JAGRAN JOURNAL OF COMMERCE AND ECONOMICSISSN 2321-6522 JAGRAN JOURNAL OF COMMERCE AND ECONOMICS...

ISSN 2321-6522

JAGRAN JOURNALOF COMMERCE ANDECONOMICS

Published By :

Jagran College of Arts, Science and CommerceA Self Financing P.G. College Affiliated to C.S.J.M. University, Kanpur

Prof. B.P. SinghChairman, Delhi School of Professional Studies and Research, Delhi Formerly Professor, Head and Dean Faculty of Commerce and BusinessDelhi School of Economics, University of Delhi

Prof. Arun KumarProfessor and Chairman, Economic Studies and Planning Centre, JNU, New Delhi

Prof. Pramod Kumar SaxenaDean, Faculty of Commerce, HOD (Accountancy and Law) Dayalbagh Educational Institute, Agra

Prof. R.C. GuptaProfessor, (Commerce) and Director, Govt. M.L.B. College of Excellence, Gwalior.

Prof. O.P. ShuklaPrincipal, National Defence Academy, Pune

Prof. H.K. SinghVice Chancellor, MUIT, Lucknow

Prof H.M. MehrotraHead, Dept. of Economics, Christ Church College, Kanpur

Dr. Vimal KumarAsst. Professor, Dept. of Economics, IIT Kanpur

Editorial Advisory Board

Shri Yogendra Mohan Gupta

Chairman, Jagran Group and Jagran Education Foundation

Shri Mahendra Mohan Gupta

CMD, Jagran Prakashan Ltd., Former Member Rajya Sabha

Smt. Ritu Gupta

Vice Chairperson, Jagran Education Foundation

Dr. J.N. Gupta

CEO, Jagran Education Foundation

Our Patrons

�Law and order exist for the purpose

of establishing justice and when they fail

in this purpose they become the

dangerously structured dams that block

the flow of social progress� rightly said by

Martin Luther King, Jr.

This phenomenon is becoming

apparent in today's social and economic

scenario and therefore there is an urgent

need of overhauling in the system rather to rebuild it according

to the present needs and conditions. There has been massive

capital flight and lack of confidence in the nation which is a

matter of concern. The regulatory system is loosing its strength

and we must realize that the end of law is not to abolish or

restrain but to preserve and enlarge freedom but its very nddisappointing that India ranks 142 in terms of 'Ease of

doing business'. The government has been actively pursuing

the goal of making India a 'manufacturing hub' through its

'Make in India' initiative and invitation to foreign companies to

invest in India. Certain worth mentioning steps in this regard

are the subject matter of the present issue for example;

Company's Act 2013, ensuring better transparency and

Corporate Social Responsibility, Banking Sector Reforms,

Corporate Disclosure Practices, Forensic Accounting, Creative

Accounting, Business Ethics etc. help us to find the solution of

this problem in some way or the other.

Besides, there are also articles on Dividend Policy of

Public and Private Sector Banks. Development of Indian Capital

Market, Lifelong Learning etc. We are constantly deliberating on

issues that are contemporary and offer wide discussions in

order to find answer to the underlying problems because we

believe that democracy must be build through open societies

that share information. When there is information, there is

enlightment, when there is debate there are solutions.

JAGRAN JOURNAL OF COMMERCE AND ECONOMICSMarch 2015Vol. 2, Issue 4 ISSN 2321-6522

Co-Editors

Chief Editor

Publisher

DirectorJagran College of Arts, Science and CommerceMarch 31, 2015

INDEX

S.No. Name of the Paper and Authors Page No.

1. Comparative Study of Dividend Policy in 1Public and Private Sector Banks Dr. R. C. Gupta, Sarika Keswani and Vinay Gupta

2. Companies Act, 2013: A Ray of Hope for Corporate 8Social Responsibility (CSR) Practices in IndiaRadhagobinda Basak

3. Savings and Investments: Crucial for Economic Growth 14Dr. Pankaj Pandey and Atul Kumar Singh

4. The Study of Creative Accounting and its Implication 19Dr. Reshma Rajani and Saloni Gupta

5. Qualitative Aspects of Corporate Information on Corporate 25Disclosure Practices with Special Reference to Multinational Corporations and Indian Corporates Dr. Shilpi Srivastava

6. Growth and Development of Indian Capital Market 36Dr. Manisha Gupta

7. Banking Sector Reforms in India 45Dr. Akhilesh Kumar Dixit

8. Ethics of Accounting and Financial Principles 49Dr. Rajeev Nayan Singh and Dr. Meera Singh

9. Companies Act 2013: The Beginning of 57a New Era for Corporate IndiaShinu Vig and Sakshi Goel

10. Internet Marketing Management: 61�Upcoming Future Need in India and World�Ankit Gupta

11. A Perceptual Study on Chartered Accountant and 66Auditors towards Forensic Accounting in Indian Perspective Dr. Nandan Velankar, Dr. R.C. Gupta and Neha Velankar

12. Rural Marketing : Issues and Challenges 76Sonia Kaur

13. Lifelong Learning: It's Paramount Importance in Current Scenario 84Shraddha Ladia

14. Managing Business Ethics: Good Work Initiatives that Build a Better World 90Dr. Vidushi Sharma and Dr. Rupali Mishra

15. Foreign Exchange Market and its Impact on Indian Economy 97Deepa Kumari

1

*Dr. R. C. Gupta**Sarika Keswani

***Vinay Gupta

Introduction

Dividend policy is one of the most important financial policies, not only from the viewpoint

of the company, but also from that of the shareholders, the customers, the workers, regulatory bodies

and the Government. Shareholders' wealth is represented in the market price of the company's

common stock, which in turn, is the function of the company's investment, financing and dividend

decision. Shareholders would like to receive a higher dividend as it increases their current wealth.

But, for the company, retention of profits would be desirable as it provides funds for financing the

expansion and growth plans. Retained earnings are the most important internal source of finance.

The dividend policy must strike a happy balance between distribution and retention.

It should allocate the earnings between dividends and retained earnings in such a way that

the value of the firm is maximized. Hence, dividend policy is a crucial area of financial management.

The optimal dividend policy is the one that maximizes the company's stock price which leads to

maximization of shareholders' wealth and thereby ensures more rapid corporate growth.

Our study will focus on factors affecting dividend policy and comparison between dividend

policy of Public and Private Sector Banks.

Review of literature

Amidu and Abor (2006) conducted research; this study examines the determinants of

dividend payout ratios of listed companies in Ghana. The analyses are performed using data

derived from the financial statements of firms listed on the GSE during a six-year period. Ordinary

least squares model is used to estimate the regression equation. Major findings of the study were

that there is a positive relationship between dividend payout and profitability, cash flow, and tax.

The results suggest that, profitable firms tend to pay high dividend.

Chawla and Srinavasan (1987) studied the impact of dividend and retention on share

price. The objectives of their study were to estimate a model to explain share price, dividend and

retained earnings relationship, to test the dividend, retained earnings hypotheses and to examine

the structural changes in the estimated relations over time. As per the financial theories they

expected the coefficients of both dividend and retained earnings to be positive in the price

equation. Similarly in the dividend supply function also they expected a positive sign for current

earnings and previous dividend.

Olson and McCann (1994) have conducted a research on the linkage between dividend

and earnings. The purpose of this paper has been to empirically test the linkage, if any, between

dividends and earnings. The Granger causality test was used for two measures of dividends and

Comparative Study of Dividend Policy in Public and Private Sector Banks

*Professor, (Commerce) and Director M. L. B. Govt. College of Excellence, Lashkar, Gwalior **Assistant Professor, Jiwaji University, Gwalior***Research Scholar, Commerce, ITM University, Gwalior

2

March 2015 ISSN 2321-6522Jagran Journal of Commerce and Economics

earnings: the level of variables and deviations from expected values. An autoregressive model for

earnings was estimated and contrasted to a bi-variate model that included dividend information as

well as an autoregressive earnings series. The results of the study indicate that the inclusion of

the dividend data improves the predictability of earnings using both the level of the variables and

deviations from expected values measures.

Mahapatra and Sahu (1993) conducted research on determinants of corporate dividend

behaviour in India- an econometric analysis. The objectives of their study were to examine the

relative significance of some known dividend models in the Indian situation and to enquire into the

determinants of corporate dividend behaviour with the help of some regression models. Their study

was based on judgmental sample of 90 companies for the period 1977/78 to 1988/89. After using

various regression equations they found that dividend decision is primarily governed by cash flow,

a measure of company's capacity to pay and dividend paid in the previous year, in majority of the

sample companies. Among other determinants, investment demand has been found having

significant impact on the dividend decision of electrical goods and chemical industries.

Pandey and Bhatt (2007) examined the dividend behaviour of Indian companies. Do Indian

firms follow stable dividend policies? How do the monetary policy restrictions affect the dividend

payouts of the firm? They used the Lintner's (1956) model to test dividend stability of firms in India.

They used the GMM estimator, which accounts for heterogeneity and is most suitable in a dynamic

setting. Their results establish the validity of the Lintner model in the emerging Indian market, and

prove the underlying dynamic relationship between current dividends as dependent variable and

current earnings and past dividends as independent variables. Further, their results also show that

the Indian firms have lower target payout ratios and higher adjustment factors.

Pradhan (1990) made a study on stock market behaviour of Nepal which was based on the

data collected for 17 enterprises from 1986 through 1990. The objectives of this study were to assess

the stock market behaviour in Nepal and to examine the relationship of market equity, market value to

book value, price-earnings, and dividends with liquidity, profitability, leverage, assets turnover, and

interest coverage. Some findings of this study, among others, were that higher the earnings on

stocks, larger the ratio of dividends per share to market price per share. Dividend per share and

market per share was positively correlated. There is positive relationship between the ratio dividend

per share to market price per share and interest coverage.

Objectives

To know the impact of Profitability on dividend payout ratio in banking sector in India.

lTo know the impact of Net worth on dividend payout ratio in banking sector in India.

lTo know the impact of EPS on dividend payout ratio in banking sector in India.

lTo know the impact of DPS on dividend payout ratio in banking sector in India.

lTo know the impact of MVPS on dividend payout ratio in banking sector in India.

lTo know the difference between Dividend Payout of public and private sector banks in

India.

l

3


Profitability

Net Worth

EPS

DPS

MVPS

Dividend PayoutRatio

The Research Model

Type of study

The study on the topic �Comparative Study of Dividend Policy in Public and Private

Sector Banks� is empirical in nature to find out the impact of profitability, net worth, EPS, DPS and

MVPS on dividend payout ratio.

Sample design and size

lDividend policy having at least ten years track record are only considered for the study. The

time period chosen for the study is 10 years (1st April 2003 to 31st March 2012).

lAll twelve banking companies listed in NSE in India have been selected in study.

lOut of twelve banks seven are of public sector and five are of private sector.

lRandom sampling has been used for this purpose.

lTo know the impact of various factors on dividend policy following variable has been taken

to analyze impact.

Dependent variable: Dividend Payout Ratio

Independent variables :

lProfitability

lNet Worth

lEPS

lDPS

lMVPS

Statistical analysis and techniques

lMultiple Regression has been applied to assess the degree of impact of Profitabity, Net

Worth, EPS, DPS, MVPS on Dividend Payout Ratio.

lT-test was conducted to compare the performance of Dividend policy among public and

private sector bank.

4


Instruments (tools of data collection)

l

lOther relevant data was obtained from the website of selected banks of public and

private sector.

Hypothesis :- Following Hypothesis will be tested at 5% significance level of the multiple regression.

l

l

l

l

l

l

Analysis and Interpretation

Regression

Model Summary

All the data is secondary and was obtained from NSE website.

Hypothesis :

There is no significant impact of Profitability on dividend payout ratio in the banking sector

in India.

There is no significant impact of Net worth on dividend payout ratio in the banking sector

in India.

There is no significant impact of EPS on dividend payout ratio in the banking sector in India.

There is no significant impact of DPS on dividend payout ratio in the banking sector in India.

There is no significant impact of MVPS ratio on dividend payout ratio in the banking sector in

India.

There is no significant difference between dividend payout of public and private sector banks in

India.

Model R R SquareAdjusted R SquareStd. Error of the Estimate

1 1.000(a) .999 .997 .31242

a. Predictors: (Constant): Net Profit, Net Worth, EPS, DPS, Market Price Per Share.

ANOVA (b)

Model Sum of Squares F

1Regression

Residual

Total

df Mean Square Sig.

340.873

.293

341.166

8

3

11

42.609

.098

436.543.000(a)

a. Predictors: (Constant): Net Profit, Net Worth, EPS, DPS, Market Price Per Share.

b. Dependent Variable: Dividend Payout Ratio

5


Coefficients (a)

Model

Constant

Net Profit

Net Worth

EPS

DPS

Market Price perShare

UnstandardizedCoefficients

StandardizedCoefficients t Sig.

29.188

.002

.000

-.881

5.370

.008

BStd. Beta

.439

.000

.000

.039

.182

.000

.511

-.829

-4.410

5.063

2.069

66.437

3.781

-7.800

-22.484

29.545

16.048

.000

.032

.004

.000

.000

.001

a. Dependent Variable: Dividend Payout Ratio

T-Test One-Sample Statistics

Model

Public Sector Bank

Private Sector Bank

N MeanStd.

DeviationStd. Error

Mean

7

5

20.1543

23.2160

1.42447

8.68531

.53840

3.88419

One-Sample Test

Model

Public Sector Bank

Private Sector Bank

tSig.

(2-tailed)Mean

Difference95% Confidence

Interval of the Difference

37.434

5.977

Test Value = 0

df

Lower Upper

6

4

0.000

0.004

20.1543

23.2160

18.8369

12.4318

21.4717

34.0002

l There is no significant difference between dividend payout of public and private sector

banks.

l The null hypothesis has not been accepted (because p<0.05, 0.000, 0.004) in this study.

There is significant difference between dividend payout of public and private sector

banks.

SUMMARY OF THE HYPOTHESES TEST

6


1. There is no significant impact of Profitability on dividend payout ratio Not Accepted

2. There is no significant impact of Net worth on dividend payout ratio Not Accepted

3. There is no significant impact of EPS on dividend payout ratio Not Accepted

4. There is no significant impact of DPS on dividend payout ratio. Not Accepted

5. There is no significant impact of MVPS ratio on dividend payout ratio. Not Accepted

Not Accepted6. There is no significant difference between dividend payout of public and private sector banks.

S/N HYPOTHESES STATUS

Findings

has not been accepted ( p<0.05, 0.032) in this study. There is significant impact of

has not been accepted (because p<0.05, 0.004) in this study. There is significant impact of




The null hypothesis �There is no significant difference between dividend payout of public and private sector banks� has not been accepted (because .p<0.05, 0.000, 0.004) in this study. There is significant difference between dividend payout of public and private sector banks.

The null hypothesis has not been accepted (because p<0.05, 0.000, 0.004) in this study. There is significant difference between dividend payout of public and private sector banks.

Conclusion

Throughout the study objectives were to find out the impact of , , achieve the goal, this paper

gathered secondary data of banking listed companies traded in National Stock Exchange (NSE)

lThe null hypothesis �There is no significant impact of Profitability on dividend payout ratio in banking sector�

Profitability on dividend payout ratio in banking sector.

lThe null hypothesis �There is no significant impact of Net worth on dividend payout ratio in banking sector�

Net worth on dividend payout ratio in banking sector

lThe null hypothesis �There is no significant impact of EPS on dividend payout ratio in banking sector�

EPS on dividend payout ratio in banking sector.

lThe null hypothesis �There is no significant impact of DPS on dividend payout ratio in banking sector�

DPS on dividend payout ratio in banking sector

lThe null hypothesis �There is no significant impact of MVPS on dividend payout ratio in banking sector�

MVPS on dividend payout ratio in banking sector

l

l

ProfitabilityNet worth, EPSDPS and MVPS on dividend policy of banking firms. In order to

because

7


and used some statistical tools to analyze all the financial information. This paper investigated the dividend policy of the firms listed in the banking industry and comparative study of dividend policy of public and private banks in India, their dependence on the accounting variables and found that the profitability Net worth, EPS. DPS and MVPS on dividend policy of banking firms have significant impact on the value of firm in banking industry and also there is difference between the dividend policy of public and private sector bank.

References

l

Central Library, Kirtipur.

lAdhikari Samita (2008) �A Comparative study of Dividend Policy in Commercial Banks� Nepal Commerce Campus Library.

lAryal, H.R. (1997), �Dividend Policy Comparative study between Nepal Arab Bank Limited and Nepal Grindlays Bank Limited�, Unpublished Masters Degree Thesis, T.U Central Library, Kirtipur.

lBasu, A.K. (1982), �Fundamentals of Banking Theory and Practices�, Calcutta: A.K. Mukherjee Publication.

lBrigham, Eugene F. and Gapenski, Louis C. (1985), �Intermediate Financial Management,� New York: The Dryden Press.

lBhattacharya, N. (2007), �Dividend policy: A review�, Retrieved January 25, 2008, from www.emeraldinsight.com

lChawla, D. & Srinivassan, G. (July-September 1998), �Impact of Dividend and Retention on Share Price � An Economic Study Decision� Vol.14 No.3 pp. 137-140

lCotter, R. & Smith, G. (1976), Commercial Banking New Jersey: Prentice Hall Inc.

lEndi Consultants Research Group, Nepalese Company Act - 1997, Nepal for Profitable Investment. Kathmandu: Shree Star Printing Press Baghbazar.

lFrancis, J.C. (1972), �Investments: Analysis and Management�, New Delhi: Tata McGraw Hill Publishing Company Limited.

lFriend, I., & Puckett, M. (September 1964), �Dividends and Stock Prices� The American Economic Review, Vol. LIV: 656-682

lGautam, R.R. (October 1996), �Dividend Policy in Commercial Banks: A Comparative Study of NGBL, LBL & SBL�, Unpublished Masters Degree Thesis, Shanker Dev Campus T.U.

lGhimire, P.K. (July 2002) �Dividend Policy of Listed Companies (with ref. to Banks, Finance & Insurance Companies)�, Unpublished Master's Degree Thesis, Shanker Dev Campus T.U

Adhikari, N.R. (1999), �Corporate Dividend Practice in Nepal�, Unpublished Masters Degree Thesis. T.U.

8

*Radhagobinda Basak

* Assistant Professor, Dept, of Commerce, Maharani Kasiswari College, University of Calcutta, Kolkata, West Bengal

Recently in India, the Companies Act, 2013 has been enacted and its provisions have already come into stforce since the 1 day of April, 2014. Moreover, the Ministry of Corporate Affairs issued the Companies (Corporate

thSocial Responsibility Policy) Rules, on 27 February 2014. One of the most notable features of the said Act is

its provisions regarding the CSR practices by Indian companies. The present study attempts to highlight those

provisions and secondly to estimate what will be the amount that is to be spent by some selected Indian companies,

both public and private sector, on CSR during the F.Y. 2014-15 as per the provisions of the said Act. Further the present

status of those selected companies regarding CSR has also been considered.

Key words: Corporate Social Responsibility, Sustainable Development, Provisions, Norms,

Stakeholders, Capital Profit/Loss, Net Worth, Profit Before Tax.

Introduction

Nature of the problem

The Indian Corporate sector was mainly governed by the Companies Act, 1956. Unfortunately

there were no provisions on CSR reporting in that Act though the concept of CSR is not a new

one in India. Even it was present in the five-fold debt system as described in Upanishads. To

overcome this problem, in Companies Act, 2013, some provisions on CSR expenditure and

reporting were added. Thus the study attempts to highlight whether those provisions can open a

new horizon for CSR practices in India or not?

Objective of the study

1.To throw light on CSR provisions of the Companies Act, 2013.

2.To estimate the probable amount of CSR expenditure of some selected Indian

companies for the F.Y. 2014-15.

3.To discuss the present scenario of CSR practices of those selected companies.

Research Methodology

For the collection of data we depended on the websites of the Ministry of Corporate

Affairs and that of the respective companies. For concept building we have taken help of some

books on the topic. We have presented the data through some tables. For analyzing the data,

simple arithmetical techniques like average, percentage, etc., have been used. No specific sampling

technique has been used. Companies have been selected keeping in mind two things. The

companies having a sound coverage in the market in terms of production and sale in the concerned

industry. Secondly, availability of published CSR report is another important yardstick.

Literature Review

The following articles were reviewed in this respect:

�Implications of Companies Act, 2013-Corporate Social Responsibility� by Grant Thornton

India LLP;

�India: Corporate Social Responsibility: Mandating Companies to Contribute towards

Society� by Megha Kapoor;

l

l

Companies Act, 2013: A Ray of Hope for Corporate Social Responsibility (CSR) Practices in India

9


l

l

l

l

l

l

l

l

�Corporate Social Responsibility (CSR) under New Company Law� by Mr. Ankit Singh;

�Notification of provisions relating to Corporate Social Responsibility under the Companies

Act, 2013� by KPMG, an Indian registered partnership.

Conceptual Framework : CSR

As a part of the society, each business house specially which has been incorporated under

a particular act has some responsibilities towards the society. Corporate Social Responsibility

(CSR) refers to the company's obligation to meet the needs of all stakeholders of the company in an

ethical way to ensure that the operations made by the company are sustainable.

Analysis and Finding

CSR provisions of the Companies Act, 2013thOn 27 February, 2014, the Central Government issued by notification the Companies

(Corporate Social Responsibility) Rules, 2014 to come into force the CSR provisions of the stCompanies Act, 2013 and those rules came into force on and from 1 April, 2014.

Applicability

Every company having net worth of rupees five hundred crore or more, or turnover of

rupees one thousand crore or more or a net profit of rupees five crore or more during

any financial year will be under the grip of the rules.

Each such company shall constitute a Corporate Social Responsibility Committee of the

Board consisting of three or more directors, out of which at least one director shall be an

independent director. However the private companies are exempted from appointing the

independent / third director.

The said committee shall formulate and recommend to the Board, a CSR policy indicating

the activities to be undertaken by the company as specified in schedule VII of the Companies

Act, 2013; recommend the amount of expenditure to be incurred on CSR activities; and

monitor the CSR policy of the company from time to time.

The Board of every company shall after taking into account the recommendations made

by the CSR Committee, approve the CSR policy and disclose the contents of such policy

in its report and also display it on its website; and ensure that the company spends, in every

financial year, at least two percent of the average net profits of the company made during

the three immediately preceding financial years (sec.198), in pursuance of its CSR

policy.

Net profits will be taken before tax and capital profit or loss such as profit or loss arising

out of acquisition of a company or sale of fixed assets, etc., will not be taken into

consideration.

Profit from foreign branches and dividend received from other companies which are

complying the CSR provisions will also not be taken into consideration. The companies of

same group can establish a registered trust or can take joint CSR projects to comply

CSR policy.

10


lFormat for the annual report on CSR activities to be included in the Board's report. Average

net profit of the company for last three financial years and the prescribed CSR expenditure i.e.

two percent of that average are to be mentioned at first. Then the amount spent is to be shown

in the following manner:

SL.No.

CSR project or activity identified

Sector in which the project is covered

Projects or programs (1) Local area or other (2) Specify the state and district where

projects or programs

were undertaken

Amount outlay

(budget) project or program wise

Amount spent on projects or programs sub-heads: (1) Direct

expenditure on projects or programs (2) Overheads

Cumulative expenditure up to the reporting period

Amount spent:

Direct or through

implementing agency*

1 2 3 4 5 6 7 8

1

2

3

TOTAL

*Details of implementing agency:

In case the company has failed to spend the prescribed CSR amount, the company shall provide the reasons for not spending the amount.

CSR Activities Specified in Schedule VII of the Act

lEradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water.

lPromoting education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects.

lPromoting gender equality, empowering women, setting up homes and hostels for women and orphans.

lSetting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.

11


lEnsuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water.

lProtection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.

lMeasures for the benefit of armed forces veterans, war widows and their dependents.

lTraining to promote rural sports, nationally recognised sports, paraolympic sports and Olympic sports.

lContribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, Other Backward Classes, Minorities and Women;

lContributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government.

lRural development projects.

We have to remember what CSR means and includes but is not limited to the activities specified in above schedule VII. The company shall give preference to the local area and areas around its operation. Activities exclusively for the benefit of the employees of the company and contribution to the political parties will not be considered as CSR activities.

Estimation of Probable Amount of CSR Expenditure of Some Selected Indian Companies Rs. in crore

Tata Steel Steel Ltd.

Reliance Oil and 27,72726,207 25,740 26,558531.16Industries PetroleumLtd.(RIL)

Infosys Information 14,00212,274 11,096 12,457.33249.15Ltd. Technology

Hindustan Consumer 4,695.784,225.823,305.944,075.8581.52Unilever GoodsLtd.(HUL)

9,409.437,811.789,281.828,834.34176.69

Name of

the

company

Sector it

belongs to

Net Profit (calculated as per

the provisions of sec.198)

2013-14

(Rs.)

2012-13

(Rs.)

2011-12

(Rs.)

Average

Net Profit

(Rs.)

CSR

obligation

for F.Y.

2014-15

(Rs.)

Larsen & Engineering Toubro Ltd. and (L&T) Construction

National Power 13,904.6514,894.5212,326.1613,708.44274.17Thermal GenerationPower Corporation Ltd.(NTPC)

Oil and OIL and 32,431.9430,544.3133,502.0132,159.42643.19Natural Gas Natural GasCorporation Ltd.(ONGC)

5,812.165,088.285,791.145,563.86111.28

Name of

the

company

Sector it

belongs to

Net Profit (calculated as per

the provisions of sec.198)

2013-14

(Rs.)

2012-13

(Rs.)

2011-12

(Rs.)

Average

Net Profit

(Rs.)

CSR

obligation

for F.Y.

2014-15

(Rs.)

12


A discussion on the present scenario of CSR practices of the selected companies:

lTata steel is one of the pioneer companies in publishing CSR report in India. Its last report is for the year 2012-13. In that year it spent Rs.429.6 crore on CSR which is sufficiently better than the amount to be spent in 2014-15.

lRIL spent Rs.711.72 crore in CSR in 2013-14 and it is also higher than its CSR obligation in 2014-15.

lInfosys has not given the data on their CSR expenditure fully. They said their community investment had been 1.48 million US Dollar (more or less Rs.9 crore) which is not satisfactory at all.

lIn the year 2013-14, HUL spent 2% of average net profit of three immediately preceding financial years calculated as per the provisions of Companies Act, 2013. So they are at par with the standard.

lL&T spent 1.40% of profit after tax, i.e., Rs. 76.90 crore for CSR which is much lower than their target in 2014-15.

lNTPC spent Rs.190.64 crore for social and environmental causes in the year 2012-13 which is little less than 2% of the profit before tax of that year. CSR report for 2013-14 is yet to come.

lONGC's expenditure for environment and community for the year 2012-13 was Rs. 852 crore whereas they have to spend Rs.643.19 crore in the year 2014-15. So it can be expected that they will continue to perform their social duties in such a good way.

