Professional Documents
Culture Documents
INTRODUCTION
A growing firm needs capital in order to run and manage a company. Right from the
promotional stage up to the end, finance plays an important role in a company’s life.
If funds are inadequate, the business suffers and if the funds are not properly manage
the entireorganization suffers. It is, therefore necessary that correcte estimate of the
current and future need of capital be made to have an optimum capital structure
which shall help the organization to run its work smoothly and without any stress.
Estimation of capital requirements is necessary, but the formation of a capital
structure is more important.The term capital structure of the company refers to the
mix of the long-term.finances used by the firm. is the financing plan of the company
perhaps, no area of financial management has commanded as much attention as the
capital structure problem. The capital structure problem, then, deals with the firms’
choice of the types of securities it has to issue in the current market oriented policies.
The corporate financial reasons On one hand, owners, including the ever more power
-ful institutional investormanagers have been motivated to use more debt-financing
for several powerful s, have confronted the management with incremented demands
for performance, generally expressed as a desire for a continuous increase earening
per share. On the other hand low-debt usage companies are extremely attractive to
leverage-minded conglomerate managers. Increased use of leveraged often offers a
way to improve a company’s earnings and at the same time removes some of the
attractiveness of the firm as a takeover target with given the objective of increse of
shareholders wealth and the need for an optimal capital structure cannot, therefore,
overemphasized.Thus, it is one of the formidable tasks of every finance manager to
design an optimum capital structure. But the precise per cent of debt and equity that
will maximize price pre share is defined in the theory of finance.Hence, till today, it
has been remained an unsolved mystery for the financial experts.Though it is almost
impossible to state accurately a suitable financing mix, however every finance
manager tries his level best to determine the approximate proportion of debt to use in
the financial plan in conformity with the object of maximizing the share price.
Trade-off theory allows the bankruptcy cost to exist. It states that there is an
advantage to financing with debt (namely, the tax benefit of debts) and that there is a
cost of financing with debt (the bankruptcy costs of debt). The marginal benefit of
further increases in debt declines as debt increases, while the marginal cost increases,
so that a firm that is optimizing its overall value will focus on this trade-off when
choosing how much debt and equity to use for financing. Empirically, this theory
may explain differences in D/E ratios between industries, but it doesn't explain diffe-
rences within the same industry.
Pecking Order theory tries to capture the costs of asymmetric information. It states
that companies prioritize their sources of financing (from internal financing to equity)
according to the law of least effort, or of least resistance, preferring to raise equity as
a financing means ―of last resort‖. Hence internal debt is used first, and when that is
depleted debt is issued, and when it is not sensible to issue any more debt,equity is
issued. This theory maintains that businesses adhere to a hierarchy of financing
sources and prefer internal financing when available, and debt is preferred over
equity if external financing is required. Thus, the form of debt a firm chooses can act
as a signal of its need for external finance. The pecking order theory is popularized
by Myers (1984)when he argues that equity is a less preferred means to raise capital
because when managers (who are assumed to know better about true condition of the
firm than investors) issue new equity, investors believe that managers think that the
firm is overvalued and managers are taking advantage of this over-valuation. As a
result,investors will place a lower value to the new equity issuance.
MAJOR MILESTONES
In 1982 Reliance group started reliance industries with a small polyester plant at
Patalganga. In the year 1986 also Reliance started PTA plant and Polyester Staple
Fibre plant at Patalganga. In the year 1988 company opened a new polyester plant at
Patalganga again. In 1995 company net profit crossed Rs. 1000 crore (US$ 338
million). In the year 1996 company issued a 50 and 100 year bond with US debt
market. And also company rated by international credit rating agency. Following
Years Company expanded their Hazira petro plant by introducing new plants like
PET plant and MEG plant. During the same period Dhirubhai Ambani got the Dean’s
medal for setting an outstanding leadership. In the mid of 1999 and 2000 company
became the 5th largest commercial producer of refinery in the world. After 2000
company reaworld class product handling, storage and despatch facilities. In 2001
RIL achieved the position as the largest company in terms all major financial
parameters. And also the legend Dhirubhai Ambani got the corporate award for the
excellence for lifetime achievement. In 2002 RIL gained the position of having
India’s biggest gas discovery. They found a volume of natural gas 7 trillion cubic feet.
