Overview of the Indian Corporate Sector: 1989-2002

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper uses firm-level data to examine the performance of India's nonfinancial corporate sector since 1989 and evaluate its financial vulnerabilities. While promising trends in liquidity, profitability, and leverage of the sector emerged in the early 1990s, they experienced a reversal after 1996. Nonetheless, most indicators were still at comfortable levels, and there is evidence of improvement in 2002, the last year in our sample. However, a number of firms still face problems servicing their debt obligations, posing a risk to lenders. In particular, the aggregate interest coverage of the corporate sector indicates that potential nonperforming loans of the corporate sector remain high. This underscores the need for close monitoring of the corporate sector in the future.

Audit Quality, Earnings Management, and Cost of Equity Capital: Evidence from India

“…The result has been a higher level of information asymmetry and mistrust in the corporate sector (Goswami, ; Ghosh, ). This situation has prompted external auditors to take on a more effective role in providing high‐quality assurance services to Indian corporations with a better governance structure (Topalova, ; Standard & Poor's, ). The value from quality auditing arises because external auditors can put constraints on managerial opportunistic behaviour and reporting discretion and, therefore, reduce information risk (Chen et al , ).…”

“…Companies are required to disclose information on the equity shareholdings of individual promoters, financial institutions, foreign institutional investors, foreign holdings, other corporate bodies, top 50 shareholders, other shareholders and the remuneration of company officers (Topalova, )…”

Law, Finance, and Politics: The Case of India

“…India is, compared to similarly-situated developing countries, said to be relatively weak in labor-intensive manufacturing, strong in skill-intensive manufacturing, and strong in services and high-tech sectors (Topalova 2004;Kochhar et al 2006). To a large extent, this is thought to flow from policies adopted during the socialist era of central planning, following independence in 1947 until the early 1980s.…”

“…In line with the relative success of India's equity markets, as compared to corporate bond markets, both aggregate and firmlevel debt-to-equity levels in India's corporate sector have decreased during the period since liberalization (Shirai 2004;Topalova 2004;Thomas 2006). Figure 2 shows the liabilities (historic cost) of Indian firms during the period of 1990-2001.…”

India: Selected Issues

“…In addition, Prowess has more detailed data fields, such as foreign borrowing, than CVU. Prowess is frequently used in the existing studies on India's financial systems, including Topalova (2004), Love and Martinez Peria (2005), Allen, et al (2006), and Allen, et al (2007). mostly represents domestic private sector companies (either independent or in a business group), although foreign and government owned companies are much larger on average than private sector companies by sales.…”