Conclusion and Recommendation

Two of our selected corporate giants have not contributed sufficiently towards CSR. As till 2013-14 there were no legal bindings on it, most of the Indian companies did it voluntarily. They were

13


not under any obligation to disclose it. So it was an area of mystery to us. Now with the enforcement of the Companies Act, 2013, the qualified companies must disclose their CSR report in specified format. So it will surely open a new horizon for CSR practices and reporting in our country. As there are enough number of companies which will come under the area of the act, it can be expected that a huge amount of community investment will be taking place each year which will lead India to be a developed country from a developing country. However the Act is silent regarding the consequences in case a company fails to comply with the CSR norms. The government should consider immediately otherwise the bad fishes may go out of the net. Still we hope for the best.

References:

l

lBanerjee, Bhabatosh and Chatterjee, Kanika and Dandapat, Dhrubaranjan. (2008). �Corporate Social Responsibility�, Department of Commerce, University of Calcutta.

l Bhattacharya, Jayanta. (2007). �Corporate Social Responsibility: Ethical and strategic choice�, Asim Books, Delhi.

lHawkins, David, E. (2006). �Corporate Social Responsibility : Balancing tomorrow's sustainability and today's profitability�, Palgrave Macmillan, New York.

l Hopkins, Michael. (2008). �Corporate Social Responsibility and International Development - Is Business the solution?� Earthscan, London.

lJatana, Renu and Crowther, David. (2007). �Corporate Social Responsibility : Theory and practice with case studies�, Deep & Deep Publications, New Delhi.

l www.mca.gov.in

lwww.tatasteel.com

lwww.tatasteelindia.com

lwww.ril.com

lwww.infosys.com

lwww.hul.co.in

lwww.larsentoubro.com

lwww.ongcindia.com

lwww.ntpc.co.in

Agarwala, Sanjay, K. (2008). �Corporate Social Responsibility in India�, Response Books, New Delhi.

14

*Assistant Professor, V.S.S.D. College, Kanpur**Research Scholor

Savings and Investments: Crucial for Economic Growth

*Dr. Pankaj Pandey **Atul Kumar Singh

Introduction

The total amount of savings and investments plays a decisive role in determining the growth

and development of an economy. In a developing nation like India the role and importance of

savings and investments becomes more crucial keeping in view the present condition of the basic

infrastructural facilities available in the country. Since savings and investments are the two pillars which

form the basis for the much needed capital formation every economy is striving hard for formulating

such policies so as to strengthen the state of capital and increase the amount of capital formation. In a

country like India saving and investment is more a social and psychological phenomena rather than

an economic phenomena. It is followed as a tradition in India. In fact the traditional nature of savings

of the people of the country helped the Indian economy and the government to face the severe

challenges resulting out of the economic crises that took place in United State of America few years

back. In a country like India with huge amount of fiscal deficit and adverse balance of payments,

savings forms the basis for credit creation by commercial banks as well as to fulfill the capital

requirements of the industrial sector. Thus it becomes essential to assess and evaluate as to how

far savings contribute to economic growth and development of India.

Savings

Saving can be understood as that part of a nation's income which is not spent on the

consumption of goods and services. Lord Keynes defined it as �the excess of income over consumption

is known as savings�. According to him what ever amount of the total income is left after expenditure

is called as savings. Thus, according to the above definition savings can be calculated with the

following formula:

S = Y � C, where S = saving

Y = Income C = Consumption

Investment and capital formation

Investment means that part of saving which is spent on the purchase of capital goods

such as equipments, plants and machinery and the purchase of shares, bonds, and debentures

which already exists in the market. However, this is just a financial investment because in this case

money and ownership moves from one hand to another and there is no increase in employment.

According to Keynes investment which results in the increase in employment and creation of

demand for factors of production is actual investment. This actual or real investment leads to capital

formation. Capital formation takes place when there is a real increase in the amount of real

production assets in an economy. In a true sense capital formation means an increase in the

present stock of capital as a result of increase in investment.

Trends of saving in India

It is clear that domestic savings forms the basis of capital formation. A high rate of saving

leads to higher amount of capital formation which is so crucial for economic growth and prosperity.

In India the role of savings is calculated as the percentage of gross domestic product. The trends of

savings in India are presented in the table depicted ahead.

15


Table 1: Ratio of Saving to GDP (percent at current prices)

1950-51 6.2 0.9 1.8 8.9

1960-61 7.3 1.7 2.6 11.6

1970-71 10.1 1.6 2.9 14.6

1980-81 13.8 1.6 3.5 18.9

1990-91 19.3 2.7 1.1 23.1

2000-01 21.0 4.3 (-)1.9 23.4

2004-05 23.6 6.6 2.3 32.4

2005-06 23.5 7.5 2.4 33.5

2006-07 23.2 7.9 3.6 54.6

2007-08 22.5 9.4 5.0 36.9

2008-09 23.8 7.9 0.5 32.2

2009-10 25.2 8.4 0.2 33.7

2010-11 23.5 7.9 2.6 34.0

2011-12 22.3 7.2 1.3 30.8

YearHousehold

Sector SavingsPrivate Corporate Sector Savings

Public Sector Savings

Gross Domestic Savings

The following inferences can be drawn from the above table:-

lThe period from 1950-51 to 1970-71 was a low saving phase in which domestic saving

rate increased from 8.9% in 1950-51 to 14.6% in 1970-71.

lThe rate of saving was almost stagnant between 1990-91 and 2000-01.

lThere was a remarkable growth in the domestic rate of savings after 2000-01. It was a

phase where there was an increase in the GDP and hence saving also increased.

lThe rate of savings which was 23.4% in 2000-01 increased to 33.7% in 2009-10. During

the same period the national income increased from Rs. 17,62,358 cr. to Rs. 53,95,687 cr.

The rate of savings however, declined slightly to 30.80% in 2011-12.

lThe contribution of household sector in gross domestic savings increased from 69.70%

in 1950-51 to 72.40 in 2011-12. The share of private corporate sector savings increased

from 10% to 23.30% and that of the public sector declined from 20.40% to 4.3% during

the same period.

The 30 percent rate of gross domestic savings is a healthy indicator keeping in view the

social and economic condition of Indian population. In a country where majority of the population lives

in villages and around 40% of the population comes below poverty line, the savings trends gives

a positive indication of economic growth and development. However, since Indian economy is in a

developing state, the rate of savings can be increased through:

16


l

MNREGA in order to increase income level.

lProvide agricultural assistance to improve agricultural productivity.

lExtension of banking facilities in rural areas to enhance saving practices.

lExtension of insurance and provident fund facilities to mobilize saving of low income group

people.

lFormulate policies so as to put a check over inflationary trend and ensure stability in

prices

Investment - Capital Formation

Capital formation plays a predominant role in determining the level of income, employment

and production in an economy. A higher level of investment enhances the production capacity leading

to increase in the level of total demand and supply of goods and services. This helps in achievement

of the objective of long term growth and development of an economy. Higher amount of capital

formation helps in solving the problem of adverse balance of payments because higher level of

production leads to import substitution.

Trends of capital formation in India

Though availability of resources, technological innovation, efficient man power and government

support is vital in economic development but capital formation has its own importance because in

absence of abundance amount of capital formation all other resources lose their importance and

efficiency. The trends of capital formation in India have been depicted in the following table.

Table 2: Trends of Capital formation in India

Creation of employment opportunities in rural areas through programmes such as

.

YearRate of Capital Formation/Rate of Gross Domestic Capital Formation

(in percentage)

1950-51 850 8.4

1960-61 2,433 14.0

1970-71 6,965 15.1

1980-81 28,975 19.9

1990-91 1,48,206 26.0

2000-01 5,11,788 24.3

2004-05 10,57,618 32.7

2005-06 12,70,648 34.3

2006-07 13,43,773 35.7

2007-08 16,41,515 38.1

2008-09 17,88,803 37.5

2009-10 20,16,186 36.5

2010-11 26,92,031 36.8

2011-12 31,81,423 35.0

Gross Domestic Capital Formation at Current Price (Rs. in crore)

17


The study of the above table shows the trends of investment and capital formation reveals the following conclusion:

lThe rate of capital formation in India was very low during the initial planning phase.

lThe planned phase (five year plans) led to the increase in national income and hence forth the rate of capital formation.

lThe rate of capital formation increased slowly from 8.4% in 1950-51 to 19.9% in 1980-81.

lThe gross rate of capital formation then picked up and increased from 26% in 1990-91 to 35% in 2011-12.

lThe gross domestic capital formation at current prices which was Rs. 850 crore in 1950-51 increase to Rs. 31,81,423 crore.

The sectoral variations in gross domestic investment or capital formation can be clearly understood through the table given below.

Table 3: Sectoral Variations in Gross Domestic Investment (GDI in India)

(in percentage)

Gross Domestic Capital Formation 32.734.335.7 38.134.535.0

· Public sector 7.4 7.9 8.4 8.99.57.9

· Private sector 23.825.326.4 27.624.624.9

· Corporate sector 10.313.514.5 16.112.710.6

· Household sector 13.511.811.9 11.512.214.3

2004-052005-062006-072007-082008-092011-12

As provided in the table it is evident that in the year 2004-05 the gross domestic capital

formation was 32.7% in which the contribution of public sector, private sector, corporate sector and

household sector were 7.4%, 23.8%, 10.3% and 13.5% respectively. The same figure in the year

2011-12 were 7.9%, 24.9%, 10.6% and 14.3% respectively.

Impact upon the Economy

Savings and investments determine the rate of capital formation in an economy. The

amount and extent of capital formation in turn plays a crucial role in determining the rate of

economic growth and development especially in a developing country like India. Inspite of the

limitations there has been a remarkable increase in the amount of savings and investments in

India which reflects in form of positive advancement in several economic and non-economic

indicators in the Indian economy. The rising amount of capital formation has the following impact

upon the Indian economy:

lThe national income at current prices which was Rs. 9,464 Cr. in 1950-51 increased to

around Rs. 83,68,571 Cr. in 2012-13. During the same period the per capita income increased

from Rs. 264 to Rs. 69,497.

18


l

Rs. 29 Cr. In the year 2011 the number of public enterprises increased remarkably to 260

and the total capital invested was Rs. 6,68,848 Cr.

lIn the year 2010-11 as per the statistical outline of India the contribution of 248 operating

public enterprises to the central exchequer was Rs. 1,56,121 Cr.

lAs a result of increased capital formation the number of private sector companies increased

from 30,461 in 1971 to 1,38,300 in 2009-10.

lThere were 71.3 lakh workers employed in the private sector in the year 2009-10. In the

same year the private sector contributed to about 80% of NNP.

lThe trends of saving and investments highly facilitated the growth and development of stbanking and insurance sector in India. Till 31 March 2010 there were 160 commercial

banks out of which there were 78 scheduled banks and 82 RRB.

lIn 1969 the nationalised banks in India granted loans to the extent of Rs. 3,275 Cr. which

increased to Rs. 18,43,102 Cr. in 2010-11. The deposits of these banks amounts to

Rs. 25,83,716 Cr. in 2010.

lThe insurance industry has invested amount to the extent of Rs. 1,10,000 Cr. all the stsectors of the economy till 31 March 1998. The Life Insurance Corporation has provided

Rs. 14,667 towards the development of basic infrastructural facilities such as electricity,

water, housing and transportation. The insurance industry has invested Rs. 21,176 Cr. in

shares and debentures of industrial and commercial concerns.

Conclusion

India is a developing economy with huge prospects for development and growth. The

GDP has declined in the recent years due to declining trends particularly in the fields of agriculture

and industry. The non-availability of sufficient amount of capital to fund industrial and commercial

requirements gives impetus to the declining trend. The adverse balance of payments and deficit

budget poses serious challenges before the economy and hampers growth and development. The

prevalence of high rate of unemployment is also the result of unbalanced growth. The dependence on

outside source of funds goes to increase foreign debt which again may cause unwanted financial

burden over the already over burdened economy. Thus, at this point of time capital generated through

increased domestic savings and investment has a important role to play in achieving economic

goals and pave the way for overall growth and development.

References

Sinha V.C., Business Environment, SBPD Publishing House, Agra, 2014, PP. 484.

lSingh S.K., Business Environment, Sahitya Bhawan Publications , Agra, 2014, PP. 392.

lJain T.R. Trehan Mukesh Trehan Ranju, Business Environment, V.K. Global Publications Pvt. Ltd. New Delhi,2014,

PP. 484.

lVishnoi R.K., Principles of Insurance , SBPD Publishing House, Agra, 2014, PP. 432.

lJain T.R. Grover M.L. Money and Financial Systems, V.K. Global Publications Pvt. Ltd. New Delhi,2014, PP. 228.

lSinha V.C., Nature and Problems of Indian Economy, SBPD Publishing House, Agra, 2011-12, PP 372.

lMamoriya C.B. , Indian Economy, SBPD Publishing House, Agra, 2013-14, PP. 679.

In the year 1951 there were 5 public enterprises in India with a total capital investment of

l

Financial statements should depict the true and fair view of the companies. In today's

competitive environment companies are trying their best to enhance their earnings and create

goodwill and confidence amongst the stakeholders. Companies desire to present the reports

with the profits growing steadily have led to numerous accounting scandals over the past

decades such as Enron, Anglo-Irish Bank, Satyam Computer Services, Lehman Brother, Autonomy

Corp. This reveals that at least some accountants can be extremely creative with their finances

they control. Such practice adversely affects the decision of different users of the financial

statements. Creative accounting has emerged as a new way of manipulating financial statements

of the companies. Certain loopholes in Indian Accounting Standards are facilitating the companies

to indulge in such malfeasance to earn huge profits or save taxes. Account manipulation attempts

to show different financial results than what they actually are. The research paper consists of the

study which has been conducted to identify the different motives of creative accounting and to

find various measures to prevent such malpractice. Our exploratory study examined and reviewed

historical facts and past literature. To address this issue a questionnaire was administered to

30 respondents. The study revealed that all the respondents were aware about the creative

accounting practice but the detection of creative accounting is difficult as it is practiced within

the framework of accounting system. This problem is not only confined to India but is present in all

the international companies too. The study concludes that there is need for stronger enforcement

and monitoring mechanism for International Financial Reporting Standards in India. Streamlining

the accounting and auditing system and enhancing the practice of corporate governance appears

to be the engines to make the accounting more objective and transparent.

Keywords- creative accounting, financial statements, manipulation, accounting standards.

Introduction

Accounting is a business language. Accounting information includes income statement, financial statement, budgeting, strategic planning, cost analysis, auditing, income tax preparation, cash flow statement, performance measurements, evaluation, control and preparing managerial reports for decision making. Accounting helps in communicating these statements, viz. the proprietor, management, owners, creditors, debtors, bankers, employees, government etc. for forecasting, planning, comparing and evaluating the earnings capacity and financial position of the business. Hence, it is necessary that the accounting information must be clear, simple and easy to understand and analysis and representation consists desirable information that is trustworthy. However there have been many accounting frauds in the past. In some cases they have reached to the tune of billions of dollars. In 2002, big accountancy firms like Arthur Anderson, Ernest and Young, Price Waterhouse Coopers etc. were drag into court or they admitted negligence in their duties. These companies were held responsible for preventing the publication of bogus financial reports. Due to their carelessness, their clients were able to publish reports which were misleading and gave a completely different impression of the client's company financial status. In the United States of America the impact of Enron collapse was great as it was closely followed by the bankruptcy of World Com Company. Then a series of similar scandals, Ahold Royal in the Netherlands and Equitable Life insurance company in the UK, all these showed that this was not just a U.S. phenomenon and the accounting and auditing practices have been widely condemned (Dana SimonaGherai and Diana Elisabeta

19

The Study of Creative Accounting and Its Implication

*Dr. Reshma Rajani**Saloni Gupta

*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur**Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur

20


Balacin, 2011). Following this scandal and many more by companies like Adelphia, Tyco International, etc. the Sarbanes Oxley Act was enacted as a U.S Federal Law in July 2002 to safeguard the investors. In India the need for corporate governance has been highlighted because of the scams occurring frequently such as Harshad Mehta Scam(1992), Ketan Parikh Scam(1995), Satyam Scam (2007) etc. Ramalinga Raju the Chairman of Satyam Computers was alleged for funding the accounts of the company cash and bank balances. Scams like Satyam have decreased investor's confidence and have raised questions on all large companies which were directly and indirectly related with it. This reveals that at least some accountants can be extremely creative with their finances they control. Such creativity can include the misdirecting or misuse of funds, understating expenses, overstating revenues, understating liabilities and overstating corporate asset values, thereby misrepresenting the financial state of a company. Certain loopholes in Indian Accounting Standards are facilitating the companies to indulge in such malfeasance. Such practice of window dressing can be referred as creative accounting or innovative accounting. Thus this paper attempts to identify the different motives behind the practice of creative accounting and providing strong measures in preventing such malpractice.

Definition and Concept of Creative Accounting

Kamal Naser (1993), offers this definition of creative accounting which presenting an academic view: creative accounting is the transformation of financial accounting figures from what they actually are to what preparers' desire by taking advantage of the existing rules and/or ignoring some or all of them.'

'Creative accounting is the process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business' (Amat, O. et al., 1999).

Methods of Creative Accounting

Following are the frequently used methods of creative accounting.

lOff-Balance Sheet financing such as deliberately failing to disclose financial liabilities.

lUnder depreciating fixed assets or changing the method of depreciation.

lIncome smoothing to reduce sales volatility.

lOverstating the business stock or inventory to show higher profits and increasing current assets.

lBusinesses that are involved in long term contract can manipulate profits by recognizing revenue too early.

lWindow dressing for instance reporting next year's financial sales in the current year or hiding or ignoring current year expenses.

lCapitalization of costs such as interest and expenditure on research and development

lAt the time of mergers, amalgamation, acquisitions writing off goodwill against reserves.

lPre � acquisitions write down and deferred consideration on acquisition.

lBrand accounting � capitalization of assets.

lContingent liabilities

lCurrency mismatch between borrowing and deposition.

Thus Creative Accounting is used to present assets and liabilities, income and expenditure in a complicated way to incur huge profits. The frequency of large scale creative accounting fraud is seldom, but is carried out with the support of key executives in a company, and may even rely on the

21


co-operation of officials in other corporation or affiliated companies. The officials present the assets and liabilities in a very clever way with motive of saving tax money or increasing the market share value. Creative Accounting can also be used to manipulate the value of publicly traded company's shares for financial gains.

Literature Review

Creative accounting has been the subject of research, discussion and even controversy in many countries these years. Much has been written on the topic in recent years. Numerous articles have appeared looking at the different perspectives of the techniques companies use to 'make statements what they want them to be' (Jon S. 1998). (Dilip2006) argues that the real incentive of creative accounting is the conflicts of interest among different interest groups. (Stolowy and Breton, 2000) suggest three broad objectives for earnings management: minimization of political costs; minimization of the cost of capital and maximization of managers' wealth. (Naser and Pendlebury, 1992) questioned senior corporate auditors about their experience of creative accounting. They were able to conclude that a significant proportion of all categories of companies employ creative accounting techniques to some extent. Many research studies examine a particular aspect or technique of creative accounting. According to Price Waterhouse senior partner's observation (Conner 1986), fraudulent reporting normally occurs among those above management level in which effective internal control are designed. Financial statement are commonly used to generate the delusion that company is in better condition than it actually is by misapplication of the accounting principles to cover the economic realities. There is a substantial literature on creative accounting, much of it originating in, and concerned with, the United States. However, the US literature offers valuable insights into creative accounting in any country with a reasonably highly developed capital market. A recent comprehensive review of the US literature is provided by (Healy and Wahlen,1999) there has been a growth in the volume of literature discussing creative accounting issues.

Objectives of the study

The study aims to achieve the following objectives-

lTo find out whether the creative accounting practice affects the financial reporting system.

lTo examine the reasons for creative accounting practices.

lTo provide valuable suggestions to prevent such malpractices.

Research Hypotheses

Based on the above mentioned objectives, the following hypotheses have been formulated-

lHo.1 - Creative accounting practices has no significant effect on the financial reporting system.

lHo.2 - Implementation of International financial reporting standards do not have significant effect in preventing creative accounting practices.


The survey method of research design was adopted in this study and non-probability convenience sampling technique was used. The sample constituted of 30 respondents including 10 professional chartered accountants, 10 CA/CS students and 10 academicians of commerce department of different colleges in Kanpur. In order to accomplish the purpose of the research a questionnaire was made with 15 questions. For the response 5 point Likert Scale was used where 1 indicates strongly agree, 2- agree, 3- neutral, 4- disagree, 5- strongly disagree. The data generated for

22


this study were presented in a table and analyzed using mean scores. The stated hypotheses were statistically tested using chi-square test.

Research analysis and findings

The hypotheses were tested using the chi-square test. The contingency table is given below -

Table 1

Ho.1 - Creative accounting practices has no significant effect on the financial reporting system.

Strongly Agree 9 6 3 9

Agree 21 6 15 225

Neutral 0 6 -6 36

Disagree 0 6 -6 36

Strongly Disagree 0 3 -6 36

30 342

ResponsesObserved (O)Expected (E) (O-E) 2(O-E)

Implication -

The calculated value of (57) is greater than the tabulated value of = 9.48 at 5% level of

signficance. Hence, we reject the null hypothesis (Ho.1) and accept the alternative hypothesis (H1). This

indicates that creative accounting has significant effect on the financial reporting system.

Table 2

Ho.2 - Implementation of International Financial Reporting Standards does not have significant

effect in preventing creative accounting practices.

2 2X X

2 2Calculation of X = (O - E)/E

= 342/6

= 57

å

Source - Field Survey

Degree of Freedom df = n - 1

= 5 - 1

= 4

Strongly Agree 8 6 2 4

Agree 15 6 9 81

Neutral 4 6 -2 4

Disagree 3 6 -3 9

Strongly Disagree 0 6 -6 36

30 134

ResponsesObserved (O)Expected (E) (O-E) 2(O-E)


2 2Calculation of X = (O - E)/E

= 134/6

= 22.33

å Degree of Freedom df = n - 1

= 5 - 1

= 4

23


Implication-2 2The calculated value of X (22.33) is greater than the tabulated value of X = 9.48. Hence, we

reject the null hypothesis (Ho.2) and accept the alternative hypothesis (H2). This indicates that implementation of International Financial Reporting Standards have significant effect in preventing creative accounting practices.

Table 3

Factors motivating the creative accounting practices (where - 1-highest and 5-lowest score)

Encourage investors to buy company stocks 2.47 2.26

Increase firm's market value of shares 1.70 1.51

Avoid taxes 2.07 1.86

Easy availability of finances at low interest rates 3.57 3.25

Healthy managerial performance 4.46 4.08

Factors for rating MeanWeighted

Average Mean


Implication

In the Table 3, the mean and weighted average mean of various motives were calculated to

find out the main aim behind creative accounting. As the highest score is 1 and lowest is 5, the

mean score which is near to 1 is the highest rated option. Hence, it is clear from the table that the

key objective of creative accounting is to increase the firm's market value of shares in market (with the

mean score of 1.70) following with the practice to avoid taxes (2.07). Attracting new investors and

retain the existing ones(2.47) also motivated companies to practice window dressing. Easy availability

of finance at low rate of interest (3.57) has been rated fourth and healthy managerial performance

(4.46) rated as the last drive to practice creative accounting.

Major findings of the study

lIn present scenario only 43% of the respondents agreed that the financial statements depict

the true and fair view of the companies and 60% of the respondents agreed that creative

accounting practice cannot be easily identified.

lAll the respondents strongly agreed that independent auditors appointed should follow the

auditing standards.

l73% of the respondents strongly agreed that public company should review the internal

financial reports time to time and enforce control to prevent losses.

l70% of the respondents strongly agreed that financial reports must be certified by CEO's and

CFO's.

l50% of the respondents strongly agreed that several legal and criminal penalties should be

imposed who indulge in such malpractices.

l50% of the respondents strongly agreed and 40% agreed that familial relationship among the

leaders of the company and board of directors puts the company at creative accounting risks.

24


l

players (CA/CS/Auditors/Accountants) have significant role in cooking the books of accounts.

l53% of the respondents agreed that companies practice of corporate governance.

lOnly 20% of the respondents agreed that the financial players follow ethical accounting.

Recommendations

The following suggestions can be made in line with the above findings-

lThe government should provide adequate environment for business so that the entrepreneurs

do not indulge in fraudulent practices.

lThere should be more than one auditor in the company and that should be rotated periodically

so that informal relationships do not affect the authenticity of the financial statements.

lRole of independent directors should be enhanced.

lThe financial statements of the companies entering the Indian market through mergers,

acquisitions or any other mode should be checked by two or more independent auditors under

the government supervision.

lTransactions which are changed in special circumstances should be closely examined.

lRewarding and motivating employees in disclosing any manipulation going in the company.

lEncouraging the new generation of accounting professionals to be honest and ethical in their

behaviour and accounting both.

Conclusion

Creative accounting has posed severe challenge to the accounting profession. The problem

is not only confined to India but is present in all the international companies too. The study concludes

that there is need for stronger enforcement and monitoring mechanism for International Financial

Reporting Standards in India. Streamlining the accounting and auditing system and enhancing

the practice of corporate governance appears to be the engines to make the accounting more

objective and transparent.

References

l

lConner, 1986, 'Enhancing public confidence in the accounting profession', Journal of Accountancy.

lDana, S.G and Diana, E.B, 2011, 'From Creative Accounting Practices and Enron Phenomenon to the Current Financial

Crisis.

lDilip, K.S, 2006, 'Creative Accounting in Bangladesh and Global Perspectives'.

lHealy, P.M and Wahlem, J.M, 1999, 'A review of the Creative Accounting literature and its Implication for Standards

Setting', Accounting Horizon.

lHervey Stolowy and Gaeton Breton, 2003, 'Account Manipulation: A literature review and proposed Conceptual

Framework'.

lJon, S, 1998, 'Why do companies use Creative Accounting?'

lNaser, K, 1993, 'Creative Financial Accounting: Its Nature and Use', HemelHempstead.

lNaser, K and Pendlebury, M, 1992, 'A note on the use of Creative Accounting', British Accounting Review.

40% of the respondents strongly agreed and 47% of the respondents agreed that the financial

Amat,O et al., 1999, 'The Ethics of Creative Accounting', Journal of Economic Literature Classification.

25

*Assistant Professor, V.S.S.D. College, Kanpur

*Dr. Shilpi Srivastava

Qualitative Aspects of Corporate Information on Corporate Disclosure Practices with Special Reference to Multinational Corporations and Indian Corporates

A review of relevant literature relating to the area of accounting and finance reveals

that inspite of the efforts on the part of company management; there is an increasing

dissatisfaction among the users with regard to the overall quality and quantity of disclosure

expressed in the published annual reports of companies. Users of annual reports expect

the management to explain the problems the company is encountering and its game-plan to

tackle the same. However companies are often scared of discussing these issues. There

is a wide gap between expectation and reality. Investors have suffered on account of

unscrupulous management of companies which have raised capital from the market at high

valuations and have performed much worse than the reported figures; leave alone the financial

professions at the time of raising money. In some cases, the management does not wish

to even accept that it grossly miscalculated the success of the venture.

The present research has focused on the evaluation of corporate reporting practices

in India after the initiation of the economic reforms in the year 2001. Domestic corporate

sector is fast forwarding itself into adopting the best of the corporate governance

practices.

