10 lakh

for studies in India and Rs.20 lakh for studies abroad, under 'priority sector'. With a view to enable banks, the


Indian Banks' Association has brought out a model scheme for educational loan in the year 2001, which facilitated

economically weaker sections of the society to avail educational loans from scheduled banks with modified easier

norms. The Scheme was revised by IBA subsequently, the latest being in September 2012. Loans for education

should be seen as an investment for economic development and prosperity, since knowledge and information

would be the principal driving force for economic growth in the coming years.

Findings & Conclusion

With the recently revised priority sector norms, focusing on small loans directly to small and marginal farmers,

micro and small enterprises low cost housing projects, student and people with low income the banks will see

priority sectors as viable business opportunity to reach financial excluded sections of the population. In the

coming 10-15 years banks in India in particular would realign their position in the pecking order based on their

ability to convert financial inclusion into a viable business opportunity. Banks which are able to craft appropriate

business and delivery models to tap the large excluded sections of society would come on top. The triad of

financial inclusion, financial literacy and financial stability would be extremely relevant in the foreseeable future.

The depth and breadth of banking in the country would determine financial stability.

The Banking sector has played a crucial role in developing the rural economy by providing credit and creating

financial awareness. But despite all the efforts, a huge section of the rural population is still out of the banking net.

Rural India has huge potential for development and it provides tremendous business opportunity for the banks.

Finance Ministers words Shir Chidambaram rightly said, ―Any economist will tell us what India can become as

we are the tenth largest economy in the world. We can become the eighth or perhaps the seventh largest by 2017.

By 2025 we could become a $5 trillion economy and among the top five in the world.‖ What we will become

depends on us and the choices that we make. As Swami Vivekananda, whose 150th birth anniversary we

celebrated recently, said "All the strength and succor you want is within yourself, therefore make your own

future‖.


HOUSEHOLD BUDGET PROVISIONS OF INVESTMENT AND

ITS DETERMINANTS

PENDSE VISHWAS SHRINIWAS

Assistant Professor,

Padmashri Dr Vithalrao Vikhe Patil Foundation’s Institute of Business Management and Rural Development, Vilad Ghat,

Ahmednagar

Vadgoan Gupta (Vilad Ghat), PO-MIDC, Ahmednagar, 414111

Mobile-9860781595, [email protected]

[email protected]

Abstract:-

As the job of retirement planning becomes less of an institutional and more of an individual responsibility the

onus of congenial post retirement life shifts to an individual investor. Hence the study of savings, determinants

and its proportion by individual investors for a stress free retirement becomes more important. The savings in

the context include total income minus total expenditure and hence the budgetary provision on various expenses

and savings or investment was investigated. The 10 budgetary expenses were found to form three distinct groups

with decreasing priority for basic needs, necessities and amenities. The provision for investment in the budget

was found to be associated with income, occupation, education of households which when further inquired

revealed that the budgetary provision for investment was partially influenced by education and more directly by

income. The effect of education on budgetary provision expressed as a percentage of gross monthly house hold

income revealed a more indirect effect as compared to income which showed more predominant effect as

observed from plot of probabilities.

Key Words: Household Budget, Investment Budget, Priority of Budget

1. Introduction

Over the past retirement planning has become less of an institutional and more of an individual

responsibility. The reasons for this change are well known and include a shift from defined benefit to

defined contribution retirement programs, longer life spans, and growing uncertainty and even company

pensions. The responsibility for a ‗‗successful‘‘ old age rests with the individual (Ekerdt,2004).

Demographic changes, tight public budgets and reduced generosity of occupational pension plans shift the

responsibility for an adequate retirement provision towards the individua l (Oehler,2008). One of the

pressing issues before individuals and governments in post reforms era is the funding of individual

retirement accounts. The amount of savings or allocation of one‘s gross income periodically can help

resolve this issue. Also the savings and investment by individual households can contribute to a greater




extent in national and personal development of a individual investor. Accordingly, considerable attention has

been given to understanding decision making underlying personal saving (e.g., Benartzi, Peleg, & Thaler,

2009; Benartzi & Thaler, 2007; de Graaf, Waan, & Naylor, 2005; Schor, 1998). Although recent decision

making studies have shown that people can be encouraged to save more money than they did before (e.g.,

Madrian & Shea, 2001; Thaler & Benartzi, 2004), it is still not clear how individuals decide how much

money to save and whether such estimates are sensitive to time frames. In this investigation the monthly

budget of respondent was inquired on 10 different items like food, grocery, clothing, house rent, fuel

expenses, entertainment and investment as a proportion or percentage of their gross monthly household

income. However, going beyond these particular assets, micro-level empirical studies of household savings

are relatively rare, presumably since such data are much less readily available than data on income or

consumption (Phipps, Woolley ,1987) The life cycle model predicts that age and income to be significant

predictors of savings, it does not deal with the amount of savings predetermined by the households as

percentage of their gross monthly household income. The present study intended to investigate the actual

budgetary provision of households and found that such provision was influenced by income and education

of respondent. The study confirms that people with higher incomes save more; indeed income is the

strongest and most significant predictor of saving.

2. Literature Review

The life-cycle model of savings is straightforward. Because people wish to smooth consumption over their

life-cycle, people will tend to save by spending less than they earn during their peak earning years, and dis

save by spending more than they earn during lower earning years (retirement). There are a number of

predictions that can be made purely from a life-cycle savings model. Income and age would be important

determinants of saving plan take-up. To the extent that home-ownership provides an alternative,

advantageously taxed, savings vehicle, we might expect to find an inverse relationship between home equity

and other savings plan take-up (holding total wealth constant). Given the extremely negative effect of

divorce on one‘s financial health, being previously married would have a predicted negative effect on

savings plan ownership. The number and age of children has an unclear effect on savings. Children are

expensive, leaving less available for saving. They increase desired bequests, motivating more sa vings.

