Summer Training, Report

On STUDY OF CAPITAL STRUCTURE

Submitted to:

Table of contents
Acknowledgement Certificate Preface Abstract INTRO TO RANBAXY LABORATORIES LTD Company Profile ision !perating "oint ent#res and $#bsidies !b&ecti'es ario#s di'isions of )anba*y ,ntro of )anba*y Plant in ,ndia and 'ario#s deptsProd#ct )e'iew 08-10 10-11 12-1% 1(-18 1+-20 12-23 24-2( 02 03 04 07

INTRO TO CAPITAL STR CT RE T!EORY AND ANALYSIS ,ntrod#ction .iterat#re of re'iew on Capital $tr#ct#re /et0odology 10eory and Analysis !ptimal Capital $tr#ct#re for )anba*y Capital e*pendit#re2 an o'er'iew .atest balance s0eet and capital str#ct#re of )anba*y )ecommendations and $#ggestions for ,nd#stry Concl#sion 3iblograp0y 27-28 2+ 30 31-38 3+-%8 %+-80 81-82 82-+0 +1-+2 +3

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A3$1)AC1
A pro&ect work is a mandatory re4#irement for t0e 3#siness /anagement Programme- 10is type of st#dy aims at e*posing t0e yo#ng prospecti'e e*ec#ti'e to t0e act#al b#siness world10is pro&ect gi'es me knowledge abo#t t0e capital str#ct#re and t0eory analysis-5inancing decisions in'ol'e raising f#nds for t0e firm,t is concerned wit0 form#lation and designing of capital str#ct#re or le'erage- 10e most cr#cial decision of any company is in'ol'ed in t0e form#lation of its appropriate capital str#ct#re- 10e best design or str#ct#re of t0e capital of a company 0elps t0e management to ac0ie'e its #ltimate ob&ecti'es of minimising o'erall cost of capital6 ma*imising profitability and also ma*imising t0e 'al#e of t0e firmorgani7ation- ,t is 'ery effecti'e way to &#dge a company8s cas0 flow prospects6 as cas0 is like blood life for any company10e report initially begins wit0 t0e company profile6 followed by t0e detailed analysis of company6 like b#sinesses of t0e company6 prod#cts offered by t0e company6 financials of t0e company6 etc 10e report in'ol'es a lot of researc0 to #nderstand w0at e*actly capital str#ct#re of t0e company s0o#ld be-t0ats 6 w0y companies re4#ire appropriate capital str#ct#re- T"e #u$#ose is to de%elo# an action #lan t"at c$eates suc" a ca#ital st$uctu$e t"at &ill u#'$ades and standa$di(e t"e )ualit* of business anal*sis+

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I TRODUCTIO

TO RA !A"Y

CO,PANY PRO-ILE
.A company empowered by one mission to place itself on the world map. An enterprise propelled by one force-that synergizes its energies to charter unexplored markets. Organizations fuelled by one dream-to transform competition into opportunity. )anba*y .aboratories .td- was incorporated in "#ne 1+(16 in t0e name of /9$ .:P,1,1 )A;3A<= .A3!)A1!),:$ .1> and it commenced its b#siness in /A)C? 1+(26 in tec0nical and financial collaboration wit0 an international company named .:P1,1 $PA6 /,.A;6 ,1A.=)anba*y .aboratories P't- .td- merged wit0 @.eptit )anba*y .aboratories P't.td-A in 1+(2 )anba*y and company also merged wit0 t0is company in 1+((10e collaboration arrangement wit0 /9$ .:P1,1 was terminated in 1+((B after w0ic0 ,ndian nationals ac4#ired t0e entire s0are capital of t0e company-

10erefore t0e word .eptit was remo'ed from t0e name of t0e company- 10e name is known as )A;3A<= .A3!)A1!),:$ .,/,1:>- ,n 1+73 t0e company iss#ed s0ares to t0e general p#blic and became a f#ll fledged PC3.,C .,/,1:> C!/PA;=1oday6 )anba*y 0as emerged as a .eading P0armace#tical Company on t0e ,ndian firmament6 wit0 t0e second largest market s0are and en&oys an en'iable rep#tation for its 0ig0 standard of et0ics and 4#ality aro#nd its core strengt0 of anti-infecti'e6 it 0as prod#ced new brands in emerging t0erape#tic areas like cardio'asc#lar6 central ner'o#s
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system and n#tritional- s#pporting t0is e*pansion6 t0e company 0as in'ested in world class man#fact#ring infrastr#ct#re t0at le'erages ,ndia8s comparati'e cost ad'antage and skilled manpower6 w0ile deli'ering international 4#ality10e company8s dri'e for ,nternationalism is g#ided by t0e well planned brand strategy t0at co'ers some of t0e world emerging markets like C0ina6 cis6 Central :#rope and .atin America - ,ts position today is in leag#e of t0e 1op 1en P0armace#tical companies of t0ree world an decent ranking as t0e ele'ent0 largest company in t0e international generics space is t0e reso#nding endorsement of its strategic mind,t is clear t0at for a long time6 t0e dominant s0are of re'en#es of t0e company wo#ld contin#e to come from t0e e'er e*panding global generics market- ?ence t0e intent of )anba*y mission is to ac0ie'e a s#stained growt0 rate t0ro#g0 t0e contin#o#s p#rs#it of inno'ation p0ase one trials for per'asion6 a compo#nd for treating prost0etic males 0a'e been completed- P0ase 1 trials wit0 clafrinast6 an ast0ma compo#nd is an important step towards researc0 based 'al#e creation10is company also 0ad s#ccess wit0 Ciploflo*acine6 an ingenio#s form6 created t0ro#g0 t0e no'el dr#g deli'ery systems researc0- As t0e demand of t0e b#lk dr#gs inside t0e co#ntry and abroad was increasingly rapidly a new6 plant was set #p at 1oansa near )opar in 1+87- 10is was a 0ig0er capacity plant designed to cater to t0e present and f#t#re needs6 initially antibiotics like Ampicillin6 1ri0ydrate and >o*ycycline were man#fact#red.ater6 on t0e ot0er dr#gs like Cep0ale*in mono0ydrate and )anitidine were also prepared- 10e plant at 1oansa was designed to meet t0e stringent standards set by t0e 5ood and >r#g Administration D5>AE of C-$-A- 10is plant 0as been appro'ed by 5>A and t0is will open #p American and ot0er newer markets for )anba*y8s prod#cts At present )anba*y 0a'e fo#r plants for t0e man#fact#re of b#lk dr#gs two at /o0ali6 one at >ewas D/-PE A;> Anot0er at 1oansa near )!PA)- At present6 )anba*y is t0e second most ,ndian company engaged in t0e man#fact#ring of P0armace#ticals6 3#lk >r#gs and 5ine C0emicals)A;3A<=8s 'ast range of 0ig0ly p#re laboratory reagent and c0emicals en&oy a place of pride in t0e market- ,1 trends6 0as reb#ilt As a step towards le'eraging information for 'al#e creation #sing its information backbone aro#nd an :)P application6 along t0e foc#s on reengineering se'eral b#siness processes aro#nd t0e internet and 0as p#tting place b#siness sol#tions t0at c0allenge e*isting ways of doing 3#siness- 10e #ndying spirit of t0e company8s 0#man assets and t0eir intensi'e competiti'e and entreprene#rial energy 0as played a
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great part in transforming t0e company into a m#ltic#lt#ral and m#ltiracial team1oday6 )anba*y is t0e largest e*porter acco#nting for 12F of t0e ind#stry e*ports p0armace#tical s#bstance and dosages forms to o'er %0 co#ntries wit0 t0e internationals sales comprising of 4%F of t0e total t#rno'er-

/ISION: 0AR DA

>#ring t0e year 20026 t0e company 0as e'ol'ed a 10-year 'ision till 20126 for s#staining significant growt0 consistent wit0 its mission to be an international researc0 based P0armace#tical Company6 #nder t0e r#bric G/ision 0a$uda86 wit0 increasing emp0asis on No%el D$u' Deli%e$* S*stems Resea$c" 1DDR2,n licensing and o#t licensing6 relations0ip wit0 ot0er important p0armace#tical entities6 e*pansion of man#fact#ring facilities bot0 in ,ndia and strategic o'erseas locations6 re'amping of organi7ational str#ct#res to cater to t0e wider and more dispersed span of operations6 and streamlining and standardi7ing t0e b#siness processes t0ro#g0 o#t t0e global organi7ation6 are ot0er areas t0at recei'e foc#s and attention of management on priorityGJ-IMT,MOHALI of 94 ANUJ KUMAR SRIVASTAVA Page $

,ission o become a !esearch based "nternational pharmaceutical company /ision34564 Achie#e significant business in $roprietary prescription products %y &'(& )ith a strong presence in de#eloped markets

As#i$ations34564 Aspire to be a*+ billion company %ecome a op + global generics player ,ignificant income from $roprietary products

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OPERATIN0 7OINT /ENT RES AND S BSIDIARIES

BRA8IL C!INA E0YPT 0ER,ANY !ON0 :ON0 INDIA : : : : : : Ranba9* S+P+ ,edicamentos Ltd+ Ranba9* 10uan'("ou C"ina2 Ltd+ Ranba9* E'*#t Ltd+ Basics 0mb !+ Ranba9* 1!on' :on'2 Ltd+ Re9cel #"a$maceuticals Ltd+; Solus #"a$maceuticals Ltd+; /id*ut T$a%el Se$%ices ltd+ IRELAND ,ALAYSIA NET!ERLANDS NI0ERIA PANA,A POLAND SO T! A-RICA T!AILAND : : : : : : : : Ranba9* I$eland Ltd+ Ranba9* 1,ala*sia2 Sdn+ B"d+ Ranba9* P"a$maceuticals B+/+ Ranba9* Ni'e$ia Ltd+ Ranba9* Panama SA+ Ranba9* Poland S#+ 8o+ Ranba9* 1SA2 1Pt*+2 Ltd+ nic"em #"a$maceuticals LTD+; nic"em Dist$ibuto$s Ltd+ Pa$t; Ranba9* nic"em CO+Ltd+ +:
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Ranba9* 1 :2 Ltd
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SA

Ranba9* #"a$maceuticals Inc+ O"m Labo$ato$ies Inc+; Ranba9* Sc"ein P"a$ma; LLC

/IETNA,

Ranba9* /ietnam Com#an* Ltd-

ALLIED B SINESSES
Ranba9* Animal !ealt" 10e Animal ?ealt0 di'ision saw an enco#raging growt0 despite t0e pre'ailing poor market conditions- 10e di'ision grew at twice t0e growt0 rate recorded in t0e ind#stry- !n t0e basis of 0a'ing a 'ast dome satiated animal pop#lation6 t0e li'estock6 po#ltry b#siness and pets b#siness are among t0e fastest growing sectors in ,ndia- A 'ast infrastr#ct#re of 'eterinary colleges6 agric#lt#ral instit#tes6 tec0nologists and researc0ers are 0elping farmers to so#rce 0ealt0y6 cost effecti'e prod#cts- ,n con&#nction wit0 t0e present scenario6 t0e A?C di'ision of )anba*y .aboratories .imited 0as introd#ced se'eral latest generation prod#cts-

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Ranba9* -ine C"emicals Limited 1R-CL2 10e di'ision ranked 4t0 in t0e ind#stry and capt#red 11F market s0are- )A;H:/ is establis0ed as a powerf#l brand6 )5C.Is brand for its range of )eagents is now synonymo#s wit0 e*cellence in reagents and fine c0emicals in t0e co#ntry- 10e foc#s of b#siness remains on de'eloping e*tensi'e c#stomer relationsB en0ancing ser'ice le'els and enric0ing t0e prod#ct mi* wit0 t0e 0elp of a 4#alified and competent marketing and sales team Dia'nostics 10e diagnostics di'ision 0as aggressi'ely foc#sed on market e*pansion acti'ities based on strategy of reliability6 4#ality prod#cts and efficient ser'ice,ntrod#ction of prod#cts in GPoint of Care8 markets 0as e*panded market presence and o'er t0e ne*t 1 J 2 years t0is segment will see considerable e*pansion in line wit0 world trends10e >ade 3e0ring segment 0as increased its installation base by (0F in leading 0ospitals and laboratories- Plans are afoot for t0e introd#ction of more parameters for t0e GPoint of Care8 market and t0e la#nc0 of $pecial C0emistries6 a range of dr#g assays6 pl#s an entry into a#tomated microbiology in bot0 t0e 3ase and >ade 3e0ring b#siness areas-

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10e company 0as also witnessed significant milestones in t0e area of ;o'el >r#g >eli'ery $ystems D;>>$E- 10e company 0as entered into strategic b#siness arrangements wit0 companies s#c0 as 3ayer AK6 Kla*o-Lellcome6 :li-.illy etc- for prod#ction and co-marketing operations- /any inno'ati'e de'elopments 0a'e been taking place in recent times- 10e company8s researc0 team is capable of de'eloping one ;>>$ prod#ct e'ery 12 to 18 mont0s- Also6 two new prod#cts2 )oletra-> and Alti'a->6 will soon be la#nc0ed in ,ndia,n order to e*pand and promote global growt06 t0e company opened se'eral new markets d#ring t0e year6 notably in 3ra7il6 w0ere 2% filings were #ndertaken in a span of 2-3 mont0s10e company 0as planned to b#ild and protect intellect#al property wit0 t0e 0elp of ,PC6 w0ic0 addresses all matters pertaining to patents- CMA s#per'ises t0e implementation of standard operating proced#res D$!PE and ens#res compliance to corporate 4#ality ass#rance policy in all tec0nological operations of t0e organi7ation- 10e company is committed to in'est (F of t0e sales in ) and > by 20036 of w0ic0 7F of t0e e*pendit#re will be earmarked for researc0 on ;ew >r#g >isco'ery and ;o'el >r#g >eli'ery $ystems- 10ere will be contin#o#s emp0asis on a#gmenting ) and > performance and prod#cti'ity wit0 ad'anced scientific and tec0nological tools/AL ES O- RANBAXY LABORATORIES LI,ITED 1- Ac0ie'ing c#stomer satisfaction is f#ndamental to t0eir b#siness2- Practice dignity and e4#ity in relations0ips and pro'ide opport#nities for people to reali7e t0eir f#ll potential3- :ns#re profitable growt0 and en0ance wealt0 of s0are0olders4- 5oster m#t#ally beneficial relations0ips wit0 all t0eir b#siness partners%- /anage t0eir operations wit0 concern for safety and en'ironment(- 3e a responsible corporate citi7en-

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OB7ECTI/ES 1234%(-

O-

RANBAXY

LABORATORIES

LTD+

1o be a leader in t0e P0armace#tical ind#stry1o be a profitable company wit0 a steady growt0 in earnings1o set an e*ample as a socially responsible company1o di'ersify in 0ealt0 care related areas1o stri'e for e*cellence and contin#o#s impro'ement in all sp0eres1o impro'e t0e 4#ality of life of people by pro'iding better ser'ices and 4#ality prod#cts-