Introduction

The present research work has focused on the evaluation of corporate reporting practices

in India after the initiation of the economic reforms in the year 2001. These reforms and

structural changes have led to the emergence of MNC's on the Indian soil.

Information reported by companies should possess some qualitative characteristics.

These are those desirable attributes which make information reported by companies useful to the

participants. These characteristics provide guidelines for selection, evaluation and communication

of the information item.

A number of desirable characteristics of accounting information have been discussed for

a long time by various professional accounting bodies in the form of pronouncements.

The most comprehensive description is statement from financial accounting concept

(SFAC) No. 2 issued by FASB, the USA (SFAC No. 2 1990). The attribute implies presenting that

information to users, which may help them in decision making. The statement exhibits that in order

to be useful for decision making, accounting information should possess two primary qualities

of relevance and reliability.

Domestic companies have been communicating information on their operation and

financial status once a year through their annual reports. These annual reports provide an important

benchmark that has the benefit of being independently audited it is inherently less timely. Though

the corporate sector, of late, has started communicating the operating performance more

frequently. Accounting Standard (AS-25) has made it mandatory for corporate to report results on a

quarterly basis as per the latest regulation on corporate reporting. However, the detailed information

pertaining to the varied factors are conspicuously absent in these quarterly performance results.

26


Therefore, annual reports are still the most exhaustive source of information that the investors and

other users do not utilize the other source for the information needed by them.

The extent of information disclosed in annual reports varies a lot amongst sample companies.

It is revealed by the empirical results analyzed. These variations in the extent of disclosure may be

due to different company specific characteristics. It is generally argued (Cerf. 1961; Buzby, 1975;

Cook, 1989) that knowledge of the relationship between corporate characteristics and the level of

disclosure facilitates appropriate policy formulations. To quote Buzby (1975), 'To the degree that

the extent of disclosure in some, if not all, annual reports is considered inadequate, some purposeful

action must be taken knowledge of the relationship between the extent of disclosure and company

characteristics could play a role in selecting a proper course of action."

To support this view, the relationship between the extent of information reported through

corporate annual reports and three company characteristics has been analysed in this study. The

company characteristics considered are as follows:

1.Size of a company (TA) � Measured by average total assets.

2.Profitability (ROI) - Measured in terms of the average rate of return on investment.

3.Nature of industry- to which a company belongs.

These attributes/characteristics are assumed to be truly associated with the extent of

disclosure.

1.Size of company

There is a well presumptive positive relationship between the size of the company and the

extent of its disclosure. Large companies are generally expected to report more information than

smaller companies due to various reasons which are as follows:

lThe management of larger company is more likely to realize the possible benefits of better

disclosure such as easier marketability of securities and greater ease in financing.

lThe larger the firm, the more is its ability to attract highly skilled individuals to manage

sophisticated information systems designed to generate and report on an extensive array

of information.

lLarge size companies are better known to the public. In order to build a positive public

image and prevent further regulation of their operations, these companies disclose more

information as compared to smaller companies.

lLarger companies are more complex entities with multi products and multi location plants;

their operation necessitates additional information required for the internal managers of

the companies. This in term implies ready availability of some types of information for

incorporation in annual reports.

lThe cost of accumulation and dissemination of additional information through annual reports is relatively higher for smaller companies. Moreover, smaller companies are more likely to fear that better disclosure of information could endanger their competitive position in the market. Therefore, a large company should report more information than a smaller company. Finally, because of regular interaction with the financial community, larger companies are probably more aware of user's informational requirements.

27


The size of a company can be measured in a number of ways. In the past, research studies have used a number of variables to define and measure the size of a company. In the present study size has been used as a sum of total assets. Total assets include Net fixed assets, Net current asset and investments. To measure the relationship between extent of disclosure and size, Average Total Assets Size and Average Disclosure Score Percentage for each company of sample has been calculated.

Importantly, the general finding of past studies Cerf (1961), Signhvi and Desai (1971), Buzby (1975), Lal (1985), Chow ant Wang-Bom (1987), Cook (1989, 1992), Vasal (1992) has been that larger firm tend to disclose more, that is, size is an important explanatory variable in exploring the inter corporate difference in disclosure.

To measure relative disclosure score an index based on items has been designed. By using modified dichotomous approach in which an item scores one if it is disclosed and Zero otherwise, Unweighted disclosure scores have been computed for respective sample companies in two groups (i) MNCs (ii) Corporates belonging to Indian group houses (Domestic Corporates)

Index = Actual disclosure / Total possible disclosure,

å=M

i-1

di / åN

i-1

di

Where d=1 if item di is disclosed and 0 if item di is not disclosed M=number of item disclosed

and N = maximum number of disclosure item possible.

The index is a ratio comparing the actual level of disclosure and the possible level.

0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

D.S

core

%

Years

Bata India Limited Hindustan Lever Limited Glaxo India Limited (GSK) Cipla Limited Honda Siel Power Products Limited

Fig. 1 : Disclosure Score : Multinational Corporations

28


0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

D.S

co

re %

Years

Apollo Tyres Ltd. Associated Cement Company Ltd. Dabur India Ltd.

Larser and Toubro Ltd. Surya Roshni Ltd.

Fig. 2 : Disclosure Score : Domestic Corporations

Tata Engineering and Locomotive Company Ltd.

In the present research, an in-depth analysis of the impact of size of company (measured

by its total assets) on the disclosure score provides an interesting observation. It has been found

that the size of the companies in terms of total assets has no relationship with that of the extent

of disclosure. It dispels the common perception that a big sized company shall have a tendency

to disclose more. Time-series analysis of the assets size of selected MNC's from the year

2003-2012 reveals that some of the MNC's like Bata India Limited, Hindustan Lever Limited, Glaxo

India Limited (GSK), CIPLA Limited and Honda SIEL Power Products limited have been building up

their assets size reflecting a growth in their operations. Correspondingly the disclosure score too

has been on the rise (Table 1.1)

29


Table 1.1

Assets size Vs Disclosure Score: Multinational Corporations

Bata India 11569.00 64.15 15397.00 64.15 18770.00 64.15 17821.00 70.75 18061.40 70.75Limited

Hindustan 53357.10 58.49 50088.99 59.43 86236.16 59.43 97605.94 61.32 142915.09 65.09Lever Limited

Glaxo India 17068.18 59.43 18961.46 62.26 22436.05 62.26 27486.57 61.32 28296.48 61.32Limited (GSK)

Cipla Limited 9523.20 51.89 11635.70 51.89 15545.90 52.83 19781.50 52.83 31272.20 52.83

Honda Siel 3819.63 48.11 3719.53 48.11 3548.41 50.00 3875.29 50.94 4565.03 50.94Power Products Ltd.

Name of Corporations

2003 2004 2005 2006 2007

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Bata India 35600.35 69.81 35143.28 70.75 36446.82 70.75 40243.63 73.58 37611.94 74.53Limited

Hindustan 144807.74 65.09 197733.88 65.09 228053.12 66.98 259983.27 68.87 312743.04 77.35Lever Limited

Glaxo India 32120.68 61.32 34372.09 62.26 38125.46 65.09 42953.64 70.75 51708.29 72.64Limited (GSK)

Cipla Limited 29640.80 52.83 38291.90 53.77 49602.30 55.66 59508.00 55.66 74868.80 61.32

Honda Siel 5781.00 50.00 7608.57 49.05 9002.27 51.89 10624.85 52.83 12102.89 63.20Power Products Ltd.

2008 2009 2010 2011 2012

Table 1.2

Average Assets Size Vs Average Disclosure Score Multinational Corporation

Bata India Limited 266663.44 69.33

Hindustan Lever Limited 157352.42 64.71

Glaxo India Limited (GSK) 31352.89 63.86

Cipla Limited 33967.03 54.15

Honda Siel Power Products Ltd. 6464.74 51.50

Name of Corporations Average Asset Size (Lakh) Average Disclosure. Score (%)

Name of CorporationsAsset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)

30


Table 1.3

Assets Size Vs Disclosure Score: Domestic Corporate

Apollo Tyres 30160.66 52.83 34826.42 52.83 35298.99 53.77 39160.09 58.49 51560.53 55.66Limited

Associated 68299.00 57.07 93221.00 57.07 110947.00 57.07 134898.00 61.32 1558234.00 62.26Cement Company Ltd.

Dabur 10961.99 57.55 12207.05 58.49 22732.64 58.49 28285.35 59.43 35577.63 59.43India Limited

Larsen and 143262.00 64.15 169480.00 64.15 202861.00 65.09 277712.00 66.03 401338.00 65.09Toubro Ltd.

Surya Roshni 13264.12 56.60 16207.06 55.66 20585.88 57.55 26793.68 56.60 36061.44 56.60Limited

Tata 178796.00 60.37 220862.00 58.49 224932.00 58.49 257601.00 64.15 369679.00 64.15engineering and Locomotive Company Ltd.

Name of Corporations

2003 2004 2005 2006 2007

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Asset Size(Lakh)

D. Score(%)

Apollo Tyres 53976.83 55.66 56736.00 56.60 60900.00 56.60 73868.00 57.55 78391.00 65.09Limited

Associated 194740.00 63.21 247573.00 65.09 246313.00 71.69 262018.00 74.52 287070.00 76.41Cement Company Ltd.

Dabur India 41674.49 60.38 49888.93 56.60 55643.86 57.50 60905.62 69.21 55830.01 71.70Limited

Larsen and 509048.00 65.09 624128.00 65.09 706497.00 65.09 783792.00 74.53 826280.00 74.53Toubro Ltd.

Surya Roshni 40337.74 56.60 46793.64 59.43 50543.69 62.26 50365.50 62.26 50687.95 62.26Limited

Tata 618474.00 66.03 706392.00 66.03 720618.00 66.03 675838.00 66.98 625266.00 70.75engineering and Locomotive Company Ltd.

2008 2009 2010 2011 2012Name of CorporationsAsset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)Asset Size

(Lakh)D. Score

(%)

31


Table 1.4Average Assets Size vs. Average Disclosure Score Domestic Corporate

Apollo Tyres Limited 51487.85 56.50

Associated Cement Company Limited 180331.3 64.57

Dabur India Limited 37370.75 60.94

Larsen and Toubro Limited 464439.80 66.88

Surya Roshni Limited 35164.07 58.58

Tata engineering and Locomotive Company Limited 246989.10 64.14

Name of Corporations Average Asset Size (Lakh) Average Disclosure. Score (%)

This may be construed as a strong positive correlation between size and the disclosure,

but the average tell us different story. For example, the average assets size of Glaxo India Limited

is almost as big as the average assets size of Cipla Limited (Table-1.2) but there is a wide

difference between the average disclosure scores of both of these MNC's i.e. the average

disclosure score of Glaxo India Limited is 63.86%. Whereas it is only 54.15% in case of Cipla

Limited. On the other hand time series analysis of Domestic Corporate show a positive relationship

between disclosure scores of a company and its assets-size. From Table 1.3 it is apparent that

for the entire sample corporate (except for Telco and Dabur India Limited) the disclosure score

percentage increases with their assets sized through out the sample period. These results support

the common belief that a big sized company shall have a tendency to disclose more. While analysing

the Average (Table 1.4) we found that the enhancement in the disclosure over a period of time

may be due to the reasons other than increase in assets size of the Corporate. For instance,

though there is a wide difference between the average asset size Telco and Larsen and Toubro but

the disclosure score of Larsen and Tourbro on the average of ten years is 66.88% while Telco's ten

years average disclosure score is 64.14%. It may be noticed from the table 1.4 that compared to this

Telco's disclosure score of 64.14% is as good as that of the Associated Cement Company

Limited (ACC) which is less than the size of assets of Telco. Similarly, the size of Appollo Tyres assets

is far higher than Surya Roshni, whilst the average disclosure score of Surya Roshni is 58.58%

compared to 56.50% of Appollo Tyres.

An in-depth analysis of the impact of size of the companies (measured by its total assets)

on the disclosure score provides an interesting observation in both. It has been found that the size

of the assets has no relationship with that of the extent of disclosures. It dispels the common

perception that a big sized company shall have a tendency to disclose more. Although the Time-

series analysis of the Asset Size of various corporate reveals that majority of the corporate has been

building up their assets size reflecting a growth in their operations. Correspondingly the disclosure

score too has been on the rise. This may be construed as a strong positive correlation, but the

averages tell us a different story. It may be stated that the enhancement in the disclosure score

over a period of time may be accounted for by the increase in the disclosure norms over a

period of time and increased stringency in the compliance regulations of varied authorities.

32


2. Profitability

To some extent, profitability could be taken as another factor for explaining the differences in the level of disclosure of various companies. Some of the possible reasons for expecting such behaviour are:

Firstly, higher profitability implies more successful and stable operations of a company. It is an indicator of the strong position of a company vis-a-vis its competitors. Thus, the competitively strong position of a company may induce it to convey the message of its strengths by resorting to more information reporting. Whereas companies with lower profitability may not be interested in disclosing much information owing to the fear that greater disclosure may further erode their competitiveness in the market. Moreover, 'nobody wants to wash dirty liner in public' applies aptly in the stake of eroded profitability.

Secondly, when profitability is high, the management of a company might disclose more information to support continuance of its position. On the other hand, when profitability is low, the management may decide to disclose less information in order to cover up or camouflage the reasons for losses or eroding profitability.

Finally, a company with higher profitability may disclose more information because of its capacity to absorb increased cost arising out of additional information disclosures.

In the literature of Accounting and Finance, Return on Total Assets has been recognized as the prime indicator of overall profitability. Therefore, in the present study profitability (ROI) is taken as an indicator of overall profitability. It has been measured as the ratio of Net after tax profit (NAT) to Total assets (TA) i.e.

Difference in the level of disclosure could be explained to some extent, by differences in the profitability position of the company. To measure the relationship between the extent of average disclosure score and Average Return On Investments the following regression model is used in the present study:

Y=+2

Where,

Y=Average disclosure score

a=intercept (constant)

b=Coefficient of ROI and 2

X= ROI= Profitability i.e. 2

Y = a + b x22

ROI = x 100NAI

TA

x 100Net Profit after Tax

Total Assets

Regression Equation for Multinational Corporations2D. Score = 62.466 + 0.144 x ROI, R=9.5%

Table 1.5

Industry-wise Analysis of Disclosure Score

Cipla Limited 54.15 Dabur India 60.94 Honda Siel 51.50Limited Power Product Limited

Limited

Glaxo India 63.83 Hindustan 64.71 Larsen & 66.88 Bata India 69.33Limited Lever Limited Toubro Limited Limited

Surya Roshni 56.31 The Associated 64.52Limited Cement Co.

Limited

Teleco 64.14

Apollo Tyres 56.60

Name ofCompany

Average %DisclosureScore

Name ofCompany


Name ofCompany


Name ofCompany


Pharmaceutical Fast Moving Consumer GoodsElectrical / Engineering Others

33


Regression Equation for Domestic Corporates.2D. Score = 61.106 + 0.07045 x ROI. R=0.3%

The result of Regression analysis establishes the fact that for both groups of corporates 2 (MNCs as well as domestic corporates) Ris insignificant. It is 0.3% in case of Domestic Corporates

and 9.5% in case of MNCs. There exist no relationship between Average disclosure score and average ROI in both types of corporates. These results do not support the research findings revealed by previous researchers � that the extent of disclosure increases with higher rate of return on total assets.

Nature of Industry

Varying degrees of competition existing in different industries may cause difference in the

extent of corporate disclosure. In case of acute competition in an industry, companies concerned

may hesitate to provide more detailed information in their Annual reports. They might fear that

greater disclosure may weaken their competitive position and could provide benefits to their business

rivals. In addition, there may be some historical reasons characterizing differences in the level of

disclosure in the level of disclosure in different industries.

In the present study, in order to examine the possible effects of industry on the level of

disclosure scores, companies have been classified into four industry groups namely,

1. Pharmaceutical Industry

2. Fast moving consumer goods industry

3. Electrical/Engineering Industry

4. Others

This classification has been carried out on the basis of their dominant operations. For each

type of Industry average disclosure percentage (of average disclosure percent as various companies)

has been computed. Finally, the disclosure percentage of one type of industry is compared with the

disclosure percentage of the other type of industry to determine whether the industries have any

influence on the extent of disclosure. (Table-1.5), Fig.3

34


Conclusion

Regarding the impact of company characteristics viz., asset size, profitability and type of

industry the following overall conclusions have been drawn:

1. Asset size has been determined by adding net fixed assets, net current assets and investment. It has

been found that the disclosure score of companies has increased with the increase in

the asset size of domestic corporate, whereas, asset-size of a company has been found to have no

influence on the disclosure score of multinational corporations.

2. Profitability as measured by Return on investment has been found to have no impact on the extent of

disclosure in both the groups of corporates. Some corporates with lower rate of profitability have been

found to be disclosing more information than corporates with higher rates of profitability and vice-

versa.

Cipl

im

ited

aL

Gla

xo In

dia

Lim

ited

Du

nda

Lie

abrI

im

itd

Hin

dust

an

eve

imite

d

LrL

Hon

da S

el

owr

r

dut L

mi

d

iP

ePo

ci

te

Lars

e

Tb

Lim

i

n&

ou

ro

ted

Sury

Ros

hini

Lim

ited

a

Tele

co

Ts

Apollo

yr

e L

imite

dBa

t n

da

Lim

ited

aI

i

T

iti

Ce

Le

he A

ssoc

aon

men

t Co.

imit

d

54.15%

63.83%60.94%

64.71%

51.50%

66.88%

56.31%

64.14%

56.60%

69.33%

64.52%

0

10

20

30

40

50

60

70

80

Aver

age

% D

iscl

osur

e Sc

ore

Pharmaceutical Fast MovingConsumer Goods

Electrical / Engineering Others

Fig. 3 : Industry-Wise Analysis of Disclosure Score

Average % Disclosure Score

35


3. The type of industry in which a particular corporate operates has also been found to

significantly influence the disclosure score. This is because average disclosure scores of

companies belonging to different industries have been found to be significantly different.

It implies that the size of the company is an important factor for the disclosure

score but profitability has no influence on the disclosure score of the corporates.

References

lDisclosure practices of corporate sector "Influence of company characteristics on corporate disclosure" P. 141.

lThis contribution to final reports is based on a total of is 8 interviews conducted by mainly in Bombay between

April 1998 and January 2000.

lDFIS put on M&A vigil "Economic Times: 30 December 1997.

lDisclosure practices of corporate sector "Influence of company characteristics on corporate disclosure" p. 161.

lDisclosure practices of corporate sector "Influence of company characteristics on corporate disclosure", p. 158.

lGerold S. Backman, "The new Audit committee Rules," Securities regulation laow journal 28 (2000).

lB.R., Cheffins, "Corporate Governance in the UK: Lessons for Canada", Canadian Business Law Journal, 28, 1997.

36

*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur

*Dr. Manisha Gupta

Growth and Development of Indian Capital Market

Capital market is the barometer of the economy. This statement truly brings out the

importance of the capital market from the macro-economic angle of any country. �The capital

market discloses the future� this is true. The state of the capital market does not reflect the past

or present but it reflects the future of the economy of any country. In the long run it is true measure

of the health of any economy. The capital market in a developing country or economy has to facilitate

the main stream of command over capital to the point of the highest yield. By doing so it enables

control over resources to pass into hands of those who can employ them most effectively thereby

increasing productive capacity and swelling the national dividend.

The Indian capital market was not properly developed before independence. After

independence the Indian capital market started to enlarge its activity with increase in the volume

of saving and investment in the economy, particularly since 1951, and has shown steady

improvement. All types of encouragement and tax relief exist in the country to promote savings.

The volume of investment has also grown significantly in recent years. Another important indicator

of the growth of capital market is the significant growth of public borrowings for investment

purposes.

During the last three decades Indian capital market has attained considerable degree

of development. There was a sharp increase in the volume of capital market transactions and the

functioning of the market that has also been diversified, through merchant houses, venture capital

funds etc. Thus Indian capital market has witnessed a radical transformation in a period of over

one decade. During the early part of 1990s the ranking of Indian capital market with reference to

global standards of efficiency, safety, market integrity etc. was low and Indian capital market was

regarded as one of the worst. However, the scenario has now completely changed. Because of

extensive capital market reforms carried out over the period of the last one decade or so, the setting

up and extension of activities of NSE, and steps taken by SEBI the Indian capital market is now

ranked in the top league. In fact, it is now considered to be way ahead of many developed country's

capital market.

Key words: Macro, barometer, steady, merchant houses, venture capital funds, league.

Introduction

Capital market is the barometer of the economy. This statement truly brings out the

importance of the capital market from the macroeconomic angle of any country. There is an age

old saying that �the capital market discloses the future�. The state of the capital market does not

reflect the past or present but it reflects the future of the economy of any country. In the long run it is

a true measure of the health of any economy.

The capital market is the market for relatively long term financial instruments. It is having a

complex of institutions investment and practices with established links between the demand for

and supply of different types of capital gains.

Capital market may be defined as �an organized mechanism for effective and efficient

transfer of money capital or financial resources from the investing parties i.e. individuals or

institutional savers to the entrepreneurs (individuals/institutions) engaged in industry or commerce

in the business either in the private or public sectors of an economy�. It also refers to the facilities

and the institutional arrangements for borrowing and lending terms funds (medium term and long

term funds).

37


Further more, the capital market in a developing country or economy has to facilitate

the main stream of command over capital to the point of the highest yield. By doing so it enables

control over resources to pass into hands of those who can employ them most effectively thereby

increasing productive capacity and swelling the national dividend. The capital market composed

of those who will demand the funds (borrowers) and those who will supply the funds (lenders). An

ideal capital market attempts to provide adequate capital at reasonable rate of return for any business

or industry which offers a prospective high yield, enough to make investment worthwhile. The

rapid expansion of the corporate and public enterprises since 1951 has necessitated the development

of the capital market in India. The major players in the capital market are Corporate Sector,

Banks, Financial Institutions and Mutual Funds etc.

The Indian capital market was not properly developed before independence. As there

were very few companies engaged in the trading in the stock market thus the growth of industrial

securities was very limited. Most of the British Companies in India had their base in London Capital

Market instead of Indian Capital Market. A large part of the capital market consisted of the gilt-edged

market for government and semi-government securities. The managing agency system had played

some role in the promotion, issue and underwriting of new capital issues.

After independence the Indian capital market started to enlarge its activity with increase in

the volume of saving and investment in the economy, particularly since 1951, and has shown

steady improvement. All types of encouragement and tax relief exist in the country to promote

savings. In the mean time, the Indian capital market has received a significant boost. One of the

important indicators of the growth of the Indian Capital market is the expansion and the growth of joint

stock companies or corporate enterprises. In 1951, there were about 28,500 companies both

public limited and private limited companies with a paid up capital of Rs. 775 crore. In 2000, there

were over 70,000 companies with paid up capital of over Rs. 200,000 crore.

The volume of investment has also grown significantly in recent years. Another important

indicator of the growth of capital market is the significant growth of public borrowings for investment

purpose. During the last three decades, Indian capital market has attained considerable degree of

development. There was sharp increase in the volume of capital market transactions and the

functioning of the market that has also been diversified. Commercial banks are important component

of the Indian capital market, but their operations are very much restricted to the purchase and sale

of government securities and other trust securities. The holdings of industrial securities by the

commercial banks are in the form of shares and debentures of some special financial institutions. They

are also setting up financial subsidiaries known as merchant houses, mutual funds, venture capital

companies etc. to mobilize funds for investment in industrial securities.

In 1887, the first organized stock exchange in India was started in Bombay when the 'Native

Share Stock Brokers Association�� known as the Bombay stock exchange was formed by the

brokers in Bombay. In 1894, the Ahmedabad Stock Exchange was started to facilitate dealings in the

shares of textile mills. The Calcutta Stock Exchange was started in 1908 to provide a market for

shares of plantation and Jute mills. The Second World War saw great speculative activity in the country

and the number of stock exchange rose from 7 in 1939 to 21 in 1995. Besides these organized

exchanges, there were a number of unorganized and unrecognized exchanges known as �Kerb

markets�, which did not have any set of rules and which could be enforced in courts of law. Under the

Securities Contract (Regulations) Act of 1956, the Government of India has so far 20 Stock

38


Exchange at present time. Bombay is the premier exchange in the country and nearly 70 percent of

all transactions in the country are done in that exchange. NSE is next important after that Bombay

stock exchange, which accounted for rest of the transactions.

The role of non-banking financial institutions plays a crucial role in the development

of capital market. The first development bank was Industrial Finance Corporation of India (IFCI)

established in India. The State Financial Corporation (SFC) Act was passed in 1951. In 1955, the

Industrial Credit and Investment Corporation of India (ICICI) was established with the main object

to enlarge underwriting facilities for public issue of capital, foreign currency loans and direct

subscription to share and debentures. At the State level, after 1960, a number of state governments

set up SIDCs to undertake developmental and promotional activities. In 1964, the Industrial

Development Bank of India (IDBI) was established. Non-banking institutions like Unit Trust of India (UTI),

Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC), Investment

Companies, the finance and the leasing companies are also actively working in the capital market.

In order to promote the rural development, the National Bank for Agriculture and Rural Development

(NABARD) was established in 1982. The Export-Import Bank of India (Exim Bank) was also established

in 1982 to cater to the needs of the importers and exporters for financing international trade.

The need for reforms in the financial market has been evident for sometime over the last

couple of years. From 1990 onwards growth in listing, market capitalization, trading volumes and

investor's interest have all attained new heights. The reform measures initiated in the capital market

over the past years, starting with SEBI, repeal of Control of Capital Issues Act and the abolition of the

office of the Controller of Capital Issues have brought significant improvement in the functioning

and regulatory efficiency of the market. The intermediaries in the securities market such as merchant

banking, brokers, underwriters, registrars, portfolio managers etc. have been brought in the regulatory

framework of SEBI. SEBI has introduced a number of measures to reform India's capital market

in recent years. By improving market efficiency, enhancing transparency, preventing unfair trade

practices, it has succeeded to a considerable extent in bringing up the Indian market to international

standards. The important development can be highlighted as under:

lThe issuers complying with the eligibility criteria are allowed freedom to issue the securities

at market determined rates.

lThe secondary market has overcome the geographical barriers by moving to screen

based trading.

l All kinds of securities - debt and equity, government and corporate are traded on exchanges,

side by side.

lTrades enjoy counter party guarantee.

lThe trading cycle has been shortened to a day and trades are settled within 2 working

days.

lPhysical security certificates have almost disappeared.

lA variety of derivatives are permitted.

lThe confidence of international investors in the Indian securities market has increased

considerably and now more than 500 FITs are registered with SEBI.

Generally investments of long term funds are dealt in capital market. During the last ten years,

39


the growth of volumes in capital market has been tremendous. Government and Corporate raise funds

from capital market for their expenditure or expansion. Supply of funds comes from surplus sector,

mainly households.

The Government securities are issued by Central, State Governments and Local bodies,

PSUs etc. are backed by the RBI. These securities have good liquidity and give a pre-determined yield.

These securities are generally held by banks to meet their SLR requirement. Others like insurance

companies, mutual funds hold government securities as risk free investments. A government security

is a marketable claim on the government and is a totally secured instrument.