This is considered as one of the ever discover by an Indian private sector company.
Company awarded as the second largest petrochemical company. In 2003 RIL
opened a new research and technology centre for their further develop in their
polyester products at their Patalganga complex. Company opened oil refinery in the
onshore of country Yemen. And also RIL became the first private sector company in
India to record a net profit of US dollar of over 1 billion. In the year 2005 company
was awarded as the lised the importance of international facilities and company
broughtinternational Refiner of the Year 2005. And also wins two National Energy
Conservation awards. In 2007 company formed a tie up with a Malaysia company
named Mammoth with a 0 million joint venture. With the help of this company they
established their polyester business in Malaysia also. And in the same year company
raised their asset by selling the equity about 15 million. In 2010 RIL merged with
Brazilian company Petro bras and as an initial tie up they bought 3 million barrels of
crude oil
Reliance Capital has a net debt equity ratio of 1.88 as of March 31, 2017. It is one of
the top rated Indian financial institutions and has the highest ratings of ‘A1+’ by
ICRA and CRISIL for its short term borrowing program, and ‘CARE D’ by CARE
for its long term borrowing program
OPERATIONES
Reliance Capital offers a range of financial services in many business lines. The
company is one of the most diversified financial services firms in India with interests
expanding from asset management, insurance, commercial finance, broking, private
equity to other niche financial services
MAJOR DEALS
In 2011, Reliance Capital sold 26% stake in its life insurance business, Reliance Life
Insurance, to Nippon Life Insurance (Nissay), amongst the world's largest life
insurers, with an AUM of over 600 billion. The transaction was completed at Rs.
3,082 crore for a 26 per cent stake, valuing Reliance Life Insurance at $2.6 billion.
In 2012, Nippon Life Insurance bought 26% stake in Reliance Capital Asset
Management for Rs. 1,450 crore.
Reports indicate that Reliance Capital is also planning to sell a 26% stake in its
general insurance business, Reliance General Insurance, at an appropriate
time. India's leading financial daily econimics times wrote, "Since Reliance General
Insurance is one of the leading players with 8.4 per cent market share, the proposed
stake sale is expected to generate handsome capital gains for Reliance Capital...
Besides de-leveraging the balance sheet, the ongoing restructuring should also help
Reliance Capital conserve capital and generate better return ratios."
Reliance Capital in July 2014 announced the merger of its global film and media
services business with Prime Focus to create an entity with a combined turnover of
over Rs 1,800 crore.In July 2017, it sold its 1% share in Paytm to China's Alibaba
Group for Rs 275 crore, making a profit of 2,600%.
Reliance Nippon Life Asset Management (RNAM; formerly Reliance Capital Asset
Management Limited) is one of the largest asset manager in India and manages and
advises Rs. 3,58,059 crore as per March 2017, across mutual funds, pension funds,
managed accounts, alternative investments and offshore funds. RNAM is the only
AMC to have the mandate for fund management by EPFO, PFRDA and
CMPFORNAM is the asset manager of Reliance Mutual Fund (RMF) Schemes.
Sundeep Sikka is the Executive Director and Chief Executive Officer of RNAM.As
per March 2017, RMF manages the highest assets from the ‘beyond Top 15 cities’
category across all AMCs in the industry.RNAM acts as the advisor for India focused
Equity and Fixed Income funds in Japan (launched by Nissay Asset Management)and
korea (Samsung Asset management). RNAM also manages offshore funds through its
subsidiaries in Singapore and Mauritius thereby catering to investors across Asia, the
Middle East, the UK, the US, and Europe.in 2019 nippon life insurance acquired 75
percent stake in reliance nippon life asset managment from realince
capital.realincemutual fund has been rebranded as nippon india mutual fund.
Reliance Nippon Life Insurance Company is among the leading private sector life
insurance companies in India in terms of individual WRP (weighted received
premium) and new business WRP. The company is one of the largest non-bank
supported private life insurers with over 10 million policy holders, a strong
distribution network of over 700 branches and over 75,000 advisors as on March 31,
2017. The company holds one of the top claim settlement ratios in the industry: it
stands at 95.21% as of March 31, 2017.
Ashish Vohra is the Executive Director and Chief Executive Officer of RNLI.
In fiscal year 2016, after the enabling regulations, Nippon Life increased its stake in
Reliance Life from 26% to 49%, subsequent to the receipt of all regulatory approval.