Moreover, to the extent that children may look after parents in their old age, investing in children can be

thought of as an alternative means of savings—and one that is especially important for women. Given that

women on average marry men older than themselves and that on average women live longer than men,

women are more likely to be dependent upon their children for care in old age. A man is statistically more

likely to be able to rely on his wife for elder-care. ( Phipps, Woolley ,2008)


Motives Behind Saving

Theoretical economic models have suggested various motives for saving, including retirement, bequest, and

for "rainy day" needs. Retirement as a motive for saving was suggested by the life-cycle hypothesis (Ando &

Modigliani, 1963; Modigliani & Brumberg, 1954).Savings are used to smooth out income flow between

stages of the life cycle. The bequest motive was inherent in Friedman's permanent income hypothesis (Bryant,

1990; Friedman, 1957). Uncertainty in life span, expenditures for health care (Kotlikoff, 1989, pp. 109-162),

or variations in income flow (Hanna, Chang, Fan, & Bae, 1993) were incorporated into the utility model to

examine consumer saving behavior.

Determinants of Family Savings

Hefferan (1982) found that both the decision to save and the level of savings were influenced by income,

wealth, and several other household characteristics. Davis and Schumm (1987) examined the saving behavior

of low- and high- income households and found that beyond a threshold level, savings rose very rapidly as

income increased. All these studies treated savings in an aggregate way. The amount of savings in each

category was not identified and analyzed.(Jing Joan 1997,).Xiao and Noting (1994) explored the relationship

between consumers' perceived motives for saving and household financial resources.They found that

low-income consumers were more likely to report saving for daily expenses, while the middle- income group

was more likely to report saving for emergencies, and the high- income group was more likely to report

saving for growth.

3. Method

Ahmednagar District is one of the largest districts in state of Maharashtra, was selected as a cohort for this

study. Data for this study were collected in Nov-Dec 2012. The district compromised of 14 tehesils. One

resource person from each tehesil was identified with whose reference 100 respondents from each tehesil

were selected as investors were believed to be skeptical about sharing their personal information especially

their financial information. Approximately 1000 questionnaires were distributed among 14 tehesils of

Ahmednagar District. On completion of questionnaire respondents returned it either through a contact person

or directly. Seven hundred and twenty two questionnaires were returned, resulting in return rates of 72.20%.

The respondents were contacted on convince basis and mostly were familiar to the interviewer or the contact

person. A structured questionnaire was administered to respondents which was prepared in the local language


‗Marathi‘ or else was read to illiterate respondents. The respondents were asked to express their provision for

various expenditure heads such as grocery, clothing, monthly fuel, traveling, entertainment, education, health,

bills (telephone, electricity, etc), house rent or accommodation expenses and provision for investment or

savings. The amount on these expenses was expressed as a percentage of their gross monthly household

income i.e. aggregate income from all sources earned by all members of household. The r espondents could

choose one of the following categories depending on their expense on each item and investment from

investment code 1) below 5%, 2) 5% to 10%, 3) 10% to15%, 4) 15% to 20%, 5) 20% to 25%, 6) 25% to 30%,

7) 30% to 35% and 8) above 35% of their gross monthly house hold income. If the respondent does not

choose any code for either of the head of expenditure or investment, it is coded as ‗0‘.

4.Results and Discussions

The sample of 722 respondents consisted of 384(53.2%) belonging to age group 55-65 years, 145(20.1%) of

35-45 years, 90(12.5%) and 39(5.4%) above 65 years of age. The sample was dominated by 663 (91.80%)

males, which can be attributed to the fact that in rural Indian household males are the primary decision

makers. Enough care has been taken to incorporate respondents having various educational background with

each class been represented. As sample consisted of respondents living in rural and semi urban area the level

of education and occupation has been diverse ranging from illiterate to post graduate. As expected farmers

constituted the largest respondent group with 25% reported farming as their primary occupation. Also 55% of

the respondents have reported income up to 25000 which again is subject to limitation as it is self reported

figure. The family budgeted expenditure in terms of percentage of total income on accounts like grocery,

clothing, education, fuel, health, travel, bills including electricity, telephone, house rent, entertainment and

investment was collected from respondents. The different accounts were analyzed by using Principal

Component Analysis in order to form different groups of account according to importance level. The four

principal components or group of accounts are given below according to descending order o f importance

level.

Group One: Grocery and Clothing

Group Two: House Rent

Group Three: Bills, Entertainment, Investment

Group Four: Education, Fuel, Health care

The above grouping is consistent with the Maslow's (1954) theory assumes that human needs are hierarchical.

People will attempt to fulfill a higher-level need after their lower-level needs have been met. The theory


categorizes human needs as being of two types: a deficit or lower-level need (Group I and II) and a growth

need ( Group III and IV) that is at a higher level. People will first pursue deficit needs; the more they get, the

less they want. When their deficit needs are met, people will pursue their growth needs; here the more they

get, the more they want (Alderfer, 1989; Maslow, 1955).The mini tab output of Principal component analysis

when only four components are extracted is given in table 1

Table 1. Principal Component Analysis of Monthly Household budget

Eigen analysis of the Correlation Matrix

Eigen value 3.6562 1.2237 1.1145 0.8475 0.6656 0.6378

Proportion 0.366 0.122 0.111 0.085 0.067 0.064

Cumulative 0.366 0.488 0.599 0.684 0.751 0.815

Eigen value 0.5335 0.4930 0.4368 0.3914

Proportion 0.053 0.049 0.044 0.039

Cumulative 0.868 0.917 0.961 1.000

Table 1: Principal Component Analysis of Budgeted Items

Variable PC1 PC2 PC3 PC4

Grocery -0.374 0.002 -0.268 0.186

Clothes -0.349 -0.193 -0.279 -0.328

Education -0.310 -0.271 -0.334 -0.423

Fuel Expense -0.312 0.186 0.093 -0.468

Health care -0.375 0.045 -0.233 0.401

Travel -0.348 0.175 -0.155 0.496

Bills -0.209 -0.417 0.492 0.106

House rent -0.057 -0.748 0.137 0.178

Entertainment -0.349 0.225 0.415 0.004

Investment -0.338 0.194 0.468 -0.101

Source: Data Analysis using Principal component analysis


Highlights of Lower level Expenditure provision

In group one 39.61% respondents have 5-10% budgeted expenditure on grocery and cloth each. Even 7.2%

respondents spend 10 %to 15% of their gross monthly house hold income on grocery and 5% to 10% on

clothing. The percentage respondents spending 10% to 15% on grocery and clothing are 6.51%. There are

very less percentage of respondents spending 20% or more of their gross monthly household income on

these two accounts.