Environment, Health and Safety [EHS] Caring for t0e :n'ironment is a core corporate 'al#e and as a part of t0is commitment- 10e Company en#nciated its :?$ policy in 1++310e Company8s :?$ policy pro'ides for t0e creation of a safe and 0ealt0y workplace and a clean en'ironment for employees and t0e comm#nity- ,t aims at 0ig0er international standards in plant design6 e4#ipment selection6 maintenance and operations- 10e policy seeks to man#fact#re prod#cts safely and in an en'ironmentally responsible manner10e implementation of t0e :?$ Policy is ens#red by instit#tionali7ing a rob#st :?$ /anagement system6 ade4#ately s#pported by well defined organi7ational str#ct#reAs a part of :?$ processes at t0e corporate le'el6 besides laying down g#idelines on systems6 policy and training6 t0e corporate :?$ office monitors compliance6 maintains and disseminates information on laws and reg#lations:?$ performance re'iew meetings are 0eld on reg#lar basis to monitor t0e progress against agreed :?$ impro'ement plans- Close cooperation between all
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#nits and indi'id#als is t0e key to maintaining 0ig0 standards of en'ironment protection and safety in all t0e plants10e key processes at location le'el comprise of reg#lar safety s#r'eillance6 inspections N a#dits6 Permit to work system for operational 9 maintenance safety6 5ire pre'ention N protection acti'ities6 operation of t0e :1P9,ncinerator6 disposal acti'ities related to 0a7ardo#s wastes6 reg#lar monitoring of t0e en'ironment internally and also t0ro#g0 appro'ed laboratories- /ont0ly reports address :?$ initiati'es6 compliance N 'ario#s records #nder t0e stat#tory re4#irement6 training of employees incl#ding contract employees on :?$ awareness6 interaction wit0 t0e residential associations9nearby comm#nity etc-6 celebration of ;ational safety day6 fire day6 :n'ironment day etc- for :?$ awareness among employees10e man#fact#ring facilities for b#lk dr#gs and dosage forms comply wit0 t0e stringent re4#irements of Kood /an#fact#ring Practices DK/PE and Kood .aboratory Practices DK.PE and are appro'ed by ,nternational 0ealt0 and reg#latory Agencies like 5>A - C$A6 /CA J CH6 L?! etc- 10ese practices and appro'als ens#re t0at an effecti'e framework is always in place6 not only for man#fact#re of 0ig0 4#ality prod#cts6 b#t also for effecti'e #se of reso#rces and red#ction of wastes as well as 0ig0 safety N 0ygiene standards)anba*y 0as made significant impro'ements in process safety of t0e e*isting man#fact#ring facilities by pro'iding e*tensi'e instr#mented safety protection systems- 10e intended safety feat#res are incorporated in t0e basic design of t0e new pro&ects,n'estments 0a'e been made on process impro'ements as well as effl#ent treatment plant #p-gradation #sing t0e latest membrane based tec0nology6 m#ltieffect t0ermal e'aporation system and state-of-t0e-art ,ncinerator- 10ese in'estments 0a'e 0elped to red#ce disc0arges of contaminants into t0e en'ironment- Lit0 t0e facilities installed at 1oansa for recycling of t0e treated effl#ent6 t0e site 0as ac0ie'ed t0e stat#s of @7ero disc0arge siteA10e Company also engages wit0 t0e concerned a#t0orities and ind#stry in de'ising responsible laws6 reg#lations and standards and t0#s making safety6 occ#pational 0ealt0 N en'ironmental information and e*pertise a'ailable to its employees and t0e comm#nity at large- )anba*y 0as made :?$ concerns and practices a necessary factor in appraising its employee performance10e Company also accords a 'ery 0ig0 priority to 0ygiene monitoring at work place and 0ealt0 assessment of all employees at site- 10e plant and processes are contin#o#sly #pgraded to impro'e 0ygiene and 0ealt0 standards- ;ecessary training is imparted to t0e employees to en0ance t0eir awareness towards 0ealt0 related matters-

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$afety knowledge of t0e employees is constantly #pdated t0ro#g0 'ario#s e*ternal and in-0o#se training programs6 incl#ding special training programs by o'erseas e*perts N cons#ltants/o'ing #p t0e 'al#e c0ain6 t0e company identified Cons#mer ?ealt0care as its new b#siness area in t0e year 2001- )anba*y Klobal Cons#mer ?ealt0care D)KC?E was la#nc0ed in !ctober 2002 wit0 a portfolio of 4 switc0 brands2 )e'ital6 Pepfi76 Kesdyp N Karlic Pearls- $ince t0ese brands were already pop#lar amongst cons#mers and represented t0e leading common ailment categories like /$ D itamins N /inerals $#pplementE6 t0is portfolio was caref#lly created for t0e introd#ction of )KC? to t0e ,ndian market$#bse4#ently in 20046 )KC? la#nc0ed its first 0erbal range of prod#cts t0ro#g0 ;ew Age ?erbals D;A?E wit0 prod#cts offering remedy in categories of Co#g0 N Cold D!lesan !il N Co#g0 $yr#psE and Appetite $tim#lant D:at :aseE-

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/ARIO S DI/ISIONS O- RANBAXY LABORATORIES LTD+

+ 6+ 4+ <+ =+ >+ ?+ @+ A+ B+

C"emical Di%ision Dia'nostic Di%ision Stan ca$e Di%ision Cu$$adia Di%ision Inte$national Di%ision P"a$maceutical Di%ision Tec"nical Di%ision Co$#o$ate Di%ision Animal !ealt" Ca$e Di%ision

DI/ISIONS IN /ARIO S 0EO0RAP!ICAL AREAS 6+ 4+ <+ =+ India and ,iddle East Eu$o#e; CIS and Af$ica Asia Pacific and Latin Ame$ica No$t" Ame$ica

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7OINT /ENT RE O- T!E CO,PANY+ 2000 )anba*y files ,;> Application for Ast0ma /olec#le- )3*4(386 after s#ccessf#l completion of pre-clinical st#dies-)anba*y ac4#ires 3ayer8s Kenerics b#siness Dtrading #nder t0e ;ame of 3asicsE in Kermany)anba*y forays into 3ra7il6 t0e largest p0armace#tical market in $o#t0 America and ac0ie'es global sales of C-$- O 2-% million in t0is market2001 )anba*y took a significant step forward in ietnam by initiating t0e $etting #p of a new man#fact#ring facility wit0 an in'estment of C-$- O 10 million)anba*y ac0ie'ed a t#rno'er of C-$- O %02 million for t0e year 2002 and mo'ed closer to ac0ie'ing a target of 1 billion dollar by 20042002 )ecei'es appro'al from 5>A to market /ida7olam ?ydroc0loride $yr#p 2 /g base9 ml- )anba*y recei'es and appro'al from 5>A to man#fact#re and market Cefpodo*ime Pro*etil for !ral $#spension6 .isinopril P ?ydroc0lorot0ia7ide 1ablets Cs6 1era7osin ?ydroc0loride Caps#les and Amo*cillin !ral s#spension C$P-?eralding t0e company8s entry into t0e ,ndian !1C market2003 )anba*y recei'ed t0e economic times award for corporate e*cellencefor t0e company for year-ranba*y signed an agreement toac4#ire )PKDa'entisE $A along wit0 its f#lly owned s#bsidiary6!P,? $A).6in france )anba*y la#nc0ed its first range of 0erbal pro&ects200% Ac)uisition of additional staCe in Ranba9* -a$maceutica Ltda+; B$a(il )anba*y anno#nced t0e ac4#isition of 3e-1abs P0armace#ticals DPtyE .imited 2008 Ac4#ired by t0e "apanese giant6 t0e O+-(2 billion >aiic0i $ankyo6 ranked ;o- 3 in "apan

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BRIE- INTRO O- RANBAXY PLANTS IN INDIA

,n t0e c0emical di'ision6 'ario#s b#lk dr#gs are man#fact#red- 10e c0emical di'ision 0ad t0ree #nits in P#n&ab- !ne is located at 1oansa6 two are located at /o0ali and one #nit is located at >ewas near ,ndore in /ad0ya Prades06 w0ere Ciproflo*acine is man#fact#red- ,n t0e plant of t0e c0emical di'ision6 'ario#s dr#gs like Antibiotics6 Anti-malarial6 Antibacterial and Anti-#lcer are man#fact#red- !ne of t0e older plants of )anba*y was closed after t0e accident in "#ne 2003-t0e second one is still working 10e 1++16 t0e 1oansa plant started f#nctioning in 1++2 and t0e >ewas plant started f#nctioning in 1+++- ario#s plant 0eads independently manage all t0ese plants,n eac0 #nit6 separate facilities wit0 respect to t0e man#fact#re of dr#gs6 along wit0 t0eir man#fact#ring areas 0a'e been pro'ided- 10is is re4#ired to red#ce t0e c0ances of any cross contamination #nder t0e dr#g laws and to comply wit0 good man#fact#ring practicesAt /o0ali plant6 separate blocks 0a'e been pro'ided for t0e preparation of eac0 dr#g -10e 1oansa6 /o0ali and >ewas plants are planned in s#c0 a way t0at t0eir system6 facilities6 man#fact#ring practices and standards meet t0e re4#irements of 5>A- /o0ali Plant also mainly in t0e man#fact#ring of Acti'e P0armace#tical ,ngredients DAP,E- 10e Plant is di'ided into two plant areas A8 and A+
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T!E /ARIO S DEPART,ENTS

!uman Resou$ce De#a$tment 10e basic f#nction of t0e 0#man reso#rce department in t0e modern corporate world is knowledge management- 10e ?) department stri'es to maintain co0esi'eness among employees- ,t also ens#res interdepartmental cooperation in ac0ie'ing targets- 10e appraisal system is also taken care by t0is department10e ?) department del'es deep into t0e employee8s psyc0e to analy7e t0e positi'es and negati'es of eac0 employee6 so t0at a proper system of delegation and 9 or empowerment can be e'ol'ed-inance De#a$tment 10e finance department takes care of t0e reg#lar financial needs of t0e company it ens#res proper allocation of f#nds and takes care of t0e working capital re4#irements- ,t 'erifies capital raised by different departments and sends t0em for appro'al to t0e 0ig0er a#t0oritiesSto$es De#a$tment 10e f#nction of t0is department is to pro'ide ade4#ate and proper storage and preser'ation of 'ario#s items to meet t0e demand of 'ario#s ot0er departments by proper iss#es and maintaining acco#nts of cons#mption- ,t also keeps a track of stock acc#m#lation and abnormal cons#mptionE$ection and -ab$ication De#a$tment As t0e name s#ggests6 t0is department identifies new pro&ects and 0elps in erecting t0em- 10is department also #ndertakes ma&or modifications of e4#ipmentERP De#a$tment :)P department 0elps to integrate t0e entire enterprise starting from t0e s#pplier to t0e c#stomer6 co'ering financial and 0#man reso#rces- 10is will enable t0e enterprise to increase prod#cti'ity by red#cing costs- ,t also ens#res a single sol#tion to t0e information needs of t0e w0ole organi7ation-

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P$oduction De#a$tment As a part of t0eir on going commitment to prod#ce 0i-tec0 4#ality dr#gs and p0armace#ticals t0at take care of t0e specific needs of markets aro#nd t0e world6 )anba*y .aboratories .imited 0as increased t0e in'estment in t0e prod#ction department- ,t is t0e most important department of t0e company and 0as t0e following ob&ecti'es2 1- ,mpro'ing 'ol#me of prod#ction2- )ed#cing re&ection rate3- /aintaining rework rateEn'inee$in' De#a$tment 10is department #ndertakes b#ilding6 constr#ction and maintenance/aintaining ser'ice facilities s#c0 as water6 gas6 0eating6 'entilation6 air conditioning6 painting and pl#mbing are some of t0e ot0er areas dealt by t0is department- 10is department also 0elps in maintaining electrical e4#ipments s#c0 as generators6 transformers6 telep0one system and electrical installationPu$c"ase De#a$tment 10e p#rc0ase department pro'ides material to t0e factory wit0o#t w0ic0 t0e w0eels of mac0ines cannot mo'e- 10e 'ario#s f#nctions performed by t0is department incl#de2 $ec#ring good 'endor performance6 incl#ding prompt deli'eries of s#pplies of acceptable 4#alities1- 1o de'elop satisfactory so#rces of s#pply and maintaining good relations0ips wit0 t0e s#ppliers2- 1o pay reasonably low pricesDualit* Cont$olEDualit* Assu$ance De#a$tment 10e p#rpose of MC N MA departments is to ens#re t0at t0e desired 4#ality standard is ac0ie'ed- ,t also ens#res t0at t0e processing or fabrication of material conforms to t0e specific c0aracteristics selected6 to ass#re t0at t0e res#lting prod#ct will in fact perform its intended f#nction-

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PROD CT RE/IEF
)anba*y8s t0erape#tic widt0 co'ers fi'e of t0e top si* categories incl#ding Anti-infecti'e6 Kastrointestinal6 ;#tritionals6 Cardio'asc#lar6 Central ;er'o#s $ystem6 )espiratory6 >ermatological and ot0ers- L0ile anti-infecti'e contrib#te %(F of t0e total sales6 )anba*y8s ot0er brands like $im'otin and $tor'as in t0e cardio'asc#lar segment6 $erlift in C;$ and )e'ital and )iconia in ;#tritionals6 are on t0eir way to s#ccess in m#ltiple markets>#ring "an - >ec 20006 amongst t0e top prod#cts of )anba*y6 $poride* DCep0ale*inE was t0e ;#mber 1 brand6 closely followed by Cifran DCiproflo*acinEAnti 3 Infecti%es Anti- infecti'e 0as been t0e main dri'er of )anba*y8s sales- 10e important brands in t0is category are Cifran DCiproflo*acinE6 $poride* DCip0ale*inE6 :n0ancin DAmo*ycla'E6 Cri*an DClarit0romycinE6 ercef DCefaclorE6 !frama* DCeftria*oneE6 Cepodem DCefpodo*ime Pro*etilE6 Qanocin D!flo*acinE6 Cero*im DCef#ro*ime A*etilE6 and .o*of D.e'oflo*acinECifran DCiproflo*acinE is t0e key brand in t0e anti- infecti'e portfolio6 wit0 estimated sales of C$ O 32 /n6 c#rrently being marketed in 1% co#ntries>e'elopment of Ciproflo*acin once a day 0as been an important landmark ac0ie'ed by )anba*y- 10e prod#ct 0as been licensed to 3ayer- Cifran contin#es to be a dominant player in t0e 4#inolones market in ,ndia6 C0ina and )#ssia$poride* is anot0er leading brand in )anba*y8s prod#ct portfolio wit0 worldwide ann#al sales of C$ O 3% /n- ,t is a'ailable in eig0t different dosage forms incl#ding caps#les6 dry powder for s#spension6 redimi*6 dispersible tablets6 paediatric drops6 soft gelatin caps#les6 sac0et and ad'anced form#lation for twice-daily administration- ,t is c#rrently marketed in 1% co#ntries- ,n ,ndia6 $poride* is t0e leading brand wit0 a market s0are of 3(F of t0e Cep0ale*in segment-

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Heflor is a'ailable in se'en different dosage forms and is t0e t0ird-largest selling brand for )anba*y worldwide- 10e dosage forms list incl#des caps#les6 dry syr#p6 modified release tablets6 dispersible tablets6 drops and redimi*:n0ancin is e*pected to be t0e leading prod#ct in )anba*y8s prod#ct portfolio wit0 estimated sales of C$ O 4% /n by t0e year 200%- 10e prod#ct will be rolled o#t to abo#t 20 important markets d#ring t0is periodQanocin6 wit0 appro*imate sales of C$ O 10 /n6 is t0e se'ent0-largest contrib#tor to )anba*y8s total salesCepodem is c#rrently a'ailable in t0ree different co#ntries o#tside ,ndia6 and will be rolled o#t to 13 different co#ntries in t0e near f#t#reCa$dio%ascula$s Cardio'asc#lar is pro&ected to be t0e second-best category for )anba*y- $tatins 0a'e been t0e key dri'ers for t0is segment- 10e sale of $im'astatin 0as grown s#bstantially in t0e past few years6 a trend t0at is likely to contin#e in t0e f#t#re,n ,ndia6 $im'otin D$im'astatinE is t0e market leader in t0e c0olesterol red#cer segment- Anot0er leading brand in t0is category is $tor'as DAtor'astatinE$tor'as 0as been one of t0e fastest-e'er to enter t0e top-300 brands list of t0e ,ndian p0arma ind#stry- !t0er global cardio'asc#lar brands are Co'ance D.osartanE and Caslot DCar'edilolECent$al Ne$%ous S*stem 10e Central ;er'o#s $egment is one of t0e important foc#s areas identified by )anba*y6 wit0 $erlift being t0e key brand- ,n ,ndia6 $erlift is n#mber 1 amongst $ertraline brands- ;ew prod#ct introd#ctions will be dri'ers of growt0 in t0is category0ast$ointestinal C#rrently6 gastrointestinal dr#gs are t0e second-largest category for )anba*y10e key brands in t0is category incl#de ?istac and )omesac- 10e c#rrent ann#al sales of )anitidine are estimated to be aro#nd C$ O 1( /n and t0e prod#ct is marketed in more t0an 20 co#ntriesR"eumatolo'icals
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10e first generation Co*-2 in0ibitors principally dri'e worldwide growt0 in r0e#matology- 10is category is estimated to grow e*ponentially for )anba*y6 wit0 brands like Celeco*ib- 10is year6 )ofiba* D)ofeco*ibE introd#ced in ,ndia6 0as establis0ed itself as a leader in t0e Co*-2 in0ibitor category and 0as o'ertaken all Celeco*ib brands- ,t 0as been identified as a key Klobal brand for t0e f#t#re-

Nut$itonals ;#tritionals 0a'e been a ma&or contrib#tor to )anba*y8s sales- 1wo of t0e important prod#cts in t0is category are )e'ital and )iconia- Lit0 ann#al sales estimated at abo#t C$ O 10 /n6 )e'ital contrib#tes a significant s0are of total sales- ,t is a leading brand in ,ndia and 0as done e*ceedingly well in some parts of t0e world as an !1C prod#ctDe$matolo'icals 10e dermatology category is mainly dri'en by ,ndia region and is likely to s0ow a good growt0 pattern in t0e f#t#re- $ome of t0e key brands doing well in t0is segment are /obi7o*6 $il'ere*6 /oist#re*6 etc-