Nippon Life Insurance, also called Nissay, is Japan's largest private life insurer, with
25% market share. The company, with over 29 million policies in Japan, offers a
wide range of products, including individual and group life and annuity policies
through various distribution channels. It mainly uses face-to-face sales channel for its
traditional insurance products. The company primarily operates in Japan, North
America, Europe and Asia and is headquartered in Osaka, Japan. It was ranked 114th
in Global Fortune 500FIRMS IN 2016
Reliance Securities, the broking and distribution arm of Reliance Capital, is one of
India’s leading retail broking houses. B Gopkumar is the Chief Executive Officer and
Executive Director of its broking and distribution business.The distribution business
has approximately 80 branches
Ravi Vishwanath is the CEO and Executive Director of Reliance Health Insurance.
Reliance Health Insurance is a Standalone Health Insurance Company promoted
solely by Reliance Capital It was established on 7th May 2017. The company is
headquartered in Mumbai, Maharashtra and has started operations on 10th December
2018.
MARKETING STRATEGY
The industry has a very good marketing strategy to compete in the market and to
maintain their top position in the market. They have about 7100 retail sales outlet all
over India and 1000 direct sales agents. And also under these direct sales agents they
have other 4800 independant sale agents. In total there are 195 major distributors
covering 50000 merchants over the major cities of India. While they establish their
industry wide they haven’t forget about customer welfare. In order to give a better
service and to ensure customer satisfaction they have trained 4800 well experienced
customer care executive over different zones of their network. They have an
innovative pricing to drive penetration to the market. They have a trend of giving
pricing offers and promotion in their products. Comparing to the other major
petroleum companies in India reliance has always a variation in their price and also
they have tried their best to keep the quality of their products. They have modern
technologies at their outlets to give a good experience for their customers. They
always try to have a minimum logistics cost to gain competitive edge. All these
factors help in them achieving their goals and maintain their market status.
FACTORS TO BE CONSIDER :
Flexibility : - The capital structure should be such that capital structure can
raise funds whenever needed.
Conservation : - The debt contained in capital structure should not exceed the
limit which the capital structure can bear.
Solvency : - The capital structure should be such that firm does not run risk of
becoming insolvent.
SWOT ANALYSIS
1. STRENGTH
Reliance industries having a leading market position and market share in India which
considered as their best strength. They possess the stand as the largest petroleum
company in India which has their business outlets even in rural areas. They have
many associates and subsidiaries for the funding to the industry. Reliance business
network is not just in India they have business over five continents. Considering the
Indian market they have only very few competitors to compete.
2. WEAKNESSES
Before four years the reliance was just one group. After the death of Dhirubhai
Ambani Reliance group split in between reliance brothers Anil and Mukesh. Before
they split reliance group was the second richest family in the world. This splitting
affects much in their business. Their business is mainly focused in India by about
80%. It seems like they failed to establish their industry worldwide. For every
business international market is a very good opportunity to increase their asset.
3. OPPORTUNITIES
In the domestic market reliance industry have business even in villages. This under
penetration gives the company more opportunity to spread their business. All the
products of reliance have a very high demand in international market, For example
their petroleum products and polyester. The opportunity they have is that we can
recognise they have put their hands on all major industries in India which makes the
industry as an inevitable factor to the Indian market. Most of all the products having
a trend of increasing demand.
4. THREATS
The main threat of the company is that their existing competitors in the current
market. The economic depression that the world faced during past few years has
affected a lot in the business. India have been witnessed a lot of natural disasters like
earth quake and tsunami. During the past few years the tsunami at Vishakapattanam
harbour destroyed the company’s wealth a lot. And also earthquake happened in
Gujarat destroyed polyester plant.
COMPETITORS IN MARKET
The below table shows how Reliance industries Limited is different from other
competitors in market in terms of financial parameters. (All the values stated in
the table is in Indian rupees crore)
TOTAL CAPITAL
EQUITY CAPITAL
ADVANTAGES :
Company does not require to mortgage its assets for issue of equity
share, so mortgage asset for long term debt in future can be created.
DISADVANTAGES :
ADVANTAGES :
The administrative & issuing cost are normally lower than raising
equity capital.
Cost advantage due to the ability to set debt interest against profit for
tax purposes.
