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INTRODUCTION
Finance is a important input for any type of business and is needed for working
capital and for permanent investment. The total funds employed in a business are
obtained from various sources. A part of the funds are brought in by the owners
and the rest is borrowed from others-individuals and institutions. While some of
the funds are permanently held in business, such as share capital and reserves
(owned funds), some others are held for a long period such as long-term
borrowings or debentures, and still some other funds are in the nature of short-term
borrowings: The entire composition of these funds constitute the overall financial
structure of the firm. You are aware that short-term funds keep on shifting quite
often. As such the proportion of various sources for short-term funds cannot
perhaps be rigidly laid down. The firmhas to follow a flexible approach. A more
definite policy is often laid down for the composition of long-term funds, known as
capital structure. More significant aspects of the policy are the debt equity ratio
and the dividend decision. The latter affects the building up of retained earnings
which is an important component of longterm owned funds. Since the permanent
or long-term funds often occupy a large portion of total funds and involve long-
term policy decision, the term financial structure is often used to mean the capital
structure of the firm. There are certain sources of long-term funds which are
generally available to the corporate enterprises. The main sources are: share
capital (owners' funds) and longterm debt including debentures (creditors' funds).
The profit earned from operations are owners' funds-which may be retained in the
business or distributed to the owners (shareholders) as dividend. The portion of
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profits retained in the business is a reinvestment of owners' funds. Hence, it is also
a source of long-term funds. All these sources together are the main constituents of
the capital of the business, that is, its capital structure.
WHAT IS CAPITAL STRUCTURE?
The term `capital structure' represents the total long-term investment in a business
firm. It includes funds raised through ordinary and preference shares, bonds, deben
-tures, term loans from financial institutions, etc. Any earned revenue and capital '
surpluses are included.
Capital Structure Planning
Decision regarding what type of capital structure a company should have is of
critical importance because of its potential impact on profitability and solvency.
The small companies often do not plan their capital structure. The capital structure
is allowed to develop without any formal planning. These companies may do well
in the short-run, however, sooner or later they face considerable difficulties. The
unplanned capital structure does not permit an economical use of funds for the
company. A companyshould therefore plan its capital structure in such a way that
it derives maximum advantage out of it and is able to adjust more easily to the
changing conditions.
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INTRODUCTION
Backed by 100 glorious years of experience in steel making, Tata Steel is amongthe top ten steel producers in the world with an existing annual crude steel
production capacity of 30 Million Tonnes Per Annum (MTPA). Established in
1907, it is the first integrated steel plant in Asia and is now the world`s second
most geographically diversified steel producer and a Fortune 500 Company.
Tata Steel has a balanced global presence in over 50 developed European and fast
growing Asian markets, with manufacturing units in 26 countries.
It was the vision of the founder; Jamsetji Nusserwanji Tata., that on 27th February,
1908, the first stake was driven into the soil of Sakchi. His vision helped Tata
Steel overcome several periods of adversity and strive to improve against all odds.
Tata Steel`s Jamshedpur (India) Works has a
crude steel production capacity of 6.8 MTPA
which is slated to increase to 10 MTPA by 2010.
The Company also has proposed three Greenfield
steel projects in the states of Jharkhand, Orissa
and Chhattisgarh in India with additional
capacity of 23 MTPA and a Greenfield project in
Vietnam.
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Through investments in Corus, Millennium Steel (renamed Tata Steel Thailand)
and NatSteel Holdings, Singapore, Tata Steel has created a manufacturing and
marketing network in Europe, South East Asia and the pacific-rim countries.Corus, which manufactured over 20 MTPA of steel in 2008, has operations in the
UK, the Netherlands, Germany, France, Norway and Belgium.
Tata Steel Thailand is the largest producer of long steel products in Thailand, with
a manufacturing capacity of 1.7 MTPA. Tata Steel has proposed a 0.5 MTPA mini
blast furnace project in Thailand. NatSteel Holdings produces about 2 MTPA of
steel products across its regional operations in seven countries.
Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has alsoentered the steel building and construction applications market.
The iron ore mines and collieries in India give the Company a distinct advantage in
raw material sourcing. Tata Steel is also striving towards raw materials security
through joint ventures in Thailand, Australia, Mozambique, Ivory Coast (West
Africa) and Oman. Tata Steel has signed an agreement with Steel Authority of
India Limited to establish a 50:50 joint venture company for coal mining in India.