Depending upon the issuing body such securities could be divided into five types:

lCentral Government Securities.

lState Government Securities

lSecurities guaranteed by Central Government for All India Financial Institutions like IDBI,

ICICI and IFCI etc.

lSecurities guaranteed by State Government for State Institutions like State Electricity

Boards and Housing Boards.

lTreasury bills issued by RBI.

The capital market is also classified into primary capital market and secondary capital market.

First we have discussed about the New Issue market or primary market. The general functions

of the New Issue Market are Origination, Underwriting of new issue and Distribution of new securities to

ultimate investors.

Next segment of the capital market is the Secondary Market means �Stock Exchange�.

According to the Securities Contract (Regulations) Act, 1956 defines �Stock Exchanges� as - �The

Stock Exchange has been defined as any body of individuals whether incorporated or not, constituted

for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in

securities�. Secondary market development depends upon the number of factors that are called

selective indicators. The different factors of secondary market are-number of stock exchange,

number of brokers, number of listed companies their turnover, FIIs net investment, stock market

indices and P/E ratio.

There are 20 stock exchanges in the year 2010-11, including NSE, BSE, OTCEI and ICSE.

Three Stock Exchanges were de-recognized in the year 2007 as per order of the SEBI; they are

Saurashtra and Kutch Stock Exchange, Magadha Stock Exchange and Hyderabad Stock Exchange.

As the year ended on March 2014, Calcutta S.E. is working along with 9411 brokers and 51885

sub-brokers registered with SEBI as against 10128 brokers and 70178 sub-brokers in 2012-13.

The number of listed companies on BSE and NSE as the year ended April 2014 were

5336 and 1688 as against 5211 and 1666 respectively in the year 2012-13. Equity market witnessed

significant uptrend during 2009-10 to downward trend in 2008-09. It was due to domestic markets

that reflected the uncertainties in international financial market during the financial year. It increased

the investors by giving five years best return in 2009-10. The BSE Sensex increased at 22386 point

on March 31, 2014 as against 18836 March 31, 2013. The S & P CNX Nifty also increased at 6704

points at the end of March, 2014 as against 5683 points at the end of March 2013. This was mainly

driven by higher growth rate, positive sentiments in market better global environment and FIIs inflows. E

40


The turnover of BSE and NSE in 2013-14 is Rs. 521664 Cr. in 2013-14 as compared to Rs. 548774 Cr.

in 2012-13 and Rs. 2808488 Cr. in 2013-14 as against Rs. 2708279 Cr. in 2012-13. BSE and

NSE together contributed 99.9% of the turnover in which NSE accounted for 74.9% and BSE

accounted for 24.9% of the total. At the end of March 2014 the P/E ratio of BSE sensex and S & P CNX

Nifty were 18.3 and 18.9 respectively as compared to 16.9 and 17.6 respectively as on March, 2013.

The P/E ratio of Indian indices witnessed significant increases in May, 2009 after the results of

Union Government elections were declared and continued increased thereafter. The next important

indicator is FIIs; the total net inflow of FIIs was Rs. 51649 Cr. in 2014 as against Rs. 168367 Cr. in 2012-

13 declined by 43.1% from the previous year.

Several important changes were brought for the smooth and effective functioning of

stock exchanges from time to time by the SEBI. Some of those initiatives that have taken place in the

secondary market are overall administration, supervision and control of the stock exchanges,

membership of the stock exchange, listing of securities, public issues, price bands, trading and

settlement cycle, investor protection fund, dematerilization of securities, implementation of STP,

corporate governance, securities transaction tax etc.

The NSE since 1994 has drastically changed the method of trading and settlement in this

country. From open outcry system to electronic trading and settlement on computer screens, the

Indian Capital Markets have come a long way. Regional Stock Exchanges lost their relevance due to

their own investor unfriendly practices and the change in regulatory approach in the years following

the creation of the NSE. The reasons for the failure of the RSEs are technological changes,

disintermediation, Satellite Based Trading, Management and operational practices, commercial

failure, Depository operations etc. Some of the measures to overcome the problems of Regional

Stock Exchanges are to float the membership, to convince the management of unlisted companies,

to spread the information, to educate the investors, to upgrade the skills of market operators, to

monitor the compliances etc.

Investors are the backbone of the securities market. Protection of their interest is very

important. They are expected to be alert and active at the time, after and even continue to make an

investment. The investment is made generally in shares, securities, bonds, and debentures etc., either

purchased from Primary or Secondary Market. Therefore, a number of regulatory authorities in the

financial market such as Department of Company Affairs, Company Law Board, Ministry of Finance,

Securities & Exchange Board of India, Reserve Bank of India etc. are functioning towards investor's

protection and developing number of measures, specially giving stress upon disclosure provisions

of the securities in Indian capital market. The disclosures generally made by issuers, intermediaries

and overseeing authorities (SEBI).

Following steps taken by SEBI to educate the Investors are-Internet based response

system, Securities Market Awareness Campaign (SMAC) that includes workshop, advertisement,

audio- visual clip, investor websites etc.

Financial intermediaries are firms that provide services and products that customers may

not be able to get more efficiently by themselves in financial markets. Thus it includes all kinds of

organisations which intermediate and facilitate financial transactions of both individuals and

corporate customers. The key financial intermediaries in India are Commercial Banks (Public, Private

and Foreign Banks), financial institutions (IDBI, IFCI, SFC, EXIM), insurance companies (LIC, GIC),

mutual funds, non-banking financial companies (HDFC, ILFs, Kotak Mahindra Finance) and non-

41


banking financial service companies (merchant banks, credit rating agencies, depositories)

Regulation is an absolute necessity in the face of the growing importance of capital market

through out the world. The development of a market economy is dependent on the development of

the capital market that involves the regulations of securities; these rules enable the capital market to

function more efficiently and impartially.

The Companies Act, 1956, covers both the financial and non-financial aspects of the working

of the corporate sector. It aims at developing an integrated relationship between promoters, investors

and company management. It seeks to protect the interest of share holders, and to promote their

effective participation and control of companies.

Controller of Capital Issues Act, 1947 was repealed by Capital Issues (control) Repeal Act,

1992. Its provisions have now become the powers and functions of the SEBI. This act mostly

regulated the primary or new issue market for securities. The Act required companies to obtain prior

approval or consent for issues of capital to the public, for pricing of public and rights issues.

It empowered the government to regulate all aspects relating to the new issues.

The Securities Contracts (Regulation) Act is to regulate the working of Stock Exchanges with

a view to prevent undesirable transactions or speculations in securities. It empowers the Government

of India to recognise and de-recognise the Stock Exchanges to stipulate laws and bye-laws for

their functioning and to make the listing of securities on Stock Exchanges by Public Limited Companies.

The SEBI, its over all objective is to protect the interest of investors in securities, to promote the

development of and to regulate the securities market. It protects the rights and interests of investors,

particularly individual investors and guides/educates them. The Depositories Act, 1996 defines

�Depository as an organisation where securities of a shareholder are held in the form of electronic

accounts in the same way as bank holds money. The importance of depository system are - it reduces

the cost of issue and transfer of securities by the issuer, reduces the scope for theft forgery damage to

securities certificates etc. The investors can trade in securities immediately on allotment without

waiting for receipt of security certificates.

The Indian capital market has witnessed a radical transformation in a period of over one

decade. During the early part of 1990s the ranking of Indian capital market with reference to global

standards of efficiency, safety, market integrity etc. was low with reference to the risk indices in

particular, the Indian Capital Market was regarded as one of the worst as it figured almost at the bottom

of the league. However, the scenario has now completely changed. Because of extensive Capital

Market reforms carried out over the period of the last one decade or so, the setting up and extension

of activities of NSE, and steps taken by SEBI, the Indian Capital Market is now ranked in the top league.

In fact it is now considered to be way a head of many developed country capital market.

A significant feature of the primary market activity after abolition of capital control has been

that the corporate attempted to diversify the range of instruments. A wide variety of innovative/

hybrid instruments were introduced to suit varied needs of investors and issues/borrowers. Some of

the instruments which become quite popular were Secured Premium Notes (SPN) with detachable

warrants, non-convertible, debentures with detachable equity warrants etc. Despite setback in some

years due to stock market scams, the sentiments look positive due to revival of retail investor interest

in the market following encouraging corporate performance in recent period. However, what continues

to be a matter of concern is the fact that it is the Foreign Institutional Investors (FIIs) that call the shots

in the Indian Capital market due to the vast amount of resources at their command and, as correctly

42


pointed out by R.H. Patel, �The operations of the FITs in India are often sporadic as their buying

and selling decisions are governed by global strategies in which the Indian market continues to be a

marginal player�.

Therefore, external shocks can destabilize the Indian capital market at any time and it is

necessary to take adequate precautionary steps to avoid/prevent this possibility.

Suggestions

Following suggestions are made for a better performance of the India Capital Market :-

lThe absence of wide spread branch network of the credit rating agencies should be modified

so it may overcome the limit in its skill rating.

lThe burden of inexperienced, unskilled or overloaded staff should be minimised because it may

not justify to their job as the resulting ratings may not be perfect.

lThere should be more concentration on time factor as time factor affects ratings and gives

misleading conclusions. A company which experiences adverse conditions temporarily will be

given a low rating on the basis of temporary phenomenon.

lSince the rating agencies receive a sizeable fee from the companies for awarding ratings, a

tendency to inflate the rating, may develop. It should be rectified by fixing a justified fee for rating

process for all companies to avoid inflation in rating process.

lThe investor should be aware before investing in any company because rating is not permanent

but deemed to changes, the agencies can not give any guarantee for the investors.

lAt present, commercial paper, bonds and debentures with maturities exceeding 18 months

and fixed deposits of large non- banking companies registered with RBI are a required to be

compulsorily rated, but there are number of areas where rating agencies will have to cover new

ground in the coming years. The ratings of municipal board, State Government borrowing,

commercial banks and public sector undertaking etc. will be covered in the near future. So, the

outlook for the credit rating industry is positive. The suitability of rating methods and models

formulated in well developed market in the west is highly doubtful in Indian conditions. So the

rating agencies in India have to evolve their own methodologies within the context of macro

economic environment.

lInvestors money has to be kept separate at all levels and is permitted to be used only against

the liability of the investor and is not available to the trading member or any other investor.

lThe trading member is required to provide every investor with a risk disclosure document which

will disclose the risk associated with the derivatives trading so that investors can take a

conscious decision to trade in derivatives.

lInvestors would get the contract note duly time stamped for receipt and execution of the order.

The order will be executed with the identity of the client and without client ID order will not be

accepted by the system. The investor could also demand the trade confirmation slip with his ID

in support of the contract note. This will protect him from the risk.

lIn the derivative market, all money paid by the investor towards margins on all open position is kept in trust with the clearing house and in the event of default of the trading member; the amounts paid by the client towards margins are separated and not utilized towards the default of the member. However, in the event of a default of a member, losses suffered by the investor, if

43


any on settled/closed out position are compensated from the investor protection fund as per the rules, bye-laws and regulations of the derivative segment of the exchange.

Though quite a good work has been done in the direction of reporting secondary capital market. There are areas requiring further actions. The RBI closely monitored developments in the stock market and provided liquidity to banks for meeting their payment obligations including any intra day requirements. These developments suggest that the following and many more measures are required on a long term basis to make stock exchanges more efficient and in tune with economic fundamentals:-

lAccording to SEBI that stock exchanges should be headed by a non-broker as chairman, instead of continuing with the prevailing system of elected brokers acting as presidents SEBI should accept the committee's recommendation. As a result, broker, presidents of stock exchanges would not be able to interfere in the functions of executive directors on a daily basis in most of the stock exchanges.

lShare transfer process has become antiquated and requires transformation so as to operate without interference from the company management. A procedure should be evolved which should provide for prosecution of company officials in case they do not transfer shares lodged with them without specifying the reasons. For reducing problems of bad delivery and speeding up shares transfers, the signature guarantee process which is based on a guarantee given by stock brokers, regarding the validity of shares and the identity of the shareholder may be involved.

lSEBI should device procedure so that speedier and effective action is taken against companies defaulting or delaying dividend payment, payment of interest, repayment of debt shares transfer etc. After all investor's confidence largely depends on the market safety and several reform measures should be available to them against corporate defaults.

lThere were cases when the interest of the company and the general shareholders is compromised in setting such deals. It is necessary to implement ways and means of imparting greater transparency and fairness in bulk or negotiated deals.

lSEBI should set up working group to find out ways and means to promote delivery based turnover because at present delivery based turnover is only at a small percentage of total turnover of most stock exchanges.

lFor development of a truly national capital market with a free flow of funds nation-wide, it is necessary to integrate Regional Stock Exchanges.

lSEBI should focus an improving transparency of mutual funds besides reducing transaction fee for investors. This will increase investment in equity and debt.

Though demat system is a very safe system, in some rare cases of frauds towards the need for caution by the investors. Investors themselves should take the following precautions so that their demat accounts are not misused by others:-

lInvestor should keep delivery slips securely and should not sign blank delivery instructions. Delivery instructions are the paper slips to be submitted by investors after selling a security on the stock exchange.

lInvestors should verify the demat account statement on a regular basis. In case of any discrepancy the investor should immediately approach the depository and depository

44


participants (DP). Their complaints are taken up very seriously.

lInvestors should also attend investor awareness programmes conducted by depositories and various information published by them.

lInvestors should give power of attorney (POA) to DPs and brokers in advance of a transaction. POA should be given for delivery of shares and money only after a trade has been done and not for buying and selling.

lInvestor should check genuineness of trades is confirmed by the depository whether CDSL or NSDL.

lInvestor should access to the internet to register for all services of depositories.

lSEBI has undertaken public awareness programmes to popularise the concept of demat trading, it should be initiated at broad level so that it may reach general public.

lTo increase the volume in demat segment for the foreign institutional investors and banks the limit of minimum portfolio of securities should be increased upto/above Rs. 10 crore.

lIt is suggested that the guidelines issued by the Accounting Standard Board and various regulatory bodies should be followed by the corporate enterprises. This lead to full disclosures of information by the corporations, which help the investors to invest in the capital market.

lIt is also suggested that all the companies should make available various annual reports and disclose the material information on their website.

lThe disclosure of information and the preparation of annual reports should be timely transparent and reliable so that various stock holders use such information and make investment in time.

References :

l

lDatta Arun K.: "Government, Finance and Capital Market, P.G. Book Market, Calcutta, p. 17.

lDutt Ruddar and Sundharam K.P.M.: "Indian Economy", S. Chand and Company, 2004. P. 880.

lGokarm, S.: "Indian Capital Market Reforms", 1992. 96, Economic and Political weekly, April 13, 1996, p. 956.

lGupta S.K. and others: "Financial Institutions and Markets", Kalyani Publishers, New Delhi, 2004, p. 31.

lReddy Gadam Naresh: "Changing of Capital Markets in India", Cyber Tech. Publication, New Delhi pg. 1.

lSEBI, Annual Report, 2012-13 & 2013-14.

lShashi K. Gupta, Nisha Agarwal, Neeti Gupta: "Financial Institutions and Markets, Kalyani Publishers, New Delhi" P. 5.21-5.22.

"Securities Laws and Regulation of Financial Market" The Institute of Company Secretaries of India, P. 44.

45

*Dr. Akhilesh Kumar Dixit

Banking Sector Reforms in India

The Indian financial system in the pre-reform period (i.e., prior to Gulf crisis of 1991), essentially

catered to the needs of planned development in a mixed-economy framework where the public sector

had a dominant role in economic activity. The strategy of planned economic development required huge

development expenditure, which was met through Government's dominance of ownership of banks,

automatic monetization of fiscal deficit and subjecting the banking sector to large pre-emption � both in

terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and cash reserve

ratio (CRR). Besides, there was a complex structure of administered interest rates guided by the social

concerns, resulting in cross-subsidization. These not only distorted the interest rate mechanism but also

adversely affected the viability and profitability of banks by the end of 1980s. There is perhaps an element

of commonality of such a 'repressed' regime in the financial sector of many emerging market economies.

It follows that the process of reform of financial sector in most emerging economies also has significant

commonalities while being specific to the circumstances of each country. A narration of the broad

contours of reform in India would be helpful in appreciating both the commonalities and the differences in

our paths of reforms.

Introduction and Background of Reforms

Reform measures were initiated and sequenced to create an enabling environment for

banks to overcome the external constraints � related to administered structure of interest rates, high

levels of pre-emption in the form of reserve requirements, and credit allocation to certain sectors.

Sequencing of interest rate deregulation has been an important component of the reform process

which has imparted greater efficiency to resource allocation.

One of the major objectives of banking sector reforms has been to enhance efficiency

and productivity through competition. Guidelines have been laid down for establishment of new banks

in the private sector and the foreign banks have been allowed more liberal entry. Since 1993, twelve

new private sector banks have been set up.

Consolidation in the banking sector has been another feature of the reform process. This

also encompassed the Development Financial Institutions (DFIs), which have been providers of long-

term finance while the distinction between short-term and long-term finance provider has increasingly

become blurred over time. The complexities involved in harmonizing the role and operations of

the DFIs were examined and the RBI enabled the reverse-merger of a large DFI with its commercial

banking subsidiary which is a major initiative towards universal banking. The effective institutional

and legal reforms have been undertaken in relation to the banking sector. In 1994, a Board for

Financial Supervision (BFS) was constituted comprising selected members of the RBI Board with a

variety of professional expertise to exercise 'undivided attention to supervision'. The BFS, which

generally meets once a month, provides direction on a continuing basis on regulatory policies

including governance issues and supervisory practices. It also provides direction on supervisory

actions in specific cases. The BFS also ensures an integrated approach to supervision of commercial

banks, development finance institutions, non-banking finance companies, urban cooperatives

banks and primary dealers. A Board for Regulation and Supervision of Payment and Settlement

Systems (BPSS) has also been recently constituted to prescribe policies relating to the regulation

* Assistant Professor, Economics, Armapore P.G. College, Kanpur

46


and supervision of all types of payment and settlement systems, set standards for existing and

future systems, authorize the payment and settlement systems and determine criteria for

membership to these systems.

There have been a number of measures for enhancing the transparency and disclosures

standards. Illustratively, with a view to enhancing further transparency, all cases of penalty imposed

by the RBI on the banks as also directions issued on specific matters, including those arising out

of inspection, are to be placed in the public domain.

And lately the regulatory framework in India, in addition to prescribing prudential guidelines

and encouraging market discipline, is increasingly focusing on ensuring good governance through

"fit and proper" owners, directors and senior managers of the banks. Transfer of shareholding of five

per cent and above requires acknowledgement from the RBI and such significant shareholders are

put through a f̀it and proper' test. Banks have also been asked to ensure that the nominated and

elected directors are screened by a nomination committee to satisfy f̀it and proper' criteria.

Performance of Banking Sector and Banking Reforms of India

Bank profitability levels in India have trended upwards and gross profits stood at 2.0 per

cent during 2005-2006, 2.2 per cent during 2004-2005 and net profits trending at around 1 per cent

of assets. Available information shows that for developed countries, at end-2005, gross profit ratios

were 2.1 per cent for the US and 0.6 per cent for France. The extent of penetration of Indian banking

system in country as measured by the proportion of bank assets to GDP has increased from 50 per

cent in the second half of nineties to over 80 per cent a decade later. The revenue of Indian banks

grew four-fold from US$ 11.8 billion to US$ 46.9 billion, whereas the profit after tax rose nearly nine-fold

from US$ 1.4 billion to US$ 12 billion over 2001-10. Operating expenses of banks in India are also

much more aligned to those prevailing internationally, hovering around 2.1 per cent during 2004-2005

and 2005-2006.The proportion of net NPA to net worth, sometimes called the solvency ratio of

public sector banks has dropped from 57.9 per cent in 1998-1999 to 50 percent in 2012 in both

priority and non priority sector however 42.9 percent in priority sector and 57.1 percent in non priority

sector in 2013 and 41 percent NPA in priority sector and 59 percent in non priority sector of all SCBs

in 2013.

Indian banks record high growth in the second quarter of 2007-2008 As per ASSOCHAM

Eco Pulse (AEP) Study, of the Scheduled Commercial Banks (SCBs) have substantially increased

their net profits with average rise of 30 per cent on the back of strong growth in deposits and fee

based income in the second quarter of the financial year 2007-2008. The ASSOCHAM Study on

�Banking Sector Performance in Second Quarter� based on the quarterly results declared by the

17 major scheduled commercial banks has revealed that banks continued to maintain a strong

momentum in both earnings growth as well as growth across all its core businesses, such as treasury

income, fee based income and interest income. Major Scheduled Commercial Banks (SCBs) saw a rise

of about 23.82 per cent in its treasury income in Second Quarter of the financial year 2007-2008. Fee

based income of the banks registered a robust growth of 40.80 per cent in while the interest

income posted a growth of 35.48 per cent in the quarter ending September 2007. Other banks, which

saw significant profits, includes viz; Indian Bank (46.34 per cent), followed by Union Bank (42.04 per

cent), HDFC Bank (40.14 per cent), State Bank of India (36.04 per cent), Centurion Bank of Punjab

47


(33.76 per cent), ICICI Bank (32.79 per cent), Vijaya Bank (23.80 per cent), Allahabad Bank (14.17

per cent), IDBI Bank (12.23 per cent), ING Vysya Bank (11.09 per cent), Canara Bank (11 per

cent), Syndicate Bank (10.98 per cent), Punjab National Bank (6.63 per cent) and Andhra Bank (3.26

per cent).

We assess the performance of India's leading banks on key metrics, such as credit

portfolio size, net interest margins (NIM) and non performing assets (NPA) ratio. The State Bank of

India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BOB) had the first, second and third

largest credit portfolios, respectively. HDFC emerged as among the best performers with a strong

NIM ratio and the lowest NPA ratio, whereas, ICICI (with the fourth largest credit portfolio) reported a

high NPA ratio in 2011 The private sector banks continue to have higher pace of growth in their

bottom lines with average 40 per cent growth as compared to 24 per cent growth recorded by public

sector banks. While Yes bank, HDFC Bank, Centurion Bank of Punjab was the best performers in the

private sector, Axis bank, Indian Bank, Union Bank and State Bank of India remained at top among

the PSBs.

Impact of Reforms in the Banking Sector in India

The implementation of reforms in the banking sector in India has lead to improve access to

credit through newly established domestic banks, foreign banks and bank-like intermediaries.

Government debt markets have developed, enabling greater operational independence in monetary

policy making. The growth of Government debt markets has also provided a benchmark for private

debt markets to develop. It shows significant improvements also in the information infrastructure.

The accounting and auditing of intermediaries and information on small borrowers has improved

and information sharing through operationalisation of credit information bureaus has helped to

reduce information asymmetry. The technological infrastructure has developed with modern-day

requirements in information technology and communications networking (www.eac.gov.in). The

primary beneficiaries of the announced reforms are the state-owned banks, which control over

three-quarters of total assets in the financial system. In the year 2005, the Central Government

gave State-run banks significantly greater operational and managerial freedom, including the rights

to: establish overseas branches or subsidiaries; exit non-profitable ventures; set human resource

policies; and acquire domestic and foreign banks. Government of India removed limits on banks

Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) requirements, and gave the central

bank greater flexibility to set the limits. In the first phase, between March 2005 and 2009, foreign

banks were allowed to establish a wholly owned subsidiary or to convert existing operations into a

subsidiary. The RBI has raised the limit of Foreign Direct Investment in private banks to 74 percent

from 49 percent. Before 2009, foreign banks will only be allowed to acquire up to 74 percent ownership

of distressed private banks identified by the RBI for restructuring, After March 2009, foreign banks

may be allowed to acquire any private bank, depending on a review of the outcome of the first

phase .

Conclusion

A further challenge which banks face in this regard is to ensure that they derive maximum

advantage from their investments in technology and avoid wasteful expenditure which might arise on

account of uncoordinated and piecemeal adoption of technology; adoption of inappropriate/ the top

48


inconsistent technology and adoption of obsolete technology. According to the top consulting firms,

the growth of Indian banks, especially in the public sector, can be optimised through increasing

productivity and efficient human resource management. Banks need to hire employees with both core

and specialist skills, while simultaneously working to control attrition. Further, banks need to optimise

the time and cost of performing non consumer activities with the help of special tools and revamping

existing knowledge processes. In the current scenario, banks are constantly pushing the frontiers of

risk management. Compulsions arising out of increasing competition, as well as agency

problems between management, owners and other stakeholders are inducing banks to look at

newer avenues to augment revenues, while trimming costs. At this stage of socio-economic

development consolidation, competition and risk management are no doubt critical to the future

of banking but governance and financial inclusion would also emerge as the key issues for a country

like India. Sustained government support and a careful re-evaluation of existing business strategies

can set the stage for Indian banks to become bigger and stronger, thereby setting the stage

for expansions into a global consumer base.

References

lAnil Patrick R, �The new face of Banking�, www.networkmagazineIndia.com.

lBimal Jain �Indian Banking and Finance: Managing New Challenges�, www.bimaljalan.com.

lGlobal Financial Stability Report (GFSR), September 2006.

lRamasastri A.S. and Achamma Samuel (2006), Banking Sector Developments in India, 1980-2005: What the Annual

Accounts Speak: Reserve Bank of India Occasional Papers; Vol. 27, No. 1 and 2, pp.177-205.

lImpact of reforms on banking sector of India- www.rbi.org.in.

lBanking Sector Reforms in India an Overview- www.rbi.org.in

lMonetary Policy and banking sector reforms � www.financial express.com

49

Ethics of Accounting and

Financial Principles

Accounting ethics is primarily a field of applied ethics, the study of moral values and judgment

as they apply to accountancy. It is an example of professional ethics. Accounting ethics were

first introduced by Luca Pacioli, and later expanded by government groups, professional

organizations, and independent companies. Ethics are taught in accounting courses at higher

education institutions as well as by companies training accountants and auditors.

Due to the diverse range of accounting services and recent corporate collapses,

attention has been drawn to ethical standards accepted within the accounting profession. These

collapses have resulted in a widespread disregard for the reputation of the accounting profession. To

combat the criticism and prevent fraudulent accounting, various accounting organizations and

government have developed regulations and remedies for improved ethics among the accounting

profession. The nature of the work carried out by accountants and auditors requires a high level

of ethics. Shareholders, potential shareholders and other users of the financial statement rely

heavily on the yearly financial statements of a company as they can use this information to make an

informed decision about investment. They rely on the opinion of the accountant who prepared the

statements, as well as the auditors who verified it, to present a true and fair view of the company.

Knowledge of ethics can help accountants and auditors to overcome ethical dilemmas, allowing for

the right choice that, although it may not benefit the money, will benefit the public who relies on the

accountant/auditor's reporting.

Introduction

Finance and accounts is perhaps the only business function which accepts responsibility to

act in public interest. Hence, a finance and accounting professional's responsibility is not restricted

to satisfy the needs of any particular individual or organization while acting in public interest, it

becomes imperative that the finance and accounting professional adheres to certain basic ethics in

order to achieve his objective.

�Accountants and the accountancy profession exist as a means of public service: the

distinction which separates a professional from a mere means of livelihood is that the profession

is accountable to standards of the public interest, and beyond the compensation paid by clients� -

Robert H. Montgomery, describing ethics in Accounting

Until recently, various surveys conducted globally has ranked finance and accounting

professionals very high in terms of professional ethics. However, various accounting scandals

witnessed during the past few years have put a serious question mark on the role of the finance and

accounting professional in providing the right information for decision making, both within and outside

their respective organizations. In companies such as Enron, World Com, Tyco, Global Crossing,

Adelphia, Quest, Xerox and most of the late dotcoms, the accounting information used by the finance

department was false and manipulative.