It is found that 27.4% respondents spend 5% to 10% of their gross monthly household income on house

rent. There are also 63.02% respondents spending 10% to 15% of their gross monthly house hold income on

house rent. Even nearly 10% respondents have not given any response to budgeted expenditure on group

two items as this might may be because they have owned houses. None of the respondents communicated

that their monthly budgeted expenditure on house rent is more than 15% of their gross monthly house hold

income.

Highlights for Growth Need Expenditure

It is observed that 21.6% respondents spend 5% to 10% of their gross monthly house hold income on

different bills such as light, electricity etc. There are 11.50% respondents spending 10% to 15% on

different bills. These respondents have not mentioned any budgeted expenditure on entertainment and

investment. There are 9.14% respondents having budgeted expenditure of 5% to 10% of their gross monthly

house hold income on each of three accounts in group three. The number of respondents spending 10% to 15%

on bills and 5% of gross monthly house hold income on entertainment and investment each are 6.99%.

Even there are 6.09% respondents having their budgeted expenditure of 10% to 15% of their gross monthly

house hold income on each of these three accounts. None of the respondents communicated that their

monthly budgeted expenditure on either or all three accounts is more than 15% of their gross monthly house

hold income.

The percentage respondents with 5% to 10% expenditure on education, health and travel of their gross

monthly household income are 15.24%. The expenditure of 6.09% respondents on education, health, travel

and fuel is 5% each of their gross monthly household expenditure. The percentage of respondents spe nding

20% or more of their gross monthly household income on fuel is incurred by 2.63% respondents. On health

5.40% respondents incurs 20% or more of their gross monthly household income. Even 12.74% respondents

incur expenditure of 20% or more of their gross monthly household income on travel.


Highlights for budgetary provision on investment

The respondents planning to have 5% to 10% of their gross monthly household income on investment per

month are 26.32%. Even 18.84% respondents also plan 10% to 15% of their gross monthly household

income on investment. Majority of respondent (54.85%) do not conveyed any response on budgetary

provision of investment.

Association between demographics and budgetary investment provision.

The association between age, gender, marital status, education, occupation, income, family type, number of

employed family member, number of dependent family member, secondary source of income and gross

monthly household income with investment budgetary provision using Chi square test of independence is

discussed.

Table2. Factors affecting investment provisions

FACTOR Group Number Chi Square

P value

Speramen

R

P value

Gender Male 663 0.406 0.077 0.080 0.333

Female 59

Age 25-35 64 31.915 0.278 -0.118 0.001*

35-45 145

45-55 90

55-65 384

Above65 39

Education Illiterate 52 91.088 0.000**

0.214 0.000**

SSC 196

HSC 162

ITI 20

Diploma 123

Computer 3

Graduate or PG

Occupation Govt Service 106 152.452 0.000**

-0.161 0.000**

Pvt Employ 177

Business 130

Labor 68

Self Employed 8

Housewife 11

Farmer 184


Retired 13

Other 25

GMHI Upto 25,000 400 181.86 0.000** 0.288 0.000**

25,000-35,000 157

35,000-45,000 76

45,000-55,000 34

Above 55,000 25

Source: Data Analysis using Chi square analysis

From above table it can be observed that apart from gender every other variable including age, occupation,

income and education were observed to be associated with proportion of budgetary provision for investment.

Income and education may be proxy for occupation and hence multinomial logistic regression was

conducted to estimate the various probabilities for provision of investment in monthly budget. The summary

of the regression estimate is as follows

Budgetary Provision of Investment= f( Age, Income, Education)

The intercept for age was not found significant and hence new revised model was proposed as

Budgetary Provision of Investment= f (Income, Education)

π(x)= e β0+β1* x

------------------------------

1+ e β0+β1* x

is binomial probability estimation based on education of respondents to set aside a predetermined

amount ranging from no allocation to above 30% of the gross monthly house hold income

π(y)= e β0+β1* y

------------------------------

1+ e β0+β1* y

are binomial probability estimation based on income

Table 3. Probability estimation based on education

Education No

response

0-5% 5-10% 10-15% 15-20% 20-25% 25-30% Above

30%


Illiterate 0.44 0.31 0.12 0.04

0.08 0.02 0 0

SSC 0.32 0.33 0.15 0.09

0.06 0.03 0.01 0.03

HSC 0.17 0.4 0.23 0.12

0.02 0.03 0.02 0

ITI 0.1 0.4 0.25 0.15

0.1 0 0 0

Diploma 0.08 0.38 0.20 0.12

0.09 0.08 0.04 0

Computer 0 0.33 0.33 0.33

0 0 0 0

Graduate

or PG

0.14 0.36 0.20 0.14

0.03 0.08 0.03 0.01

Source: Primary Data Analysis

From the above table it can be observed that a illiterate respondent has shown the highest probability of

skipping the above question which might be due to the fact that he has no such provision in his monthly

budget for savings or investment. The budgetary provision on investment of 5% to 10% increases up to a

certain threshold beyond which it increases. The probability of respondents having higher provision on

investment ie more than 30% and above is very minimal in each education class. The plot of investment

provisions and their respective probabilities are shown with help of a 3 D wired mesh plot in following

figure.

The investment codes ranges from 0 to 7 which denote budgetary provision in various categories ranging

from less than 5% to above 35% of gross monthly household income.