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INTRODUCTION TO CAPITAL STRUCTURE THEORY AND ANALYSIS

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T)i* i* a Report on t)e +Capita, Stru-ture an. Capita, E/pen.iture o0 Ran1a/2 La1oratorie* Lt.343 T)e purpo*e an. *-ope o0 t)e pro5e-t -an 1e ,i*te. a*6 nde$standin' t"e o$'ani(ational st$uctu$e and functionin' of Anal*sin' and com#a$in' t"e financial "ealt" of t"e fi$ms in t"e Identif*in' and anal*sin' t"e ca#ital st$uctu$e of Ranba9*+ Conductin' a Re%ie& of t"e Ca#ital E9#enditu$e done at Ranba9* Identif*in' loo#"oles in t"e functionin' and in t"e a$ea of stud* Ranba9* Labo$ato$ies Ltd+ Indian P"a$ma Indust$*+

Labo$ato$ies Ltd+ and $ecommendin' t"e su''estions fo$ t"e same+ -ollo&in' a$e t"e limitations of t"e stud*: Balance s"eets of onl* < *ea$s "a%e been studied but t"e com#an* is in o#e$ation fo$ so man* *ea$s+ Onl* s#ecific tools 1i+e+ $atio anal*sis2 "a%e been used fo$ data anal*sis; &"ile so man* ot"e$ tools a$e also t"e$e+ O$'ani(ational $ules G $e'ulations+ A%ailabilit* of data+ -inancial fi'u$es fo$ 455A of Ranba9* &e$e not a%ailable+ Limitations of t"e financial tools used+

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Litret re of re!ie" o# Ca$ita% Str &t re

CAPITAL STRUCTURE IS A MI' O( DE)T AND E*UITY CAPITAL MAINTAINED )Y A (IRM+ CAPITAL STRUCTURE IS ALSO RE(ERRED AS (INANCIAL STRUCTURE O( A (IRM+ THE CAPITAL STRUCTURE O( A (IRM IS VERY IMPORTANT SINCE IT RELATED TO THE A)ILITY O( THE (IRM TO MEET THE NEEDS O( ITS STAKEHOLDERS+ MODIGLIANI AND MILLER ,-./01 2ERE THE (IRST ONES TO LANDMARK THE TOPIC O( CAPITAL STRUCTURE AND THEY ARGUED THAT CAPITAL STRUCTURE 2AS IRRELEVANT IN DETERMINING THE (IRM3S VALUE AND ITS (UTURE PER(ORMANCE+ ON THE OTHER HAND, LU)ATKIN AND CHATTERJEE ,-..41 AS 2ELL AS MANY OTHER STUDIES HAVE PROVED THAT THERE E'ISTS A RELATIONSHIP )ET2EEN CAPITAL STRUCTURE AND (IRM VALUE+ MODIGLIANI AND MILLER ,-.561 SHO2ED THAT THEIR MODEL IS NO MORE E((ECTIVE I( TA' 2AS TAKEN INTO CONSIDERATION SINCE TA' SU)SIDIES ON DE)T INTEREST PAYMENTS 2ILL CAUSE A RISE IN (IRM VALUE 2HEN E*UITY IS TRADED (OR DE)T+ IN MORE RECENT LITERATURES, AUTHORS HAVE SHO2ED THAT THEY ARE LESS INTERESTED ON HO2 CAPITAL STRUCTURE A((ECTS THE (IRM VALUE+ INSTEAD O( THE (IRM+ MODIGLIANI AND MILLER ,-.561 ARGUED THAT THE CAPITAL STRUCTURE O( A (IRM SHOULD COMPOSE ENTIRELY O( DE)T DUE TO TA' DEDUCTIONS ON INTEREST PAYMENTS+ HO2EVER, )RIGHAM AND GAPENSKI ,-..51 SAID THAT, IN THEORY, THE MODIGLIANI-MILLER ,MM1 MODEL IS VALID+ )UT, IN PRACTICE, )ANKRUPTCY COSTS E'IST AND THESE COSTS ARE DIRECTLY PROPORTIONAL TO THE DE)T LEVEL O( THE (IRM+ HENCE, AN INCREASE IN DE)T LEVEL CAUSES AN INCREASE IN )ANKRUPTCY COSTS+ THERE(ORE, THEY ARGUE THAT THAT AN OPTIMAL CAPITAL STRUCTURE CAN ONLY )E ATTAINED I( THE TA' SHELTERING )ENE(ITS PROVIDED AN INCREASE IN DE)T LEVEL IS E*UAL TO THE )ANKRUPTCY COSTS+ IN THIS CASE, MANAGERS O( THE (IRMS SHOULD )E A)LE TO IDENTI(Y 2HEN THIS OPTIMAL CAPITAL STRUCTURE IS ATTAINED AND TRY TO MAINTAIN IT AT THE SAME LEVEL+ THIS IS THE ONLY 2AY THAT THE (INANCING COSTS AND THE 2EIGHTED AVERAGE COST O( CAPITAL ,2ACC1 ARE MINIMISED THERE)Y INCREASING (IRM VALUE AND CORPORATE PER(ORMANCE+ !OOD7OO Ro*)an AS- Finan-e, !!A 87on*9 Finan-e, !S- 87on*9 !an:ing ; Internationa, Finan-e 8Emai,6 ro*)an1oo.)oo<intnet3mu = Te,6 >23(?%&9'&&&9 GJ-IMT,MOHALI ANUJ KUMAR SRIVASTAVA Page 2# of 94

@et)o.o,og2
10e met0odology adopted for t0e st#dy was as follows2 5amiliari7ation6 e*amination and e'al#ation of t0e proced#res relating to capital str#ct#re and capital e*pendit#re Collection of rele'ant data form company records and cross c0ecking of t0is data Calc#lations of financial ratios6 parameter and norms6 as also t0eir financial implications3roadly t0e data were collected for t0e report on t0e pro&ect work 0as been t0ro#g0 t0e primary and secondary so#rces10e primary data is collected by 'ario#s approac0es so as to gi'e a precise6 acc#rate6 realistic and rele'ant data- 10e main goal in t0e mind w0ile gat0ering primary data was in'estigation and obser'ation- 10e ends were t0#s ac0ie'ed by a direct approac0 and personal obser'ation from t0e officials of t0e company- 10e ot0er staff members and t0e employees were inter'iewed for t0e sake of maintaining reasonable standard of acc#racy10e secondary data as it 0as always been important for t0e completion of any report pro'ides a reliable6 s#itable e4#ate and specific knowledge- 10e ann#al reports6 t0e fi*ed asset register and t0e Cape* register pro'ided t0e knowledge and information regarding t0e rele'ant s#b&ects10e 'al#able cooperation and contin#ed s#pport e*tended by all associated personnels6 0ead of t0e department6 di'ision and staff members contrib#ted a lot to f#lfil t0e re4#irement in t0e collection of data in order to present a complete report on t0e pro&ect work-

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Capital Structure: Theory and Analysis

Capital Structure
5inancing decisions in'ol'e raising f#nds for t0e firm- ,t is concerned wit0 form#lation and designing of capital str#ct#re or le'erage- 10e most cr#cial decision of any company is in'ol'ed in t0e form#lation of its appropriate capital str#ct#re- 10e best design or str#ct#re of t0e capital of a company 0elps t0e management to ac0ie'e its #ltimate ob&ecti'es of minimising o'erall cost of capital6 ma*imising profitability and also ma*imising t0e 'al#e of t0e firm10e capital str#ct#re decision of a firm is concerned wit0 t0e determination of debt e4#ity composition- Capital str#ct#re ordinarily implies t0e proportion of debt and e4#ity in t0e total capital of a company- 10e term capital may be defined as t0e long J term f#nds of t0e firm- Capital is t0e aggregation of t0e items appearing on t0e left 0and side of t0e balance s0eet minus c#rrent liabilities,n ot0er words capital may be e*pressed as follows2 Capital R 1otal Assets J C#rrent .iabilities5#rt0er6 capital of a company may broadly be categorised into equity and debt. 10e total capital str#ct#re of a firm is represented in t0e following fig#re2

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Total Ca#ital

E)uit* Ca#ital

Debt Ca#ital

:4#ity $0are Capital Preference $0are Capital $0are Premi#m )etained :arnings

1erm .oans >ebent#res >eferred Payments .iabilities !t0er .ong term >ebt

:stablis0ed companies generally 0a'e track record of t0eir profit earning capacity6 w0ic0 0elps t0em to create t0eir creditwort0iness10e lenders feel safe to in'est t0eir f#nds in s#c0 companies- 10#s6 t0ere is ample scope for t0is type of companies to collect debt- 3#t a company cannot freely i-e- wit0o#t 0a'ing any limit- 10e company m#st 0a'e to c0alk o#t a plan to collect a debt in s#c0 a way t0at t0e acceptance of debt becomes beneficial for t0e company in terms of increase in :P$6 profitability and 'al#e of t0e firm,f t0e cost of capital is greater t0an t0e ret#rn6 it will 0a'e an ad'erse effect on company8s profitability6 'al#e of t0e firm and its :P$$imilarly6 if company is #nable to repay t0e debt wit0in t0e sc0ed#led period it will affect t0e goodwill of t0e company in t0e credit market and conse4#ently may create problems in f#t#re for collecting f#rt0er debt- !t0er factors remaining constant6 t0e company s0o#ld select its appropriate capital str#ct#re wit0 d#e consideration-

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Capital str#ct#re in'ol'es a c0oice between risk and e*pected ret#rn10e optimal capital str#ct#re strikes t0e balance between t0ese risks and ret#rns and t0#s e*amines t0e price of t0e stock$ignificant 'ariations wit0 regard to capital str#ct#re can easily be noticed among ind#stries and firms wit0in t0e same ind#stry- $o it is diffic#lt to generate t0e model capital str#ct#re for all b#siness #ndertakings- 10e following is an attempt to consolidate t0e literat#re on 'ario#s met0ods to s#ggested by researc0ers in arri'ing at optimal capital str#ct#reNotations used: R 'al#e of firm

5C5 R free cas0 flow LACC R weig0ted a'erage cost of capital rs and rd are costs of stock and debt

re and wd are percentages of t0e firm t0at are financed wit0 stock and debt-

Operating and inancial !everages 10e term leverage refers to t0e ability of a firm in employing long J term f#nds 0a'ing a fi*ed cost6 to en0ance ret#rns to t0e owners- ,n ot0er words le'erage is t0e employment of fi*ed assets or f#nds for w0ic0 a firm 0as to meet fi*ed costs or fi*ed rate of interest obligation irrespecti'e of t0e le'el of acti'ities attained or t0e le'el of operating profit earned?ig0er t0e le'erage6 0ig0er t0e profits and 'ice J 'ersa- 3#t a 0ig0er le'erage ob'io#sly implies 0ig0er o#tside borrowings and 0ence riskier if t0e b#siness acti'ity of t0e firm s#ddenly takes a dip- 3#t a low le'erage does not necessarily indicate pr#dent financial management6 as t0e firm mig0t be inc#rring an opport#nity cost for not 0a'ing borrowed f#nds at a fi*ed cost to earn 0ig0er profitsGJ-IMT,MOHALI 29 of 94 ANUJ KUMAR SRIVASTAVA Page

Operating -e#erage !perating le'erage is concerned wit0 t0e operation of any firm- 10e cost str#ct#re of any firm gi'es rise to operating le'erage beca#se of t0e e*istence of fi*ed nat#re of costs- 10is le'erage relates to t0e sales and profit 'ariationsO#e$atin' Le%e$a'e H Cont$ibution EBIT

Contrib#tion R $ales J ariable Costs :3,1 R :arnings 3efore ,nterest and 1a*esDisad%anta'es of O#e$atin' Le%e$a'es 10e reliability of operating ratios rests to a large e*tent on t0e correctness of t0e fi*ed costs identified wit0 a prod#ct- 5a#lty apportionment wo#ld distort t0e #sef#lness of t0e ratio 10e p#blis0ed acco#nts does not gi'e details of t0e fi*ed cost inc#rred and t0e contrib#tion from eac0 prod#ct and for an o#tsider it is diffic#lt to calc#late t0e firm8s operating le'erage5irm8s cost str#ct#re and nat#re of t0e firm8s b#siness affects operating le'erage- A degree c0ange in sales 'ol#me res#lts in more t0an proportionate c0ange DP9-E in operating Dor lossE can be obser'ed by #se of operating le'erage.inancial -e#erage 10is ratio indicates t0e effects on earnings by rise of fi*ed cost f#nds,t refers to #se t0e #se of debt in t0e capital str#ct#re- 5inancial le'erage arises w0en a firm deploys debt f#nds wit0 fi*ed c0arge- 10e ratio is calc#lated wit0 t0e following2
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Ea$nin's befo$e inte$est and ta9 E Ea$nin's afte$ inte$est I 10e 0ig0er t0e ratio6 t0e lower t0e c#s0ion for paying interest on borrowings- A low ratio indicates a low interest o#tflow and conse4#ently lower borrowings- A 0ig0 ratio is risky and constit#tes a strain on profits- 10is ratio is considered along wit0 t0e operating ratio6 gi'es a fairly and acc#rate idea abo#t t0e firm8s earnings6 its fi*ed costs and t0e interest e*penses on long term borrowingsEa$nin's #e$ S"a$e I ?ig0er financial le'erage leads to 0ig0er EBIT res#lting in 0ig0er EPS, if ot0er t0ings remain constant5inancial le'erage affects t0e 'ariability and e*pected le'el of EPS- 10e more debt t0e firm employs t0e 0ig0er its financial le'erage- 5inancial le'erage generally raises e*pected EPS6 b#t it also increases t0e riskiness of sec#rities as t0e debt 9 asset ratio rises-inancial Le%e$a'e H EBIT EBT

EBIT I :arnings 3efore ,nterest and 1a* EBT I :arnings 3efore 1a*esConsider T"o Hypothetical irms

5irm C

5irm . ;o debt 206000 in assets 40F ta* rate 106000 of 12F debt 206000 in assets 40F ta* rate

3ot0 firms 0a'e same operating le'erage6 b#siness risk6 and :3,1 of 36000- 10ey differ only wit0 respect to #se of debt-

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"mpact of -e#erage on !eturns 5irm C in Rs ! :3,1 ,nterest :31 1a*es D40FE ;, R"E 36000 0 36000 16 200 16800 #. $ 36000 16200 16800 720 16080 % .&$ 5irm . (Fig.

/ore :3,1 goes to in'estors in 5irm .1otal dollars paid to in'estors2 C2 ;, R )s-16800 .2 ;, P ,nt R )s-16080 P )s-16200 R )s-26280 1a*es paid2 C2 )s-16200B .2 )s-720/ow consider the fact that 0%" is not known with certainty. 1etermining the impact of uncertainty on stockholder profitability and risk for .irm 2 and .irm .irm 23 2nle#eraged :conomy in Rs ! (Fig.