The pre tax rate of interest is invariably lower, than the return required
by equity capital suppliers
DISADVANTAGES :
ASSUMPTIONS
There are only two kinds of funds used by firm i.e., debt & equity.
Modigliani-Miller Approach
Traditional Approach.
This may sometimes leads to over capitalization
According to NOI approach yhe value of the firm is independent of its structure here
it is believed that increase in the employment of debt capita lincrease the expected
rate of return by the shareholders & the benefit of using relatively cheaper debt funds
is offset by the loss arising out of the increase in cost of equity According to NOI
Approach, the market value of the firm depends upon the Net Operating Profit ‗
Firms can be grouped into equivalent risk classes on the basis of their
business risk.
The value of the levered firm can neither be greater nor lower than that of
an unlevered firm according to this approach. The two must be equal.
There is neither advantage nor disadvantage in using debt in the firm‘s capital
structure.
TRADITIONAL APPROACH
The traditional approach strikes a balance in NOI approach and MM
Approach :
The cost of debt capital remains more or less unchanged up to certain degree of
leverages but rises thereafter at an increasing rate.The cost of equity capital remains
more or less unchanged or rises only gradually up to a certain degree of leverage but
rises sharply thereafter.As a consequence of the above behavior of cost of equity
capital the average cost of capital structure decreases up to a certain point. Capital
structure remains more or less unchanged for moderate increase in leverage & capital
structure rises beyond a certain point.The principle implication of this approach is
that cost of capital is dependent on the capital structure. Thus it is possible to have an
optimum capital structure which would minimize the cost of capital.EBIT or WACC
A firm can alter its capital structure slowly by adjusting its future financing mix
appropriately. Alternatively, the firm could change its capital structure quickly
through an exchange offer, recapitalization offer, debt or share repurchase or stock
for debt swaps
Capital structure determines how funds are procured and used and they
relate to a firm’s financing and investment policies. It involves the solution for three
decisions namely investment decisions, financing decisions and dividend decisions
which determine the value of the firm to its share holders. A firm should strive for an
optimal combination of the three interrelated decisions in order to maximize its value.
The decision to invest in new capital project necessitates financing the investment.
The financing decision, in turn, influences, and is influenced by the dividend decision,
for retained earnings used in internal financing represent dividends foregone by
stockholders. Thus, these three financial decisions are inseparable and therefore
whenever a decision has to be taken, the financial manager should give due weight
age to all of them as the situation demands.The modern financial manager is
concerned with determining the best financing mix or capital structure. If companies
can change its total valuation by varying its capital structure, an optimal financing
mix would exist, in which market price per share could be maximized. Since, firms
regularly make new investment, the need for financing and hence the necessity of
making the financing decisions are ongoing. The financial manager should decide,
when, where and how to acquire funds to meet the firm’s investment needs. The
theories suggest that firms select capital structures depending on characteristics that
determine the various costs and benefits associated with debt and equity financing.
All the studies related to the relationship between industry grouping and Capital
Structure of the corporations belongs to developed capital markets and it is important
to study these in Indian companies. The existing literature identifies a number of
sources responsible for the variations in capital structure. This study checks which of
these sources can possibly be important in the Indian context, and so seeks to get
answers to the following aspects.
METHODLOGY
SOURCE OF DATA :
This study is based on the secondary data collected from websites data base of capital
structure of reliance india The data which is taken from varios sources from the
company is supplemented with information from various financial dailies, margarine
reports, industry reports and annual reports of companies to enable proper analysis
and to facilitate the attainment of study objective listed earlier.
The data used in the study releted to the capital structure of reliance india the
company which is listed in the BSE abd NSE and the data is avalible in the scrbid
database based on selected the study based on the criteria that the company should
have maintained its identity and reported its annual accounts without any gaps for the
years screening for data consistency on the basis of this criterion led to the selection.
HYPOTHESIS
The following hypothesis were framed for the purpose of the study.
2. There is no significant difference among the various industries with respect to the
Determinants of capital structure.
The study has been undertaken only through the analysis of quantitative financial
data, the qualitative aspects which have a bearing on Capital Structure have not
been considered.
The study is entirely based on the financial statement which shows historical data.
The limitative pertained to financing statement analysis is also applicable to the
study.
Thus the findings of the present study should be used judiciously and carefully
taking into account the various limitations.