Figure 1. Probability estimation of investment provision

Source: Data Analysis using MINITAB


The probabilities of different investment provision with respect to various income groups using multiple

logistic regressions are shown in table 4

Table 4. Probabilities of investment provision for various income groups

Income No

response

0-5% 5-10% 10-15% 15-20% 20-25% 25-30% > 30%

Upto 25,000 0.23 0.45 0.17 0.08 0.03 0.02 0.01 0.01

25,000-35,000

0.15 0.3 0.27 0.15 0.04 0.08 0.02 0

35,000-45,000

0.14 0.16 0.21 0.17 0.2 0.09 0.01 0.01

45,000-55,000

0.09 0.35 0.12 0.24 0 0.06 0.15 0

Above 55,000

0.2 0.08 0.32 0.08 0.12 0.04 0.08 0.08

Source: Data Analysis using Binomial Logistic regression analysis

From above table it can be seen that respondents having monthly household income up to Rs 25,000/- have the

highest probability of reporting the minimum provision for investment whereas the high income group

respondents have maximum probability of reporting one fourth of their gross household income as savings or

investment provision. The variation in budgetary provision for investment seems to fluctuate to a greater extent

as compared to education in various income groups. The plot o probabilities found out using multiple logistic

regression is done using 3D wire mesh plot with various budgetary investment provisions and different income

categories. The plot for the same is shown in figure 2

Figure 2. Probabilities of investment provision with respect to income groups


5. Conclusion

The house hold budget is a true picture of savings and investment provision made by an individual or a house

hold considering its various long term and short term goals. The various factors such as age, gender, occupation,

income may affect such provision. The attempt to understand the budgeted expenditure of households on

expenditure heads categories such as grocery, education, health and other heads revealed 4 principal

components which basically fall into two groups of Maslow‘s need theory. The budgetary provision on

investment was associated with education, income and occupation of respondent. As occupation could act as a

proxy for income and education the multiple logistic regression for income and education was plotted. The

effect of education on budgetary provision expressed as a percentage of gross monthly house hold income

revealed a more indirect effect as compared to income which showed more predominant effect as observed from

plot of probabilities.

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Corporate Governance in India

Author: -Prof.Dr.Shailesh O. Kediya Assistant Professor (MBA Department)

Affiliation: -DattaMeghe Institute of Engineering Technology &Research, Sawangi Wardha Email: [email protected]

Mobile no: - 9890833172

Author: -Mr.RupeshR.Dahake AssistantProfessor (MBA Department)

Affiliation: -DattaMeghe Institute of Engineering Technology &Research, SawangiWardha Email: [email protected]

Mobile no: - 9371699986

Author: -Mr.Sachin S. Panchabhai

Assistant Professor (MBA Department) Affiliation: -Dr. Ambedkar Institute of Management Studies & Research, Nagpur.

Email: [email protected] Mobile no: - 9423407072

Abstract

Presently corporate governance is very important issue for every organization because its matter of trust, marketing strategy,

name of company, etc. To better understand the role of corporate governance in business today, it is important to consider how it

relates to fundamental beliefs about the purpose of business. Some organizations take the view that as long as they are

maximizing shareholder wealth and profitability, they are fulfilling their core responsibilities. Other firms, however, believe that

a business is an important member, even citizen, of society and therefore must assume broad responsibilities that include

complying with social norms and expectations. This paper discuss about on corporate governance concepts, issues and

imperatives & present scenario in India.

Keywords: Corporate Governance, corporate scams, Whistle Blower, Anglo-American "model”, corporate social

responsibility, Stakeholder.

Introduction

‗Corporate governance‘ has become one of the most commonly used phrases in the current global business vocabulary. This

raises the question, ‗is corporate governance a vital component of successful business or is it simply another fad that will fade

away over time?‘ The notorious scam of saytam in 2009, one of India‘s biggest IT Company, has focused international attention

on company failures and the role that strong corporate governance needs to play to prevent them. Nations around the world are

instigating far-reaching programmes for corporate governance reform, as evidenced by the proliferation of corporate

governance codes and policy documents, voluntary or mandatory, both at the national and supra-national level. We believe that

the present focus on corporate governance will be maintained into the future and that, over time, corporate governance issues

will grow in importance, rather than fade into insignif icance. The importance of corporate governance for corporate success as

well as for social welfare cannot be overstated. Recent examples of massive corporate collapses resulting from weak systems of

corporate governance have highlighted the need to improve and reform corporate governance at an international level. In the

wake of Enron, satyam and other similar cases, countries around the world have reacted quickly by pre-empting similar events

domestically.The phenomenal growth of interest in corporate governance has been accompanied by a grow ing body of academic

research. As the discipline matures, far greater definition and clarity are being achieved concerning the nature of corporate

governance.




What is corporate governance?

Corporate governance is a central and dynamic aspect of business. The term ‗governance‘ derives from the Latin gubernare,

meaning ‗to steer‘, usually applying to the steering of a ship, which implies that corporate governance involves the function of

direction rather than control. There are many ways of defining corporate governance, ranging from narrow definitions that focus

on companies and their shareholders, to broader definitions that incorporate the accountability of companies to many other

groups of people, or ‗stakeholders‘.

The process of supervision and control intended to ensure that the company’s management acts in accordance with the interests

of shareholders (Parkinson, 1994).

The structures, process, cultures and systems that engender the successful operation of the organization (Keasey and Wright,

1993).

The system by which companies are directed and controlled (The Cadbury Report, 1992)

Why India Need Good CORPORATE GOVERNANCE:-

A corporation is a congregation of various stakeholders, namely customers, employees, investors, vendor partners, government

and society. In this changed scenario an Indian corporation, as also a corporation elsewhere should be fair and transparent to its

stakeholders in all its transactions. This has become imperative in today‘s globalized bus iness world where corporations need to

access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner

with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and

demonstrates ethical conduct, it will not be able to succeed. Corporations need to recognize that their growth requires the

cooperation of all the stakeholders; and such cooperation is enhanced by the corporations adhering to the best Corporate

Governance practices. In this regard, the management needs to act as trustees of the shareholders at large and prevent

asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the

shareholders. The following are the top 4 corporate fraud cases had happen in India.

