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Environmental Clearance: Daunting Challenge & Mystifying Signal to

Stakeholders of India

Article  in  SSRN Electronic Journal · December 2012

DOI: 10.2139/ssrn.2191989

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 ENVIRONMENTAL CLEARANCE: DAUNTING CHALLENGE &
MYSTIFYING SIGNAL TO STAKEHOLDERS OF INDIA
Dr. Ashwin G. Modi
Reader, S.K.School of Business Management, Hemchandracharya North Gujarat
University, Gujarat, India
ashwin_modi@yahoo.com
09426005090

Mr. Jay Trivedi

Assistant Professor, S.K.College of Business Management, Hemchandracharya North
Gujarat University, Gujarat, India
visit2jay@gmail.com
08128684670
ABSTRACT

Nations all over the world & India has given utmost importance for protecting,
nurturing, preserving and saving the environment. For business, environmental
clearance presents both daunting challenges and stimulating opportunities. One
challenge is the threat to physical infrastructure, while another is regulatory uncertainty.
Environmental Clearance is an ongoing process and has no importance from the
shareholders of the company. Hence, there should be no significant effect on the value of
the firm & its stock prices after the clearance announcement. However, there is a greater
importance and challenge for a management of an existing company to have
environmental clearance for any new project because of huge investment in physical
infrastructure prior to clearance. Hence, after the environmental clearance, management
of company expects to have favorable reaction to its stock prices. The contradiction
between shareholders belief and company expectation, which expects no change in stock
prices consequent to environmental clearance, and the reality, with company expectation
of significant market reaction, motivates the present study. The market response &
reaction to announcement of environmental clearance is investigated with the dataset
from an emerging country – India for 29 companies. Paper has identified the challenges
of environmental clearance from the Ministry of Environment & Forest, and examined to
what extent an announcement has an impact to the companies’ share price under efficient
market hypothesis. The findings may have immense implications for the market
regulators in protecting the interest of company & investors for trading strategies.

KEYWORDS: Efficient Market Hypothesis, Environmental Clearance

Electronic copy available at: http://ssrn.com/abstract=2191989

1. INTRODUCTION

Major environmental resource like clean air, fresh water, forests, land and biodiversity on
which economic activities depend, perform multiple functions and they are valuable not
just ecologically but also economically. Excessive utilization of the natural capital has led
to deterioration in quantity and quality of all major environmental resources in India.
(Ganesamurthy V.S., 2009) It has created a formal importance through foregoing
legislations. The recent legislations have empowered the Central and State Governments
to create necessary institutions and instruments to prevent environmental degradation. It
has given more importance to environmental clearance for any new project with various
governmental clearance processes. It remains to be a challenging task to the management
of the company to start a new project even though there are all other resources available.
The present paper attempts to check the challenging task of management for
environmental clearance and its necessity. It also studies the impact of environmental
clearance on the stakeholder of the company, mainly shareholders through their trading
strategies. There are many theoretical explanations for Efficient Market Hypothesis and
Signaling Hypothesis which has been reviewed in this study to test the hypothesis. This is
an empirical study which aims to find out the significant movement in share price
because of an announcement of environmental clearance news. In India, having
environmental clearance with lots of uncertainty in policies & politics, is the
demoralizing challenge for the business community. Many a times it is getting delayed
and stakeholders are mystified with the impact of environmental clearance on share
prices. This really inspires one to study whether there is favorable significant change or
not in the share prices, after receiving the environmental clearance from the Government
for a company. The paired observation t-test has been carried out to find out the
significant change in the share prices by the announcement of environmental clearance
news.