What was the role of finance and accounting professionals in all these high profile failures? Of

course there were few professionals who were directly involved in fraudulent activities, however, the

majority, at most of the times, refused to challenge what they had already known.

Enron is a classic example of such behaviour. When Enron Corp. declared its bankruptcy, an

*Asst. Professor, Dept. of Commerce, Jagran College of Arts, Science and Commerce, Kanpur**Asst. Professor, Dept. of Commerce, Uday Pratap Autonomus College, Varanasi

* Dr. Rajeev Nayan Singh ** Dr. Meera Singh

50


employee of the name of Sherron Watkns sent the company's top executive (Kenneth Lay) a message

which had detailed information of the accounting hoax in the form of now famous 'Off the Book

Liabilities'. However, instead of taking note of what was mentioned in the message, the management of

the company demoted Sherron. It is well known now, that, like Sherron, hundreds of finance and

accounting employees knew about the happenings but preferred to remain silent. Hence, most

of them did not lie, but neither did they disclose the truth nor did they attempt to correct the misleading

and confusing information. Shouldn't they have blown the whistle the way Sherron did? Was the

behaviour of these employees unethical? Cases like Enron exist in plenty. World Com, Global Crossing,

Xerox, Qwest and many other companies have been known to have created accounting entries with

the sole purpose of making their financial statement look attractive thereby inviting further investments

from unsuspecting individual and organizations.

For a finance and accounting professional working as consultant or auditor

Finance and accounting professional in public practice should take reasonable steps to identify

circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to

compliance with the fundamental principles. For example, a threat to objectivity may be created when

a professional accountant in public practice completes directly with a client or has a joint venture or

similar arrangement with a major competitor of a client. More examples of such threats are discussed

later.

For a finance and accounting professional working as an employee

Finance and accounting professional has a professional obligation to comply with certain

fundamental principles. There may be times, however, when their responsibilities to an employing

organization and the professional obligations to comply with the fundamental principles are in

conflict. Ordinarily, finance and accounting professional should support the legitimate and ethical

objectives established by the employer and the rules and procedures drawn up in support of those

objectives. Nevertheless, where compliance with the fundamental principles is threatened, finance

and accounting professional must consider a response to the circumstances. As a consequence

of responsibilities to an organization, finance and accounting professional may be under pressure

to act or behave in ways that could directly or indirectly threaten compliance with the fundamental

principles. Such pressure may be explicit or implicit; it may come from a supervisor, manager, director

or another individual within the organization. Finance and accounting professional may face

pressure to:

lAct contrary to law or regulation.

lAct contrary to technical or professional standards

lFacilitate unethical or illegal earning management strategies.

lLie or otherwise intentionally mislead (including misleading by remaining silent) others, in

particulars:

lThe auditors of the organization; or regulators.

lIssue or otherwise be associated with, a financial or non-financial report that materially

misrepresent the facts, including statement in connection with, for example; the financial

statements; tax compliance; legal compliance; or reports required by securities regulators.

51


Ethical Environment

In light of the various corporate scandals mentioned above, the following three points need to

be addressed for creating a sound ethical environment in any company. They are,

lEnsuring that employees are aware of their legal ethical responsibilities.

Ethical organizations have policies to train and motivate employees toward ethical behaviour.

This would require initiation from the top. A number of companies, both in the West and in India have

been known for their quality and soundness of their ethics programs. Companies like Raytheon make

ethics training compulsory for everyone. Similarly Texas Instrument has a well drafted ethics program

from as long as 1961. In India Wipro was amongst the pioneers to establish an organized set of beliefs

which would guide business conduct. This was done as early as 1970s. In the process the company has

established an integrity manual which helps employees take ethical decision when faced with choices.

lProviding a communication system between the management and the employees so

that any one in the company can report about fraud and mismanagement without the

fear of being reprimanded.

Ethical organizations need to provide facilities for employees through whom they could

communicate with responsible positions for reporting frauds, mismanagement or any other form of non

routine detrimental behaviour. In India Wipro has introduced a helpline comprising of senior members of

the company who are available for guidance on any moral, legal or ethical issues that an employee of the

company may face.

lEnsuring fair treatment to those who act as whistle blowers.

This is perhaps the most important and sensitive issue. When Sherron has raised questions at

Enron, she was demoted. Similar fate would have met all those who had followed Sherron. Fair

treatment to whistle blowers is a basic necessity to check fraud. It is reassuring that two of the three

persons of the year, selected by the popular Time magazine were accountants from Enron and World

Com who had dared to blow the whistle, however, needless to say that the appreciation is much more

needed from within the company rather than outside.

Unethical Behaviour

A creation of a proper ethical environment requires a proper understanding of the reasons

which lead to unethical behavior. Four such reasons are discussed below:

lEmphasis on short term results. This is one of the primary reasons which have led to the

downfall of many companies like Enron and WorldCom. Manipulating accounting entries to

depict good profitability can help companies raise further capital from the market.

lIgnoring small unethical issues: It is a known fact that most of the compromises we make

start are small however they lead us to large problems. Similarly, companies need to develop an

environment where small ethical lapses are taken seriously so that they do not repeat in the

future. Otherwise, toleration of such small lapses could lead to larger problems.

lEconomic cycles: When Enron was doing well, no one had bothered to understand its actual

financial position. There were no question mark on its financial statements. However, when the

52


economy took a downward turn, finance and accounting managers took decision which was

compromise over the established code of conduct. This was done to reflect a financial position

which would keep the investors in the market satisfied. All this resulted in a huge crisis and the

ultimate fall of this US Giant. Hence, to prevent disclosure of ethical problems in times of

depression, company need to be extremely careful and vigilant during good times.

l In the era of globalization and massive cross border flow of capital,

accounting rules are changing faster than ever before. The rules have become more complex

and it is difficult to identify deviations from these complex set of requirements. The complexity of

these principles and rules and the difficulty associated with identifying abuse are reasons which

may promote unethical behaviour.

Threats

The dynamic environment in which businesses operate today may usher a broad range of

circumstances because of which compliance with the fundamental principles may potentially be

threatened. Such threats may be classified as follows:

lSelf-interest threats, which may occur as a result of the financial or other interests of finance

and accounting professional or of an immediate or close family member.

lSelf-review threats, which may occur when a previous judgment needs to be revaluated by

the finance and accounting professional responsible for that judgment.

lAdvocacy threats occur when a professional promotes a position or opinion to the point

that subsequent objectivity may be compromised.

lFamiliarity threats occur when finance and accounting professional has close relationship in

the work environment and such relationship impairs his selfless attitude towards work.

lIntimidation threats occur when a professional may be prohibited from acting objectively by

threats, actual or perceived.

Circumstances leading to the actual happening of the various threats are given below:

Self interest threat for finance and accounting professional working as consultants or auditors

lA financial interest in a client or jointly holding a financial interest with a client.

lUndue dependence on total fees from a client.

lHaving a close business relationship with a client.

lConcern about the possibility of losing a client.

lPotential employment with a client.

lContingent fees relating to an assurance engagement.

Self interest threat for finance and accounting professionals working as an employee

lFinancial interests, loans and guarantees in the company the professional is working.

lIncentive compensation arrangements.

lInappropriate personal use of corporate assets.

lConcern over employment security.

Accounting rules:

53


l

lCommercial pressure from outside the employing organization.

Self review threat for finance and accounting professionals working as consultants or

auditors

lThe discovery of a significant error during a re-evaluation of the finance and accounting

professional.

lReporting on the operation of financial systems after being involved in their design or

implementation.

lHaving prepared the original data used generates records that are the subject matter of the

engagement.

lA member of the assurance team being, or having recently been, a director or officer of that

client.

lA member of the assurance team being, or having recently been, employed by the client in a

position to exert direct and significant influence over the subject matter of the engagement.

Self review threat for finance and accounting professional working as an employee

Such threats occur when business decision or data is subjected to review and justification is

required to be given by the same professional who was responsible for taking such decisions or

preparing that data.

Advocacy threat for finance and accounting professionals working as consultants or auditors

lPromoting shares in a listed entity when that entity is a consultancy or a financial statement

audit client.

lActing as an advocate on behalf of an assurance client in litigation or disputes with third parties.

Advocacy threat for finance and accounting professionals working as an employee

The legitimate goals and objectives of the organizations employing finance and accounting

professionals may promote the organization's positions, provided any statement made is neither false

nor misleading. Such actions generally would not create an advocacy threat.

Familiarity threats for finance and accounting professionals working as consultants or auditors

lA member of the engagement team having a close or immediate family relationship with a

director or officer of the client.

lA member of the engagement team having a close or immediate family relationship with an

employee of the client who is in a position to exert direct and significant influence over the

subject matter of the engagement.

lA former partner of he firm being a director or officer influence over the subject matter of the

engagement.

lAccepting gifts or preferential treatment from a client, unless the value is clearly insignificant.

lLong association of senior personnel with the assurance client.

Commercial pressure from outside the employing organization.

54


Familiarity threats for finance and accounting professional working as an employee

l

reporting or business decisions having an immediate or close family member who is in a

position to benefit from that influence.

lLong association with business contacts influencing business decisions.

lAcceptance of a gift or preferential treatment, unless the value is clearly insignificant.

Intimidation threat for finance and accounting professionals working as consultants or

auditors

lBeing threatened with dismissal or replacement.

lBeing threatened with litigation.

lBeing pressured to reduce inappropriately the extent of work performed in order to reduce fees.

Intimidation threat for finance and accounting professionals working as employees

lThreat of dismissal or replacement of the finance and accounting professional or a close or

immediate family member over a disagreement about the application of a accounting principle

or the way in which financial information is to be reported for external use as well as for decision

making purposes.

lA dominant personality attempting to influence the decision making process, for example with

regard to the exclusion of irrelevant costs from projected cost estimates.

Safeguards

It is important to have safeguards which may increase the likelihood of identifying or deterring

unethical behavior. Such safeguards, which may be created by the finance and accounting profession,

legislation, regulation or an employing organization, shall ensure an ethical environment. Safeguards

that may eliminate or reduce the above mentioned threats to an acceptable level fall into two broad

categories:

a.Safeguards created by the professional, legislation or regulation; and

b.Safeguards in the work environment.

a.Some of the Safeguards created by the profession, legislation or regulation are as follows

lEducational, training and experience requirements for entry into the profession.

lContinuing professional development requirement.

lCorporate governance regulations.

lProfessional standards.

lProfessional or regulatory monitoring and disciplinary procedures.

lExternal review by a legally empowered third party of the reports, returns, communions or

information produced by concerned Professionals.

A finance and accounting professional, in a position to influence financial or non financial

55


b.Safeguards in the work environment are as follows

l

lThe employing organization's ethics and conduct programs.

lRecruitment procedures in the employing organization emphasizing the importance of

employing high caliber competent staff.

lStrong internal controls.

lAppropriated disciplinary processes.

lLeadership that stresses the importance of ethical behavior and the expectation those

employees will act in an ethical manner.

lPolicies and procedures to implement and monitor the quality of employee performance.

lTimely communication of the employing organization's policies and procedures, including any

changes to all employees and appropriate training and education on such policies and

procedures.

lPolicies and procedures to empower and encourage employee to communicated to senior

levels within the employing organization any ethical issues that concern them without fear of

retribution.

Conclusion

While evaluating compliance with the fundamental principles, finance and accounting

professional may be required to resolve a conflict in the application of fundamental principles. The

following are to be considered, either individually or together with others, during a conflict resolution

process.

lRelevant facts,

lEthical issues involved,

lFundamental principles related to the matter in question,

lEstablished internal procedure, and

lAlternative courses of action.

Having considered these issues, finance and accounting professional should determent the

appropriate course of action that is consistent with the fundamental principles identified. The

professional should also weight the consequences of each possible course of action. If the matter

remains unresolved, the professional should consult with other appropriate persons within the firm or

employing organization for help in obtaining resolution. During times where a matter involves a conflict

with or within an organization, finance and accounting professional should also consider consulting

with those charged with governance of the organization, such as the board of directors.

It may be in the best interests of the professional to document the substance of the issue

and detains of any discussions held or decision taken, concerning that issue.

The employing organization's systems of corporate oversight or other oversight structures.

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If a significant conflict cannot be resolved, a professional may wish to obtain professional

advice from the relevant professional body or legal advisors and thereby obtain guidance on ethical

issues without breaching confidentiality. If, after exhausting all relevant possibilities, the ethical conflict

remains unresolved, a professional should, where possible, refuse to remain associated with the matter

creating the conflict. The professional may determine that, in the circumstances, it is appropriate to

withdraw from the team or specific assignment or to resign altogether from the firm or the employing

organization.

References

l

1.Business Law, Ethics and Communication,

2.Ethics in Accounting and Finance.

lProfessional Accounting Bodies Perceptions of Ethical Issues by Barry J. Cooper

lJournal of Business Ethics.

lAccounting Ethics by Duska, Ronald F.; Brenda Shay Duska.

lAccounting Students Perceptions of Business and Professional Ethics by Sellers, James H.

The Institute Chartered Accountants of India

57

*Assistant Professor, Amity Business School, Noida**Assistant Professor, Jagran College of Arts, science and Commerce, Kanpur

*Shinu Vig**Sakshi Goel

Companies Act 2013: The beginning of a New Era for Corporate India

With the increasing globalization foreign investors are looking towards India as an

attractive destination for investment. Also the companies in India are moving beyond domestic

territory to plunge into the huge pool of finance and human capital available in the international

market. In this scenario the new Companies Act 2013 has come as a harbinger of new hope. The

Companies Act of 1956 had become inefficient in addressing the challenges of the growing corporate

sector in India. Thus there was a need for a modern regulation which enables business. The new

Companies Act is a landmark piece of legislation which envisages comprehensive changes in the

existing corporate governance regime by providing for more transparency and enhanced

disclosures. Some of the new provisions introduced include appointment of female and resident

directors, class action suits, mandatory CSR, cross border restructuring, rotation of auditors and

establishment of serious frauds investigation office. All these provisions would have far reaching

implications for the corporate sector in India and lead to adoption of the best corporate governance

practiced world wide. The paper examines the implications of the new provisions introduced in the

Companies Act 2013 for the corporate sector.

Introduction

The corporate sector in India has been growing at a mounting pace. There are close to 1 million

registered companies in India. The Indian economy is integrating into the world economy. The current

economic and regulatory environment in India is also on the brink of a major change. With the increasing

globalization foreign investors are looking towards India as an attractive destination for investment. Also

the companies in India are moving beyond domestic territory to plunge into the huge pool of finance and

human capital available in the international market. In this scenario strong company legislation is

imperative. The Companies Act of 1956 had become inefficient in addressing the challenges of the

growing corporate sector in India. Thus there was a need for a modern regulation which is aimed at

simplification of the existing legal system to ensure that it is easy to understand, implement and also

enables business. Therefore, last year in December the new Companies Act 2013 was enacted. The

objective of the new act is to make company regulation more meaningful in terms of investor protection

and corporate governance.

Importance of corporate governance in the capital market

Good corporate governance is critical for the integrity of corporations, financial institutions and

markets and has a significant impact on the constant growth and stability of any economy. In the past

decade, India has made a significant leap in the area of corporate governance reforms, which has

enhanced public trust in the market. These reforms have been well received by the investors, including

the foreign institutional investors (FIIs). Gross FII portfolio investment has risen from US $ 2.7 billion in FY

1996 to US $ 166.2 billion in FY 2013. This growing interest of FIIs in the Indian market clearly

demonstrates the improvement in the governance standards.

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Figure The Linkage in Globalization, Corporate Governance and Foreign Investment

Above Figure shows that globalization of the capital markets has provided a momentum to the

Corporate Governance practices, which in turn have led to rising foreign investment. A very important

result of internationalization of Indian securities markets was a voluntary drive towards a more

rigorous corporate governance regime by the Indian industry itself. Firstly, in order to sell their

securities to the foreign investors, Indian companies making public offerings in India were forced to

comply with corporate governance norms that investors in the developed countries were familiar with.

Secondly, Indian companies listing abroad to raise capital were subject to stringent corporate

governance norms applicable to listing on those Exchanges. These companies also had to adhere to the

standards and practices of corporate governance applicable to markets where they listed their

securities. This resulted in an enormous improvement in the corporate governance standards in

India. The new Companies Act 2013 is a milestone in this direction.

Companies Act 2013

The Act has 470 clauses as against 658 Sections in the old Companies Act, 1956. The

entire Act has been divided into 29 chapters. The new Act is a major landmark in the history of

corporate India and can be seen as beginning of a new era for the corporate sector. It will

change the way the companies are governed in India. The new Act is a modern and progressive

piece of legislation which emphasizes on corporate democracy and investor protection. The Act

provides for business friendly corporate regulation, e-governance initiatives, Corporate Social

Responsibility (CSR), enhanced disclosure, stricter enforcement, audit accountability and better

framework for insolvency regulation. It also places greater responsibility and obligation on the

Board of Directors and Management. The Act has introduced some definitions for accounting

and auditing standards, financial statement, independent director, interested director, key

managerial personnel (KMP), etc. Following are the provisions in which major changes have

been introduced in the Companies Act, 2013.

lOne person company' (OPC) (Sec 2(62)): The Act introduces a new type of entity called

'one person company' (OPC) to the existing classes of companies. An OPC means a

company with only one person as its member. Only a natural person who is an Indian citizen

59


and resident in India can incorporate an OPC or be a nominee for the sole member of an

OPC. OPC provides an opportunity to the individuals for carrying on a business with limited

liability.

l The Act introduces the concept of independent

director for the first time in company law and states that every listed company shall have

at least one-third of the Board as independent directors. The term has also been defined in

the Act.

lBoard of Directors (Sec 166): The new Act provides that the company can have a maximum

of 15 directors on the Board; appointment of more than 15 directors will require approval

from the shareholders. Further, the new Act prescribes both academic and professional

qualifications for directors. It states that the majority of members of Audit Committee

including its Chairperson should have the ability to read and understand the financial

statements. Further, the duties of directors have been defined in the Act. The Act has also

considerably enhanced the roles and responsibilities of the Board of Directors and has made

them more accountable.

lWoman Directors (Sec 149): Listed companies need to have at least one woman on their

board, according to the law. The deadline for their appointment varies from one year to three

years, depending on the size of the company.

lRelated Party Transactions (RPT) (Sec 188): The new Act requires that no company should

enter into RPT contracts pertaining to (a) sale, purchase or supply of any goods or materials; (b)

sale or dispose of or buying, property of any kind; (c) leasing of property of any kind; (d) availing

or rendering of any services; (e) appointment of any agent for purchase or sale of

goods, materials, services or property; (f) such related party's appointment to any office or

place of profit in the company, its subsidiary company or associate company. In case such

a contract or arrangement is entered into with a related party, it must be referred to in the

Board's Report along with the justification for entering into such contract or arrangement.

Further, any RPT between a company and its Directors shall require prior approval by a

resolution in general meeting.

lCorporate Social Responsibility (CSR) (Sec 135): The new Act has mandated the profit

making companies to spend on CSR related activities. Every company having net worth

of Rs 500 crore or more or turnover of Rs 1000 crore or more or net profit of Rs 5 crore or

more during any financial year shall constitute a CSR Committee of the Board, which shall

recommend a CSR policy. The Board of every such company shall ensure that the

company spends (in every financial year) at least 2 percent of the average net profits

of the company made during the three immediately preceding financial years. If the

company fails to spend it then the Board shall in its report state reasons for the same.

lAuditors (Sec 139): A listed company cannot appoint or reappoint (a) an individual as auditor

for more than one term of five consecutive years, or (b) an audit firm as auditor for more than

two terms of five consecutive years. The Act also states that an auditor cannot render

accounting and book-keeping services, internal audit, investment banking services,

investment advisory services, management services etc to the company. National Financial

Independent Directors (Sec 149 (5)):

60


Reporting Authority (NFRA) has been designated to be the new regulator for Auditors and will have

powers to recommend, enforce and monitor compliance of accounting and auditing standards.

l In the new Act, there is significant transformation in

non-financial annual disclosures and reporting by companies as compared to the earlier

format in the Companies Act, 1956.

lSerious Fraud Investigation Office (SFIO) (Sec 211): The Act has proposed statutory

status to SFIO. Investigation report of SFIO filed with the Court for framing of charges shall be

treated as a report filed by a Police Officer. SFIO shall have power to arrest in respect of certain

offences of the Act which attract the punishment for fraud. Further, the new Act has a provision

for stringent penalty for fraud related offences.

lClass Action Suits (Sec 245): For the first time, a provision has been made for class action

under which it is provided that specified number of member(s), depositor(s) or any class of

them, may file an application before the National Company Law Tribunal (NCLT) seeking any

damage or compensation or demand any other suitable action against a company. This

clause will increase transparency within the organization and augment respect for the rights

of stakeholders in the functioning of the company.

lE-governance: The Companies Act 2013 provides for e-governance in various company

processes like maintenance and inspection of documents in electronic form, keeping the

books of accounts in electronic form, holding of board meetings through video-conferencing/

any other electronic means, voting through electronic means, etc. All these provisions will lead

to increased transparency and efficiency in the companies.

lSevere consequences for non compliance: The Act has significantly increased the penal

consequences, with a large number of sections reserving provisions for the prosecution of

directors, officers in default and key managerial personnel.

lCross-border Merger [Sec 234]: The Act permits merger of Indian company with foreign

company and vice-versa. Central Government will make necessary Rules in consultation with

RBI and notify permitted jurisdictions. Merger will be approved by NCLT and consideration can

be only in cash or Depositary Receipts.

Conclusion

The new Companies Act 2013 has definitely raised the bar on corporate governance in India. Its

provisions suit the demands of the modern times in the changing economic and business environment.

The Act is expected to have far-reaching effects on the corporate sector in terms of its growth and

development. It will also make the Indian corporate sector more transparent, simple and globally

acceptable.

Disclosure and Reporting (Sec 92):

61

*Ankit Gupta

*Assistant Professor, Dream Valley College, Gwalior (M.P)

Internet Marketing Management: Upcoming Future Need in India and World

In this modern world, organizations and customers, both are now equipped with computers

powered by high speed internet service. This technology change had created new gateways of

one-to-one relations and mass population reach. This mutual benefit has boomed internet marketing in

21st century.

Internet marketing covers all terms used for marketing a product or service on Internet. Importance

of Internet Marketing is now expanding, since the aim of every business starts and ends with three

purposes of generating revenue, maintaining customer relation and increasing customer's loyalty. Thus

this paper attempts to find out the importance of internet marketing in today's world and the

reasons why now a days companies are using it? The main concern of any organisation is reaching

the customer very easily and binding its customers for a long time. Internet is the best way to fulfil

these two aims. The study shows that there is a need of adding it into the present curriculum because

it will definitely become one of the essential requirements for each company in future. So that the

upcoming managers can be aware of it to avoid any problem in future, not only to become managers

but for being a good customer also they should be well acquainted with it.

This research clearly indicates the need of internet marketing to be practiced by professionals,

managers and also by the learners. We need pool of professional who are capable of marketing via

various modes of Internet marketing. Thus there is thrust on upcoming professionals and managers

to be prepared for the marketing strategies gained and practised on Internet in digital form. This paper

also attempts to suggest strong measures to adopt social media marketing for B2B business.

Introduction

Future of tomorrow's India is Internet. Internet is booming in India like anything. More

and more Indians are becoming friendly to internet use. This is a positive sign and even the statistical

data has revealed the fact that Internet is upcoming and prospective tool in India and world. Local

markets are at the verge of shattering and the hike is on internet. The thrust of present scenario is the

Internet. Internet is widely accepted because it is easy and user friendly. The E-commerce is the

area which has revolutionized the dimensions of the Internet. Internet finds wide acceptability.

Internet use ranges from online shopping to online banking, to online tutoring to online reservations.

Gone are the days when we used to stand in queues for bank services or for the reservations.

The technology has simplified the lives. Thus this research paper will deal with the fact that internet

marketing is becoming the most prominent way to advertise over large scale and it is in wide use

for the marketing over the internet in digital form with various means like banner, commercial

advertisements, pay per click and many other ways. It is clearly observed that it is becoming

necessary for the management studies to inculcate internet marketing in the curriculum.

Objectives of the Research Paper

This research paper will cover the following objectives:

1.To deal with the importance of internet marketing.

2.To analyze the need to introduce internet marketing in curriculum.

3.To analyze the internet marketing success.

4.To analyze the areas of internet marketing.

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In management studies, core focus lies on imparting knowledge to students and

making them skilful. Management talks about the entrepreneurship and the new dimension where

management studies should be extended, is the area of the Internet marketing. Internet marketing

is the prospective area where the business can be nourished. Internet is wide source of information.

Complex things and services on internet are just a click away from you. Internet marketing has

emerged as a powerful tool. Marketing on social networking sites, marketing on per click basis and

also the online marketing are powerful tools adopted widely by small, medium and large enterprises.

Internet marketing is all about the promotion of goods and services over internet. It involves the

showcasing of the goods, services and values over internet. It is thus termed as online marketing

or digital marketing. Internet marketing is broad term, it ranges from marketing through e-mail to

marketing through social networking sites. Digital customer data and electronic customer

relationship management systems are also often grouped together under internet marketing. Internet

marketing is the platform which brings the service providers from different countries to overcome

the barrier of regional boundaries and the clients and customer who need the services, goods

or products. Internet marketing uses the creativity for the advertisement over internet in digital

form. According to Cialdini there are 6 key principles of Internet Marketing:

lReciprocity

lCommitment and Consistency

lSocial Proof/Consensus

lAuthority

lLiking

lScarcity

Importance of Internet Marketing

Internet marketing strategy gives a measurable and definitive way to target market

and position of the business. Creating a successful online sales process can be accomplished by

representing and courting the visitor through the five levels of the sales process on the site. This

can be done by meeting the psychological needs that the visitor has. Networking is one of the

most effective ways to find clients for any consulting or professional services business (C. J.

Hayden). Marketing online offers many benefits that are not available in traditional marketing and

many companies are embracing those benefits during these tough economic times. Why is

internet marketing the most cost effective and efficient? It's the only marketing vehicle that allows

you to make tweaks and changes to your campaigns on the fly. When was the last time you ran a

marketing campaign and realized it wasn't pulling the results that you had hoped for? With the use of

internet marketing changes can be made at the first sign of failure. The changes could include

tweaking the text, modifying the graphic or strengthening the message. As discussed earlier, social

media consists of a wide range of sites and forums online, like chat rooms, video or music sharing

rooms, networking sites, company websites, company chat rooms, product rating websites

designed for the purpose of obtaining feedback from consumers, internet forums, threads and

discussion boards, mob logs (these are sites enabling image, audio and video sharing) and blog.