India's top 4 corporate scams cases:-

1. SATYAM (2009)

Protagonist – B RamalingaRaju& others

Amount – Rs. 7,200 Cr

What was it about? –

An accounting scandal where RamalingaRaju confessed to having cooked up the accounts of Satyam Computers

and inflated its bank balances. He has, along with his family members, also been accused of laundering money

through a mesh of hundreds of companies.

Status:

Out of jail, on bail! Raju walked out in late November 2011 after spending 32 months behind bars after the CBI

failed to charge him on time and the ED delayed launching criminal prosecution because of lack of clarity on

which court will hear the matter. Not just Raju, but all the 10 co-conspirators are also out on bail. The CBI is is

believed to be nearing completion of the case. But with the ED chargesheet, which includes 37 other individuals

apart from the 10 prime accused and 166 companies, just being filed, it could take more time before there is

closure to this case.

2 – KETAN PAREKH SECURITIES SCAM (2001)

Protagonist – Ketan Parekh

Amount – Rs. 1,250 Cr

http://www.business-standard.com/search?type=news&q=Cbi



Parekh was involved in circular trading and stock manipulation through 1999-2001 in a host of companies. Like his mentor

Harshad Mehta, Parekh too borrowed from banks like Global Trust Bank and Madhavpura Mercantile Co-operative bank,

and manipulated a host of stocks popularly known as K-10 stocks.

Status:

Parekh has spent only 1 year in jail but has been banned from trading in the Indian stock markets till 2017. His name though,

continues to haunt the street as he has been accused of pulling the strings from the backstage. An IB (Intelligence Bureau)

report last year alleged that Parekh and his associates were still engaged in circular and insider trading through front entities,

but it was very difficult to establish his complicity because these were largely benami transactions.

3 – SPEAK ASIA SCAM (2011)

Protagonists: HarenderKaur, Manoj Kumar Sharma, TarakBajpai& others

Amount – Rs. 2000 + Cr


An online business survey firm that collected thousands of crores of rupees from over 24 lakh investors, asking them to fill

surveys and guaranteeing to quadruple their income in one year, Speak Asia was accused of running a Ponzi scheme. A

criminal case was registered against the firm in 2011, some accounts frozen and its business shutdown.

Status:

The Economic Offences Wing (EOW) despite promising to file a watertight case hasn‘t yet filed a chargesheet in the case,

even with the Bombay High Court rapping it for clubbing all the cheating cases together, leading to a delay. Speak Asia‘s

panelists have still not been refunded their money (Over Rs 2,000 Cr is due according to some media reports) and its key

management personnel are absconding, with no convictions made till date.

4 - SARADHA CHIT FUND SCAM (April 2013)

Protagonist – SudiptaSen

Amount – Rs. 2060 – 2400 Cr


One of the biggest Ponzi schemes in West Bengal that enjoyed political patronage and lured millions of investors to deposit

money with the promise of abnormally high returns including fancy holidays etc. The chit fund eventually collapsed leading

to defaults after a crackdown by SEBI and the Reserve Bank of India. The default, apart from leaving small depositors high

and dry, also led to 10 media outlets owned by Saradha being forced to wind up, leaving 1000 journalists jobless.

Status:

Various agencies including ED and SFIO are probing the misappropriation of funds. SudiptoSen, the Chairman and

managing director of the Saradha Group was arrested earlier this year and the Enforcement Directorate has been granted his

custody for interrogation to probe money laundering. Suspended TMC MP KunalGhosh, who was accused by Sen for being

involved in the scam has been called for questioning by SFIO, but not arrested yet. The state had set up a fund of Rs 500

crore for compensating poor depositors. Of Saradha‘s 1.7 million investors, only 1000 depositors were indemnified in

September and about 1 lakh were expected to be compensated before durga puja.

According to report on corporate governance: Changing paradigm in India Survey findings by Ernest and

young research company finding is most of the fraud find in Banking & NBFC followed by Real Estate

industry.


Literature Review:-

A comprehensive study by Chakrabarti, Megginson, and Yadav" has traced the evolution of the Indian

corporate governance system and examined how this system has both supported and held back Indias ascent to

the top ranks of the world's economies. The authors of the study have found that while on paper, the framework

of the country's legal system provides some of the best investor protection in the world.('"Chakrabarti, Rajesh;

Yadav, Pradeep K. and Megginson, William L., "Corporate Governance in India", Journal of Applied

Corporate Finance, Forthcoming, Available at SSRN: hffp://ssrn.com/abstract=1012222)

Gupta and Parua" attempted to find out the degree of compliance of the Corporate Governance (CG) codes by

private sector Indian companies listed in the Bombay Stock Exchange (BSE). Data regarding 1245 companies

for the year 2004-2005 was taken for the study from the CG reports (which are included in the Annual Reports)

of these companies and 21 codes (of which 19 are mandatory and 2 non-mandatory) were selected for study.("

Gupta, Arindam and Parua, Anupam, An Enquiry into Compliance of Corporate Governance Codes By

the Private Sector Indian Companies (18 December 2006). Tenth Indian institute of Capital Markets

Conference Paper. Available at <SSRN: htfp://ssm.com/abstract=962001)

Khanna's" analysis suggests that enforcement is important to the growth of stock markets, but the active civil

enforcement of corporate laws may not always be critical to their initial development.(Khanna, Vikramaditya,

Law Enforcement and Stock Market Development: Evidence from India (January 2009). Paper prepared

for the Law and Economy in India Project at the Centre on Democracy Development, and The Rule of


Law. Freeman Spogli institute for International Studies Stanford University; Available at:

<http://cddrl.stanford.edu>.