2. ENVIRONMENTAL CLEARANCE : A NECESSITY

With the high level of economic activities today, emissions, effluents and waste discharge
exceed the carrying capacity of many resources at many places in the country. Such
economic activities adversely affect the environment. In India, the Ministry of
Environment and Forests is the nodal agency at the Central level for clearing, planning,
promoting and coordinating the environmental schemes, programmes and project. The
executive responsibility for prevention and control of industrial pollution lies primarily
with the Central & State Pollution Control Board. If the proposed industrial unit is likely
to discharge effluents into a stream, sewer, or on land, it is required to obtain a ‘Consent
to Establish’ for discharge of effluents under the Water (Prevention and Control of
Pollution) Act, 1974. Similarly, if the proposed unit is to be located in an air pollution
control area as declared by the concerned State Government, and is likely to emit any air
pollutants in the atmosphere, it is required to obtain ‘Consent to Establish’ for emission
under the Air (Prevention and Control of Pollution) Act, 1981.

Electronic copy available at: http://ssrn.com/abstract=2191989

Prior environment clearance has been made mandatory for 29 specified categories of
development projects through statutory categories of development projects through a
statutory notification issued in January 1994. The underlying purpose is to mitigate the
adverse environmental effects of these projects and in integrating the environmental
concerns into development. The Central Pollution Control Board is the national apex
body for assessment, monitoring, and control of water and air pollution. The Board has
identified 17 categories of heavily polluting industries, namely cement, thermal power
plants, distilleries, sugar, fertilizer, integrated iron and steel, oil refineries, pulp and
paper, petrochemicals, pesticides, tanneries, basic drugs and pharmaceuticals, dye and
dye intermediates, caustic soda, zinc smelter, copper smelter, and aluminum smelter.

In February 1992, the ministry of Environment and Forests declared a policy statement
for abatement of pollution. It has created an importance of clean and practicable
technologies rather than end of the pipe treatment. In other words, the focus is on source
reduction, and substitution of chemicals with safe alternatives which has challenged the
business community. Environmental clearance after the impact assessment, leads
reduction of environmental pollution on one hand, and helps businesses achieve resource
and energy efficiency on the other; thus getting an edge over the competitors and
maintaining a cleaner environment at the same time.

3. STATEMENT OF PROBLEM

To remain adhered to the norms of environmental clearance, companies are facing

challenges from the Government on Environmental clearance, because they have invested
huge in physical infrastructure. Ministry of Environment & Forest and Eleventh Five
Year plan has given more emphasis on environmental clearance for any new projects or
establishments.i For all businesses, to achieve a combination of economic, social and
environmental objectives, implementing to sustainable technology is becoming
imperative. It really forces the business community for necessity of the clearance and
increases the stress for the kind of challenging task. Even after having the environmental
clearance from the ministry, some of the stakeholders expecting favorable movement
about the share price of the company while others have some dilemma for the share
prices movement. Present study clarifies about change in share prices after the
announcement of environmental clearance from the company. The study has reviewed
literature on challenging task for the management of company on one part and efficient
market hypothesis on other part.

4. LITERATURE

The literature on impact of stock prices followed by an announcement of environmental

clearance has not yet found a definitive explanation for either the abnormal gain/returns
observed after the announcement, or no significant change in the stock prices are
observed. The more prominent hypotheses are the signaling hypothesis. Some of the
literature which is relevant to the value of firm, opportunities, issues and challenges on
environmental clearance has been reviewed herewith in the first part of literature study. It
is an announcement of environmental clearance by the concern authority and agency of
the market to the public, which also causes to check the literature available on reflection
on stock prices followed by any announcement. Detailed literature is available not
specific to the environmental clearance announcements and its impact but various
monetary or non-monetary announcements like bonus, stock-split, change in
management, dividend, ranking of the company, profit, various Governmental Clearance,
new projects and establishments etc., Thus, second part of literature review has
emphasized on Efficient Market Hypothesis under such announcement of company.

Literature reviewed on the different challenges at the first part, revealed that resource
management forms a central part of the India’s development plans. A sound
environmental policy and law framework is in place to have the environmental protection
and sustainable development at top of the national priorities. Every business
establishments, those who are effecting to the environment have to take the
environmental clearance from the Ministry of Environment & Forest and which remains
to be the barrier for implementing the economic liberalization policies of recent times. ii
With a paradigm shift in businesses towards environmental issues, both in the developed
and developing countries, the performance evaluation indicator for business is changing,
thereby making it mandatory to integrate the environmental clearance issues in business
decision-making processes. This has led business leaders around the world to realize the
benefits or advantages associated with the broad range of new opportunities related to
environmental issue.