Also, Tata Steel has bought 19.9% stake in New Millennium Capital Corporation,Canada for iron ore mining.
Exploration of opportunities in titanium dioxide business in Tamil Nadu, ferro-
chrome plant in South Africa and setting up of a deep-sea port in coastal Orissa are
integral to the Growth and Globalisation objective of Tata Steel.
Tata Steel¶s vision is to be the global steel industry benchmark for Value Creation
and Corporate Citizenship.
Tata Steel India is the first integrated steel company in the world, outside Japan, to
be awarded the Deming Application Prize 2008 for excellence in Total Quality
Management.
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Capital Structure Analysis for five years
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Financial Year 2005-2006
The year that was
Ranked World¶s Best Steel Maker - World Steel Dynamics
Consolidated gross turnover crosses Rs. 22,000 crores Acquisition of Millennium Steel, Thailand
1 MTPA expansion completed. 1.8 MTPA expansion launched
Reduction in domestic clean coal ash content by 1.2 % enables
lower usage of imported coal from 46% in FY05 to 32% in FY06,
resulting in an overall reduction in cost of manufacturing coke.
Standard and Poor¶s upgrades Tata Steel to µBBB¶- two notches
above India¶s sovereign rating
Equity participation in coal mines - Australia
steeljunction - an innovative initiative
Tata Structura launched
Other highlights (Consolidated)2005-2006 2004-2005
2005-2006
2004-2005
Turnover Rs. 22518.75
crores
Rs. 17596.96
crores
Profit After Tax Rs. 3734.62
crores
Rs. 3603.26
crores
NetDebt/Equity
0.31 0.57
Return onEquity
44% 62%
EVA spread Rs. 2536 crores Rs. 2448
crores
Earnings per Share
Rs. 67.62 Rs. 65.27
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Financial Year 2006-2007
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In the last few years, the Company has been steadily consolidating
its financial position. No major borrowings were undertaken and
the entire funds for capital expenditure were met from internal
generation. Surplus cash reserves were temporarily invested in
money market mutual funds to facilitate liquidity.
The Company was, therefore, in a strong position to leverage
its balance sheet to meet the substantial funds required for the
acquisition of Corus. The Company proposes to infuse USD 4.1
billion as equity to part fi nance the transaction. The equity will
comprise of USD 700 million from internal generation, USD 500
million of external commercial borrowings, USD 640 million from
the preferential issues of equity shares to Tata Sons Ltd. in 2006-07
and 2007-08, USD 862 million from a rights issue of equity shares
to the shareholders, USD 1000 million from a rights issue of
convertible preference shares and about USD 500 million from a
foreign issue of equity-related instrument.
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Secured and unsecured loans increased by Rs. 7,129.18 crores
from Rs. 2,516.15 crores as on 31st March, 2006 to Rs. 9,645.33
crores as on 31st March, 2007 due to new syndicate foreign
currency loans drawn for funding the acquisition of Corus
Group plc. The Company has drawn foreign currency syndicate
loans of Rs. 7,225 crores (USD 1.65 billion) during the year as
per details given below:
1. JPY Syndicated External Commercial Borrowings of USD
495million equivalent: Rs. 2,162.66 crores (unsecured loan)
2. External Commercial Borrowings of USD 5 million
equivalent: Rs. 21.77 crores (unsecured loan)
3. JPY Syndicated External Commercial Borrowings of USD
750 million equivalent: Rs. 3,298.88 crores (unsecured loan)
4. International Finance Corporation, Washington -
A Loan USD 100 million equivalent: Rs. 435.35 crores
(secured loan)
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5. International Finance Corporation, Washington -
B Loan USD 300 million equivalent: Rs. 1,306.05 crores
(secured loan).
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Financial Year 2007-2008
Finance
During FY 2007-08, the financing structure of the Corus
transaction has been reorganised to achieve fi scal unity in
the Netherlands and consequent tax effi ciencies. The Corus
businesses in UK and Netherlands are now organised under
fully owned subsidiaries of Tata Steel NetherlandsB
.V., which in turn is
an indirectly fully owned subsidiary of Tata Steel Limited.
By the close of April 2008, the financing for the Corus acquisition has
been completed with all the recourse bridge funding contracted for the
acquisition having been paid off through a mix of debt, equity and
internal accruals and the non-recourse funding syndicated during the
year.