3ad
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A'g-

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Prob:3,1 ,nterest :31 1a*es D40FE ;, .irm -3 -e#eraged

0-2% 26000 0 26000 800 16200 36000 0 36000 16200 16800

0-%0 46000 0 46000 16(00 26400

0-2%

:conomy 4.ig. in !s5'''6 3ad A'gKood

Pr'b.( :3,1S ,nterest :31 1a*es D40FE ;, 7Sa8e a9 for (ir8 U+ -i$m 3:P )!,C )!: 1,: -i$m L 3:P )!,C )!:
GJ-IMT,MOHALI 33 of 94

.)* 26000 16200 800 320 480

.* 36000 16200 16800 720 16080

.)* 46000 16200 26800 16120 16(80

3ad 10-0F (-0F (-0F n-a3ad 10-0F (-0F 4-8F

A'g1%-0F +-0F +-0F n-aA'g-

Kood 20-0F 12-0F 12-0F n-a-

Kood 1%-0F 20-0F +-0F 12-0F 10-8F 1(-8F

Page

ANUJ KUMAR SRIVASTAVA

1,:

1-7*

2-%*

3-3*

P$ofitabilit* ,easu$es: E(BEP! %*. $ E(R"I+! #. $ :D)!:E RisC ,easu$es: s)!,C s)!: Conclusions

%*. $ #. $ +-0F

10-8F 2-12F 2-12F 2-12F 4-24F

3asic earning power D:3,191AE and )!,C D;!PA19Capital R :3,1D1-1E91AE are #naffected by financial le'erage . 0as 0ig0er e*pected )!:2 ta* sa'ings and smaller e4#ity base . 0as m#c0 wider )!: swings beca#se of fi*ed interest c0arges- ?ig0er e*pected ret#rn is accompanied by 0ig0er risk,n a stand-alone risk sense6 5irm .8s stock0olders see m#c0 more risk t0an 5irm C8sC and .2 s)!,C R 2-12FC2 s)!: R 2-12F.2 s)!: R 4-24FGJ-IMT,MOHALI 34 of 94 ANUJ KUMAR SRIVASTAVA Page

.8s financial risk is s)!: - s)!,C R 4-24F - 2-12F R 2-12F- DC8s is 7ero-E

5or le'erage to be positi'e Dincrease e*pected )!:E6 3:P m#st be T rd-

,f rd T 3:P6 t0e cost of le'eraging will be 0ig0er t0an t0e in0erent profitability of t0e assets6 so t0e #se of financial le'erage will depress net income and )!:-

,n t0e e*ample6 :D3:PE R 1%F w0ile interest rate R 12F6 so le'eraging @works-A

Choosing the Optimal Capital Structure for #an$a%y !a$oratories !td& 3ased on t0e ratio analysis done abo'e it can be concl#ded t0at )anba*y is an #nle'eared firm wit0 'ery less debt component in its capital str#ct#re- 10e company is in a position to increase its debt component by resorting to e*ternal debt financing- ?owe'er it s0o#ld be kept in mind t0at6 t0ere co#ld be two opposite effects if debt is increased in t0e capita str#ct#re- 10e first effect may be an o'erall red#ction in t0e cost of capital as t0e proportion of debt increases in t0e capital str#ct#re d#e to low cost of debt- !n t0e ot0er 0and6 beca#se of fi*ed contract#al obligation t0e financial risk of t0e company increases- 10#s6 it is said t0at t0e optim#m capital str#ct#re implies a ratio of debt and e4#ity at w0ic0 weig0ted a'erage cost of capital wo#ld be least and t0e market 'al#e of t0e firm wo#ld be 0ig0estHeeping t0e abo'e t0o#g0t in mind , 0a'e tried to comp#te w0at wo#ld be t0e optimal capital str#ct#re for )anba*y .aboratories .td-6 based on t0e following information as per t0e Ann#al )eport 200%2
GJ-IMT,MOHALI 3# of 94 ANUJ KUMAR SRIVASTAVA Page

:3,1 being 3762736800B Ass#ming t0at t0e firms e*pects 7ero growt0 22%6%%76810 s0ares o#tstandingB rs R 12FB 1 R 3%FB b R 1-0B r)5 R (FB )P/ R (F-

:stimates of Cost of >ebt Percent financed wit0 debt6 wd 0F 20F 30F 40F %0F 8-0F 8-%F 10-0F 12-0F rd

,f company recapitali7es6 debt wo#ld be iss#ed to rep#rc0ase stock10e Cost of :4#ity at >ifferent .e'els of >ebt2 ?amada8s :4#ation // t0eory implies t0at beta c0anges wit0 le'erage

bC is t0e beta of a firm w0en it 0as no debt Dt0e #nle'ered betaE b. R bC U1 P D1 - 1ED>9$EV

10e Cost of :4#ity for wd R 20F

GJ-IMT,MOHALI 3$ of 94 ANUJ KUMAR SRIVASTAVA Page

Cse ?amada8s e4#ation to find beta2 b. R bC U1 P D1 - 1ED>9$EV R 1-0 U1 P D1-0-3%E D20F 9 80FE V R 1-1( Cse CAP/ to find t0e cost of e4#ity2 rs R r)5 P b. D)P/E R (F P 1-1( D(FE R 12-+8F Cost of :4#ity 's- .e'erage wd 0F 20F 30F 40F %0F 0-00 0-2% 0-43 0-(7 1-00 >9$ 1-00 1-1( 1-28 1-43 1-(% b. 12-00F 12-+8F 13-(7F 14-(0F 1%-+0F rs

10e LACC for wd R 20F LACC R wd D1-1E rd P we rs LACC R 0-2 D1 J 0-3%E D8FE P 0-8 D12-+8FE LACC R 11-42F )epeat t0is for all capital str#ct#res #nder considerationLACC 's- .e'erage wd
GJ-IMT,MOHALI 3% of 94

rd

rs

LACC

ANUJ KUMAR SRIVASTAVA

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0F 20F <5J 40F %0F R 5C5 9 DLACC-gE

0-0F 8-0F A+>J 10-0F 12-0F

12-00F 12-+8F 6<+?@J 14-(0F 1%-+0F

12-00F 11-42F 66+4<J 11-3(F 11-8%F

Corporate al#e for wd R 20F gR06 so in'estment in capital is 7eroB so 5C5 R ;!PA1 R :3,1 D1-1E;!PA1 R D)s-3762736800ED1-0-3%E R )s-2462276+70 R )s-2462276+709 0-1142 R )s-21261%368%2-8+

Corporate al#e 's- .e'erage wd 0F 20F <5J 40F %0F LACC 12-00F 11-42F 66+4<J 11-3(F 11-8%F Corp- al#e )s-20168++67%0-00 )s-21261%368%2-8+ Rs+46>;@B6;<6>+B@ )s-21362746383-80 )s-20464%%6443-04

>ebt and :4#ity for wd R 20F 10e 'al#e of debt is2 R wd $R R 0-2 D)s-21261%368%2-8+E R )s-4264306770-%8J>

$ R )s-21261%368%2-8+ J )s-4264306770-%8 R )s-1(+67236082-31

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>ebt and $tock al#e 's- .e'erage wd 0F 20F 30F 40F %0F >ebt6 > 0 )s-426 4306770-%8 )s-(46 73763+4-7+ )s-8%6 30+67%3-%2 )s-1026 2276721-%2 $tock al#e6 $ )s-20168++67%0-00 )s-1(+67236082-31 )s-1%160%36+21-18 )s-1276+(46(30-28 )s-10262276721-%2

Fealt" of S"a$e"olde$s al#e of t0e e4#ity declines as more debt is iss#ed6 beca#se debt is #sed to rep#rc0ase stock3#t total wealt0 of s0are0olders is 'al#e of stock after t0e recap pl#s t0e cas0 recei'ed in rep#rc0ase6 and t0is total goes #p D,t is e4#al to Corporate al#e on earlier slideE-

StocC P$ice fo$ &d H 45J 10e firm iss#es debt6 w0ic0 c0anges its LACC6 w0ic0 c0anges 'al#e10e firm t0en #ses debt proceeds to rep#rc0ase stock-

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$tock price c0anges after debt is iss#ed6 b#t does not c0ange d#ring act#al rep#rc0ase Dor arbitrage is possibleET"e stocC #$ice afte$ debt is issued but befo$e stocC is $e#u$c"ased $eflects s"a$e"olde$ &ealt": S; %alue of stocC Cas" #aid in $e#u$c"ase>0 and n0 are debt and o#tstanding s0ares before recap> - >0 is e4#al to cas0 t0at will be #sed to rep#rc0ase stock$ P D> - >0E is wealt0 of s0are0olders8 after t0e debt is iss#ed b#t immediately before t0e rep#rc0aseP R $ P D> J >0E n0 P R )s-1(+67236082-31P D)s- 4264306770-%8J 0E 22%6%%76810 P R )s-+4-0( per s0areW )ep#rc0ased R D> - >0E 9 P W )epR D)s-4264306770-%8 J 0E 9 )s-+4-0( R 4%611(W )emaining R n R $ 9 P n R )s-1(+67236082-31 9 )s-+4-0( R 1680464(2Price per $0are 's- .e'erage W s0ares
GJ-IMT,MOHALI 4( of 94

W s0ares
Page

ANUJ KUMAR SRIVASTAVA

wd )emaining 0F 20F <5J 40F %0F

)ep#rc0-

)s-8+-%1 0 )s-+4-0( 4%1611( Rs+B>+?@ ?@?;?@< )s-+4-%% +026231 )s-+0-(4 16127678+

262%%6%78 1680464(2 6;>@A;B5> 163%36347 16127678+

Optimal Capital Structure wd R 30F gi'es2 ?ig0est corporate 'al#e .owest LACC ?ig0est stock price per s0are 3#t wd R 40F is close- !ptimal range is pretty flat-

'odigliani and 'iller Theory ('odern )ie"* 10e traditional 'iew of capital str#ct#re e*plained in ,eig-ted average c'st '. capital is re&ected by t0e proponents /'digliani and /iller (//! (%#*&!. According to t0em6 #nder competiti'e conditions and perfect markets6 t0e c0oice between e4#ity financing and borrowing does not affects a firm8s market 'al#e beca#se t0e indi'id#al in'estor can alter in'estment to any mi* of debt and e4#ity t0e in'estor desires-

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Assum#tions of ,, T"eo$* 10e // T-e'ry is based on t0e following ass#mptions2 Perfect capital markets e*ist w0ere indi'id#als and companies can borrow #nlimited amo#nts at t0e same rate of interest 10ere are no ta*es or transaction costs 10e firm8s in'estment sc0ed#le and cas0 flows are ass#med constant and perpet#al 5irms e*ist wit0 t0e same b#siness or systematic risk at different le'els of gearing 10e stock markets are perfectly competiti'e ,n'estors are rational and e*cept ot0er in'estors to be0a'e rationally// 10eory2 ;o 1a*ation 10e debt is less e*pensi'e t0an e4#ity- An increase in debt will increase t0e re4#ired rate of ret#rn on e4#ity- Lit0 t0e increase in t0e le'els of debt6 t0ere will be 0ig0er le'el of interest payments affecting t0e cas0 flow of t0e company- 10en e4#ity s0are0olders will demand for more ret#rns- 10e increase in cost of e4#ity is &#st eno#g0 to offset t0e benefit of low cost debt6 and conse4#ently a'erage cost of capital is constant for all le'els of le'erage as s0own in 5ig#re 1-

r
Cost of Ca#ital

Cost of E)uit*

AAerage -o*t o0 Capita,

Cost of Debt

Le%el of le%e$a'e

.igure (3 77 #iew of 8apital ,tructure

GJ-IMT,MOHALI 42 of 94 ANUJ KUMAR SRIVASTAVA Page

,n // t-e'ry t0e following notations will be #sed2 R /arket 'al#e of #ngeared company i-e- company # wit0 100F e4#ity financingR /arket 'al#e of a geared company i-e- capital g str#ct#re of t0e company incl#des bot0 debt and e4#ity capital> R /arket 'al#e of debt in a geared companyR /arket 'al#e of e4#ity in a geared companye R eP> g H# R Cost of e4#ity in an #ngeared companyHg R Cost of e4#ity in a geared companyHd R Cost of >ebt7 7 heory3 P$o#osition I 10e market 'al#e of any firm is independent of its capital str#ct#re6 c0anging t0e gearing ratio cannot 0a'e any effect on t0e company8s ann#al cas0 flow- 10e assets in w0ic0 t0e company 0as in'ested and not 0ow t0ose assets are financed determine t0e market 'al#e10#s6 t0e market 'al#e of a firm is #naffected by its financing decisions6 its capital str#ct#re6 or its debt-e4#ity ratio,n simple words6 / N / t0eory 'iews t0e 'al#e of t0e company as a w0ole pie- 10e si7e of t0e pie does not depend on 0ow it is sliced i-e- t0e firm8s capital str#ct#re b#t rat0er t0e si7e of t0e pie pan i-et0e firm8s present 'al#e based on its f#t#re cas0 flows and its asset baseT"e %alue of t"e 'ea$ed com#an* is as follo&s: R g # R Profit before interest g LACC R R :arnings in #ngeared company g # H# LACC is independent of t0e debt 9 e4#ity ratio and e4#al to t0e cost of capital w0ic0 t0e firm wo#ld 0a'e wit0 no gearing in its capital str#ct#re-

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Proof by e*ample Consider 0olding 1F of stock in an all-e4#ity firm wit0 'al#e C10en yo#r wealt0 is 0-01
C

Also6 yo# recei'e a cas0 flow of 0-01C5t e'ery periodAlternati'ely6 consider 0olding 1F e4#ity and 1F debt in le'ered 'ersion of t0e same firm wit0 'al#e gR:P>=o#r wealt0 t0en is U0-01:P0-01>V R 0-01 Cas0 5lows eac0 periodX ,ntEVR0-01C5tg

U0-01D,ntEP0-01DC5t-

FACC

As t0e in0erent risk of t0e firm is t0e same6 t0en t0e disco#nted 'al#e of t0e cas0 flows m#st be t0e same6 i-e-6 gR C$rop. "

,G,

T$aditional

B E

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,, T"eo$*: P$o#osition I 7 7 heory3 P$o#osition II 10e rate of ret#rn re4#ired by s0are0olders increases linearly as t0e debt 9 e4#ity ratio is increased i-e- t0e cost of e4#ity rises e*actly in line wit0 any increase in gearing to precisely offset any benefits conferred by t0e #se of apparently c0eap debt// went on arg#ing t0at t0e e*pected ret#rn on t0e e4#ity of a geared company is e4#al to t0e ret#rn on a p#re e4#ity stream pl#s a risk premi#m dependent on t0e le'el of capital str#ct#re10e premi#m for financial risk can be calc#lated as debt 9 e4#ity ratio m#ltiplied by t0e difference between t0e cost of e4#ity for #ngeared company and risk J free cost of debt10e cost of e4#ity depends on t0e following t0ree 'ariables2 1- 10e re4#ired rate of ret#rn on t0e firm DHuE2- 10e re4#ired rate of ret#rn on t0e firm8s debt DHdE3- 10e firm8s debt9e4#ity ratio D01EE

3g = 3u +

>
g

(3u 3d )

// pr'p'siti'n II can be s#mmed #p in following points2 :4#ity 0olders re4#ire a premi#m o'er w0at e'eryone is paid if t0e firm 0as debt

10e premi#m 0"ES depend #pon t0e firm8s financing mi*Any increase in le'erage raises b't- t0e risk of e4#ity and its re4#ired ret#rn-

T-e ,ealt- '. equity -'lders, -',ever, is una..ected.

St'c2-'lders are indi..erent t' capital structure and t' c-ange in leverage.