Environment Protection has greater importance, as it has been considered in Eleventh

Five Year Plan (2007-12), “Our concern for environmental issues is growing along with
the lines of global concern. While in the short run there may seem to be a trade-off
between environmental sustainability and economic growth, we must in the longer run,
take recourse to the complementarities between environmental sustainability and human
well-being. Our development strategy has to be sensitive to these concerns and should
ensure that threats and trade-offs are appropriately evaluated.” Because of the more
importance to environment protection, recently most infrastructure and mining related
projects in India were plagued with controversies regarding environmental clearances.
(GOI, 2006) In most of the cases, due to lack of coordination between various
governmental authorities governing the project, the developer was given the nod by one
authority only to be stalled by the other, sometimes even after the developer had
commenced with the project. Not only were the environmental clearances unnecessarily
delayed, clearances once granted were also retracted by the authority that too after the
lapse of considerable time period. iii This has negative impact on the value of the firm.

Second part of literature review provides an insight into the announcement of news and
its impact on the the stock prices/market. This is represented by Efficient Market
Hypothesis (EMH). It has been seen from the various literature that the weak-form EMH
reflect all historical market information such as: prices, trading volumes, and any market
oriented information on the movement of stock prices. The semi-strong-form EMH states
that prices fully reflect not only the historical information but also all public information
including non-market information, such as earning and dividend announcements,
economic and political news. Lastly the strong-form EMH contends that stock prices
asserts all information from historical, public, and private sources, so that no one investor
can realize abnormal rate of return.

There are many statistical tests, have been used in the literature to examine the validity of
weak-form Efficient Market Hypothesis and the Random Walk Model (RWM). RWM
Model proves that there is no successive movement of prices based on historical prices.
Future prices cannot be predicted based on the past prices. The RWM is one of those
models; it assumes that successive price changes are independent and identically
distributed random variables, so that future price changes cannot be predicted from
historical price changes. Hence, the RWM has some testable implications for the weak-
form EMH.

Literature review reveals that Efficient Market Hypothesis were tested heavily and
frequently in both developed and developing countries for Random Walk Model. Most
studies in the literature on predictability of stock market returns test the EMH in its weak
or semi-strong form. There are several comprehensive reviews of the empirical evidence
such as: Fama (1970); Granger (1975); Hawawini (1984); Fama, (1991); and Lo (1997)
for Random Walk Model. With unsupported empirical facts, the study has been made for
reflection on stock prices followed by any announcements Cowles (1933), Friend et al
(1962) and Horowitz (1963). While Semi-Strong or Strong Market hypothesis has been
supported by Sharpe (1964) and Lintner (1965), Fama, Fisher, Jensen and Roll (1969)
and Brown (1968), Scholes (1969). Further, the literature on study of Efficient Market
Hypothesis is available which reflects specific study of some market or country. Solink
(1973); Ang and Pohlman (1978); Cooper (1982); Errunza and Losq (1985); Urrutia
(1995); Huang (1995); and finally Dahel and Laabas (1999) supports Efficient Market
Hypothesis for Weak, Semi-Strong and Strong market. It is expected that the market
behaves in weak & semi-strong form to find out the impact of environment clearance.

Thus, first part of the literature review examines that it is a challenging task for the
management of the company to have environmental clearance of the company. Stock
prices have been changed on announcement of the news of company under Random
Walk, Weak, Semi-Strong & Strong Market Hypothesis with different assumptions of
efficient market hypothesis, as noticed from the second part of literature. In an attempt to
fill the gap found in the literature on the Indian Stock Market, this study examines impact
on stock prices under the announcement of specific news related to environmental
clearance with Efficient Market Hypothesis and Signaling Hypothesis.
Few Cases and Empirical has been ascertained for a period of June 2008 to October 2012,
as detailed in table 1. The companies represent different sector and industry segment of
India. It has been presented to illustrate the framework of interrelations in the context of
impact on stock prices. Following companies have faced nail-biting challenges, issues
and opportunities under environmental clearance because of the huge investment in
physical infrastructure.