(Kaplan A. M; Nardi, B.A.). Social networking sites have infact altered the very way in which individuals

communicate, interact and collaborate with each other. Web usage or internet usage has taken on a

63


new meaning and people are beginning to view it in an entirely different light, thanks to the growing

popularity of social networking websites. The nature of such networking websites is that it enables

people to easily take part in many socially interactive activities, urging people to open up and share their

opinions, content and cultural tastes with others around the world. Music, for instance, is in extensively

shared, discussed about and sampled across all kinds of online social networks. These social

networking sites make it easy for people to create and exchange with others content, and are very user

friendly.

Internet marketing tools

It can be broadly classified as:

lEmail Notification

lBanner Ads over Internet

lPer click Advertisement

lAd on Social Networking Site

lBlogs Creation

lWebsites

lMobile Ads

lSMS Ads

lAds on Search Listing

lAds on Google Ad words

lSearch Engine Optimization

lGoogle Ad Planner

lFacebook Ads Promotion or marketing of business over Facebook, LinkedIn, Twitter or

Blog Spot

lArticle Marketing over Internet

lVideo for promotion over You Tube

lEffective CRM building over Internet from users of different regions

lEffective Data Base for marketing

lUse of multimedia and links for the Marketing and Promotions

Business Models in Internet Marketing

E-commerce: In this model of business, goods are sold directly to consumers, businesses,

or from consumer to consumer electronically.

Websites based marketing: A strategy whereby an organization generates value by

acquiring sales leads from its website similar to walk-in customers in retail world. These prospects are

often referred to as organic leads.

Affiliate Marketing: A process wherein a product or service developed by one entity is

sold by other active sellers for a share of profits. The entity that owns the product may provide some

marketing material (e.g., sales letters, affiliate links, tracking facilities, etc.); however, the vast majority of

64


affiliate marketing relationships come from e- commerce businesses that offer affiliate programs.

Local Internet marketing: A strategy through which a small company utilizes the Internet

to find and to nurture relationships that can be used for real-world advantages. Local Internet marketing

uses tools such as social media marketing, local directory listing, and targeted online sales promotions.

Findings and Analysis

Adopting social media marketing has been difficult for the B2B business. However a

recent study has revealed that 69% of B2B buyers use social media to assist them in business

development and decision making. Can B2B companies really afford to continue to dismiss

social media marketing techniques as an effective way to get the word out about their products and

services? The study clearly proves that in future if a company needs to retain its customers then it

should take a lot of efforts to improvise its advertising and marketing strategies. The companies

can create profiles in social networking websites and these profiles can contain links that redirect

the user to the company's website. According to Grant (1988), the companies should also create a

separate unit that actively participates in social communities and markets its goods in these sites. If

a separate unit is established then they can make sure to throw positive light on the products sold by

the company and thereby expand its customer base. Apart from this following recommendation can

be followed :

lThe companies can also provide videos that virtually demonstrate the functioning of a

product thereby assisting the user in understanding how a particular product works.

lThey can also provide features like free shipment of goods. Thus they should think of new

techniques to attract the customer.

lThe consumers should also be ensured that their personal information will be maintained

in a secure database and that their privacy will be maintained.

lThe company should also provide various post purchase services since customer

retention is very essential for the success of the company. Thus in future the company

should expand its marketing strategies in the internet to keep their customers happy

Sidney J. (1959).

Conclusion

The research has revealed the fact that upcoming requirement is the Internet marketing.

Internet marketing seems to be powerful tool for advertisement and promotion for today and in nearby

future. Effective internet marketing management is needed to be taught in curriculum of management

studies to make the future managers and entrepreneur aware of the scenario.

Thus, we see that there is ample possibility for thoughts and awareness to get converted

into action by means of social networking websites. Social networking websites are in a way the

latest medium of interaction and communication for people. They are also dependable for the purpose

of finding long lost acquaintances as well as making and maintaining new relationships. They are

also a cult phenomenon among the youth of today and hence very popular. It is the medium through

which people and especially youth look for information regarding latest sales, offers, exchange

schemes, discounts, etc., since more and more people are spending more time online each day

compared to even the time spent reading newspapers, where usually sales offers are advertised in the

65


traditional way. Even if exchange schemes, or offers are advertised in newspapers, they carry short

and precise information regarding the offer. Also, access to such in depth information may in fact

educate the customer about aspects of the offer that he was not even aware of by reading the limited

information offered in a newspaper advertisement or a thirty second television commercial. Online

medium of information about any product or information regarding its sales and promotion enables

a consumer to take his time to absorb all relevant information regarding the product at his leisure,

since this medium has neither timing restrictions like television commercials nor space restrictions

like newspaper advertisements.

References

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of Marketing Research, 23 (2), 184-188.

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making,� Advances in Consumer Research, 8 (1), 187-191.

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sensitivities,� Marketing Science, 7, 1, 1-20.

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Quarterly Journal of Economics, 64 (2), 183-207.

lMyers, James H. and Thomas S. Robertson (1972) �Dimensions of opinion leadership,� Journal of Marketing

Research, 9 (1), 41-46.

lNancy Atkinson, Wen-ying Sylvia Chou, Yvonne M Hunt, Ellen Burke Beckjord, Richard P Moser, and Bradford

W Hesse. (2009) Social Media Use in the United States: Implications for Health Communication. J Med Internet

Res. 2009 Oct�Dec; 11(4): e48

lRogers, Everett M. and David G. Cartano (1962), �Methods of measuring opinion leadership,� Public Opinion

Quarterly, 26 (Autumn), 435-441.

lSchor, J. (2004) �Born to Buy: The Commercialized Child and the New Consumer Culture�.

lTurney, P.D. and Littman, M.L. (2003)?Measuring praise and criticism: inference of semantic orientation from

association , ACM Trans. Inf. Syst., Vol. 21 No. 4, pp. 315- 46. 12.

lValente, Thomas W., Beth R. Hoffman, Annamara Ritt-Olson, Kara Lichtman, and C.Anderson Johnson (2003),

�Effects of a social-network method for group assignment strategies on peer-led tobacco prevention programs

in schools,� American Journal of Public Health, 93 (November), 1837-1843.

lWeimann, Gabriel (1994), �The Influential's: People Who Influence People�, Albany, NY: State University of New

York Press

lWernerfelt, Birger (1990),�Advertising content when brand choice is a signal,� Journal of Business, 63 (1), 91-

98.

Childers, Terry L. (1986), �Assessment of the psychometric properties of an opinion leadership scale,� Journal

66

*Asst. Prof. Prestige Institute of Management, Gwalior **Prof. Commerce and Director � MBA Programme, Govt. M.L.B. College of Excellence, Gwalior ***TGT, St.Teresa S.S.School,Gwalior

A Perceptual Study on Chartered

Accountant and Auditors Towards

Forensic Accounting in Indian Perspective*Dr. Nandan Velankar

**Dr. R. C. Gupta***Neha Velankar

Forensic Accounting is of utilizing accounting, auditing and investigative skills to assist in legal

matters. It is the special practice area of accounting that describes engagements that result from

actual or anticipated disputes or litigation. Also there is a need for forensic Chartered Accountants

and Auditors to investigate the legal problems. In proposed study factors were determined for

the perception of chartered accountant and auditor's towards forensic accounting. The present

study is an attempt to check the perception of Chartered Accountant and Auditors towards

Forensic accounting. The study has been taken a sample of 100 respondents including Chartered

Accountants and Auditors of Gwalior region. The validity, reliability and explanatory factor analysis

test were applied to make this study more effective and trustworthy. Finally the significance of

the outcomes has been tested by t-test.

Key Words: Chartered Accountants and Auditors, Forensic Accounting, Perception,

Explanatory factor analysis

Introduction

Perception is closely related to attitude. According to Polanyi (1962) perceptions are our

interpretation of reality. Tradition, culture, expectation, need and experience all affect our perspective

of the world and its underlying realities. The perception of understanding is achieved through the

development of correlations between perceptions of experiences and the formation of higher

level concepts. From the perception of understanding a perception of certainty is attained.

This perception of certainty is the judgment and from the judgment the decision is made. In

this proposed study the perception of Chartered Accountants and Auditors towards forensic

accounting is evaluated to draft some decisions.

Chartered Accountant

An important phenomenon of recent times is the rapid growth of the accountancy

profession. The vast changes occurring in the economy of the country have been placing great

responsibilities on the Chartered Accountants. It also constitutes a challenge to the profession

to bring to bear their knowledge and skill in their specialised fields of activity. The types of functions

generally performed by the Chartered Accountant are varied.

C.As. play invaluable role in assisting business organisations to utilise resources

effectively, increase their efficiency and achieving their goals and objectives as management

consultants. C.As. render host of consulting sevices as under-

lDeveloping management information system.

lDesigning budgetary and control system.

lDetermining measures of the effective utilisation of capital.

lInstalling cost accounting system.

lAssisting the management in the efficient use of working capital as an aid to improve

productivity

lAdvising management on principles of organisation and methods for effective delegation

and planning of work.

67


l

double taxation agreements etc.,

lReview of financial planning and policies for effective utilisation of resources.

lAdvising management on amalgamations, reconstructions, takeovers and expansion

schemes.

lAssist in finding solutions for specific business problems such as product mix decisions,

pricing decisions, making representation to Government on various matters etc.

lAppraisal of personnel policies and practices.

lActing investment counselor in respect of securities.

Auditor

Forensic Accounting

Forensic accounting, also called investigative accounting or fraud audit, is a merger of

forensic science and accounting. Forensic science according to Crumbley (2003) �may be

defined as application of the laws of nature to the laws of man�. He refers to forensic scientists

as examiners and interpreters of evidences and facts in legal cases that also offers expert opinions

regarding their findings in court of law. The science here refers to accounting science that is

the examination and interpretation of economic information.

Coenen (2005) stated that forensic accounting involves the application of accounting

concepts and techniques to legal problem. It demands reporting, where the accountability of

the fraud is established and the report is considered as evidence in the court of law or in the

administrative proceeding.

Literature Review

Zadeh and Ramazani (2012) in �Accountant's Perception of Forensic Accounting�

examined the extent of accountant's perception of forensic accounting and provided some

recommendation in order to enhance C.A. and Auditors' opinion towards it.

Mukoro Yamusa and Faboyede (2013) in �The Role of Forensic Accounting in Fraud

Detection and National Security� explained that to ascertain the relevance of forensic accounting

in curbing financial crime and corruption in the public sector by specifically examining the relevance

of forensic C.A. and Auditors investigating crime and corruption in the public sector, as well as

determining the roles and relevance of forensic C.A. and Auditors in litigations, support services,

documentation and reporting.

Asuquo (August-2012) in �Empirical Analysis of the Impact of Information Technology

on Forensic Accounting Practice in Cross River State Nigeria� described the impact of emerging

information technology on forensic accounting activities in cross river state. A survey, using self-

administered interview was conducted to achieve this objective. Forty (40) interviews were

conducted with various accounting professionals who were directly or indirectly linked to the

Rendering advice on international taxation matters, foreign collaborations, joint ventures,

Working in audit involves checking accounting ledgers and financial statements

of corporations and government, and is the basis of much of accountancy practice. Auditing

work is becoming increasingly computerised and can rely on sophisticated random sampling

methods. This area may involve considerable travel and allows you to work in a wide array of

sectors, to get a great understanding of how money is being made and managed.

68


business of investigative accounting. Data collected were analyzed using ANOVA statistics. The

results of the study revealed that accounting professionals need to enhance their knowledge

and skills of computerized accounting systems for the purpose of planning, directing, supervising

and reviewing the work performed. Therefore, accounting professionals should better understand

and evaluate their computerized accounting systems to enable them carry out more effectively

the business of investigative accounting now and in the future.

Malusare (2013) in�The Effectiveness of Forensic Accounting in Detecting, Investigating,

and Preventing Frauds in India� clarified the uses of Forensic Accounting, how to control financial

frauds in companies and the effectiveness of forensic audit.

Wadhwa and Pal (2012) in �Forensic Accounting and Fraud Examination in India� explained

the uses of Forensic Accounting in India and the role of forensic accounting (techniques) in fraud

examination.

Murlidhar Lohana (2013) in �Forensic Accounting at Nascent Stage in India� elucidated

that Forensic Accounting is the tripartite practice that integrates accounting, auditing, and

investigative skills to conduct an examination into a company's financial statements. Though

forensic accounting is a new practice in India, prospects are growing fast in public as well private

organizations. This research article seeks to examine the meaning, nature, validation and

prospects in India.

Objective of the study

lTo design, develop and standardize the measure to evaluate Perception of Chartered

Accountants and Auditors towards Forensic Accounting.

lTo check the perception of Chartered Accountants and Auditors towards Forensic

Accounting.

lTo analyze the perception of Chartered Accountants and Auditors on gender basis

towards forensic accounting.

lTo open some new vistas for further researches.


The study is exploratory in nature. It is aimed to check the perception of Chartered

Accountant and Auditors towards Forensic accounting. The study is done to analyze the relationship

in Indian context. Questionnaire survey method is applied to take the responses from respondents.

Population was Chartered Accountants and Auditors. Sampling frame was self employed and

salaried chartered accountants and auditors. Individual respondent was the sampling element.

Sample size was 100. To draw the sample non probability purposive sampling was used.

For the purpose of data collection, a self-designed questionnaire was utilized. The measure was

Likert-type 1 To 5 Scale,where 1 indicates the minimum agreement and 5 indicates maximum

agreement. Tools used for data analysis were:

lItem to total correlation was used to check the internal consistency of the

questionnaires.

lReliability test was applied to check the reliability of the questionnaire with the help

of Cronbach Alpha.

69


Cronbach's Alpha

Cronbach's Alpha Based on Standardized Items

No. of Items

0.866 0.871 30

Reliability Statistics

It is considered that the reliability value more than 0.7 is good and it can be seen that reliability value(0.886) is quite higher than the standard value, so all the items in the questionnaire are highly reliable.

Consistency measure for CA and auditor towards forensic accounting Item -Total Statistics

VAR00001 110.3900 173.695 .542 .542 .858

VAR00002 110.2400 174.002 .553 .488 .858

VAR00003 110.2000 174.202 .534 .527 .858

VAR00004 110.3600 176.132 .466 .478 .860

VAR00005 110.2700 174.603 .472 .407 .860

VAR00006 110.2600 174.800 .516 .437 .859

VAR00007 110.1700 179.092 .385 .381 .862

VAR00008 110.3700 178.720 .404 .341 .862

VAR00009 110.4500 181.826 .238 .419 .866

VAR00010 110.8000 181.616 .168 .495 .869

VAR00011 110.0100 171.808 .599 .515 .857

VAR00012 110.3100 180.236 .306 .469 .864

VAR00013 110.1500 174.169 .451 .347 .860

VAR00014 110.0900 169.254 .664 .555 .854

VAR00015 109.9200 171.347 .619 .551 .856

VAR00016 110.0500 179.422 .398 .454 .862

VAR00017 110.3500 175.199 .511 .445 .859

VAR00018 110.7000 180.152 .232 .601 .867

VAR00019 110.1200 175.278 .562 .494 .858

VAR00020 109.9000 172.172 .595 .545 .857

VAR00021 110.3500 182.391 .195 .299 .867

Scale Mean if Item Deleted

Scale Varianceif Item Deleted

Corrected Item-Total Correlation

Squared Multiple Correlation

Cronbach's Alpha if Item Deleted

l

Chartered Accountants and Auditors towards Forensic Accounting.

lThe t-test was applied to compare the perception of Chartered Accountants and Auditors

on gender basis towards forensic accounting.

Empirical Analysis

Reliability, Validity and Consistency Measure:

Cronbach's Alpha method has been applied to calculate reliability of all items in the

questionnaire. Reliability test using SPSS software and the reliability test measure is given

below:

Factor analysis was applied to find out the underline factors to know the perception of

70


It can be seen from item-total statistics that the dropping of any item do not increase

the reliability very significantly, so it was decided not to drop any question from the measure and it

was used as it is for further analysis.Validity was checked through face validity and found to be very

high.Item to total correlation was computed using SPSS and all the items in the measure were

accepted.

Factor Analysis

KMO and Bartlett's Test factor analysis for perception

Kaiser-Meyer-Olkin Measure of Sampling Adequacy

Bartlett's Test of Sphericity Approx. Chi-Square

0.761

950.031

435.0

.000

Df

Sig.

The KMO score is 0.761 which is quite higher than 0.5, thus it can be said that, sample is adequate for factor analysis. The degree of common variance among the thirty variables is "middling" bordering on �meritorious".

Chi-Square Value Df Sig

950.031 435.0 .000

Bartlett's Test of Sphericity is highly significant, becauce (P < 0.05) hence,corelation matrix

is not an identity matrix and therefore factor analysis is appropriate.

Principle component factor analysis with Varimax Rotation and Kaiser Normalization was

period details about factors, the factor name variable number and convergence and that Eigen

Values are given in the table which are as follows :

VAR00022 110.0900 181.133 .277 .362 .865

VAR00023 110.3100 174.984 .489 .600 .859

VAR00024 110.1200 176.369 .417 .397 .861

VAR00025 110.1200 179.440 .318 .397 .864

VAR00026 110.1600 180.277 .255 .527 .866

VAR00027 110.3200 183.311 .178 .284 .867

VAR00028 110.2000 177.960 .353 .432 .863

VAR00029 110.4400 185.986 .049 .441 .872

VAR00030 110.2300 181.431 .236 .367 .866

Scale Mean if Item Deleted

Scale Varianceif Item Deleted

Corrected Item-Total Correlation

Squared Multiple Correlation

Cronbach's Alpha if Item Deleted

Bartlett's Test of Sphericity has provided the following results:

71


Strong

Auditing

tools1.9916.638

Innovative

Practices1.8646.013

Financial

Security1.6185.393

Factor

Name

Eigen Value

Total % ofVariance

Variable Convergence / StatementLoading

Value

lI am aware with forensic accounting.

lForensic accounting is used as a fraud detection tool.

lForensic accounting has sound impact on internal control system.

lForensic accounting solely enough as a tool to detect suspicious transaction.

lForensic accounting is a tool to disclose actual financial status.

lForensic accounting is a tool to avoid manipulation in accounting.

lForensic accounting is a challenge for future accounting consultant.

lTo meet with the client and to obtain an understanding of the important facts is typical approach of forensic accounting.

lForensic accounting can improve security and secrecy of client.

lForensic accounting is measure to provide remedy for investigation..

lForensic accounting is useful in preventing financial crime.

lForensic accounting is costly for organization.

lForensic accounting is able to create transparency.

lForensic accounting is used in practice to investigate fraudulent acts.

lForensic accounting should be compulsory.

lForensic accounting is used as risk assessment process towards financial frauds.

lForensic accounting is a negative approach towards audit process.

Protection

towards

financial

frauds

7.13723.791

.686

.486

.714

.645

.448

.724

.508

.539

.625

.785

.486

.487

.489

.883

.785

.485

.747

72


Practical Approach

1.4034.677

1.2401.134

Misreprese-ntation of financial statement

1.1213.738

Long lasting process

1.0533.508

Factor

Name

Eigen Value

Total % ofVariance

Variable Convergence / StatementLoading

Value

lForensic accounting is helpful in settling the disputes.

lForensic accounting is a detail oriented process.

lForensic accounting is a dynamic tool for combating corruption.

lForensic accountancy has not been recognized in bank and financial services industry.

lForensic accounting is a unique accounting approach.

lForensic accounting requires practical knowledge.

lForensic accounting has a sound impact on external audit.

lForensic accounting is an remedial practice towards creative accounting.

lForensic accounting can stop misrepresentation of financial statement.

lForensic accounting is a long lasting. process

Explicit accounting approach

1.4384.794

.718

.635

.606

.540

.667

.718

.714

.758

.885

.833

Remedial Practice

Description of Factors Analysis (Perception)

lProtection towards financial frauds:-The most important factor that come out of the study

�protection towards financial frauds� which comprise of 9 variables and explains 23.791% of

variance. Total Eigen value is 7.137. I am aware with forensic accounting (.686), forensic

accounting is used as a frauds detection tool (.486), forensic accounting has sound impact on

internal control system (.714), forensic accounting solely enough as a tool to detect suspicious

transaction (.645), forensic accounting is a tool to disclose actual financial status (.448),

forensic accounting is a tool to avoid manipulation in accounting (.724), forensic accounting is a

challenge for future accounting consultants (.508), to meet with the client and to obtain an

73


understanding of the important facts a is typical approach of forensic accounting (.539), forensic

accounting can improve security and secrecy of client (.625).

l The second important factor is �strong audit tools� which comprise of 4

variables and explains 6.638% of variance. Total Eigen value is 1.991. The included variables

are, 'forensic accounting is costly for organization� (.785), �forensic accounting is usefu tol

prevent financial crime.�(.486),�.forensic accounting is costly for organization�(.487), �forensic

accounting is able to create transparency �(.489).

lInnovative prentices:- The third important factor is �innovative prentices� which comprise of 2

variables and explains 6.013 % of variance. Total Eigen value is 1.864. The included variables

are �forensic accounting is used in practice to investigate fraudulent acts �(.883), �forensic

accounting should be compulsory �(.785).

lFinancial security:- The forth important factor is �financial security� which comprise of 2

variables and explains 5.393 % of variance. Total Eigen value is 1.618. The included variables

are �forensic accounting is used as risk assessment process towards financial frauds� (.485),

�forensic accounting is a negative approach towards audit process�(.747).

lExplicit accounting approach:- The fifth important factor is �explicit accounting approach�

which comprise of 3 variables and explains 4.794 % of variance. Total Eigen value is 1.438. The

included variables are �forensic accounting is helpful to settlement the disputes �(.718),

�forensic accounting is a detail oriented process �( .635), �forensic accounting is a dynamic tool

for combating corruption �(.606) .

lPractical approach:- The sixth important factor is �New Approach� which comprise of 3

variables and explains 4.677 % of variance. Total Eigen value is 1.403 The included variables

are. �Forensic accountancy has not been recognized in bank and financial services industry�

(.540) �Forensic accounting is an unique accounting approach �( .667). �Forensic accounting is

required practical knowledge ''(.718).

lRemedial practices:- The seventh important factor is �7 group� which comprise of 2 variables

and explains 1.134 % of variance. Total Eigen value is 1.240. The included variables are.

�Forensic accounting is an sound impact on external audit.� (.714). �Forensic accounting is an

remedial practice towards creative accounting�(.758).

lMisrepresentation of financial statement :- The eight important factor is �misrepresentation

of financial statement� which comprise of 1 variables and explains 3.738 % of variance.

Total Eigen value is 1.121. The included variables are. �Forensic accounting can stop

misrepresentation of financial statement �(.885).

lLong lasting process :- The nine important factor is �long lasting process� which comprise of

1 variables and explains 3.508 % of variance. Total Eigen value is 1.053. The included variables

are. �.forensic accounting is a long lasting process�( .833 )

Strong audit tools:-

74


Independent T-Test

Independent T-Test is applied to compares the means between two unrelated groups on

the same continuous, dependent variable. Here we have applied the independent t-test to understand

the deference of mean between perception (dependent variable) and gender of respondents as

(independent variable).

H: There is no significant difference between perception of Chartered Accountants and auditors 0

towards forensic accounting on gender basis.

Group Statistics

Gender N Mean Std. DeviationStd. Error Mean

Male

Famale

75

25

93.1250

92.5192

11.34553

11.52539

1.15795

1.13016

Independent Samples Test

Levene's Test for Equality of Variances

Equal variances assumed

Equal variances not assumed

.227.637-.515

-.570

T- Test for Equality of Means

FSig. TDf Sig.(2-tailed)

.98

50.114

.608

.571

MeanDifference

Std. ErrorDifference

95% ConfidenceInterval of the Difference

-1.64000

-1.64000

3.18622

2.87491

Lower Upper

-7.96295

-7.41410

4.68295

4.13410

On the basis of independent sample t-test column labeled Levene's Test for Equality of Variances, which indicates the p value (.637) which is greater than standard value (.05) so, His not 0

rejected.Thus,

�There is no significant difference between perception of Chartered Accountants and auditors towards forensic accounting on gender basis�

Conclusion

The study performed necessary analysis to derive the research and �A Perceptual Study on Chartered Accountant and Auditors Towards Forensic Accounting in Indian Perspective� of Gwalior region. The questionnaires were filled by C.A. Auditors, Internship students and by applying test like; to test the validity, face validity test was applied and to check the reliability of the questionnaire, reliability test was applied with the help of Cronbach's Alpha. Factor analysis test was applied to find

75


out the underlying factors to know the perception of chartered accountants and auditors towards forensic accounting. Many factors have came out from this study which promote the forensic accounting practices in indian perspective. Independent T- test was applied to compare the perception of Chartered Accountants and Auditors on gender basis towards forensic accounting. It has been concluded by testing the hypothesis and following results were obtained that, there is no significant difference between perception of Chartered Accountants and auditors towards forensic accounting on gender basis.

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76


*Sonia Kaur

Rural marketing is a developing concept and as a part of any economy it has untapped potential;

marketers have realized the greater opportunity recently in this market. The heart of India lives in its villages

and the Indian rural market with its vast size and demand base offers great opportunities to marketers.

Any macro-level strategy for these markets should focus on availability, accessibility, affordability

and awareness.' Go rural' is the marketer's new slogan and they are looking at the opportunities,

which rural markets offer to them, it can be said that the future of rural market is very promising. Rural

Marketing is now a two-way marketing process. There is inflow of products into rural markets for

production or consumption and there is also outflow of products to urban areas. The rural market has

been growing steadily over the past few years and is now even bigger than the urban market. Rural

marketing is getting new heights in addition to rural advertising and various medium of communication,

television and radio have played prominent role in the rural India today. The development of the nation

largely depends upon the development of the rural population. Rural market witnesses a high demand

and it is the rural segment of market that contributes more profit than its urban counterpart. Along with

this some issues and challenges have also been associated with the rural marketing like low levels

of literacy, low per capita income, dispersed markets, cultural factors, communication problems,

traditional life etc. Apart from having so many issues and challenges in rural marketing the companies

have shown a considerable interest in the rural India and have tried to market themselves by using the

4A's model. The Government of India seeks to promote innovation and technology development in

rural and tribal areas of the country. The government also plans to form a committee that will study

these innovations and submit a report to the department or ministry concerned. Thus this paper

attempts to suggest the different marketing strategies to meet the challenges to be successful in rural

market.

Introduction

Rural marketing is a developing concept, and as a part of any economy it has untapped

potential; marketeers have realized the greater opportunity recently in this market. Any macro-level

strategy for these markets should focus on availability, accessibility, affordability and awareness.

Rural Marketing is now a two-way marketing process. There is inflow of products into rural

markets for production or consumption and there is also outflow of products to urban areas. The

urban to rural flow consists of agricultural inputs, fast-moving consumer goods (FMCG) such as

soaps, detergents, cosmetics, textiles, and so on. The rural to urban flow consists of agricultural

produce such as rice, wheat, sugar, and cotton. There is also a movement of rural products within rural

areas for consumption.

The rural market has been growing steadily over the past few years and is now even bigger

than the urban market. About 70 per cent of India's population lives in villages. 'Go rural' is the marketer's

new slogan which means how Indian companies go for rural marketing as larger percentage of

Indian population lived in rural areas. Indian marketers as well as multinationals, such as Colgate-

Palmolive, Godrej and Hindustan Unilever have focused on rural markets. Thus, looking at the

opportunities, which rural markets offer to the marketers, it can be said that the future is very promising

for those who can understand the dynamics of rural markets and exploit them to their best advantage.