(Corporate Governance in India: Disciplining the Dominant Shareholder - Jayanth Rama

Varmapaper-Indian Institute of Management, Bangalore , in which the paper was first published

(October- December 1997, 9(4), 5-18) This paper has discussed the role of two such forces – the regulator (the

company law administration as well as the securities regulator) and the capital market.the key to better

corporate governance in India today lies in a more efficient and vibrant capital market. Over a period of time, it

is possible that Indian corporate structures may approach the Anglo-American pattern of near complete

separation of management and ownership. At that stage, India too would have to grapple with governance issues

like empowerment of the board. Until then, these issues which dominate the Anglo-American literature on

corporate governance are of peripheral relevance to India.

(Corporate Governance is Key to Better Corporate Image: A Study in the Banking Sector in India Dr.

Suresh Chandra Bihari published in IJMBS Vol. 2, Issue 4, Oct - Dec 2012 )The development of norms and

guidelines are an important first step in a serious effort to improve corporate governance. There is a need for a

strong culture of compliance at the top of the organization and it will be necessary to consider how management

can respond appropriately to ethical or reputation concerns that come to their knowledge. The bigger challenge

in India, however, lies in the proper implementation of those rules at the ground level. Corporate governance

does not end with commercial banks. It is imperative to extend the above principles of good corporate

governance practices to cooperatives, PDs, NBFCs and other financial institutions. Even the most prudent

norms can be hoodwinked in a system plagued with widespread corruption. Nevertheless, with industry

organizations and chambers of commerce themselves pushing for an improved corporate governance system,

the future of corporate governance in India promises to be distinctly better than the past.

Objective of the Study:-

To know the corporate governance & its importance in current scenario.

To study current scenario of corporate governance in India

To find the issue & imperatives of corporate governance.

To study global corporate governance model.

Research design:-

The report has been developed based on quantitative. Data and information collected from various web sites,

various corporate governance report etc.

Methodology:-

1. Desk research: A detailed review of relevant literature for the Indian corporate governance was conducted at

this stage.

2. Collation and analysis of information: All data and information gathered through secondary data was

collated and analyzed forthe purpose of developing the research paper.

Corporate governance models around the world:-


There are many different models of corporate governance around the world. These differ according to the

variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the

interests of shareholders. The coordinated or Multistakeholder Model associated with Continental Europe and

Japan alsorecognizes the interests of workers, managers, suppliers, customers, and the community. A related

distinction isbetween market-orientated and network-orientated models of corporate governance and the United

Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom,the CEO

generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the

norm,despite major misgivings regarding the impact on corporate governance.

European Union

The EU‘s approach to corporate governance matters is principle-based. It seeks to ensure the adoption of certain

key specific standards throughout the EU, while leaving it to Member States and market participants to

determine how to best apply these standards. The EU corporate governance framework, which consists of a mix

of binding and nonbinding rules, has as its cornerstone the ‗comply or explain‘ principle. Every listed EU

company is under an obligation to make an annual statement indicating which Code of corporate governance it

applies and declaring whether it complies with all the provisions of that Code. If that company does not comply

with some provision of the Code, it must state to what extent and give a justification. Alongside the corporate

governance statement, the Commission has adopted two non-binding recommendations on the remuneration of

directors and on the role of independent directors, which contain key substantive standards. With these

measures, the Commission seeks to encourage national corporate governance codes to converge gradually. The

European Corporate Governance Forum, set up by the Commission and composed of fifteen high level experts,

seeks to reinforce this through exchanges of views on best practices to promote the convergence of national

corporate governance practices within the European Union.

China

In most companies now at least one-third of the board are independent directors and it is evident that they are

playing a more important role in corporate governance. A listed company is required to publish an audited

annual report as well as a semi-annual report. From 2002, listed companies are also required to publish

un-audited quarterly reports. The rules have recently been revised to simplify and streamline the format of these

reports so that they would be more readable and easily understood by investors. To better protect the rights and

interests of public investors, the CSRC issued The Provisions on Strengthening the Protection of Rights &

Interests of Public Shareholders (December 2004). According to the Provisions, listed companies‘ majo r

business decisions, such as rights issues and issuing additional new shares, and equity-for-debt plans, should

receive a majority of the votes from holders of tradable-shares present at the general shareholders meeting.

Middle East

In the Middle East the first Code of corporate governance was launched in Oman as early as 2002. Egypt has

published two corporate governance Codes, one for listed companies and one for State Owned Enterprises.

Egypt has sought to strengthen its listing rules and is focusing on implementation by launching the Egyptian

Institute of Directors and a series of training programs being conducted by the Egyptian Banking Institute for

bank directors. Bahrain, Morocco, Qatar, and Tunisia have facilitated the review of their legal and regulatory

framework and are in the process of preparing a corporate governance Code. Jordan is developing a model

corporate governance Code for listed companies. Lebanon has conducted a bank corporate governance survey


and conducted a legal review followed by the Central Bank issuing a corporate governance regulation.

Additionally the Lebanese corporate governance Task Force has spearheaded the development of a Code of

corporate governance for non-listed companies and is working with Lebanese companies fo r voluntary

compliance. In the UAE, the Central Bank has drafted corporate governance guidelines for banks, and the

UAE‘s Securities and Commodities Authority has issued a corporate governance Code, setting a national

governance standard, for both the Dubai Financial Markets and the Abu Dhabi Securities Market. Similarly,

Saudi Arabia‘s Capital Market Authority launched corporate governance regulations for its listed companies,

and the banking sector is seriously looking at improving corporate governance standards. The West Bank/Gaza

is also in the process of developing a Code of Corporate Governance, after a series of corporate governance

awareness programs organized by business associations and regulatory authorities.

India

India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by

management of the inalienable rights of shareholders as the true owners of the corporation and of their own role

as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and

about making a distinction between personal & corporate funds in the management of a company." It has been

suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive

Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in

Anglo-American and most other jurisdictions.

United States, United Kingdom

The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It

relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by

shareholders. Because of this, it is also known as "the unitary system". Within this system, many boards include

some executives from the company (who are ex officio members of the board). Non-executive directors are

expected to outnumber executive directors and hold key posts, including audit and compensation committees. In

the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of

securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the

Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware,

which continues to be the place of incorporation for the majority of publicly traded corporations. Individual

rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.

Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate

bylaws.

Corporate governance initiatives in India and its Positive impact:-

There have been several major corporate governance initiatives launched in India since the mid-1990s. The first

was by the Confederation of Indian Industry (CII), India‘s largest industry and business association, which came

up with the first voluntary code of corporate governance in 1998. The second was by the SEBI, now enshrined

as Clause 49 of the listing agreement. The third was the Naresh Chandra Committee, which submitted its report

in 2002. The fourth was again by SEBI — the Narayana Murthy Committee, which also submitted its report in

2002. Based on some of the recommendation of this committee, SEBI revised Clause 49 of the listing

agreement in August 2003. Subsequently, SEBI withdrew the revised Clause 49 in December 2003, and


currently, the original Clause 49 is in force.

Now recent change in corporate governance policy by SEBI is as follows:-Corporate Governance

norms in India for listed companies The Board has approved the proposals to amend the Listing Agreement with

respect to corporate governance norms for listed companies. The amendments, inter-alia, propose to align the

provisions of Listing Agreement with the provisions of the newly enacted Companies Act, 2013 and also

provide additional requirements to strengthen the corporate governance framework for listed companies in India.

The amendments shall be made applicable to all listed companies with effect from October 01, 2014.

Exclusion of nominee Director from the definition of Independent Director

Compulsory whistle blower mechanism

Expanded role of Audit Committee

Prohibition of stock options to Independent Directors

Separate meeting of Independent Directors

Constitution of Stakeholders Relationship Committee

Enhanced disclosure of remuneration policies

Performance evaluation of Independent Directors and the Board of Directors

Prior approval of Audit Committee for all material Related Party Transactions (RPTs)

Approval of all material RPTs by shareholders through special resolution with related parties abstaining

from voting

Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees

shall be independent.

At least one woman director on the Board of the company

It has been decided that the maximum number of Boards an independent director can serve on listed

companies be restricted to 7 and 3 in case the person is serving as a whole time director in a listed

company

To restrict the total tenure of an Independent Director to 2 terms of 5 years. However, if a person who has

already served as an Independent Director for 5 years or more in a listed company as on the date on which

the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more

term of 5 years only.

The scope of the definition of RPT has been widened to include elements of Companies Act and

Accounting Standards.


Corporate Governance: Issues and Imperatives:-

India is driving major transformations in improving the corporate governance. In positive aspects itmatches

even the mature economies in regard to design of effective policies aimedtowards strengthening of governance

and compliance standards. It might be usefulrecapitulate a few of the major trends emerging in the Indian

corporate sector in regardto corporate governance as also important issues and imperatives.

Separation of Chairman and CEO

Separation of Chairman and CEO are increasingly recognized as a best practice that thecompanies should

absorb. Several companies now have separate Chairman and the CEOs.

An Independent Board

Given the importance of independence of the board, the scope of non-executive directorsand independent

directors assume great significance.

Lead Independent Directors

Big corporations are now designating lead independent directors who will coordinate thework of the

independent directors as also review the progress of the company and set itsbusiness agenda. The role of the

Lead Independent Director in one of the top Indiancompanies is defined as below:

• To preside over the meetings of Independent Directors

• To ensure that there is adequate and timely flow of information to Independent Directors


• To liaise between the Chairman and Managing Director, the Management and Independent Directors

• To preside over meetings of the Board and Shareholders when the Chairman andManaging Director is not

present or where he is an interested party

• To perform such other duties as may be delegated to the Lead IndependentDirector by the

Board/Independent Directors.

It can be seen that companies are beginning to give more weightage to the scope andfunctions of the

independent directors and in this process identifying a Lead IndependentDirector, who could be a catalyst in

deriving the best from this process.Some companies have more than one Lead Independent Directors with

different directorslooking at different aspects of the governance and growth of the companies. For instance,in

one company, one Independent Director each is vested with the responsibilities of thedriving agenda for the

Board, improving board processes, corporate strategy, financial andinternal controls, risk management and

compliance and one independent directoridentified as the Chief Ombudsman for the Whistle Blower Policy of

the company.

Independent Directors

Independent Directors are the major instrument of the corporate governance in themodern corporates. Many

companies, excepting a few public sector have complied withthe requirement in regard to proportion of the

representation of the independentdirectors in the boards. Though big corporates find good quality independent

directorswith relative ease, the same is emerging as a major challenge for the mid and small capcompanies who

appear to be facing sizeable problem in finding right number of directorswith right qualities andqualifications.

At present, nominee directors are treated asindependent directors, but SEBI is proposing not to consider

nominee directors asindependent directors, in which case, the challenge becomes much tougher for a host

ofcompanies. In view of the representation of independent directors becoming a prominentaspect of the

corporate governance, it is important that companies take this aspect withgreater focus and seriousness.In

March 2007, the Union Cabinet of the central government gave its approval to theguidelines on Corporate

Governance for Central Public Sector Enterprises (CPSEs) as perwhich, the board of directors of a company

shall have an optimum combination ofexecutive and non executive directors with not less than 50 percent

comprising nonexecutive directors. On implementation, it would improve the compliance standards ofthe public

sector enterprises.

Board Committees

Companies are taking keen interest in constituting various subcommittees of the board inaddition to the

strengthening of the board. In addition to the mandated ones such as theaudit committee and investor grievances

committee and remuneration committee etc.,companies are found to set up a wide range of sub committees as

per their specificrequirements. Names of the few sub committees in the corporate analysed in the studyinclude;

project appraisal committee, ethics committee, human resources policycommittee, investment committee, safety,

health and environment committee, planningand projects committee, contracts committee, projects evaluation

committee,establishment committee, financial management committee, marketing strategycommittee,

technology committee, rural sector business committee, risk managementcommittee, directors committee,

asset- liability management committee, specialcommittee for monitoring large value frauds, board management

committee, creditapproval committee, customer service committee, management controls committee,science

committee, banking and organization committee, intellectual property rights committee.