TABLE 1 : SIGNALS OF COMPANY UNDER ENVIRONMENTAL

CLEARANCE

OMDC touches roof on receiving environment clearance for production of 3 million

tonnes per annum (mtpa) of Iron Ore (ROM) and 0.24 mtpa of Manganese Ore (ROM).
Trident bestowed with golden peacock environment management award.
DS Kulkarni gets environmental clearance for Special Township project at Furusngi,
Pune.
Commercial Engineers zooms on getting clearance for new railway wagon plant.
Tata Power surges as its unit gets certified for Quality Environment, OHS Management
Systems.
Octant Industries soars on getting clearance to set up 10MW bio mass power project.
RPower strengthens as its 700 MW hydro power project gets techno-economic &
environmental clearance.
Emami Paper Mills optimistic on getting environmental and water clearances for Odisha
project.
Ushdev International rises on receiving Host Country Approval from the Ministry of
Environment & Forests.
Electrosteel Castings gets MOEF clearance for iron ore mines.
NTPC's power project in Karnataka gets environment ministry nod.
Opto Circuits rise on its subsidiary receiving regulatory clearance.
Stone India jumps on designing environment friendly Bio-Toilet system.
Ashiana Housing surges on receiving MoEF's clearance for Utsav Lavasa.
SRM Energy touches the roof on receiving approval for environment clearance.
Hindalco Industries gets final forest clearance for alumina refinery project in Orissa.
HCC's arm gets conditional permission from Environment Ministry for its Pune township
project.
Lanco Infratech subsidiary gets Environmental Clearance for Thermal Power Project .
Jindal Power gets green signal from the Environment Ministry for its Raigad project.
Alstom Projects bags environmental control systems contracts.
Sarda Energy gets environmental clearance for coal mines.
Tata Steel gets environmental clearance for Rs 15,000 cr expansion.
Adani Power advances on getting government clearance for two of its projects.
JSW Energy trades lower despite getting MoEF clearance for its Jaigad plant.
Zuari Industries gets environmental clearance to revamp ammonia plant.
Cals Refineries gets environment clearance to set up the 5 MMTPA refinery.
Parsvnath Developers gets environmental clearance for township project.
Ansal Properties surges on getting environment clearance from govt.
Godawari PowerÂ’s environment clearance unable to move the stock
Reliance Power trading positive after obtaining environmental clearance from SC.
Mundra Port was denied for environmental clearance because of the alleged offence of
Coastal Regulation Zone rules violation.
NCC Limited has faced a challenge for wrongly showing wetland as barren land.
IL&FS Tamil Nadu Power alleged for violations of Environmental Impact Assessment
(EIA) Notification.
NHPC stock prices are declined on Environment ministry rejecting its Uttarakhand
projects
Nalco faces environment clearances problem for its new aluminum project in Orissa
Coal India to face closure of 22 mines over environmental concerns.
GVK Power & Infrastructure gained by receiving environmental clearance for the project
of USD 10 billion (about Rs 55,000 crore).

Source: Bombay Stock Exchangeiv

5. THE SIGNALING HYPOTHESIS

The signaling hypothesis proposes that, in a situation of asymmetric information between
company and investors, company may use Environment Clearance to signal positive
information to the market about the firm’s future expectations. To be credible signal, the
signal has to be costly. The costs of this financial signal are investment made to receive
the environmental clearance, registration, consultation expenses. Though the signaling
hypothesis can be supported by empirical studies, it mystifies the investors. In addition,
the signaling hypothesis assumes that there is no new information content around and
after the announcement of environment clearance. The following hypothesis has been
derived to test the data.
Ho: There is no significant change in the stock prices after the announcement of
Environmental clearance news.
H1: There is a significant change in the stock prices after the announcement of
Environmental clearance news.