Since ancient times, Indian villages had the concept of village markets popularly known as the village

haats. The haats are basically a gathering of the local buyers and sellers. The barter system was quite

Rural Marketing: Issues and Challenges

77


prevalent, which still continues in a number of places even today. Haats are basically a weekly event

and are central to the village economy.stIn this 21 century, the rural markets have acquired significant place in the marketing

environment of India. The green revolution and the white revolution combined with the overall growth

of Indian economy have resulted in substantial increase in the purchasing power of the rural

communities. Rural marketing denotes flow of goods and services from rural producers to urban

consumers at all possible time with reasonable prices, and agricultural inputs and consumer goods

from urban to rural. It is of paramount importance in the Indian marketing environment as rural and

urban markets in India are so diverse in nature that urban marketing programmes just cannot be

successfully extended to the rural markets but also differ from that of the urban Indian markets. Further

the values, aspiration and needs of the rural people vastly differ from that of the urban population. Buying

decisions are highly influenced by social traditions and beliefs in the rural communities. As regards

the purchasing power, the urban markets are segmented according to income levels, but in rural

areas, the family incomes are grossly underestimated.

Farmers and rural artisans are paid in cash as well as in kind and sometimes they misrepresent

their purchasing power. For this reason, a marketer must therefore, make an attempt to understand

the rural consumer better before making any marketing plans. Rural markets in India have an untapped

potential and there are several difficulties confronting the effort to fully explore the rural markets.

The concept of rural markets in India is still in evolving shape and this sector involves a variety of

challenges. Distribution costs and non-availability of retail output are the major problems faced by

marketeers. Many successful brands have shown high note of failure in the rural markets because the

marketeers try to extend marketing plans that they use in urban areas. The unique consumption

pattern, tastes, and need of the rural consumers should be analysed at the product planning stage

so that they match the needs of the rural people.

Reason Why the Companies are Focusing on Rural Market

The main reason why the companies are focusing on rural market and developing effective

strategies is to tap the market potential that can be identified as follows:

lLarge and scattered population - About 70 per cent of India's population live in rural

areas. The rate of increase in rural population is also greater than that of urban population.

The rural population is scattered in over 6 lakhs villages. The rural population is highly

scattered, but holds a big promise for the marketeers.

lHigher purchasing capacity - Purchasing power of the rural people is on rise. Marketeers

have realized the potential of rural markets, and thus are expanding their operations in rural

India. In recent years, rural markets have acquired significance in countries like China and

India, as the overall growth of the economy has resulted in substantial increase in

purchasing power of rural communities.

lMarket growth - The rural market is growing steadily over the years. Demand for

traditional products such as bicycles, mopeds and agricultural inputs; branded products

such as toothpaste, tea, soaps and other FMCGs; and consumer durable such as

refrigerators, TV and washing machines has also grown over the years.

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l

construction of roads and transportation, communication network, rural electrification and

public service projects in rural India, which has increased the scope of rural marketing.

lTraditional outlook - The rural consumer values old customs and traditions. They do not

prefer changes. Gradually, the rural population is changing its demand pattern, and there is

demand for branded products in villages.

lMarketing mix - The urban products cannot be dumped on rural population; separate sets of

products are designed for rural consumers to suit the rural demands. The marketing mix

elements are to be adjusted according to the requirements of the rural consumers.

Rural Marketing Potential in India

The heart of India lives in its villages and the Indian rural market with its vast size and

demand base offers great opportunities to marketeers. Rural marketing is currently growing at about

20% every year and companies are spending approx Rs. 600 crore per years for promotional

budget. Rural marketing involves addressing over 700 million potential consumers and over 40 per

cent of the Indian middle income and the rural markets have been a vital source of growth for most

of the companies and for a number of FMCG companies in the country, more than half their annual

sales come from the rural market, the strategies of FMCG can be understood through its SWOT

analysis chart.

Development of infrastructure - There is development of infrastructure facilities such as

Strengths1. Low operational costs

2. Established distribution network in

both urban and rural areas,

3. Presence of well-known brands

in FMCGsector

Weakness1. Lower scope of investing in technology

and achieving economies of scale

2. Low exports levels.

3. Counterfeit Products

Opportunities1. Untapped rural market

2. Rising income levels

3. Large domestic market

4. Export Potential

5. High consumer goods spending

Threats1. Removal of import restrictions

2. Slowdown in rural demand

3. Tax and regulatory structure

SWOTAnalysis

(FMCG Sector)

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Rural marketing is gaining new heights in addition to rural advertising. Among various

mediums of communication, television and radio have played prominent role in the rural India today.

Due to globalisation, economic liberalisation, IT revolution, women empowerment, and improving

infrastructure, middle and rural India today has more disposable income than urban India.

Measurement Company Nielsen expects the FMCG market in rural India to top US$ 100

billion by 2025. Another report by McKinsey Global Institute predicts that by 2025, annual real

income per household in rural India will rise to 3.6 per cent from 2.8 per cent of the last 20 years. India

generates around half of the country's gross domestic product (GDP) and are home to about 70 per

cent of its population. This market is a combination of growing incomes and aspirations of about

850 million consumers who inhabit 650,000 villages across the country. Consumption patterns in

these areas are also gradually beginning to mirror those of their urban counterparts. Owing to this

changing trend as well as the size of the market, rural India provides a tremendous investment

opportunity for private companies. The Indian government has earmarked financial inclusion as

one of its foremost priorities. In August 2014, Prime Minister Mr Narendra Modi launched the

Pradhan Mantri Jan Dhan Yojana, the National Mission for Financial Inclusion. There is enough

evidence to suggest that financial inclusion is crucial to reducing poverty.

MANAGE, an extension management institution may provide extension services to rural

public in the form of price information, insurance, and credit information by using various media. �It is

often said that markets are made not found. This is especially true for the rural market like India.

Rural market is a market for a truly creative marketeer". Civilization always begins with the

development of villages; therefore, it needs high concentration.� -Mahatma Gandhi

Issues Related With the Rural Marketing

India is ingenious with a good degree of ethnic, cultural and regional diversity. Radio

reaches to the total population that resides in the rural areas and majority of them are dependent

upon agriculture for their subsistence. Agriculture contributes about 13.7% to the Gross Domestic

Product (GDP) of the country. It also contributes about 13.1% to the total Indian exports. This sector

provides employment to 50% of the country's workforce and livelihood to more than 650 million

people. Despite this fact, the condition of these people has not shown any significant improvement.

The development of the nation largely depends upon the development of the rural population.

Rural market witnesses a high demand and it is the rural segment of market that contributes more

profit than its urban counterpart. Rural marketing broadly involves reaching customers, understanding

their wants, supply of goods and services, and ultimately satisfying consumers, leading to more sales.

The general impression is that only agricultural inputs like seeds, fertilizers, pesticides, cattle feed and

agricultural machinery has a potential for growth in the rural market. However, there is a growing market

for consumer goods now. It has been estimated the rural market is growing at the rate of five times

its urban counterpart.

Problems Faced in Rural Marketing

lDeprived people and deprived markets - The number of people below the poverty line

has not decreased in any appreciable manner. Thus, poor people and consequently

underdeveloped markets characterize rural markets. A vast majority of rural people are tradition

bound, and they also face problems such as inconsistent electrical power, scarce infrastructure

80


and unreliable telephone system, and politico-business associations that hinder development

efforts.

l Many rural areas are not connected by rail transport. Many roads have been

poorly surfaced and got severely damaged during monsoons. The use of bullock carts is

inevitable even today. Camel carts are used in Rajasthan and Gujarat in both rural and urban

sectors.

lMany languages and dialects - The languages and dialects vary from state to state, region

to region and probably from district to district. Since messages have to be delivered in the

local language, it is difficult for the marketers to design promotional strategies for each of

these areas. Facilities such as phone, telegram and fax are less developed in villages adding to

the communication problems faced by the marketers.

lDispersed markets - Rural population is scattered over a large land area. And it is almost

impossible to ensure the availability of a brand all over the country. District fairs are periodic and

occasional in nature. Manufacturers and retailers prefer such occasions, as they allow greater

visibility and capture the attention of the target audience for larger span of time. Advertising in

such a highly heterogeneous market is also very expensive.

lLow per capita Income - The per capita income of rural people is low as compared to the

urban people. Moreover, demand in rural markets depends on the agricultural situation, which

in turn depends on the monsoons. Therefore, the demand is not stable or regular.

lLow levels of literacy - The level of literacy is lower compared to urban areas. This again

leads to a problem of communication in these rural areas. Print medium becomes ineffective

and to an extent irrelevant, since its reach is poor.

lPrevalence of spurious brands and seasonal demand - For any branded product, there are

a multitude of local variants, which are cheaper and hence more desirable. Also, due to illiteracy,

the consumer can hardly make out a spurious brand from an original one. Rural consumers are

cautious in buying and their decisions are slow, they generally give a product a trial and only

after complete satisfaction they buy it again.

lDifferent way of thinking - There is a vast difference in the lifestyles of the people. The choice

of brands that an urban customer enjoys is not available to the rural customer, who usually has

two to three choices. As such, the rural customer has a fairly simple thinking and their decisions

are still governed by customs and traditions. It is difficult to make them adopt new practices.

lWarehousing problem - Warehousing facilities in the form of godowns are not available in

rural areas. The available godowns are not properly maintained to keep goods in proper

conditions. This is a major problem because of which the warehousing cost increases in

rural areas of India.

Challenges in Rural Marketing

lLack of Education - Rural people are not well educated in comparison to urban people.

lCommunication Problems - Facilities such as telephone, internet, fax and telegram are

rather poor in rural areas.

Transport -

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l

do not easily adapt new practices. For example, even rich and educated class of farmers

do not wear jeans or branded shoes.

l Career in Rural Market - While rural marketing offers a challenging career, a rural sales

person should require certain qualifications and specialized talent.

lBuying Decisions - Rural consumers are cautious in buying and decisions are slow and

delayed. They like to give a trial and only after satisfying personally, they buy the product.

lCultural Factors - Culture is a system of shared values, beliefs and perceptions that influence

the behaviour of consumers. There are different groups based on religion, caste, occupation,

income, age, education and politics and each group exerts influence on the behaviour of

people in villages. There is a belief among rural people that experience is more important than

formal education and they respect salespersons who can offer practical solutions to their

problems. Therefore, it is desirable that sales persons, especially those who have been brought

up in cities are given a thorough training consisting of both theory and practical aspects

of village life. The training will help these sales persons to align themselves with the market

retailers and settle down smoothly in their jobs.

Government Initiatives

The government plans to spend Rs 75,600 crore (US$ 12.22 billion) in the coming years

to supply electricity through separate feeders for rural and agricultural domestic consumption - an

initiative aimed at providing round-the-clock power to villages. This outlay is inclusive of expenditure

towards an integrated power development initiative which involves strengthening distribution and

sub-transmission systems. The Government of India also seeks to promote innovation and

technology development in rural and tribal areas of the country. The government plans to form a

committee that will study these innovations and submit a report to the department or ministry

concerned. The programme, Nav Kalpana Kosh aims to improve rural areas at all levels - governance,

agriculture and hygiene.

With the increasing demand for skilled labour, the Indian government plans to train 500

million people by 2022, and is looking out for corporate players and entrepreneurs to help in this

venture. Corporate, government, and educational organisations are joining in the effort to train,

educate and produce skilled workers.

Banks are working on establishing 'Rural ATMs' which will dispense currency notes of

smaller denominations. "We have encouraged banks to find a solution for bringing in rural ATMs...

banks will have to find an appropriate technology solution for a different type of ATM to care for the

needs of the rural people," as per Mr R Gandhi, Deputy Governor, Reserve Bank of India (RBI).

Rural Marketing Strategy

Rural marketing strategy is based on their 4A's � Availability, Affordability, Acceptability and

Awareness. The first 'A'-Availability emphasises on the availability of the product for the customers i.e.

it gives importance on effective distribution through efficient channels of distribution. The second

'A'- Affordability which focuses on product pricing i.e. it gives importance for smaller packages/

pouches easily affordable by families in the rural areas. The third 'A' � Acceptability focuses on

Traditional Life - Life in rural areas is still governed by customs and traditions and people

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convincing the customers to buy the product i.e. extending suitable promotional efforts to influence the

customers to buy the product. The fourth 'A'- Awareness emphasises that people should be properly

aware about the product. Marketeers need to understand the psychology of the rural consumers and

then act accordingly.

Rural marketing involves more intensive personal selling efforts as compared to the urban

marketing. Firms should refrain from pushing goods designed for urban markets to the rural areas and

effectively tap the rural market. This can be done by utilizing the various rural folk media to reach them in

their own language and in large number so that the brand can be associated with the myriad rituals,

celebration, festivals, fairs and weekly haats. The rural and urban market both contributes in the market

share of the country which makes the availability of food grains, clothing, durable goods and services to

the customers and making them aware about the product by using different modes of entertainment

programmes, this can be understood through the market share chart that how much these two market

have contributed in the growth and development of the country.

Source : NSSO 5th round; KPMG Analysis

Share of Market : Urban VS Rural

64 36

61 39

57 43

50 50

44 56

33 67

Food

Clothing & Footwear

Misc. Consumer Goods

Durables

Consumer Services

Entertainment

0 25 50 75 100

Rural Urban

Rural Distribution Strategy

One of the ways that would be using the company to deliver the goods and services to

the masses, which can serve two purposes � it can take the products to the customers in every nook

and corner of the market and it also enables the firm to establish direct contact with them and

thereby facilitate sales promotion. However, only the large manufactures can adopt this channel.

The companies with relatively fewer resources can go in for the syndicated distribution where a

tie-up between non-competitive marketers can be established to facilitate distribution. Some other

distribution strategies for the rural population are as under:

lThe general insurance companies may promote their policies of health insurance, crop

insurance and vehicle insurance through the existing co-operatives.

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l

smaller pouches.

lAll communication in the rural areas must be in the regional language and dialects

lMarkets need to develop innovative packaging technology which would be economic,

protective and improve shelf-life of goods.

lMarketeers need to place emphasis on retailers directly rather than depending on the

wholesalers for distribution in the rural market as this has not proved to be very effective

marketing channel.

lMarketeers targeting the rural market should be well aware about the seasonality of the

business. This means that business should view market research data that relies on yearly

aggregate statistics with caution.

lMarketeers must trade off the distribution cost with incremental market penetration.

Conclusion

In spite of having so many issues and challenges in rural marketing, the companies

have shown a considerable interest in the rural India and have tried to market themselves using

the 4A's model which says that the products marketed should be acceptable by the rural

population, the products should be easily available, they should be affordable and most importantly, an

awareness drive should be created to educate people about the products. The rural market is very

large in comparison to the urban market as well as it is a more challenging market. The consumer wants

those products which are long lasting, good, easy to use and cheaper. The income level of rural

consumers is not as high as the income level of urban consumers, that's why they want low price goods.

It is one of the reasons that the sale of sachet is much larger in the rural area in all segments. It is

necessary for all the major companies to provide those products which are easy to affordable to the

consumers. It is right that the profit margin is very low in the FMCG products, but at the same time the

market size is much larger in the rural area. The companies can reduce their prices by cutting the

costs on the packaging because the rural consumers don't need attractive packaging. Rural market

has an untapped potential but it is different from the urban market so it requires the different

marketing strategies and marketeer has to meet the challenges to be successful in rural market.

References

l

lR.S.N. Pillai & Bhagavathi, Marketing Management, S.Chand

lEconomic Times.indiatimes.com

lPradeep Kashyap and Siddharth Raut, Rural Marketing- Text and Cases

lRural Marketing in India- Strategies and Challenges � Ruchika Ramakrishnan

Marketeers may arrange more number of ware-houses for storage and re-packaging into

Philip Kotlar, Marketing Management,

84

stWe work in a fast moving world, where everyone is trying to shape 21 century transactions.

The challenges facing business today require that organizations be able to transform into flexible

and agile enterprises which respond to market driven opportunities. Staff and employee contributions

are fundamental to any organization's success, their lifelong learning and development embolden

companies to grow and change in response to the challenges and opportunities confronted by them.

In a continuously changing work environment, an employee's knowledge and skills quickly become

obsolete and they must continue to learn. This paper presents a review of current research and

practice of lifelong learning done in various organizations. The objective of the study is to find out the

need of continuous learning and strategies that can be adopted for creating that environment. The study

examined and reviewed historical facts and past literature. Organizations such as Infosys, Deloitte, TCS,

IIMs, etc were assessed. It was found that strategies for LLL are being used in the corporate community

so as to thrive in the marketplace. Results of the study also showed that training courses, action learning,

staff learning development program, online learning are some strategies that create a continued

learning environment.

Keywords: Lifelong Learning, Organization, Career, Learners, Skills

Introduction

Henry Fayol once said, �Anyone who stops learning is old, whether at 20 or 80. Anyone who

keeps learning stays young. The greatest thing in life is to keep your mind young.� Lifelong Learning is

the ongoing, voluntary, and self-motivated pursuit of knowledge for either personal or professional

reasons. Professional activity has become so knowledge intensive and fluid in content that learning

has become an integral and irremovable part of adult work activities. Learning is a new form of labour

(Zuboff, 1988). In the coming future, a person will be called educated in the society who is willing to

consider learning as a lifelong process. Lifelong learning is more than training or continuing education.

It must support multiple learning opportunities including exploring conceptual understanding as well

as narrowing to practical application of knowledge, ranging over different settings such as academic

education, informal lifelong learning, professional and industrial training (Gerhard Fischer).

Several environmental factors such as abundant access to information, rapid technology

changes, increased global interactions, industry shifts, as well as increasing entry level credentials and st skill requirement are driving the demand for lifelong learning in the 21century. The message seems

to be that employees who are valuable today maybe obsolete tomorrow, if they do not constantly

strive to keep their skills current. Thus, the need for continuous learning has been an important result

of the changes taking place in the corporate community. Employees are being encouraged to be

entrepreneurial and engage in lifelong learning in anticipation that they will change jobs and possibly

career paths many times during their working years (Gardiner, 2001). As organizations struggle to

survive and prosper in an increasingly competitive environment, continuous learning is becoming

an important strategy within an organization. The ability to learn and develop one's skills is becoming a

core career competency (Hall & Mirvis, 1995). Companies should focus on building a learning

Lifelong Learning: It's Paramount Importance

in Current Scenario*Shraddha Ladia


85


architecture, integrating their technologies, driving a deeper focus on content and the learning

experience and driving a learning culture (Pessanha, 2013).

In this study, efforts have been put to find out the need of lifelong learning and what

strategies can be used to apply the theory of continued learning in this competitive era. To find the

answers the literature on individual learner attributes and workplace learning environments and the

strategies used by them have been reviewed. The search was conducted using company websites

and electronic databases such as ERIC, Project Muse, Talentlms, tompeters. To address the questions

above, the literature review will proceed as follows: defining lifelong learning; explaining the need for

lifelong learning at the individual and organizational level; briefly reviewing programs used by

different Organizations and elaborating other programs that can be conducted for LLL.

Literature Review

Lifelong Learning has been an integral part of our culture. Notwithstanding the gradual

modernization of society and the emergence of multiple channels of learning, the first formal recognition

of LLL came in 1966, when the Indian Education Commission (1964-66) made the following

observation-

Education does not end with schooling, but is a lifelong process. The adult needs an

understanding of the rapidly changing world and the growing complexities of society. Even those who

had the most sophisticated education must continue to learn, the alternative is obsolescence (Report

of Indian Education Commission, 1966).

Amartya Sen justifies the notion of economic empowerment of people through the

participation in continuing education until workforce attains certain levels of accuracy, understands

job specification and follows instructions. The utilization of knowledge resources can be habituated

and sensitized through the lifelong learning programs, which are available in the forms of workplace

learning, continuous professional development, refresher courses, orientation programs, open

learning and e-learning. Sessa and London (2006) suggest that all humans have the potential to

be continuous learners. However, learning cannot be forced. It can only be fostered and supported.

Learning depends on an individual's capacity and readiness to learn. The key to lifelong learning at all

levels is to provide support for learning and to provide measures and meaningful rewards for

participation.

There may also be discernible benefits to lifelong learning that are unrelated to employment

conditions in terms of improved life satisfaction, greater tolerance, interpersonal trust and more

participation in community and political activities (Feinstein & Hammond, 2004). Lifelong learning's

core values of learning, exploring and serving coupled with benefits for the mind, body and spirit

make it an incredibly powerful tool for personal transformation and enhancement. It leads to an

enriching life of self fulfillment. It helps us make new friends and establish valuable relationships.

Learning keeps us involved as active contributors of society (Nordstrom, 2006).

Need for Lifelong Learning

Various factors in business and organizational competitiveness highlight the need for ng are the

86


Lifelong Learning at all levels of employment. These factors compel organizations to adjust quickly

and adopt new ways of operating to remain competitive and to survive and prosper in dynamic and

competitive environment (Mayo, 2000). Following are the needs for lifelong learning in the current

scenario:

lLifelong learning can enhance our understanding of the world around us, providing us with

much better opportunities and improve our quality of life.

lLifelong learning helps in one's personal and professional development.

lLearning makes us less risk averse and more adaptable to change when it happens.

lEmployers are nowadays looking for well balanced people with multi-skills. This includes the

ability to be able to demonstrate that one is eager to learn and develop.

lLearning gives option to change career path so as to attain self actualization.

lLifelong learning induces one to be motivated in work and to remain active in their respective

field.

lLifelong learning is the way to keep people afloat in their career by picking up new skills and

leverage new experiences.

lLifelong learning is important for preventing skill obsolescence of unemployed people.

lLearning is important for older unemployed individuals to increase the chances for

employability.

Lifelong Learning Programs Initiated by Various Organizations

According to Vishal Sikka, CEO of Infosys, at Infosys, �we will double down on learning and

education for all of us and indeed engage in lifelong learning�. Company offers a unique combination

of career mobility, learning and technological challenges to retain top and cream talent and try to

renew its manpower to diversity of every sort globally. Infosys has started a program called

'Murmuration'. This program aims at crowd sourcing ideas from employees. These ideas could

range from improvement in delivery, better processes to skill enhancement or changes that can

be brought in workplace. Through this, deeper relevance of each employee can be realized.

TCS started TCS Ignite Learning Space which is a learning ecosystem designed to impart

a culture of learning by doing, ownership and innovation at work. The core focus is on 'Learning to

Learn' and 'Learning by Doing'. Trainees have access to e-learning and ambient learning i.e. learning

from all sides, to enhance their lifelong learning skills.

Deloitte hosts events where lifelong learning is ensured by keeping up with industry trends

or regulatory changes that impact one's professional life. There are breakfast seminars and

educational sessions held in offices across the country. The Deloitte Learning Academy, largely geared

to audit professionals, offers learning in various formats that can go toward earning CPE credits.

Deloitte Dbrief Webcast series cover current trends, business issues, projections and innovations

across all industries and services.

Larsen and Toubro's Institute of Project Management (IPM) at Vadodra imparts interdisciplinary

87


skills and experiential learning. Management Development Centre (MDC) of the company in Mumbai

is devoted to provide lifelong learning by ushering a key mantra in aspirants i.e. to learn, unlearn and

re-learn.

In the European Banking Sector, a number of employers and trade unions have agreed on

lifelong learning to facilitate joint initiatives and promote cooperation. Provision for study leave, the

reimbursement of expenses for Professional Qualifications and cultural study leave is there. Specific

training is provided to employees over the age of 40. Young employees are encouraged to participate

not only in internal training courses but also in those delivered by an external provider covering all

associated costs to support employee participation. Various seminars are run by Union of Bank

employees to teach them about relevant legislation that regulates work.

Tata Steel has in-house facilities for technical as well as management trainings. The training

needs of all the employees are identified in the form of Training Need Survey. Various programs

conducted for skill management and lifelong learning are mentors workshop, training program in foreign

and achievement orientation.

Johnsonville believes very strongly in the importance of lifelong learning because every

member should have the chance to grow. Continuous learning with the sky the limit, is almost a religion

at 'Johnsonville'. All workers take a sophisticated course in Economics. They are encouraged by

company to study anything, job related or not.

To encourage lifelong learning, Fuji Xerox has diversified learning opportunities to enhance

employee competencies. Companies learning resources include an in-house library, e-learning course

and comprehensive training via the staff professional development program. Staff can accumulate their

individual learning mileage points to exchange for ferry and flight tickets for overseas trip to Europe as a

reward of their achievements.

At Siemens, a German Company, in fiscal 2011, the company invested 251 million, or about

�608 per employee, in employee's training and continuing education. All around the world, company

has given its people at all levels the chance to fully develop their potential by providing International

Employee Development Program (IEDP) in Brazil, China, India, Italy, Mexico, The Czech Republic and

U.S.

Suggestions and Recommendations

After reviewing past literatures, company data and various articles written by eminent scholars,

we can say in explicit terms that Lifelong learning has become a necessity for employees and

companies to survive in this competitive era. Organizations should accentuate on programs to make

sure that continuous learning takes place. Following are certain programs that Organizations or

employees can initiate in order to inculcate lifelong learning atmosphere-

lOnline Learning: In 2012, massive Online Courses were one of the most talked about and

important trends in education technology (Watter, 2012). MOOC's are open e-learning

programs for higher education. Courseera, TED, iTunesU, You Tube Edu, Open Study, Khan

Academy, Duolingo etc are online classes providing knowledge in different fields.

88


l

by the help of local professional networking events, or even on LinkedIn.

lConsider volunteering: Always grab an opportunity of taking an upcoming project or cross-

functional tasks. This helps in expanding your professional network.

lAsk for help: When something is not understood, don't hesitate in asking for help. Always try

new ways of doing things.

lApply what you learn: Practice what has been learnt. It will help you learn it more completely

and retain it longer.

lRead, read and read: Read all sorts of books. Recognize educational value in whatever

you read. Through reading you will never stop learning.

lTeach others: Teaching is a wonderful way to learn a subject better and improve your

understanding of it. Joseph Jouber once said that �To teach is to learn twice�.

lUndergo training: Companies should arrange for training of employees on regular basis.

Their training needs should be identified and multi-skill development should be made a core

objective of it. Employees should also have a curious mind to undergo training programs

wherever the opportunity arises.

lSabbaticals: Organizations should allow employees to take sabbaticals. This will help them

to undertake projects in their fields and thus, initiating a learning on their parts.

lGet out of your routine, expand possibilities: When you challenge yourself to think

outside the box, you open up the possibility for new and exciting opportunities, and learning

a new skill may even lead you to pursue a completely different career path. Even if you don't

have the time or energy to completely shift careers, at worst you'll go back to your old job with

a new perspective and a refreshed mindset that ultimately may lead to job satisfaction.

(Cooper, 2014).

Conclusion

From the above review, it is clear that continuous learning is linked to better organizational

performance, to a richer life and a better future for owners and their employees. Learning new things

can also stave off old-age ailments like Dementia and Alzheimer's. One study has shown that older

folks who stay cognitively active and curious about the world around them are 2-6 times less likely to

develop Dementia and Alzheimer's than those who let their minds lie fallow (www. Artofmanliness.com).