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!0

P$o#+ II
,G, Slo#e H !A R1

!A

T$aditional

% 0

,, T"eo$*: P$o#osition II , , T"eo$*: P$o#osition III // t-e'rys t0ird proposition asserts t0at t0e c#t-off rate for new in'estment will in all cases be a'erage cost of capital and will be #n affected by t0e type of sec#rity #sed to finance t0e in'estments, , T"eo$*: A$bit$a'e 10e cost of e4#ity will rise by an amo#nt &#st s#fficient to offset any possible sa'ing or loss- 10e lenders determine t0e s#pply of debt- 10e optimal le'el is simply t0e ma*im#m amo#nt of debt w0ic0 lenders are prepared to s#bscribe in any gi'en circ#mstances e-g- le'el of inflation6 rate of economic growt06 le'el of profits etc- t0e in'estors will e*ercise t0eir own le'erage by mi*ing t0eir own portfolio wit0 debt and e4#ity- 10e in'estors call t0is t0e arbitrage process- Cnder t0ese conditions of in'estment t0e a'erage cost of capital is constant,f two different firms wit0 same le'el of b#siness risk b#t different le'els of gearing sold for different 'al#es6 t0en s0are0olders wo#ld mo'e from o'er 'al#ed firm to t0e #nder 'al#e firm and ad&#st t0eir le'el of borrowing t0ro#g0 t0e market to maintain financial risk at t0e same le'el- 10e s0are0olders wo#ld increase t0eir income t0ro#g0 t0is met0od w0ile maintaining t0eir net in'estment and risk at t0e same le'el- 10is process of arbitrage wo#ld dri'e t0e price of t0e two firms to a common e4#ilibri#m total 'al#eGJ-IMT,MOHALI 4$ of 94 ANUJ KUMAR SRIVASTAVA Page

10e word Garbitrage is a tec0nical term referring to a sit#ation w0ere two identical commodities are selling in t0e same market for different prices6 t0en t0e market will reac0 e4#ilibri#m by t0e dealers start at t0e lower price and sell at t0e 0ig0er price6 t0ereby making profit- 10e increase in demand will force #p t0e price of t0e lower priced goods and increase in s#pply will force down t0e price of t0e 0ig0 priced commodities10e arbitrage in // t-e'ry s0ows t0at t0e in'estors will mo'e 4#ickly to take ad'antage and will make profit in an e4#ilibri#m capital market6 t0en t0is wo#ld represent an arbitrage opport#nity-

,, T"eo$*: Co$#o$ate Ta9ation ,n abo'e disc#ssion6 // t-e'ry 0as ignored t0e ta* relief on debt interest- // 0as f#rt0er modified t0eir t0eory by considering ta* relief a'ailable to a geared company w0en t0e debt component e*ists in t0e capital str#ct#re- 10e ta* b#rden on t0e company will lessen to t0e e*tent of relief a'ailable on interest payable on t0e debt6 w0ic0 makes t0e cost of debt c0eaper6 w0ic0 red#ces t0e ,eig-ted average capital of t0e lower w0ere capital str#ct#re of a company 0as debt componentConsider a firm wit0 no debt Di-e- all e4#ity or #nle'eredE wit0 a 'al#e of #$#ppose firm c0anges capital str#ct#re by iss#ing debt and retiring some e4#ity- 10e firm will reali7e gain since interest payments on debt are ta*-ded#ctible6 so ta* liability will declineY 5or perpet#al debt2 =early 1a* $a'ings D1a* $0ieldE R ,nterest Z 1C R r Z> Z 1C R )> Z 3 Z 1C 1a* s0ield will be reali7ed eac0 year fore'er- $ince it goes to bond0olders6 it s0o#ld be disco#nted at )>6 t0#s P of ta* s0ield R D)> Z 3 Z 1CE9 )> R 3 Z 1C al#e of firm wit0 debt . Di-e- @le'ered firmAE will be 2 . R # P 3 Z 1C
GJ-IMT,MOHALI 4% of 94 ANUJ KUMAR SRIVASTAVA Page

al#e increases by P of ta* s0ield1a* ad'antage of debt increases as 1C increases,n /N/ world D1C R 0E6 . R

/L

Slo#e H TC

P/ of Ta9 S"ield

,G, /alue

B ,, T"eo$*: Co$#o$ate Ta9ation Cnder t0e ass#mption of ta* relief being a'ailable on debt interest6 t0e total market 'al#e of t0e company is increasing f#nction of t0e le'el of gearing// t-e'ry cost of e4#ity form#la for a geared company2 9g : 9u ; 4( 6 49u 9d6 // t-e'ry ass#mes t0at t0e 'al#e of t0e geared company will always be greater t0an an #ngeared company wit0 similar b#siness risk b#t only by t0e amo#nt of debt J associated ta* sa'ing of t0e geared company- al#e of geared company2 <g : <u ; 1 L0en corporation ta*ation is introd#ced6 t0e ta* ded#ctibility of debt interest creates 'al#e for s0are0olders 'ia t0e ta* s0ield6 b#t t0is is a wealt0 transfer from ta*payers- 10e 'al#e of a geared company e4#als t0e 'al#e of an e4#i'alent #ngeared company8s s0are0olders is less t0an t0at in t0e all e4#ity company6 reflecting t0e ta* benefits- A f#rt0er effect of corporate ta*ation is to lower 45++6 w0ic0 falls contin#o#sly as gearing increasesGJ-IMT,MOHALI 4& of 94 ANUJ KUMAR SRIVASTAVA Page

,, T"eo$*: Pe$sonal Ta9ation // t-e'ry considered only corporate ta*es- ,t was left to a s#bse4#ent analysis by /iller (%#66! to incl#de t0e effects of personal as well as corporate ta*es- ?e arg#ed t0at t0e e*istence of ta* relief on debt interest b#t not on e4#ity di'idends wo#ld make debt capital more attracti'e t0an e4#ity capital to companies- 10e market for debt capital #nder t0e laws of s#pply and demand6 companies wo#ld 0a'e to offer a 0ig0er ret#rn on debt in order to attract greater s#pply of debt- L0en t0e company offers after personal ta* ret#rn on debt at least as e4#al to t0e after personal ta* ret#rn on e4#ity6 t0e e4#ity s#pply will switc0 o'er to s#pply debt to t0e company- ,t is ass#med t0at6 from t0e angle of t0e company6 it will be indifferent between raising debt or e4#ity as t0e effecti'e cost of eac0 will be t0e same and t0ere is no ad'antage to gearing-

inancial +istress and Capital Structure 10e ass#mption is t0at w0en firm 0as 'ery 0ig0 le'el of borrowing t0ey are more likely to r#n into t0e cost of final distress and cost of bankr#ptcy- L0en t0e le'erage of t0e firm is e*tremely 0ig0 t0en it is 'ery likely t0at at some stage it will not be able to make ann#al interest payments and loan repayments- >i'idends for s0are0olders can be bypassed b#t fail#re to pay interest on loans often gi'es t0e lender t0e rig0t to claim on t0e firms operating assets t0ereby pre'enting t0e firm8s contin#ity of acti'ity10e following ill#strati'e list of acti'ities w0ic0 may ca#se increase in cost of t0e firm $#ccessi'e borrowings beyond t0e company8s target debt J e4#ity ratio 3orrowing 0ig0er le'els of interest $kip off or c#t in di'idend w0ic0 may ca#se t0e fall of market rate of s0aresGJ-IMT,MOHALI 49 of 94 ANUJ KUMAR SRIVASTAVA Page

.oss of trade credit from s#ppliers >istress sale of 0ig0ly profitable instr#mentsAbandonment of promising new pro&ects)ed#ced credit period res#lting in loss of b#sinessCorporate image may be tarnis0ed>emand for wit0drawal of loans made to t0e firm pre'io#sly)ed#ction in stock le'els res#lt in red#ction in sales etc-

,an-ruptcy Costs 10e cost of bankr#ptcy may be of two types2 >irect costs [ 10ose directly associated wit0 bankr#ptcy6 bot0 legal and administrati'e ,ndirect costs [ Costs associated wit0 a firm e*periencing financial distress Dcreditors6 bankers6 c#stomers6 employers6 etc-E 3ankr#ptcy costs R direct costs P indirect costs An increase in debt is associated wit0 increased ta* sa'ings b#t also an increased probability of r#nning into cost of financial distress and bankr#ptcy- 10e 'al#e of t0e le'eraged firm is it8s capitalised after ta* operational cas0 flow plus t0e present 'al#e of t0e ta* sa'ings incorporating t0e anticipated cost of financial distress and bankr#ptcy< : = ; 1 %8 ! )here> R al#e of le'erage firm < R Anticipated net operational cas0 flows ) R Capitalisation )ate > R /arket al#e of >ebt 1 R Corporate ta* rate 3C R Anticipated costs of bankr#pting
GJ-IMT,MOHALI #( of 94 ANUJ KUMAR SRIVASTAVA Page

8ost of 1ebt P/ of BanC$u#tc* Cost

P/ of Ta9 S"ield / Cost of E)uit*

O#timum Ca#ital St$uctu$e

-i'u$e: O#timum Ca#ital St$uctu$e and Costs of -inancial Dist$ess 10e e*istence of ta* benefit for modest amo#nts of debt6 and t0e need to a'oid t0e costs of financial distress6 s#ggest t0at t0ere is an optimal capital str#ct#re as ill#strated in .igure w0ic0 s0ows t0at t0ere is an optimal capital str#ct#re at t0e point w0ere t0e market 'al#e of t0e firm is ma*imi7ed6 t0at is w0ere 1DT I BC2 is ma*imi7ed+e$t inancing and Agency Costs Agency t0eory models a sit#ation in w0ic0 a principal Da s#periorE delegates decision making a#t0ority to an agent Dt0e s#bordinateE w0o recei'es reward in ret#rn for performing some acti'ity on be0alf of t0e principal- 10e o#tcome of t0e agents effects t0e principals welfare in some way6 for e*ample sales re'en#e6 o#tp#t or contrib#tion margin- 10e principal attempts to combine a reward system wit0 an information system6 in order to moti'ate t0e agent to c0oose t0e action6 w0ic0 ma*imi7es t0e principal8s welfareGJ-IMT,MOHALI #' of 94 ANUJ KUMAR SRIVASTAVA Page

,n respect of debt finance6 t0e s#ppliers of debt are m#c0 concerned6 abo#t t0eir in'estment in t0e company6 abo#t t0eir in'estment in t0e company6 abo#t t0e risk in'ol'ed in financing debt to t0e company- ,n order to minimi7e t0e risks in debt finance6 t0e s#ppliers of loan will impose restricti'e conditions in loan agreements t0at constraint management8s freedom of action and it is known as agency costs- 10e more money t0e s#ppliers of debt lend to t0e company J t0en t0e more constraints t0ey are likely to impose on t0e managements in order to sec#re t0eir in'estments- T-ere.'re, agency c'sts are m're in -ig-ly geared .irms. >iffic#lt to identify and estimate6 b#t e*ist R C P 31C J P 3CJ P of agency costs P 3C P P AC e'ent#ally dominate o'er P of ta* s0ieldP of agency costs 6 as 3 generally-

P/BC K P/AC

P/ of Ta9 S"ield /

Debt -inancin' and A'enc* Cost Signaling Theory

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,n a pioneering st#dy p#blis0ed in 1+(16 Kordon >onaldson e*amined 0ow companies act#ally establis0 t0eir capital str#ct#re- 10e findings of 0is st#dy are s#mmarised below2 1- 5irms prefer to rely on internal accr#als6 i-e- on retained earnings and depreciated cas0 flow2- :*pected f#t#re in'estments opp#rt#nities and e*pected f#t#re cas0 flow infl#ence target di'idend payo#t ratio- 5irms set t0e target pay o#t ratio at s#c0 a le'el t0at capital e*pendit#res6 #nder normal circ#mstances6 are co'ered by internal accr#als3- >i'idends tend to be sticky in t0e s0ort r#n- >i'idends are raised only w0en t0e firm is confident t0at t0e 0ig0er di'idend can be maintainedB di'idends are not lowered #nless t0ings are 'ery bad4- ,f a firm8s internal accr#als e*ceed its capital e*pendit#re re4#irements6 it will in'est in marketable sec#rities6 retire debt6 raise di'idends6 resort to ac4#isitions6 or b#yback its s0ares%- ,f a firm8s internal accr#als are less t0an its non-postponable capital e*pendit#re6 it will first draw down its marketable sec#rities portfolio and t0en seek e*ternal finance;oting t0e inconsistencies in t0e trade J off t0eory6 /yers proposed a new t0eory6 called t0e signalling, 'r asymmetric in.'rmati'n, t-e'ry '. capital structure. 10e main points of t0e t0eory are2 /anagers often 0a'e better information $ell stock if stock is o'er'al#ed $ell bonds if stock is #nder'al#ed ,n'estors #nderstand t0is6 so 'iew new stock sales as a negati'e signalCorporate inance .ractices 10e capital str#ct#re decision is a diffic#lt decision t0at in'ol'es a comple* trade J off among se'eral considerations like income6 risk6 fle*ibility6 etc- gi'en t0e o'er J riding ob&ecti'e of ma*imising t0e market 'al#e of a firm6 t0e following g#idelines s0o#ld be kept in mind w0ile 0ammering o#t t0e capital str#ct#re of t0e firm A%ail of t"e Ta9 Ad%anta'e of Debt+
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,nterest on debt finance is a ta* J ded#ctible e*pense- ?ence finance sc0olars and practitioners agree t0at debt financing gi'es rise to ta* s0elter w0ic0 en0ances t0e 'al#e of t0e firm P$ese$%e -le9ibilit* 5le*ibility implies t0at t0e firm maintains reser'e borrowing power to enable it to raise debt capital to respond to #nforeseen c0anges in b#siness and political en'ironment- ?ence t0e firm m#st maintain some #n#sed debt capacity as an ins#rance against ad'erse f#t#re de'elopments Ensu$e t"at t"e Total RisC E9#osu$e is Reasonable 10e affairs of t0e firm s0o#ld be managed in s#c0 a way t0at t0e total risk borne by t0e e4#ity s0are0olders is not #nd#ly 0ig0 Subo$dinate -inancial Polic* to Co$#o$ate St$ate'* 5inancial policy and corporate strategy are often not integrated well- 10is may be beca#se financial ,iti'ate Potential A'enc* Costs+ >#e to separate owners0ip and control in modern corporations6 agency problems arise- $0are0olders scattered and dispersed as t0ey are not able to organise t0emsel'es effecti'ely- ?ence6 'ery little monitoring takes place in t0e sec#rity markets$ince agency costs are borne b#y s0are0olders and t0e management6 t0e financing strategy of a firm s0o#ld seek to minimise t0ese cost by employing e*ternal agents w0o specialise in low cost J monitoring Issue inno%ati%e Secu$ities 10anks to $:3, g#idelines introd#ced in 1++26 iss#es 0a'e considerable freedom in designing financial instr#ments- 10ere is greater scope for employing inno'ati'e sec#rities to t0e ad'antage of t0e firm- 10e important sec#rities inno'ations 0a'e
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been as follows2 floating rate bonds Dor notesE6 collateralised mortgage obligations6 d#al c#rrency bonds6 e*tendible notes6 medi#m term notes Fiden t"e Ran'e of -inancin' Sou$ces ,n as dynamically e'ol'ing financial en'ironment6 traditional so#rces of financing may diminis0 in importance- 10ey may not be ade4#ate or optimal- ?ence6 it be0o'es on a firm to employ new modes of finance like commercial paper6 factoring6 :#ro iss#es6 and sec#ritisation-

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Ca$ita% o!er!ie"
actors Of Cape%

e:$e#;it re<

a#

!rgani7ations engaged in man#fact#ring and marketing of goods or ser'ices re4#ire assets in t0eir operations- An asset can be t0o#g0t of as any e*pendit#re6 w0ic0 creates or aids in creation of a re'en#e-generating base- Companies inc#r 'ario#s e*pendit#re to carry on standard flow of work6 e*pendit#re intended to yield ret#rns o'er a period of time6 and #s#ally e*ceeding one year is regarded as capital e*pendit#re- ario#s factors are considered before 3oard of >irectors appro'es any e*pendit#re- All t0at factors can f#rt0er be di'ided into2 Operational .actors ,1o meet f#t#re re4#irements based on market forecast,,1o maintain coordination wit0 t0e 'ision of t0e company as )anba*y 'ision Kar#da states to be top fi'e generic players in t0e world by 2012 and ac0ie'e sales of % billion- 1o ac0ie'e t0is target company 0as to inc#r 0ea'y e*pendit#re on ac4#isition of fi*ed assets,,,1o increase market penetration, 1o maintain6 renew6 e*pand6 #pgrade e*isting p0ysical assets t0at 0elps to facilitate and en0ance re'en#e-generating capacity1o create6 ac4#ire and de'elop re'en#e generating acti'ities9 capacities t0at is imperati'e for an organi7ation8s 0ealt0y growt0 and e*istence.inancial .actors ,n deciding w0ic0 assets to create6 ac4#ire or de'elop6 t0e benefits to be gained from t0e e*pendit#re 0a'e to be weig0ed against t0e costs t0at will be inc#rred- L0ile costs can always be e*pressed in financial terms6 t0e benefits may or may not be
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similarly 4#antifiable- ;e'ert0eless6 an attempt m#st be made to e*press t0e benefits e*pected6 in a manner t0at facilitates comparison wit0 costs and 0elps form#late a rational basis for t0e decision making process- 5ollowing are t0e financial tools t0at are taken into acco#nt for appro'ing capital e*pendit#re1iscounted 8ash .low 418.6 10is is one of t0e tec0ni4#es for financial e'al#ation of Cape*8s- >C5 tec0ni4#es are based on t0e concept of time 'al#e of money and pro'ide a met0odology of taking into acco#nt t0e timing of cas0 proceeds and o#tlays o'er t0e life of t0e in'estment- 10e proced#re #nderscores t0e need to state cas0 flow streams arising in different time periods t0#s differing in 'al#e and6 0ence comparable only in terms of a common denominator 'i7- present 'al#es". 1iscounted $ayback $eriod 41$$6 >PP is t0e n#mber of years it takes for t0e present 'al#e of inflows to e4#al t0e initial in'estment- Apart from gi'ing d#e importance to time 'al#e of money it ser'es as a reasonable tool of risk appro*imation- ,t fa'ors pro&ects6 w0ic0 generate s#bstantial cas0 inflows in initial years6 and discriminates against t0ose t0at bring in s#bstantial inflows in later years Drisk tending to increase wit0 ten#reE- 10ereby implying t0at an early resol#tion of #ncertainty enables t0e decision maker to take prompt correcti'e action by modifying9 c0anging ot0er in'estment decisions?owe'er6 by t0e same logic it cannot be #sed as a principal tool for analysis beca#se it ignores any s#bstantial cas0 flows arising after t0e pay back period"nternal !ate of !eturn 4"!!6 ,)) is t0e disco#nt rate t0at e4#ates t0e present 'al#e of t0e e*pected f#t#re cas0 inflows to t0e present 'al#e of t0e e*pected f#t#re cas0 o#tflows- ,t is t0e post ta* ret#rn from in'estment and 0ence t0e e*cess of ,)) o'er t0e cost of capital indicates a s#rpl#s after paying for t0e capital employed- ,)) pres#pposes an e4#i'alent rate of ret#rn on t0e cas0 flows
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"".