6. DATA AND METHODOLOGY

6.1 DATA
The basic sample for the study is comprised of all Bombay Stock Exchange (BSE) equity
stocks that have environmental clearance and is recorded at Bombay Stock Exchange or
other Stock Exchanges of India. The choice of the time period is guided by the fact that
more emphasize has been given in the Eleventh Five Year Plan for Environment
Protection by the Government. Therefore, the period from June 2008 to October 2012 has
been considered for study. Based on availability of data, analysis was possible for 29
companies as given in table 2.
The following criteria have been applied to include a company in the sample.
i) The announcement dates are available on the website, viz.,
http://www.bseindia.com under the news and corporate action section or may
be from the website of Ministry of Environment and Forest, viz.,
http://moef.nic.in.
ii) The stock price data is available on daily basis before and after the date of an
announcement for atleast 30 days on an average.
iii) Listed Companies those who received environmental clearance for any new
establishments or ongoing project have been included for the empirical
analysis.
iv) Other required financial information is available from the AceAnalyser Software
http://www.aceanalyser.com and http://www.bseindia.com.

TABLE 2 : SAMPLE OF QUALIFIED 29 COMPANIES FOR THE PAIRED TEST

AS PER THE ABOVE CRITERIA

Sr. Name of Company Average daily Average daily Announcement

No. closing price before closing price on Date of
the announcement or after the Environmental
date (Rs.) announcement Clearance (Date)
date (Rs.)
1 GVK Power & 12.99 11.82 23 Aug 2012
Infrastructure Ltd.
2 Orissa Minerals 31456.18 49226.32 25 July 2012
Development Co Ltd.
3 GVK Power & 12.25 13.63 29 May 2012
Infrastructure Ltd.
4 DS Kulkarni Developers 57.99 58.07 22 May 2012
Ltd.
5 Commercial Engineers & 62.32 69.29 19 April 2012
Body Builders Co Ltd.
6 Tata Power Company 101.43 100.22 17 April 2012
Ltd.
7 Octant Industries Ltd. 9.40 7.97 6 Mar 2012
8 Emami Paper Mills Ltd. 33.40 31.61 1 Mar 2012
9 Electrosteel Steels Ltd. 6.72 7.00 18 Feb 2012
10 NTPC Ltd. 163.26 179.03 27 Jan 2012
11 Suryachakra Power 3.73 3.92 28 Dec 2011
Corpn. Ltd.
12 Ashiana Housing Ltd. 151.04 140.45 15 Dec 2011
13 Ushdev International Ltd. 316.22 327.71 3 June 2011
14 SRM Energy Ltd 27.92 27.96 24 May 2011
15 Hindalco Industries Ltd. 210.48 190.95 12 May 2011
 16 Hindustan Construction 35.00 38.06 25 Mar 2011
Company Ltd.
17 Adhunik Metaliks Ltd. 97.15 92.03 22 Mar 2011
18 Coal India Ltd. 310.91 348.12 9 Mar 2011
19 Lanco Infratech Ltd. 40.07 37.81 3 Mar 2011
20 Steel Authority Of India 164.09 157.58 10 Feb 2011
Ltd.
21 Jindal Steel & Power 671.26 696.22 4 Dec 2010
Ltd.
22 Tata Steel Ltd. 481.32 486.75 22 June 2010
23 Adani Power Ltd. 117.99 123.99 14 June 2010
24 JSW Energy Ltd. 106.51 109.79 15 Feb 2010
25 National Aluminium 73.38 77.87 21 Jul 2009
Company Ltd.
26 Cals Refineries Ltd. 0.78 0.80 26 May 2009
27 Ansal Properties & 24.84 25.35 9 Feb 2009
Infrastructure Ltd.
28 Godawari Power & Ispat 64.11 74.03 28 Nov 2008
Ltd.
29 Reliance Power Ltd 160.74 158.15 8 Sep 2008