Instead of sitting lame, why not make one's life meaningful. Lifelong Learning creates a curious,

hungry mind and helps in raising one's wisdom. This research has provided readers with the insight

for the requirement of lifelong learning in our lives. E-Learning courses are widely used lifelong

learning programs by one and all around the globe. Other programs such as sabbatical practice

what you learn, reading, setting goals, etc can be used by organizations and individuals to foster the

culture of learning. A lifelong learner stays on top of their field so that when opportunities come knocking,

they answer immediately. The people who harness the potential of human mind and believe in

learning, they can look forward to active and meaningful lives instead of sitting around and watching

life pass by. The end result can be enriching and fulfilling world.

Learn from others: Try to connect yourself with others. You can seek out experts in your field,

89


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269-289.

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Education, 30: 199-221.

lGerhard Fischer, Lifelong Learning- �More than Training�.

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72.

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Perspectives�.

lwww.artofmanliness.com

lwww.humanresourcesonline.net

90

*Dr. Vidushi Sharma** Dr. Rupali Mishra

*Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur**Assistant Professor, Jagran College of Arts, Science and Commerce, Kanpur

Managing Business Ethics : Good Work Initiatives that Build a Better World

In the era of liberalization, privatization, and globalization (LPG) all the organizations as well as

the society have become mechanized and mechanistic and has forgotten the very basic factor of

their lives on which the concept of sustainability is depend i.e. Ethics. Owners of businesses

that routinely engage in unethical practices cannot help but pass those values and principles along

to the other people working in the business. Small businesses suffer even more, because unethical

behaviour and actions are easier for customers to take notice of. Today, more than ever before,

consumers pay a great deal of attention to corporate behaviour of owners because the marketplace

is flooded with numerous variations of the same businesses, promises must be fulfilled and the price

and quality of products must be equal to what is advertised. Therefore, a code of ethics � whether

unarticulated or formally documented is vital to ensuring that a business will succeed. The present

paper focuses attention towards the need of Ethical Management in today's business with

respect so as to be more stable in comparison to the near by competitors even in the time of any

danger.

Introduction

Leading a company to success is like steering a vehicle to your destination. Roadmaps

are being created and constantly updated in many business sectors in order to encompass the

broadening aspects of the modern business world. As corporate leaders steering your crew to your

destination, you must watch out for any new signposts along the road, detailing changes or challenges

in the external environment e.g. the globalization of market, the advancement of technology etc.

By mastering these changes well, successful leaders can transform challenges into opportunities

and enhance competitive edge of their companies. However, moving along the business highways,

strong leadership is very important ot avoid enticing short cuts and to stay steadily on the right route

to reach the ultimate destination of their companies. In today's modern business world, the road

to success requires more than merely technical skills, practical knowledge and a good product.

Business ethics, above all, are the guiding forces to achieve and sustain success. The public of today

has high demands of those behind the steering wheel of modern business. Greater accountability

and transparency, up to the minute market information, reliable financial and market data, etc.

are essential gauges for investment decisions. Business ethics become the fundamental building

blocks that link up all these expectations.

Ethics � An Overview

An ethical culture is a set of widely shared values and beliefs accepted by everyone

working within an organization. It involves a common understanding of what is right and wrong in

the course of business dealings and outlines the methods of resolving ethical problems encountered

at work. If an ethical culture forms the basis upon which everyone of a company makes business

decisions, the company's profitability can be enhanced and overall operational efficiency can be

improved.

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Need of Ethics in Current Scenario

Many organizations now implement the code of ethics in their company polices, which

they implement during induction and regular training. A Code of Ethics "is generally a more blanket

statement of values and beliefs that defines the organization or group" (Brandl and Maguire). It is

primarily for the following areas: Company's assets, funds and records.

lConflict of interest.

lManagement and employee practices.

lInformation on competition.

Following are a few ethical business practices that should be followed to build an honest

reputation and ensure smooth running of the organization.

Investors - Ensuring safety of their money and timely payment of interest.

Employees - Provision of fair opportunities in promotions and training, good working conditions and

timely payment of salaries.

Customers - Complete information of the services and product should be made available. Personal

information of the customers should not be used for personal gain.

Competition - Unscrupulous tactics and methods should be avoided while handling

competitors.

Government - Rules and regulations regarding taxes, duties, restrictive and monopolistic trade

practices and unlawful activities like corruption and bribing should be adhered to.

Environment - Polluting industries should ensure compliance with the government norms regarding air,

water and noise pollution.

For a company to develop an ethical culture, a long term commitment from top management

is required. This can be achieved by launching a well planned ethics training programme for staff at

all levels. Even though a comprehensive company code of conduct and an elaborate system of

controls are in place, appropriate training is also essential to the effective ethical development of

staff because it helps in:

lIncreasing all directors and employees understanding of the relevant legal requirements.

lEnabling them to understand the company's ethical standards and the management's

determination to include ethics as an integral part of the business practice to guard against

corruption and fraud.

lEnhancing their awareness of the ethical dilemmas that they may come across in the

workplace.

lEquipping them with the necessary analytical skills to handle the dilemmas properly.

lDrawing the management's attention to early warning signals of malpractice and relevant

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preventive measures.

A code of ethics in business is just as important as a sound marketing place a solid

financial strategy, and an organized business plan.

Objectives

A code of ethics must encapsulate the beliefs and values of the organization. Those beliefs

and values should become internalized by all employees and used regularly in all business

practices. Owners of businesses that routinely engage in unethical practices cannot help but pass

those values and principles along to the other people working in the business. Small businesses

suffer even more, because unethical behaviour and actions are easier for customers to take notice

of. When customers come to know about unethics of some business person then he goes

somewhere else.

Code of ethics varies among businesses and also from one country to another. When a

business grows large enough to expand its operations into other countries, it is critical to hire local

talent to assist in training existing personnel with regard to the integrity, understanding, responsibility,

and cultural norms of the country where the new operation is located. All employees must be treated

equally and any issues of inequality must be dealt with quickness.

Today, more than ever before, consumers pay a great deal of attention to corporate

governance and proper behaviour of businesses and their owners. Because the marketplace is

flooded with numerous variations of the same businesses, promises must be fulfilled and the price

and quality of products must be equal to what is advertised or another business will step into

deliver, therefore, a code of ethics � whether unarticulated or formally documented is vital.

A code of ethics that is both defined and acted upon is part of the business culture of

every successful business, and must become the mantra of every business owner. Growing a

flourishing business through the use of sound ethical principles will reap not only the benefits of

growth and prosperity, but also the satisfaction of being able to sleep soundly at night.

Strategies Needed to Perform

Cross boundary transactions have grown rapidly in the last decade. Following China's

accession to the World Trade Organization, vast business opportunities are emerging and cross

boundary transactions are racing to a new height. Under "one country two systems" principle,

Hong Kong business people need to be acquainted with the legal provision both Hong Kong and

the Mainland in order to avoid disputes, litigation and contravention of laws and regulations.

Both the Prevention of Bribery Ordinance (PBO) in Hong Kong and the Criminal Law of

the People's Republic of China (PRC) prohibit offering and accepting bribes in connection with

commercial transactions. In Hong Kong an agent abuses his official position by soliciting or accepting

an advantage in relation to his principal's permission will breach the PBO. Any person who offers

an advantage to an agent for the latter's showing favours, in his official capacity will also be guilty. In

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the Mainland, "corruption" and "bribery" are different offences under the Criminal Law of the PRC.

"Corruption" refers to any act whereby a person takes advantage of his office to appropriate,

steal, swindle or use other illegal means to acquire public money or property, whereas accepting

a bribe is the act of taking advantage of one's office to solicit or accept money or property from

another person illegally so seek benefits for such a person. While it has become a trend for Hong

Kong companies to base their operations in the Mainland to tap the advantages of cost and market

potential, managers are facing the challenges of monitoring operations from afar. The integrity and

experience of outpost staff are of vast importance. Management should monitor staff are of vast

importance. Management should monitor staff working across the boundary to detect any indication

of wrongdoing. Conducting random checks and constantly collecting feedback from the suppliers

will definitely be useful in detecting fraud or corruption.

Steps from Management Side

To drive along the business highways successfully business leaders should abide by the

laws and regulations when doing business, including the PBO and specific codes laid down by

relevant professional bodies and regulators. As those holding on the wheel, directors should also

assume the responsibilities to lead with integrity and put business ethics into practice.

A comprehensive ethics programme that can plug hidden threats and minimize corruption

risks comprises their main components. A summary of these three components is given below.

Set Up a Code of Conduct

A well established company code of conduct can help prevent corruption and fraud, as well

as build a company's reputation. Under the PBO, the principal of a commercial firm has the right

to decide whether a director or a staff member is allowed to accept an advantage in relation to the

company's business. The company's policy on the acceptance of advantages serves as legitimate

authority for a principal's approval. It is therefore your responsibility to lay down clear policies regarding

the scope and circumstances in which directors and employees are allowed to accept advantages

in relation to their official capacity. As a responsible manager, a person should ensure that the

code adopted by the company is enforceable, practical up to date and set in accordance with the

fair competition principle.

Strengthen System of Controls

Prudent system controls not only allow business to conduct in an orderly and controlled

manner, but also help detect and deter irregularities, thereby allowing the management to take swift

remedial measures at an early stage. Corruption loopholes in procurement, sales and marketing,

accounting, personnel and staff administration, inventory and stock control, and their corresponding

preventive measures are provide. Ten general principles that can be used by a company to evaluate the

adequacy of its internal control measures are:

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lClear company policies.

lClear work procedures.

lClear job responsibilities.

lSegregation of duties and functions.

lAdequate safeguards against tempering with sensitive information.

lEffective staff supervision.

lIndependent and active audit function.

lChannels for complaints and review.

lContinuous monitoring and review.

lPromoting a company wide ethical culture. Culture

Foster Ethical Culture

If an ethical culture forms the basis upon which everyone of a company makes business

decisions, the company's profitability can be enhanced and overall operational efficiency can be

improved. To develop an ethical corporate culture, a well planned ethics training programme for staff

at all levels should be launched. The purposes are to strengthen staff's knowledge on the basic legal

requirements, equip staff with the skills to handle ethical dilemmas that they may come across in the

workplace and develop a sense of ethics throughout the company. Management's awareness and

attention to early warning signals of malpractice can also be enhanced.

Benefits of Good Business Ethics

lIncrease in the social image.

lIncrease in production rate.

lIncrease in mutual understanding and trust among employees.

lIncrease in business stability.

lIncrease in business effectiveness in the market.

lIncrease in customers.

Positive Impact on Human Resource

For a business to achieve long term profits customer relationship is of utmost importance. To

gain a long � term relationship with customers and achieve customer return for the business the

business needs to be based on ethics. The trustworthiness of a business, its customer service, its

customer care, its way of dealing with customers and its urge to retain their old customers, is a part of

the business ethics.

95


Most of the people are concerned about making money for the business. But seldom bother

to base business on ethics. At times, ethical duties of businessman and project managers could be

more abiding than even the business laws. Ethics is a far reaching concept and goes beyond the idea

of making money legally. Ethical values are way ahead of earning money. People who seek motivation

behind being ethical should understand that they are ethical by definition. Ethics is an integral part of

running a business and hence ethical values accompany business by default. Without following

certain ideals in business, one cannot become successful. Success that is attained without a

foundation of strong ethics is bound to be short lived.

The benefits given by the business organization should not be sued in an unfair manner.

The use of company resources for personal benefits and taking an undue advantage of business

resources is completely unethical. Using the wealth of the business for personal reasons is not

ethical. Using company funds for personal reasons is unethical. A thoughtful and a careful utilization of

company resources is a part of business ethics. Ethics is a vigilant and a prudent use of resources.

Accepting bribes or favouring important accepting bribes or favouring important clients is against

business ethics. The clients is against business is not just to maximize profits. It is rather to cater to the

needs of society.

Experts in business management and researchers have endorsed the need for businessmen

and company professionals to study ethics. They have asserted the importance of founding business

on ethical values and following them. They have urged management professionals to adhere to

ethics and accept it as a part of business. Ethics remain being important in business and strong

ethical values shall take the business a long way.

Recommendations

The fundamental rule is therefore to avoid any conflict of interest situation as far as possible

or in cases where such conflicts cannot be avoided a declaration should be made with transparency

and gaining public confidence. Whenever in doubt, the one involved in a conflict of interest should

declare the interest to demonstrate his impartiality. Management should be vigilant and give clear

guidelines on which kinds of conflicts need to be decelerated and set proper procedures on dealing

with the declarations.

A comprehensive training programme should include the following areas:

lLegal requirements regarding the legislation governing corruption and fraud.

lConduct requirements as expected by the company of its staff.

lSkills in handling situations of ethical dilemmas at work.

lPreventive measures for unethical practices, e.g. how to strengthen a system of controls and

develop skills in managing staff integrity.

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Stumpf (Eds.), Handbook on Responsible Leadership and Governance in Global issues, Northampton, MA:

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initiative. In T. Piper, M. Gentile & S.D. Parks (Eds.), Can Ethics Be Taught? (pp. 1-12). Boston: Harvard Business

School.

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71-81.

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Barnes, M.C. and Keleher, M. (2006), Ethics in Conflict. Business Communication Quarterly, 69 (2), 144-157.

97


*Deepa Kumari

A foreign exchange transaction is an agreement between a buyer and a seller that a given amount of one currency is to be delivered at a specified rate for some other currency. The exchange rate of one currency versus the other is influenced by numerous fundamental and technical factors. These include relative supply and demand of the two currencies, economic performance, outlook for inflation, interest rate differentials, capital flows, technical support and resistance levels and so on. In the foreign exchange (forex) market, currency valuations move up and down as a result of many factors, including interest rates, supply and demand, economic growth and political conditions. Generally speaking, the more dependent a country is on a primary domestic industry, the stronger the correlation between the national currency and the industry's commodity prices. In general, there is no uniform rule for determining what commodities a given currency will be correlated with and how strong that correlation will be? However, some currencies provide good examples of commodity-forex relationships.

India's share of world trade is less than two per cent and makes up less than six per cent of the global economy. Yet it accounts for 25 per cent of the world's gold demand. Indeed, surging gold demand is fast becoming a problem for policy makers as imports of the yellow metal are beginning to weigh down the economy stock markets have remained out of reach for most of our population. Many of our fellow citizens are unaware of the stock market. There are many intricacies in dealing with our stock market and hence it is an unviable option for most of our citizens. Though stock markets have given better returns, Gold wins in terms of the consistency. If we draw a graph between stock and Gold, the growth of Gold will be more linear and stock market would be filled with crests and troughs.

R.B.I has to carefully assess taking a leap of faith call on the forward-looking inflation numbers and proceed with measures which ensure better liquidity at attractive cost. It is also necessary to ensure that the measure lead to effective monetary policy transmission. In the past, the R.B.I has shown a strong resolve in controlling inflation; now, with inflation beginning to get under control, it needs to show a similar resolve in boosting the economic growth to help India seize the momentum.

Introduction

Globally, operations in the foreign exchange market started in a major way after the breakdown of the Bretton Woods system in 1971, which also marked the beginning of floating exchange rate regimes in several countries. Over the years, foreign exchange market has emerged as the largest market. The foreign exchange market provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of exchange between currencies is determined, and foreign exchange transactions are physically completed. A foreign exchange transaction is an agreement between a buyer and a seller that a given amount of one currency is to be delivered at a specified rate for some other currency.

Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by numerous fundamental and technical factors. These include relative supply and demand of the two currencies, economic performance, outlook for inflation, interest rate differentials, capital flows, technical support and resistance levels, and so on. In general terms, a weaker currency will stimulate exports and make imports more expensive, thereby decreasing a nation's trade deficit (or increasing surplus) over time. Conversely, a significantly stronger currency can reduce export competitiveness and make imports cheaper, which can cause the trade deficit to widen further, eventually weakening the currency in a self-adjusting mechanism. India imports more goods (in value terms) than exports, which

Foreign Exchange Market and its Impact on Indian Economy

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results in a huge imbalance in trade, or what is called trade deficit. In 2011-12, India received foreign direct investment of more than $30bn, in addition to a net flow of $18bn from foreign institutional investors in stocks and bonds. But uncertainty about India's commitment to economic reforms, retrospective taxes, and policy paralysis within the government have forced foreigners to either postpone their investment decisions, or take money out of Indian stock markets. In this scenario, most foreigners as well as Indians tend to take money abroad, or keep it away from India.

Objectives of the Study

lTo find out the domestic reasons responsible for the decline of rupee during 2012.

lTo analyse the relationship among crude oil prices, gold prices and inflation with foreign

exchange.

lTo study the relationship between Indian rupee and dollar.

lTo evaluate the measures taken by RBI in this regard

Review of Literature

Subarna K. Samanta and Ali H. M. Zadeh (2012) examined the co-movements of selected

macro-variables (gold price, stock price, real exchange rate and the crude oil price) based on 21 years

data using econometric models for the periods from January 1989 to September 2009. The study

exposes that there is a co-integrated relationship between the variables.

S. Kaliyamoorthy and S. Parithi (2012) have made a study to examine the relationship between

gold price and stock market for the period from June 2009 to June 2010. They prove that there is no

relationship with the stock market and gold price and stock market is not a ground for rising gold price.

Le Thai-Ha et al (2011) have made a study to investigate the relationships between the prices of

two strategic commodities, that is, gold and oil in terms of index of US dollar by using monthly data from

January, 1986 to April, 2011 with the application of financial econometrics. Empirical results of the study

showed that there is a long-run relationship existing between the prices of oil and gold and the oil price

can be used to predict the gold price.

The conclusive sum of this review is that there is some contradictory view of different

researches made by different people.The subsistence of crude oil price, gold price and stock price

indices of stock market in India are hardly available.Therefore, the present study aspires to observe the

changes or increase in daily crude oil price, gold price and its impact on sensex in India.

Analysis and Findings

Oil and gold prices affect the currency exchange rate: In the foreign exchange (forex)

market, currency valuations move up and down due to many factors, including interest rates, supply and

demand, economic growth and political conditions. Generally speaking, the more dependent a country

is on a primary domestic industry, the stronger the correlation is between the national currency and the

industry's commodity prices. In general, there is no uniform rule for determining what commodities a

given currency will be correlated with and how strong that correlation will be. However, some currencies

provide good examples of commodity forex relationships. For example, if Canadian dollar is positively

correlated to the price of oil. Therefore, as the price of oil goes up, the Canadian dollar tends to

appreciate against other major currencies. This is due to the fact that Canada is a net oil exporter; when

oil prices are high, Canada tends to reap greater revenues from its oil exports, giving the Canadian dollar

99


a boost on the foreign exchange market. Another good example comes from the Australian dollar, which

is positively correlated with gold. Because Australia is one of the world's biggest gold producers, its

dollar tends to move in unison with price changes in gold bullion. Thus, when gold prices rise

significantly, the Australian dollar will also be expected to appreciate against other major currencies.

The gold rush: India legally imports about 700 tonnes of gold a year and we don't have

estimates of smuggled gold. India's share of world trade is less than two per cent and makes up less

than six per cent of the global economy. Yet it accounts for 25 per cent of the world's gold demand.

Indeed, surging gold demand is fast becoming a problem for policy makers as imports of the yellow

metal are beginning to weigh down the economy.

Traditionally, Indians always have an affinity towards Gold Jewellery. In the recent years, we

have started moving from the concept of Gold Consumption (buying for Jewellery) towards Gold

Investment (buying for future benefits). In 2011-2012, 56% of Gold Imports happened through Banks. It

is said that Gold has been purchased more due to the high returns it offers. But if we compare the returns

between the period of April 2003 and March 2013, Rs.1000 investment would have given Rs. 5267 in

Gold, Rs. 6158 in Sensex, Rs. 5746 in Nifty (Bank deposit at 8% would have given Rs. 2337). So,

comparatively stock market has given more benefits. However recently gold as a commodity has lost its

sheen as the price correction and led to the loss of interest by investors in the glittering metal since mid-

March 2014.

Stock markets have remained out of reach for most of our population. Many of our fellow

citizens are unaware of the stock market. There are many intricacies in dealing with our stock market and

hence it is an unviable option for most of our citizens. Though stock markets have given better returns,

Gold wins in terms of the consistency. If we draw a graph between stock and Gold, the growth of Gold

will be more linear and stock market would be filled with crests and troughs.

Gold is considered more liquid compared to Real estate. It also doesn't require huge

investment. Typically, it is said Peasants are the largest consumers of Gold. It protects them from

Inflation. It is said to the best Hedge from uncertainties. It has been found that for every 1 % increase in

income, gold consumption increases by 1.5%. India's Golden period also happened between 2003 and

2010 when the GDP growth was spectacular and the per capita income increased tremendously. Also

the MNREGA scheme increased the income of Rural masses and their primary investment turned out to

be Gold. But the dark side of the whole story is that such huge demand for gold has resulted into:

Rising import bill: Gold is India's second most expensive import after crude oil. While oil

accounts for 35 per cent of the import bill, gold imports contribute 11 per cent to India's trade bill. Crude

is crucial for the Indian economy, but gold is a drain on resources. In simple words, the government has

to spend precious foreign exchange for a commodity that is of little industrial value. Terming gold

imports as "wasteful expenditure", Rajiv Takru, financial services secretary, said that India could not

afford the current levels of forex spending on gold imports.

Widening trade deficit: India is the world's biggest buyer of bullion. Gold imports by India

surged to 162 tonnes in May -- more than twice the monthly average in the record year of 2011. Rising

imports lead to current account deficit (exports minus imports), which is usually accompanied by

depletion in foreign-exchange assets. The Reserve Bank has described high CAD as the biggest risk to

Indian economy.

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Black money leads to inflation: There is a growing concern about the volume of �Black'

Money� or unaccounted money circulating in the system. Real estate has been a favourite parking

ground for unaccounted income because the large ticket size of assets allows for hefty lots of 'Black'

funds to be absorbed in each transaction.The real estate sector runs a well-oiled layered black money

system beginning from land transactions to the final stage of sale of apartments. Since consumers pay

in cash at the construction stage, vendors too are paid in cash. This helps them hide their real income.

But that is only the tip of the iceberg. The volume of Black money in real estate is purely because of the

sector size and informal structure, it is difficult to quantify.If the black money component can be brought

back into the national mainstream,our gross domestic product (GDP) growth rates would be much

higher.

RBI Measures

RBI Governor Raghuram Rajan kept key rates unchanged till december 2014 despite

rising pressure from the government and industry to soften rates in a bid to boost the economy.

However, he struck dovish tone, saying that rate cut can be expected early next year if the current

inflation trend continues. Following are some of the reasons that explore why the RBI did not cut rates:

lThe recent decline in inflation is partly due to the base effect but according to economists this is

likely to reverse early next year. Also, the Ministry of Agriculture has forecasted a lower kharif

output for cereals, pulses and oilseeds which could put some upward bias on inflation in the

coming months.

lSupply side issues in agriculture have still not been sorted out.

lInflation expectations still remain elevated.

lInterest rate cuts in India will reduce the interest rate differential with the US, which is expected

to raise rates next year, which might lead to capital outflows.

lAlthough crude oil prices have crashed from a peak of $115 to $70.15, approximately down

40%, rupee has depreciated from a low of 58.3350 to 62.0325, depreciating by some 6%,

negating some good effect of crashing of crude oil price as far as Indian crude oil imports are

concerned. There is strong likelihood that the dollar will appreciate more in the coming months

in light of interest rate hike to be implemented by the Fed probably in the second half of CY15.

Reasons for Rates Cut

The Reserve Bank of India reduced its repo interest rate by 25 basis points to 7.75 per cent in

a surprise move on 15 January 2015 making its first reduction since May 2013, probably because

inflation showed signs of slowing and the government was making efforts to curtail the fiscal deficit.

Cheering the move, stock markets zoomed and rupee appreciated. The move will bring relief to

borrowers and industry, boosting consumer demand. With the RBI reducing the benchmark repo rate,

the level at which it lends to commercial banks, home and auto loans are expected to get cheaper.

United Bank of India has already announced a reduction in base rate by 0.25 per cent from February 1.

Other banks are expected to cut their lending rates by 0.10 per cent to 0.25 per cent. Finance

Minister Arun Jaitley hailed the decision of RBI to cut the interest rate, saying it is positive for the Indian

economy and will certainly help in reviving the investment cycle the government is trying to restore.

Deputy Finance Minister Jayant Sinha said rate cut would mark an "inflection point" after a period of high

interest rates. Mr Sinha said the RBI decision was driven by declines in both actual and expected

inflation, and not by any concerns that India's economic recovery was losing traction. He also said that

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"The economy is picking up momentum,� Further cuts in interest in interest rate will depend upon

inflation and fiscal consolidation. Analysts expect the RBI to keep its lending rates steady at its next

month policy review. Sajjid Chinoy, Indian economist at JP Morgan, said Dr Rajan is likely to wait for

the government's budget before taking further monetary easing measures.

Conclusion

Currency moves can have a wide ranging impact not just on a domestic economy, but also on

the global one. Stock markets have remained out of reach for most of our population. Many of our fellow

citizens are unaware of the stock market. There are many intricacies in dealing with our stock market and

hence it is an unviable option for most of our citizens. Though stock markets have given better returns,

Gold wins in terms of the consistency. If we draw a graph between stock and Gold, the growth of Gold

will be more linear and stock market would be filled with crests and troughs. Investors can use such

moves to their advantage by investing in overseas or in U.S multinationals when the greenback is weak.

It may be best to hedge this risk through many hedging instruments available. Foreign capital will tend to

flow into countries that have strong governments, dynamic economics and stable curriencies. A nation

needs to have a relatively stable currency to attract investment capital from foreign investors. Rajan's

move to cut the repo rate by 0.25% is possibly taking into account the broader impact on India of a

potential global recession in 2015.Rupee ends higher at 62.06 as R.B.I cuts rates.

The recently announced reduction in the repo rate was a much awaited move. To quote Martin

Feldstein �Just as I want sound pilots on the planes that I fly, when it comes to monetary policy, I want to

think that there is someone with sound judgement at the controls.� The massive fall in global oil prices,

though surprising, augurs well for India. Initially, oil prices were expected to bounce back sharply. Now,

given the demand supply mismatch and growth concerns of the majority of the developed economies, it

seems increasingly likely that oil prices will remain subdued for a reasonable length of time. Most

commodity indices have drifted lower in the last six month (June 2014-Dec 2014). Against this backdrop

most of India's macroeconomic parameters, be it inflation, fiscal deficit or current account balance, will

look better for the current year and perhaps the one following. Growth in India is still languishing at lower

levels. Consumers are understandably cautious, having seen a difficult period of sustained high inflation.

R.B.I has to carefully assess taking a leap of faith call on the forward-looking inflation numbers

and proceed with measures which ensure better liquidity at attractive cost. It is also necessary to ensure

that the measure lead to effective monetary policy transmission. In the past, the R.B.I has shown a

strong resolve in controlling inflation; now,with inflation beginning to get under control, it needs to show a

similar resolve in boosting the economic growth to help India seize the momentum.

References

l

lBusiness Standard, 2015-01-28

lwww.NDTV Profit.com

lDainik Jagran newspaper, 15 Jan, 2015.

lJournals, web portal articles etc.

www.investopedia.com

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