In September 2007, the Company issued USD 0.875 billion of 1%
Foreign Currency Convertible Alternative Reference Securities(CARS).
Between September 4, 2011 and August 6, 2012, each security is
convertible at the option of holder of the security, at a conversion price
of Rs. 758.10 into a Qualifying Security issued by the Company. The
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Company must redeem all outstanding CARS at 123.349% of their
principal amount together with accrued and unpaid interest no later than
September 5, 2012. The Company raised an amount of Rs. 9121 crores
through a Rights and Cumulative Compulsorily Convertible Preference
Share Issue and Rs. 25 billion through a long term loan. The syndication
of the GBP 3.67 billion senior facility consisting of multiple tranches of
term loans and a GBP 0.5 Billion five year revolving credit facility,
secured by the assets of Corus was
successfully closed in December 2007 by which time, a large
number of banks as well as institutions had come into the
transaction. The deal was widely recognised as a landmark
deal and won numerous awards and recognition from fi nancial
journals.
Tata Steel also privately placed Non-Convertible Debentures
totaling upto Rs. 2,000 crores in May 2008. The deemed date
of allotment of these debentures was 7th May, 2008 and they
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consist of 3 series: 3 year floating (MIBOR-linked) notes (Rs.
1,090
crores), 7 year fixed rate notes (Rs. 620 crores) and 3 year fixed
rate notes (Rs. 290 crores). These funds may be used by thecompany for various corporate needs.
Rights IssuesDuring the year under review, the Company allotted the
Cumulative Convertible Preference Shares (CCPS) and Ordinary
Shares on a Rights basis to the shareholders of the Company
as under:
(i) 121,611,464 Ordinary Shares of Rs.10 each at a premium
of Rs.290 per share in the ratio of 1:5, aggregating to
Rs. 3,648 crores.
(ii) 547,251,605 2% Convertible Cumulative Preference Shares
(CCPS) of Rs. 100 each at an issue price of Rs. 100 each, in
the ratio of 9:10, aggregating to Rs. 5,473 crores. As per the
terms of the issue, six CCPS of Rs.100 each are compulsorily
and automatically convertible on 1st September, 2009,
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into one Ordinary Share of Rs. 10 each, at a premium of
Rs. 590 per share.
The proceeds of the Rights Issue have been utilised to repay
the short term Bridge Loan availed by the Company from the
State Bank of India.
The increases in the total debts by Rs. 8,376 crores from
a level of Rs. 9,645 crores as on 31st March, 2007 to
Rs. 18,022 crores as on 31st March, 2008 were mainly due
to 1% Convertible Alternate Reference Securities ± USD
875 million, short term bridge loans from State Bank of
India and IDBI used for funding the Corus deal.
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The loans have gone up from Rs. 24,926 crores as on
31st March, 2007 to Rs. 53,593 crores as on 31st March,
2008 mainly due to inclusion of the Secured loans of
Corus from Banks and Financial Institutions. The increase in
the loan balances of Tata Steel¶s Indian operations
represent 1% Convertible Alternate Reference Securities ± USD 875 million, short-term bridge loans from State Bank
of India and IDBI used for funding the Corus deal.
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Financial Year 2008-2009
The increase in net debt by Rs. 2,095 crore represents
an increase in the gross debt by Rs. 6,276 crore due
to the issue of non-convertible debentures and term
loans taken from Banks, by Tata Steel India, partly
compensated by repayment of external debts at Tata
Steel Europe. The increase in gross debts was offset byan increase in current investments (in growth funds) by
Rs. 2,264 crore and an increase in the cash and bank
balance by Rs. 1,917 crore.
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Financial Year 2009-2010
Net debt as on 31st March, 2010 at Rs. 20,286 crores was lower
by Rs. 1,800 crores against 31st March, 2009. During the current
fiscal year, the secured and unsecured loans decreased by Rs.1,654 crores and Rs. 53 crores respectively as compared to the
balances as on 31st March, 2009 due to repayments of term
loans and other repayments partly offset by issue of Non-
Convertible Debentures, fresh term loans and other drawals.
Current investment was lower by Rs. 1,550 crores which was
offset by increase of Rs.1,644 crores
in the cash & bank balances.
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Bibliographyy Financial Management, I M Pandey
y Financial Management, R K Sharma & ShashiGupta
y www.capitaline.com
y http://www.tatasteel.com/investors/performance/annual-report.asp