Financing pattern of Indian corporate sector under liberalisation : with focus on acquiring firms abroad

Abstract

Indian corporate sector has experienced a paradigm shift over the last two decades with the initiation of certain measures of financial liberalisation. As a result of these policy changes, the ratio of Indian FDI outflows to Indian FDI inflows has increased significantly since 2000. An increasing trend in the purchases of firms or assets abroad is also observed since 2000, for various reasons. Against this background, an attempt has been made in this paper to analyse the financing pattern of Indian corporate sector during 1990-2009. This paper further seeks to identify the pattern of resource mobilisation of Indian firms acquiring firms abroad. Indian private corporate sector mobilised large share of resources through external sources although there is an increasing trend in the share of internal financing since 2000. Borrowings are the major source of external financing. Share of resources mobilised through capital market has sharply declined since mid-1990s. A similar trend is observed in case of the selected industries as well. Indian acquiring firms mobilised large funds through external sources although the share of retained profit was quite substantial unlike in case of the manufacturing sector. They could also consistently raise resources through capital market throughout our study period. However, borrowings constituted the major contributor to external financing. These firms were also raising resources from abroad and therefore we could argue that it is not primarily their financial muscles which enable firms to engage in acquisitions abroad. Revenue foregone through various tax concessions is still found to be a major source of corporate growth during liberalisation period. The paper argues that the pecking order theorem does not seem to be applicable in case of the Indian manufacturing sector. Further, we conclude that, although stock market development is expected to lower the cost of capital for Indian corporations, it has not played a major role as far as the actual resource mobilisation of the Indian manufacturing sector is concerned. Finally, we argue that regulation by the State through measures of corporate governance is important in order to create conditions for a desirable path of growth and development. Key Words: Capital and Ownership Structure; M&As; Corporate Governance. JEL Classification: G32, G34, G37

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