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generated d#ring t0e life of t0e asset i-e-6 it ass#mes rein'estment of intermediate cas0 flows at t0e rate of ret#rn e4#al to t0e pro&ectIs ,)),nternal rates of ret#rn are most often #sed as #sef#l additions to ;P comp#tations- 10is 0as in t#rn &#stified t0e #se of ,)) as a good s#bstit#te to ;P - ,))s 0a'e t0e merit of indicating w0et0er a pro&ect is wort0w0ile6 in t0at - an ,)) abo'e t0e cost of capital represents a positi'e ;P pro&ect6 an ,)) e4#al to t0e cost of capital is a 7ero ;P pro&ect and an ,)) less t0an t0e cost of capital is associated wit0 a negati'e ;P pro&ect,nspite of its merits6 it needs to be #nderstood t0at ,))s 0elps only to identify pro&ects t0at ma*imi7es t0e ratio of r#pee-'al#e to r#pee-capital in percentage terms- L0at ;P will 0elp in determining is t0e pro&ects t0at ma*imi7es t0e r#pee-spread between 'al#e and capital""". /et $resent <alue 4/$<6 ;P is e4#al to t0e present 'al#e of cas0 inflows min#s t0e present 'al#es of cas0 o#tflows- A positi'e ;P is a prere4#isite for t0e IacceptanceI of t0e pro&ect10e primary tool of appraisal wo#ld be t0e ;P met0od- ,ts s#periority o'er ot0er met0ods arises o#t of its principal merit of incorporating all benefits and costs occ#rring o'er t0e life of t0e asset $rofitability "ndex 4$"6 10e Profitability ,nde* essentially meas#res t0e Present 'al#e of benefits times t0e initial in'estment- Cnder #nconstrained conditions6 t0e profitability inde* will accept and re&ect t0e same pro&ects as t0e ;P criterion,t is possible t0at a pro&ect may 0a'e no critical risks- !r t0e financial are e*tremely fa'orable D0ig0 ;P 6 0ig0 ,))6 0ig0 P,6 low >PP etc-E and t0e occ#rrence of conse4#ent risks may not compromise t0e s#ccess of t0e pro&ect- ,t is also possible t0at t0ere is a conscio#s corporate decision to accept certain risks- ,n s#c0 cases6 no meas#res are re4#ired- 10ese risks6 in any case6 m#st be e*plicitly stated in t0e M#antitati'e
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"<.

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assessment of )isk Capital in'estments are essentially committed in e*pectation rat0er t0an in certainty6 w0ic0 implies t0at in'estments are s#b&ect to risk contrib#te to remo'ing t0e s0ortcomings of an #nstr#ct#red workings-

I TRODUCTIO
10e term ?8apital expenditure? refers to e*pendit#re intended to yield ret#rns o'er a period of time6 #s#ally e*ceeding one year- 10is basically implies t0at any e*pendit#re6 w0ic0 res#lts in t0e creation of a new asset or s#bstantially increases t0e capacity9benefits of an e*isting asset and is of a \long term\ nat#re6 s0o#ld be classified as Capital e*pendit#re$ince6 t0e e*pression ICapital e*pendit#reI is not e*0a#sti'ely defined6 t0e facts of a partic#lar case wo#ld decide w0et0er e*pendit#re is capital or re'en#e- Kenerally speaking6 t0e e*pendit#re s0o#ld be tested on t0e following criteria to facilitate classification between capital and re'en#e:*pendit#re wo#ld be deemed to be capital6 if inc#rred for ,nitiation of b#siness

:*tension of b#siness2 :ntry into new markets N prod#cts Dincl#ding )N> and reg#latory e*pensesE /odification of asset9 e4#ipment res#lting in increased benefits from t0e e*isting asset 3ringing into e*istence a new asset-

Con'ersely6 e*pendit#re wo#ld be deemed to be re'en#e6 if inc#rred for

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)o#tine repairs and maintenance of e*isting plantANUJ KUMAR SRIVASTAVA Page

 )eplacement of any part of t0e e*isting plant wit0 capacities remaining #nc0anged premises $0ifting of plants /aking alterations or reno'ations on rented Assets 0a'ing life of less t0an one year

Classification Of Capital /nvestments $ince t0e analysis for appraisal of t0e proposed capital e*pendit#re will largely depend #pon t0e kind of in'estment6 it is necessary to classify capital in'estments into t0e following categories2 62 Cost Reduction; ,ode$nisation and Rationalisation+ :*pendit#re to replace ser'iceable6 b#t obsolete e4#ipment- 10is may become necessary beca#se of t0e e*piry of normal life or c0ange in tec0nology- 10e p#rpose of t0is e*pendit#re is to impro'e prod#cti'ity6 increase efficiency or red#ce cost of labo#r6 material or ot0er items s#c0 as power42 E9#ansion of E9istin' P$oductsE Ca#acit* :*pendit#res to increase plant capacity for e*isting prod#cts9e4#ipment or en0ance m#lti-p#rpose fle*ibility<2 E9#ansion into Ne& P$oductsENe& P$oduct PacCs :*pendit#re necessary to prod#ce new prod#cts9new prod#ct pack- 10is also incl#des e*pendit#re on e*isting facilities to 0andle new prod#cts w0ic0 may res#lt in incremental reali7ations 9 'al#e additions=2 Ne& ma$Cet de%elo#ment and ,a$Cet Ent$*
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10is wo#ld incl#de e*pendit#re made for entering and de'eloping new markets- $#c0 proposals wo#ld re4#ire t0e b#siness case to be accompanied wit0 detailed financial analysis>2 Re#lacement: ,aintenance of Business :*pendit#re necessary to replace worn-o#t or damaged e4#ipment- 10ey are not likely to increase capacity or alter prod#ction significantly- Capital spares are incl#ded 0ere?2 Dualit*; 0ood ,anufactu$in' P$actices; Safet*; !ealt" and En%i$onment+ :*pendit#res necessary to #pgrade 4#ality6 compliance of K/Ps6 go'ernment reg#lations6 labo#r agreements6 ins#rance policy terms6 and en'ironmental safety re4#irements- 5inancial e'al#ation9benefits from s#c0 e*pendit#re may to t0e e*tent 4#antifiable6 be pro'ided@2 Resea$c" G De%elo#ment :*pendit#re on )N> pro&ects9 e4#ipment9 facilities- 5inancial e'al#ation9benefits from s#c0 e*pendit#re may to t0e e*tent 4#antifiable6 be pro'idedA2 Info$mation Tec"nolo'* :*pendit#re on proc#rement of ,1 infrastr#ct#re D?ardwareE and9or application software- 5inancial e'al#ation9benefits from s#c0 e*pendit#re may to t0e e*tent 4#antifiable6 be pro'idedB2 Ot"e$s 10is incl#des office b#ildings6 'e0icles6 f#rnit#re6 office e4#ipment6 ,nfo1ec0 related e4#ipment and #tilities6 and all s#c0 assets6 w0ic0 pro'ide infrastr#ct#res s#pport- 10is also incl#des any capital e*pendit#re not e*plicitly co'ered in t0e abo'e classificationsCapital E%penditure proposals are not applica$le for
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6L 0mployee entitlements Capital e*pendit#re necessary to meet t0e commitments in respect of pro'ision of assets to t0e employees in terms of personnel policies- 5inancial e'al#ation of s#c0 e*pendit#re is not re4#ired- Assets p#rc0ased by employees against t0eir 0ard9soft f#rnis0ing entitlements do not fall wit0in t0e scope of t0is man#al and 0ence6 will not be incl#ded 0ere as t0ey are per policy4L Amounts less than !s.('> '''@ *(>''' $egregation of Cape* and )e'en#e :*pendit#re 3roadly6 t0e following s0all be considered as )e'en#e2 All repairs to e4#ipment in t0e normal co#rse of b#siness All ann#al maintenance contracts DA/CE to keep t0e said e4#ipment9assets in working condition All e*pendit#res6 w0ic0 do not res#lt in an end#ring9permanent benefit to t0e assets /odification to t0e e*isting assets6 w0ic0 does not res#lt in end#ring benefit6 are to be treated as )e'en#e after taking ratification of 1ec0nical ?ead of Plant Piping and ins#lation of t0e nat#re of minor repair or replacement )e-arrangement of assets or minor str#ct#ral c0anges for reg#latory batc0es All accessories 9 dies N p#nc0es w0ic0 are proc#red s#bse4#ent to p#rc0ase of assets ,n case of certain e*pendit#re t0e treatment of w0ic0 is in do#bt6 t0e decision in t0is respect s0all be e*ercised by t0e Plant Acco#nt /anager in cons#ltation wit0 t0e Cser91ec0nical ?ead+ate Of Capitalisation >ate of Capitalisation wo#ld be t0e date w0en t0e assets is certified by t0e concerned :ngineering 9 :N5 >epartment as ready to #se or K); date in case of assets w0ic0 do not need commissioning Dt0at is comp#ters6 f#rnit#re6 fi*t#res etc-EGJ-IMT,MOHALI $2 of 94 ANUJ KUMAR SRIVASTAVA Page

A#t0ority for fi*ing date of capitalisation wo#ld be wit0 :N5 department.ead-time between certification and Commencement of commercial prod#ction will not normally e*ceeds 30 days ,n case of lead-time e*ceeding 30 days to take specific appro'als from t0e Plant ?ead8apitalization of 0xpenditure other than basic cost of assets All e*pendit#re directly related to t0e assets capitali7ed incl#ding freig0t6 :ntry ta*6 !ctroi6 c#stom d#ty6 and any s#c0 amo#nt6 w0ic0 does not form part of t0e original in'oice6 is to be capitali7ed along wit0 t0e rele'ant assetsAll installation cost6 ser'ice c0arges and labo#r cost6 trial r#n cost Dnet of reali7able 'al#e of t0e prod#ctE6 tec0nician fee and any ot0er e*pendit#re directly attrib#table to t0e installationCen'at 9C > credits will be netted off from t0e cost of assetsAs per acco#nting standard we 0a'e to capitalise t0e assets net of /od'at:N5 department operational cost will be directly identified wit0 t0e pro&ects or allocated to t0e pro&ects on e4#itable basis5or all t0is e*pendit#re it is important to book at t0e stage of initiation at $AP locations t0ro#g0 t0e same capital internal order n#mber6 w0ic0 0as been #ni4#ely gi'en to t0e Cape* proposal at t0e time of initiation of t0e partic#lar asset)egarding Cen'at9 C > credits netting off6 special care is re4#ired to be taken towards year ends to ens#re meeting tec0nical re4#irements as per t0e Acco#nting $tandards and ens#re ma*im#m depreciation Dincl#ding 0ig0er depreciation allowed is acco#nted for on capitali7ation6 as applicable N t0ere is no Cen'at Dcas0 flowE lossCape% 0um$ering 10e n#mbering sc0eme is as #nder
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Entit*EDi%isionECost Cente$ No+E Yea$E Se$ial No+ of C:P raised by t0at )CC9 )#nning $erial ;o- of Cape* of t0e >i'ision9 Plant6 to be gi'en by t0e Acco#nts department- ,n case of ?ead !ffice6 ?-! will appear against di'isionIs nameAt t0e beginning of t0e year capital b#dget prepared by e'ery cost center D)CCE for t0e partic#lar year in e'ery b#siness area- 10is b#dget prepared e'ery department and s#bmitted to t0e di'ision10en di'ision decided and finali7ed t0e b#dget and gi'en to t0e management committee for t0e final appro'al- Capital b#dget is t0ree type prepared by t0e company>i'isional ,nfo tec0 :mployee entitlement 10e w0ole process works in a 'ery systematic manner w0ere firstly engineers working at operational le'el locate t0e re4#irement of any new mac0inery- After identifying need at operational le'el process of capital b#dgeting commenceC#rrently w0ole Cape* system is followed man#ally- 10e w0ole organi7ation is di'ided plant wisePlants located at /o0ali 1 N26 1oansa6 >ewas are 0andled di'ision wise- >i'ision consists of 0ead from eac0 department and t0ey control AP, /an#fact#ring plants from one di'ision- AP, man#fact#ring acts as a coordinator between abo'e 4 plants- 10ey are responsible for comm#nicating reports generated by eac0 plant 0ead t0at comes #nder AP, man#fact#ring to 0ig0er a#t0orities5or eac0 Plant responsible cost center 0ead are assigned w0o looks after operational need- >ifferent )CC8s are prepared depending #pon t0e f#nctions10ese 0ead can be di'ided into following categories
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Prod#ction :ngineering Personnel9sec#rity

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$afety9:1P MA9MC $tores 5or abo'e different f#nctions )CC8s 0ead prepared t0eir re4#irement c0art specifying

MA9MCE

)CC8s n#mber >escription Dw0et0er prod#ction6 engineering6

Classification D)eplacement6 CpgradationE Hind of e*pendit#re Dcapital or re'en#eE "#stification :> M#antity )CC8s n#mber is #ni4#e for eac0 f#nction- >escription abo#t t0e f#nction w0et0er it falls in prod#ction6 engineering6 personnel etc)e'en#e or capital e*pendit#re can be f#rt0er di'ided as per )CC8s re4#irements2

CAPITAL EXPENDIT RE )eg#lation K/P DKoods /an#fact#ring PracticesE :?$ D:n'ironment ?ealt0 $afetyE )eplacement Capacity Cpgradation
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Additional

RE/EN E EXPENDIT RE !perating :*penses $tores )epairs 3#ilding )epairs and /aintenance $taff Lelfare :> is a management science tool6 w0ic0 is #sed by 'ario#s department depicting 'itality of partic#lar need raised at operational le'el w0ere stands for ,1A. : stands for :$$:;1,A. > stands for >:$,)A3.: 10e abo'e re4#irement c0art prepared by )CC 0ead t0en consolidated by >i'isional 5inance Acco#nts >epartment and b#dgets are prepared- 5or eac0 plant t0is c0art is prepared w0ere re4#irement of 'ario#s f#nctions are s0own and also respecti'e )CC 0ead gi'es &#stification- 5inance department re'iew t0e e*pendit#re type w0et0er capital or re'en#e again as it co#ld be classified wrong by )CC 0ead- 5inance department t0en modifies t0is c0art into b#dget based on Plant wise re4#irement Hind of f#nction ,n plant wise re4#irement 'ario#s e*cel files are prepared w0ic0 is as follows $#mmery statement
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)e'en#e e*pendit#re Capital e*pendit#re )CC wise $imilarly depending #pon t0e f#nctions 'ario#s b#dgets is prepared- 3asically 0ere for prod#ction and engineering re4#irements send by )CC 0ead is pro'ided in plant wise description c0art b#t for ot0ers s#c0 as Personnel9sec#rity $afety9:1P MA9MC $tores ,n abo'e f#nctions di'ision wise b#dgets are also made for e*ample DAEDC 3M Di%ision 3M PDL DA Cont$act ,anufactu$in' Pe$sonnelEsecu$it* 3M Di%ision 3M Pe$sonnelEsecu$it* Di%ision ,ana'ement Di%ision Accounts $eparate b#dgets are prepared and t0en sanctioned by respecti'e 0ead;ow t0e b#dgets prepared by finance department is f#rt0er send to respecti'e departmental 0ead- 10en plant 0eads6 followed by ice President N onwards as per t0e Cape* amo#nt6 appro'es t0ese cape*8s-