Meetings

Companies have shown good progress in respect of the number of meetings of the Boardand the Audit

Committee held in a year. The number of meetings held is normally higherthan the mandatory requirement in

most of the companies.

Periodic Evaluation of the Performance

Good governance requires periodic evaluation of the performance of the Board and AuditCommittees by an

internal process or an external agency. Though big corporations takeelaborate care and processes in

identification and selection of the members of the board, not all companies have a well defined process of

performance evaluation. Infosys has putin place, where in an annual performance evaluation exercise; each non

executive boardmember has tomake a presentation to the Board on the major contribution made by himleading

to an assessment that will determine the further scope of the membersparticipation in the board. Such structured

processes are not evident in a large number ofcompanies.

Related Party Transactions

OECD defines related party transactions as those that involve between a parent companyand subsidiary,

employees, an enterprise and its principal owners, management ormembers of their immediate families; and

affiliates (OECD Principles, IAS 24(9); FASBStatement No.57). Related party transactions can take various

forms including; transfer pricing, asset stripping, inter company loans and guarantees; sale of receivables

tospecial purpose vehicle; leasing or licensing agreement between a parent and a subsidiary.In view of the

extensive family holding of Indian companies, doubts exist on the accuracyand authenticity of the declarations

and statements made to the board on the relatedparty transactions. Officials of the board secretariats of several

companies expressed thescope for further refinement and reforms in the information pertaining to related

partytransactions.

Annual Reports

Annual Reports are important documents for assessing and analyzing the companyperformance in regard to

corporate governance standards and compliance. There is vastimprovement in the quality of content in the

Annual Reports, but scope exists forpresenting the data in a manner that is easy to locate and understand. Even

in respect ofthe corporate governance reports, though the number of aspects on which information isrequired to

be given is uniform, companies present information in different formatsmaking it rather cumbersome for the

readers who look at the documents of a number ofcompanies.

Corporate Governance Reports

Corporate Governance Reports are important part of the Annual Reports. Many companiesin addition to giving

the compliance on various parameters also sometimes discuss thephilosophy and objectives of the corporate

governance thus setting the background for thespirit and letter of governance that is reported.

Corporate Social Responsibility

It is also found that several leading Indian companies undertake corporate socialresponsibility, which they


report in the annual reports in a separate section. It isinteresting to note several companies taking interest in

corporate social responsibility.

Statement of the Policies

Most of the disclosures that are found in the companies annual reports are mandatory innature. Many companies

tend to fulfill the regulatory or compliance norms rather thantaking a proactive initiative in discussing and

disclosing pertinent policies and procedureson a wide range of issues that the company deals with it.For the

purpose of an illustration a global major corporate, in its corporate governanced iscussed and disclosed the

following, which is not usually evident in Indian companies,unless those like Infosys or Wipro which have

global investor base or operations.

a. Board Reserves one full day per year to discuss strategic questions

b. Average duration of the Board Meetings

c. Average attendance at the Board Meeting

d. Working of the Compensation Committee.

e. Information Policy

f. Specific guidelines/ policy in regard to Dealing with the people,

a) Relationships with suppliers and customers,

b) Legal compliance,

c) Genderequality and empowerment,

d) Health and safety,

e) Environment and public good,

f) Conflict of interest

g) Protection of confidential information,

h) Use of companyfacilities,

i) Leading by example and

j) Buying and selling of company stock.

Promoter Holding

A recent report of the Moody‘s, quoted in the media showed that 17 of the 30 companies inthe Sensex are

family controlled. The report observed that family controlled companiesface corporate governance challenges in

the future. Family controlled companies faced criticism during the economic and financial crises in the South

East Asia, whereinproblems accentuated because of lesser disclosure standards prevalent in family ownedfirms.

Directors Training

Companies are found to disclose the importance of training for their directors and mentionthe same in the

corporate governance reports. While some companies explain the specificnature of training that is usually

imparted to the directors, some make a broad referenceto it. There is however no mention of the specific time


spent by the directors on training.

Whistle Blower Policy

Being a non-mandatory disclosure, companies mention about the Whistle Blower policy inplace, but no record

of any specific activity or incidence. Some companiesput an independent director to look into the

implementation of the policy

Shortcomings in Compliance

Though the design of the corporate governance framework in India is considered matchingthat of the advanced

countries, on aspects of enforcement and quality of supervision,scope exists for significant improvements.

Conclusion:-

In this paper we studied how corporate governance is very important in present era. The scope and significance

of corporate governance in India increased generously in the Current scenario, particularly following the

financial sector reforms.The corporate governance mechanisms cannot prevent totally al the unethical activities,

but they can at least act as a means of detecting such activities beforeit is too late. So we find some of these

guideline if followed, they can make transparent system for stakeholders. In this paper we also studied corporate

governance practices adopted by Infosys and we found that the company give more emphasis on transparency

and ethical business Practices as well Company comply all national & international guideline and standard of

corporate governance.And the results we all know, company is most reputed trusted and most ethical company

in the world. It is found today most of the company giving more importance to corporate governance.

Reference:-

1. Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance , Gee, London,

December, 1992, p. 15

2. A study of corporate governance practices in leading corporates in India December 2007

3. Jill Solomon and ArisSolomon Corporate Governance and Accountability, 2004 John Wiley & Sons Ltd, The

Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England

4. Business ethics—Encyclopedias. 2. Social responsibility of business—Encyclopedias. I. Kolb, Robert W.,

1949-HF5387.E53 2008

5. Infosys Annual Report 2011-12

6. Report on corporate governance: Changing paradigm in India Survey findings by Ernest and young-2012

Documents

Issue- DECEMBER 2013 FM DEC...DETERMINANTS BY PENDSE VISHWAS SHRINIWAS 39 5 CORPORATE GOVERNANCE IN INDIA BY PROF.DR.SHAILESH O. KEDIYA, MR.RUPESHR.DAHAKE, MR.SACHIN …