6.2 METHODOLOGY TO ASSESS MARKET REACTION ON

ENVIRONMENTAL CLEARANCE:
Management of company, after receiving environmental clearance from the Ministry of
Environment and Forest informs to the stakeholders through various intermediaries and
stock exchanges. In the present study, the event is the announcement date, defined as an
effective date or the signaling date. The study considers merely a month before the
signaling date and a month after the signaling date. The daily closing price of companies
has been considered for the trading days which are in pre-announcement month and post-
announcement month. In order to have sustainable effect of environmental clearance,
closing price of all the sample trading days are averaged. Thus, pre-announcement
average price of a company is one variable has an impact of an environmental clearance
event and that would be the post-announcement average price of a company.

The empirical results are best explained by Testing Differences between means (or
paired) samples as per equation 1. The only assumption to test is that the population of
differences is normally distributed.
EQUATION 1:

where sd is the standard deviation of the mean difference values, and the sample size n is
the number of pairs of observations.
In the case of the paired t-test, the formula for calculating t is:

7. EMPIRICAL FINDINGS
Table 3 presents the t-statistics with a computed value of 1.0046, which is less than
critical point of t-value 1.701 at degree of freedom 28 and 5% significant level. Hence,
the null hypothesis is accepted with the result that there is no significant change in the
price after the announcement.
TABLE 3: MARKET REACTION ON ANNOUNCEMENT OF ENVIRONMENT
CLEARANCE NEWS*

Evidence
Size 29 n Assumption
Average Difference 615.483 D Populations Normal
Standard Deviation
of Difference 3299.33 sD
Note: Difference has been defined as
Test Statistic 1.0046 t Sample1 - Sample2
df 28
At an  Confidence Intervals for the Difference in
Hypothesis Testing of Means
p-
Null Hypothesis value 5% (1 - ) Confidence Interval
H0: 1 2 = 0 0.3237 95% 615.4834 ± 1255 =
H0: 1 2 >= 0 0.8382 -639.513, 1870.48
H0: 1 2 <= 0 0.1618

*Testing Differences between means (or paired) samples for 29 qualified companies.
To sum up, all 29 randomly qualified companies have been tested with paired t-test with
5% of significant level. From the finding, it seems that on the announcement date of
environmental clearance, the stock price of the firm has no significant effect. The result
of the investigation is in line with the assumed hypothesis, which shows significantly no
excessive increase in the stock price after date of environmental clearance.
T-value from the finding explains that the signaling hypothesis on declaration of the
event of environmental clearance may generate euphoria in completion and satisfaction
but not in significant rise of stock price. Even P-value is 0.3237, explained at the
significant level of 5% and justifies that there is no significant positive change in the
price of stock price after the announcement of environment clearance news from the firm
or any intermediaries.

8. CONCLUSION

Protection of the environment remains to be a central part of any sustainable inclusive

growth strategy. This aspect of development is especially important in the 11 th & 12th
Plan when consciousness of the dangers of environmental degradation has increased
greatly. But it has been observed from the empirical that an accelerated growth of
economy is not possible if the environmental clearance is getting delayed. It also looses
the charm and greater impact on stock prices. Even after making huge investment in
physical infrastructure and with the cost and time of investment, the project expects
instant green signal for environment clearance from ministry of environment and forest.
Ministry may or may not be favorable and instant to the firms for the kind of green
signal. These have always discouraging and no significant instant reaction to stock price,
as assessed from the empirical. A comprehensive review of environmental clearance
procedure is necessary to ensure that the system is transparent and avoids unnecessary
delay. Unless this is done, the large increases in investment required for accelerated
growth will not fructify.
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WEBSITE REFERENCES
i
http://www.moef.nic.in
ii
http://www.businessandclimate.org/gemi/climate
iii
http://www.singhania.in
iv
http://www.bseindia.com

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