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As e*plained earlier 5inance manager maintain t0e b#dget information6 following man#fact#ring locations of AP, are catered at /o0ali >i'ision /!?A., 1!A;$A >:LA$ After preparation of 3#dgets6 3!> appro'es Capital :*pendit#re by initiating CAP:< form by Plant 0ead t0at is appropriately signed by re4#isite a#t0orities- ,n CAP:< 5orm itself amo#nt is classified into 'ario#s categories A- )eplacement9Cost )ed#ction 3- :*pansion into ;ew Prod#ct9;ew Prod#ct Packs C- M#ality6 $afety6 :n'ironmental >- :*pansion of :*isting Prod#cts Packs :- )eplacement2 /aintenance of 3#siness 5- !t0ers All kinds of e*pendit#re are classified into abo'e 0ead for AP, /an#fact#ring for appro'al of Capital :*pendit#re Accounting #oute for A./ 'anufacturing Ca#ital E9#enditu$e L0en top a#t0orities appro'e t0e Cape* re4#irement t0en an internal order n#mber is created by Plant department- After t0e creation of internal order n#mber finance department inform respecti'e acco#nts department abo#t t0e same- !n receipt of t0e ,!6 indenter will create t0e p#rc0ase re4#isition t0at s#bse4#ently go to p#rc0ase department- P#rc0ase department will float en4#ires and prepare comparati'e c0arts for at least 3 'endors- After selecting t0e 'endor6 p#rc0ase department will place a p#rc0ase order DP!E on t0e 'endor for s#pply of t0e
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asset- ,n case6 as per t0e terms of t0e P!6 any ad'ance is to be gi'en to 'endor6 t0e same is released by acco#nts department6 after passing t0e necessary entries in t0e 'endor acco#nt #nder respecti'e b#siness area D3AE- 10e p#rc0ase department w0ile preparing t0e P! wo#ld ens#re to mention complete name as @)A;3A<= .A3!)A1!),:$ .,/,1:>6 AP, /A;C5AC1C),;KA and address9 location of deli'ery of t0e asset- !n receipt of t0e goods6 t0e $tores department will arrange to prepare t0e K); and get t0e same appro'ed by t0e #ser department- !n appro'al of t0e K);6 t0e stores department will send t0e bill to acco#nts for in'oice 'erification- 10e acco#nts department will 'erify t0e in'oice wit0 P! and release t0e balance payment to 'endor,ate$ial Cost 10e p#rc0ase re4#isition DP)E for domestic materials i-e- $ol'ents6 C0emicals and ot0er Cons#mables re4#ired for pro&ect completion will be raised by scientists after obtaining appro'al from t0e respecti'e 0ead6 t0e p#rc0ase re4#isition DP)E will be send to p#rc0ase department for proc#rement of t0e material- P#rc0ase department will float en4#ires and prepare comparati'e c0arts for at least 3 'endors- 10e p#rc0ase department will place t0e P! on t0e 'endor for s#pply of t0e materials- ,n case6 as per t0e terms of t0e P!6 any ad'ance is to be gi'en to 'endor6 t0e same will be released by acco#nts department after passing t0e necessary entries in t0e 'endor acco#nt #nder 3#siness Area D3AE- 10e p#rc0ase department w0ile preparing t0e P! wo#ld ens#re to mention complete name as @)A;3A<= .A3!)A1!),:$ .,/,1:>6 AP, /A;C5AC1C),;KA and address9 location of deli'ery of t0e asset- !n receipt of t0e goods6 t0e stores department will arrange to prepare t0e K); and do t0e respecti'e 0ead appro'e t0e same- !n appro'al of t0e K);6 t0e stores department will send t0e bill to acco#nts department for in'oice 'erification- 10e acco#nts department 'erifies t0e in'oice wit0 P! and releases t0e balance payment to 'endor- 10e cost of material will be booked in t0e AP, /A;C5AC1C),;K cost center #nder 3#siness Area 1000GJ-IMT,MOHALI $9 of 94 ANUJ KUMAR SRIVASTAVA Page

,n case of imported material on receipt of appro'ed P) from t0e AP, /A;C5AC1C),;K6 p#rc0ase department6 /o0ali will send t0e P) to international p#rc0asing department D,> P#rc0aseE at >e'ika 1ower6 >el0i- 10e ,> P#rc0ase6 w0ile preparing t0e P! wo#ld ens#re to mention t0e complete as @)A;3A<= .A3!)A1!),:$ .,/,1:>6 AP, /A;C5AC1C),;KA and address9 location of deli'ery of t0e asset!n receipt of t0e material6 t0e p#rc0ase department will arrange to prepare t0e K); and do t0e respecti'e 0ead appro'e t0e same- !n appro'al !f t0e K);6 t0e ,> P#rc0ase department will send t0e bill to acco#nts department will only 'erify for in'oice 'erification- 10e acco#nts department will 'erify t0e in'oice wit0 P! -t0e 'erification of C#stom d#tyB !'erseas frig0t etc- will be done by ,> acco#nts and will arrange to release t0e payment to 'endor- 10e cost of material will be booked in t0e AP, /A;C5AC1C),;K cost center #nder 3#siness Area 1000,n t0e $AP system6 a separate storage location D$torage .ocation 107% plant 1030E for material re4#ired by AP, /A;C5AC1C),;K s0o#ld be created so t0at at any gi'en point t0e material p#rc0ased N cons#med may be identified- P0ysically6 t0e capital assets as well as t0e materials p#rc0ased for AP, /A;C5AC1C),;K s0o#ld be stored in a separate storage preferably wit0in AP, /A;C5AC1C),;K storage locationRe%enue E9#enditu$e Apart from material6 to carry on t0e AP, /A;C5AC1C),;K6 certain e*penses will be inc#rred #nder 'ario#s acco#nting 0eads10ese e*penses eit0er may be inc#rred directly by AP, /A;C5AC1C),;K6 or may be inc#rred by ot0er locations- 10e acco#nting of t0ese e*penses wo#ld be made as #nder2 10e manpower i-e- lab tec0nician and ot0er s#pporting staff working for t0e AP, /A;C5AC1C),;K s0o#ld be identifiedAll direct N indirect e*penses inc#rred in connection wit0 recr#itment6 salaries6 allowances and ot0er benefits related t0e said manpower be c0arged to t0e cost center for AP,
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/A;C5AC1C),;K e-g- )epairs N maintenance of b#ilding6 A/C8s 0o#sekeeping6 ?ortic#lt#re6 3ooks N Periodicals6 Conference N /eeting6 training6 tra'eling lab assistant6 Kifts N presents etc6 s0o#ld be c0arged to t0e cost center of AP, /A;C5AC1C),;KCtilities cost s#c0 as :lectricity6 Later6 Power6 and $tream etc6 inc#rred for AP, /A;C5AC1C),;K6 based #pon t0e act#al bills recei'ed from t0e s#pplier- ,n case t0e #tilities are pro'ided by any of t0e e*isting man#fact#ring facilities6 t0e s#pply s0o#ld be monitored by separate meter9s#b meter etc6 and c0arges for t0e same based #pon t0e act#al #nits cons#med s0o#ld be debited to t0e cost center of AP, /A;C5AC1C),;K10e ot0er s#pplies9facilities s#c0 as 1elep0one6 5a*6 1ele* etc-6 s0o#ld be directly in t0e name of AP, /A;C5AC1C),;K- ,n case6 any common facility is #sed6 c0arges on reasonable basis s0o#ld be debited to t0e cost center of AP, /A;C5AC1C),;K6 /o0ali- 10e s#pplies from common canteen s0o#ld also be c0arged on a reasonable basis i-e- linked to t0e n#mber of employees working in AP, /A;C5AC1C),;K- 10e c0arges for 1ea6 coffee6 snakes etc6 cons#med by AP, /A;C5AC1C),;KK#est wo#ld be c0arged on reasonable basis to t0e Cost Center of AP, /A;C5AC1C),;K,n case any materials9cons#mables are pro'ided by any of t0e man#fact#ring location to t0e AP, /A;C5AC1C),;K- A stock transfer note will be raised on AP, /A;C5AC1C),;K$imilarly if any ser'ices are pro'ided by marketing facility to AP, /A;C5AC1C),;K6 cost t0ere of at arms lengt0 basis will be debited to t0e AP, /A;C5AC1C),;KStatuto$* Com#liances 1-o$ Duties G Ta9es2: 7a8 E9cise: 110e C:; A1 credit s0all not be a'ailable in respect of t0e ,np#ts recei'ed from t0e 'endors21ransfer of any e*cisable inp#ts as s#c0 or intermediate from man#fact#ring locations t0e same s0o#ld be on payment9re'ersal of appropriate d#ty6 on w0ic0 C:; A1 is not applicable
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7b8 Sales Ta92 110e premises stand already declared for t0e p#rpose of sales ta* registration2As no direct sale acti'ity is in'ol'ed from t0e premises6 0ence no payment on acco#nt of sales ta*es7c8 "t-er ta9es: As applicable on t0e items proc#red for t0e p#rpose D!ctroi6 etc-E SA. .rogramming #oute or Approval Of Cape% $AP stands for $ystem Application Prod#cts in >ata Processing3efore gi'ing t0e ro#te of $AP for Cape* an introd#ction abo#t w0at act#ally is $AP )anba*y is an :)P organi7ation t0at #ses t0e $AP software system in t0eir organi7ation- )anba*y 0as adopted $AP )93 'ersion- $ystem Application Prod#ct D$APE is a prod#ct of K:)/A;= t0at 0elps in data processing,n t0is $AP software t0ere are 'ario#s mod#les6 w0ic0 deal wit0 different b#siness acti'itiesConfig#ration of in'entory #nder $AP system ,n t0e $AP system 'ario#s materials master codes are maintained to identify t0e materials w0et0er it is raw material6 work in progress6 finis0ed goods or semi finis0ed goods- 5or t0is p#rpose a 7-digit code is maintained)AL /A1:),A. PACH,;K /A1:),A. L!)H ,; P)!K):$$ 5,;,$?:> K!!>$
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3SSSSSS %SSSSSS 8SSSSSS 1SSSSSS

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ANUJ KUMAR SRIVASTAVA

$1!): A;> $PA):$

4SSSSSS

/aterial mod#le #nder $AP consist of t0e following !rgani7ation str#ct#re /aster data Proc#rement process ,n'entory management

O$'ani(ation st$uctu$e Client Company code 3#siness Area Plant Controlling area !perating concern Cost center Client G Com#an* Code Client - Application-independent #nit2 1op le'el P0ysical str#ct#re Client is a self-contained #nit in $AP )93 $ystem wit0 $eparate /aster )ecords and its own set of tables Company Code )epresents an independent legal acco#nting #nit6 w0erein a 3alance s0eet6 and PN. statement can be prepared$e'eral company codes can be set #p for eac0 client6 t0#s enabling acco#nting data to be managed sim#ltaneo#sly for se'eral independent organi7ations:*ample2 a s#bsidiary company6 member of a corporate gro#p

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)A;3A<= organi7ation 0as different client and company codes for its companies- $#c0 as )anba*y laboratories .1> )anba*y fine c0emical .1> )anba*y CH .1>

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%usiness Area .ine of 3#siness2 e-g- AP, /an#fact#ring6 P0armace#ticalsAn organi7ational entity t0at is not independent from a .egal standpoint- ,nternal balance s0eets and income $tatements can be created at 3#siness Area le'el3#siness Area config#red in ).. AP, /A;C5AC1C),;K AP, /A)H:1,;K 5!)/C.A1,!; /A;C5AC1C),;K 5!)/C.A1,!; /A)H:1,;K 1)A>,;K A..,:> 3C$,;:$$ P?A)/A 3C$,;:$$ $CPP!)1 ):A$:A)C? N >: :.!P/:;1

$lant A plant is an organi7ational #nit wit0in a company- A plant prod#ces goodsB render ser'ices6 or makes goods a'ailable for distrib#tion- A plant can be one of t0e following types of locations /an#fact#ring facility e-g- /5K D/o0aliE Lare0o#se distrib#tion center 3ranc0 office 8ontrolling Area 10is is organi7ational controlling #nit- 1ransactions wit0in Controlling area is possible
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Operating 8oncern 1op-le'el logical #nit in $AP- ,t is s#perset of all Cost Center6 3#siness Area and Controlling Area etc 8ost 8enter Cost center is t0e smallest #nit in P0ase ,- ,n $AP for 0andling 'ario#s costs6 t0ere are different types of cost centers- :*amples6 Personal Cost Center6 Amo*y Cost Center6 Ctility Cost Center5or 5inancial p#rposes Cost Center are classified into 'ario#s 0eads s#c0 as administrati'e cost center6 works cost center6 Ctility 9 Prod#ction cost center,A$ !oute $AP f#nctioning in t0e system begins by creating internal order,nternal order n#mber is created by finance department by #sing $AP command is Acco#nting -T ,n'estment /anagement -T internal order -T /aster data -T special f#nctions -T H!02 10e abo'e pat0 command is H!02 t0at creates an internal order for w0ic0 following information need to be filled Keneral data6 Applicant6 Person )esponsible6 Processing gro#p6 :stimated costs6 Application data6 >epartment6 Control data6 $ystem stat#s6 Cser stat#s6 Assignments6 Company code6 3#siness area6 Plant6 !b&ect class 1o make certain c0anges in internal order t0e command is
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Acco#nting -T ,n'estment /anagement -T internal order -T 3#dgeting -T !riginal 3#dget -T H!22 ,n abo'e command is #sed to 'erify t0e amo#nt and te*t of internal order10e report created by finance department can be 'iewed by #sing command $]A.)]8701301,t is not mandatory to fill #p certain fields in t0e internal order at t0e time of its creation wit0 t0e res#lt t0at t0e cost o'er-r#ns are not reflected a#tomatically by $AP systems- 5or e*ample6 t0e system pro'ides t0at w0ere t0e e*pendit#re #nder any internal order e*ceeds 2-%F of t0e b#dgeted amo#nt6 t0e same is reflected in t0e reportsAfter creating t0e internal order t0e finance manager will mail t0e CAP:< amo#nt sanctioned by 0ig0er a#t0orities and also t0e internal order n#mber to respecti'e Plant ?ead- ,ndenter will indent t0e re4#ired material- ,ndenter is t0e person w0o at operational le'el re4#ires t0e material ,n $AP ne*t step is creation of P#rc0ase )e4#isition t0at can f#rt0er be prepared in 2 ways Cost Center CAP:<-,! 5or t0e p#rpose of capitali7ation we 0a'e to foc#s on CAP:< ro#te- ?ere6 after getting mail from finance department Plant ?ead will a#t0ori7es t0e indenter to raise indent t0at is t0e indenter will create P#rc0ase )e4#isition- 5rom t0e department t0e $AP ro#te comes to P#rc0ase >epartment t0at in /o0ali 0andles t0e P#rc0ase )e4#isition for /o0ali and 1oansa- ,n p#rc0ase department t0ree doc#ments are prepared in order to raise final PC)C?A$: !)>:) t0at is initiate to s#pplier-

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1 ):MC:$1 5!) MC!1A1,!; D)5ME J P#rc0ase >epartment after recei'ing t0e P#rc0ase )e4#isition will place order depending #pon re4#irements- ,n system6 for different items different staff person recei'es partic#lar P#rc0ase re4#isition t0at is differentiated by #ni4#e p#rc0asing gro#p- 5or :*ample %0% is t0e p#rc0asing gro#p t0at 0andled P#rc0ase )e4#isition for items related to :lectrical and instr#ments5or eac0 item P#rc0ase >epartment is re4#ired to send )5M to 3 'endors- 10ree is t0e minim#m limit for e'ery item b#t in case w0ere P#rc0ase )e4#isition DP)E specify t0e brand of partic#lar need to be ac4#ired6 in t0at case only one )5M need to send- 5or e*ample if P) specifies one .K 1- t0en only one )5M need to send to dealers dealing in .K commodities- 5or CAP:< P) starts from 3000001+87- )5M is t0e 10-digit n#mber- ,n $AP for creating a )5M /:41 is t0e command #sed by p#rc0ase department- 10en a applet window comes w0ere information regarding )5M type .ang#age key )5M date M#otation deadline )5M !rgani7ational data P#rc0ase organi7ation P#rc0asing gro#p >efa#lt data for items ,tem category >eli'ery date Plant /aterial Kro#p $torage locationGJ-IMT,MOHALI %& of 94 ANUJ KUMAR SRIVASTAVA Page

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Balance s"eet
Dec N 5A Dec N 5@ Dec N 5? Dec N 5> Dec N 5=

Sou$ces of funds
!wnerIs f#nd :4#ity s0are capital $0are application money Preference s0are capital )eser'es N s#rpl#s 210-1+ 18(-%4 18(-34 18(-22 18%-8+ 17%-(( 1-18 0-88 0-28 2-83 36330-+2 263%0-(8 261(2-7+ 261+0-80 26320-7+ 1(2-07 3(%-07 224-2+ 3%3-4+ 133-37 36%(3-30 36137-+( 26+%4-31 (7(-31 2-4+ 76442-14 (6041-42 %6%28-(1 36407-10 26(4%-38

Loan funds
$ec#red loans Cnsec#red loans 1otal

ses of funds
5i*ed assets Kross block .ess 2 re'al#ation reser'e .ess 2 acc#m#lated depreciation ;et block Capital work-in-progress ,n'estments 2638(-7% 262(1-48 26133-%7 167++-32 16402-7+ +30-07 7+1-+( (++-%4 %++-3% %2%-21 164%(-(8 164(+-%2 16434-03 161++-+7 877-%8 428-77 327-42 301-88 432-84 2(4-1( 36(18-03 36237-%% 26(7+-+% 7(2-78 (7+-07 (6%0+-+7 26+22-42 26(20-++ 2640+-08 263((-8+ 46%71-31 16+1%-4+ 16%08-24 163+7-%( 16%42-33 16+38-(7 1600(-+3 16112-7( 16011-%2 824-%7 76442-14 (6041-42 %6%28-(1 36407-10 26(4%-38 36372-(0 3610(-(+ 26(%+-+4 7(2-77 280-4( 14-27 0-01 2%2-8% 201-00 1%+-40 202-40 4203-70 3730-71 372(-87 3724-42 (7+-07 0-01 307-+% 18%8-+1

Net cu$$ent assets

C#rrent assets6 loans N ad'ances .ess 2 c#rrent liabilities N pro'isions 1otal net c#rrent assets /iscellaneo#s e*penses not written 1otal

Notes:
3ook 'al#e of #n4#oted in'estments /arket 'al#e of 4#oted in'estments Contingent liabilities ;#mber of e4#ity s0areso#tstanding D.acsE

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Ca#ital st$uctu$e
-$om To Class Of Yea$ Yea$ S"a$e :4#ity 2008 2008 $0are :4#ity 2007 2007 $0are :4#ity 200( 200( $0are :4#ity 200% 200% $0are :4#ity 2004 2004 $0are :4#ity 2003 2003 $0are :4#ity 2002 2002 $0are :4#ity 2001 2001 $0are :4#ity 2000 2000 $0are :4#ity 1+++ 1+++ $0are :4#ity 1++7 1++8 $0are :4#ity 1++( 1++7 $0are :4#ity 1++% 1++( $0are :4#ity 1++% 1++( $0are :4#ity 1++4 1++% $0are :4#ity 1++3 1++4 $0are :4#ity 1++2 1++3 $0are Aut"o$i(ed Ca#ital 2++-00 2++-00 2++-00 2++-00 1++-00 1++-00 1++-00 1%0-00 1%0-00 1%0-00 (+-00 (+-00 (+-00 (+-00 (+-00 (+-00 4+-00 Issued Ca#ital 210-18 18(-%4 18(-34 18(-22 18%-8+ 18%-%4 18%-4% 11%-+0 11%-+0 11%-+0 %3-73 4+-41 48-13 48-13 43-13 3%-33 21-7+ Paid # Paid # Paid # S"a$es 1Nos2 -ace /alue Ca#ital 4203(+7%3 37307082+ 372(8(+(4 3724421+0 18%8+0742 18%%43(2% 18%4%20+8 11%8+%478 11%8+%478 11%8+%2%0 %372(2%2 4+414717 431322%3 %000000 431322%3 3%3302(+ 217+30%0 % % % % 10 10 10 10 10 10 10 10 10 3 10 10 10 210-18 18(-%4 18(-34 18(-22 18%-8+ 18%-%4 18%-4% 11%-+0 11%-+0 11%-+0 %3-73 4+-41 43-13 1-2% 43-13 3%-33 21-7+

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#ecommendations and Suggestions for the /ndian .harma /ndustry&

10e ac0ie'ements of t0e ,ndian p0armace#tical ind#stry are spectac#lar in recent times and are praise wort0y6 w0ic0 0as e'ol'ed as model ind#stry of t0e co#ntry in performance- 3#t6 in t0e 21st cent#ry6 t0e p0armace#tical 'al#e c0ain wo#ld depend on t0e ability of p0armace#tical companies to make t0e tec0nological s0ift necessary to maintain and increase t0eir competiti'e positionsAlso for t0e /;Cs6 ,ndia pro'ides not &#st t0e possibility J b#t t0e #ni4#e N tangible opport#nity to make t0e desired Gtec0nological s0ift8 J in process6 and in locationY 10e 4#estion before P0arma Company C:!s t0e world o'er today is not2 G$0o#ld my company go to ,ndiaX8 b#t GCan my company afford not to go to ,ndia8XA STEPS RED IRED TO BOOST T!E CO,PETITI/ENESS OT!E P!AR,A IND STRY

E9tension of deduction of 6>5J of RGD e9#enses+ 10is wo#ld enco#rage more and more companies to in'est in )N>-

10e go'ernment 0as earmarked 1%0 crores for )N>- 10is is &#st not eno#g0- ,t s0o#ld be a#gmented to at least 2000 crores

To $ationali(e D$u' P$ice Cont$ol O$de$ 1DPCO2+ 10e ob&ecti'e of t0e price control was to ens#re ade4#ate a'ailability of 4#ality medicines at affordable prices- 10e prod#ct patent regime will make it obligatory for ,ndian companies to compete in )N> if t0ey want to s#r'i'e- $imilarly6 L1! led global trading system will res#lt in import tariffs coming down- 5or ,ndian companies to compete wit0 c0eap imports6 t0ey will 0a'e to in'est in cost effecti'e tec0nology and processes- 10erefore6 it is imperati'e t0at t0e p0arma ind#stry 0as s#rpl#s for in'estment- ,n t0is conte*t6 a liberali7ed price control regime becomes more importantAn academic Iindust$ial $elations"i# can be fu$t"e$ e9#lo$ed6 on t0e lines of t0e C$ model6 w0ere t0e #ni'ersities are t0e sites of inno'ation and t0e ind#stry commerciali7es t0e
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prod#ct- 10e #ni'ersities are permitted to own t0e ,ntellect#al Property )ig0ts D,P)E and get a s0are of t0e profits- Academic instit#tions will t0en become t0e engines of entreprene#rs0ip10is also re4#ires setting #p of greater n#mber of centres of academic e*cellence t0ro#g0o#t ,ndia in different states6 so t0at people from across t0e co#ntry can a'ail of s#c0 ed#cation and make t0eir contrib#tions wit0o#t feeling t0e need to look beyond ,ndia for ac0ie'ing academic e*cellence

Income ta9 e9em#tions s"ould be 'i%en on clinical t$ials and cont$act $esea$c" done outside t"e com#an* and ab$oad+ 10is is beca#se ,ndia is seen as emerging as a ma&or centre for o#tso#rcing of clinical trials for t0e P0armace#tical /;CsT"e #$oblem of s#u$ious d$u's "as to be tacCled+ 10e proced#re for proc#rement of licence s0o#ld be made more stringent6 incl#ding e*tensi'e disclos#re of detailed personal6 financial and b#siness information and a t0oro#g0 backgro#nd c0eck- 10ere is a strong need to strengt0en and streamline t0e Central and $tate >r#g Control !rgani7ations- $tate dr#g controllers s0o#ld take meas#res like setting #p of separate intelligence-c#m-legal mac0inery wit0 police assistance- 5aking s0o#ld be made non-bailable and cogni7able offence and t0e prosec#tion s0o#ld be instit#ted by any police or Central 3#rea# of ,n'estigation officer not less t0an t0e rank of a s#binspector Dinstead of an inspector in t0e e*tant pro'isionE /ost of t0e cases relating to sp#rio#s dr#gs remain #ndecided for years- ?ence t0ere is a strong need for setting #p separate co#rts for speedy trials of s#c0 offences- 10e case s0o#ld be tried by t0e co#rt of t0e rank of a $ession "#dge or abo'e w0ereas t0e e*tant pro'ision pro'ides for a trial by a metropolitan magistrate or a first class &#dicial magistrate or abo'e:ac0 state s0o#ld set #p accredited testing laboratories t0at are well e4#ipped and ade4#ately staffed10e staff s0o#ld be trained well for drawing samples for

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test and monitoring t0e 4#ality of dr#gs and cosmetics mo'ing in t0e $tate- ,t is most important and essential to 0a'e training programmes for tec0nical staff of central and state dr#g control laboratories and pri'ate testing laboratories as it is based on t0e report of t0ese testing laboratories t0at a man#fact#rer releases 0is prod#ct or ot0erwise- .egal action against t0e man#fact#rer is likely to be taken on t0e basis of t0e test report gi'en by a go'ernment analyst

India s"ould e9#loit its Cno&3"o& in "e$bal medicines+ $ince t0ese medicines do not come #nder t0e p#r'iew of t0e 1),P$ regime and t0e researc0 in new c0emical entities in'ol'es millions of dollars of in'estment6 t0e ,ndian companies s0o#ld engage in )N> in 0erbal medicine- 10e companies s0o#ld try to e*ploit t0e ,ndian traditional knowledge in ay#r'eda and 0erbal c#res and file as many patents for 0erbal medicine as t0ey can5or t0is t0e go'ernment s0o#ld set #p )N> laboratories #ndertaking researc0 e*cl#si'ely in t0e area of 0erbal medicines and s#pport t0e companies in t0eir researc0 and patent filingT"e 'o%e$nment s"ould encou$a'e settin' u# of S-DA3 com#liant #lants b* #$o%idin' ta9 "olida*s fo$ a s#ecified #e$iod 1as 'i%en in $e'ions liCe Baddi2; so t0at t0e ,ndian companies can e*ploit t0e opport#nity arising o#t of patented dr#gs and take #p marketing of generics in t0e de'eloped co#ntries like C$A-

TRE DS A D STRATEBIES 10e ,ndian domestic p0armace#tical ind#stry is increasingly becoming globally competiti'e to co#nter t0e weaknesses and t0reats10e key trends and strategies being adopted by t0e local p0armace#tical ind#stry are2 Inc$eased RGD -ocus >ri'en by t0e imminent c0ange to a prod#ct patent regime at 0ome from 200% t0e leading p0armace#tical companies in ,ndia 0a'e been increasing t0eir )N> b#dgets o'er t0e years- ,ndian p0armace#tical
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companies are likely to do#ble t0eir e*pendit#re on )N> o'er t0e ne*t 2 years-

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E9#o$ts D$i%en 0$o&t" ,ndian p0armace#tical companies are on a global beat- C#rrently6 e*ports contrib#te more t0an 0alf t0e total re'en#es for most of t0e ,ndian p0armace#tical ma&ors- :*ports 0a'e increased in recent years as ,ndian p0armace#tical companies 0a'e made deep inroads into t0e reg#lated generic markets of t0e C$ and :#rope6 in addition to #nreg#lated markets,NCs S"o&in' 0$o&in' Inte$est in India 10e s0are of /;Cs in t0e ,ndian p0armace#ticals market is e*pected to increase wit0 t0e recognition of prod#ct patents in t0e co#ntry from 200%6 as t0ey will be able to freely introd#ce top of t0e line6 patented prod#cts in t0e domestic market- /oreo'er6 wit0 t0e new price control order e*pected to be passed soon6 >PC! co'erage will be s#bstantially red#ced and margins of most /;Cs wit0 strong brands will drastically impro'e- 10e ,ndian Ko'ernment8s decision to allow 100 per cent 5oreign >irect ,n'estment into t0e dr#gs and p0armace#tical ind#stry is e*pected to aid increased in'estment in )N> infrastr#ct#re by /;Cs in ,ndia#ecommendations !a$oratories !td& and Suggestions for #an$a%y

10is paper describes a met0odology for deri'ing t0e optim#m capital str#ct#re for an #nle'ered e4#ity dri'en firm- Csing a 0ypot0etical model for comp#ting optimal capital str#ct#re6 t0e idea is to determine t0e optim#m le'el of debt w0ic0 )anba*y can for ma*imisising its market 'al#e and s0are0olders wealt0- ario#s met0ods t0ro#g0 w0ic0 )anba*y can raise debt are2 Debentu$es >ebent#res are loans t0at are #s#ally sec#red and are said to 0a'e eit0er fi*ed or floating c0arges wit0 t0emA sec#red debent#re is one t0at is specifically tied to t0e financing of a partic#lar asset s#c0 as a b#ilding or a mac0ine- 10en6 &#st like a mortgage for a pri'ate 0o#se6 t0e debent#re 0older 0as a legal interest in t0at asset and t0e company cannot dispose of it #nless t0e
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debent#re 0older agrees- ,f t0e debent#re is for land and9or b#ildings it can be called a mortgage debent#re>ebent#re 0olders 0a'e t0e rig0t to recei'e t0eir interest payments before any di'idend is payable to s0are0olders and6 most importantly6 e'en if a company makes a loss6 it still 0as to pay its interest c0arges,f t0e b#siness fails6 t0e debent#re 0olders will be preferential creditors and will be entitled to t0e repayment of some or all of t0eir money before t0e s0are0olders recei'e anyt0ingOt"e$ Loans 10e term debent#re is a strictly legal term b#t t0ere are ot0er forms of loan or loan stock- A loan is for a fi*ed amo#nt wit0 a fi*ed repayment sc0ed#le and may appear on a balance s0eet wit0 a specific name telling t0e reader e*actly w0at t0e loan is and its main detailsO%e$d$aft -acilities /any companies 0a'e t0e need for e*ternal finance b#t not necessarily on a long-term basis- A company mig0t 0a'e small cas0 flow problems from time to time b#t s#c0 problems donIt call for t0e need for a formal long-term loan- Cnder t0ese circ#mstances6 a company will often go to its bank and arrange an o'erdraft- 3ank o'erdrafts are gi'en on c#rrent acco#nts and t0e good point is t0at t0e interest payable on t0em is calc#lated on a daily basis- $o if t0e company borrows only a small amo#nt6 it only pays a little bit of interestLines of C$edit f$om C$edito$s 10is so#rce of finance really belongs #nder t0e 0eading of working capital management since it refers to s0ort term credit- 3y a Iline of creditI we mean t0at a creditor6 s#c0 as a s#pplier of raw materials6 will allow #s to b#y goods now and pay for t0em later- L0y do we incl#de lines of credit as a so#rce of financeX Lell6 if we manage o#r creditors caref#lly we can #se t0e line of credit t0ey pro'ide for #s to finance ot0er parts of o#r b#siness0$ants Krants can be an attracti'e aspect of a companyIs financing str#ct#re,f a company 0as a specific iss#e t0at it wants or needs to deal wit0
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t0en it co#ld find t0at t0ere are grants a'ailable from local co#ncils and ot0er bodies t0at will 0elp to pay for it/entu$e Ca#ital ent#re Capital 0as become a 'ital aspect of t0e so#rce of finance market o'er t0e last 10 to 1% years- ent#re Capital can be defined as capital contrib#ted at an early stage in t0e de'elopment of a new enterprise6 w0ic0 may 0a'e a significant c0ance of fail#re b#t also a significant c0ance of pro'iding abo'e a'erage ret#rns and especially w0ere t0e pro'ider of t0e capital e*pects to 0a'e some infl#ence o'er t0e direction of t0e enterprise- ent#re Capital can be a 0ig0 risk strategy-acto$in' 5actoring allows yo# to raise finance based on t0e 'al#e of yo#r o#tstanding in'oices- 5actoring also gi'es yo# t0e opport#nity to o#tso#rce yo#r sales ledger operations and to #se more sop0isticated credit rating systems- !nce yo# 0a'e set #p a factoring arrangement wit0 a 5actor6 it works t0is way2 !nce yo# make a sale6 yo# in'oice yo#r c#stomer and send a copy of t0e in'oice to t0e factor and most factoring arrangements re4#ire yo# to factor all yo#r sales- 10e factor pays yo# a set proportion of t0e in'oice 'al#e wit0in a pre-arranged time - typically6 most factors offer yo# 80-8%F of an in'oiceIs 'al#e wit0in 24 0o#rsLeasin' .easing is a contract between t0e leasing company6 t0e lessor6 and t0e c#stomer Dt0e lesseeE- 10e leasing company b#ys and owns t0e asset t0at t0e lessee re4#ires- 10e c#stomer 0ires t0e asset from t0e leasing company and pays rental o'er a pre-determined period for t0e #se of t0e asset- 10ere are two types of leases2

-inance Leases Cnder a finance lease t0e rental co'ers 'irt#ally all of t0e costs of t0e asset t0erefore t0e 'al#e of t0e rental is e4#al to or greater t0an +0F of t0e cost of t0e asset- 10e leasing company claims writing down allowances6 w0ilst t0e c#stomer can claim bot0 ta* relief and A1 on rentals paid-

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O#e$atin' Leases 10e lease will not r#n for t0e f#ll life of t0e asset and t0e lessee will not be liable for its f#ll 'al#e- 10e lessor or t0e original man#fact#rer or s#pplier will ass#me t0e resid#al risk- 10is type of lease is normally only #sed w0en t0e asset 0as a probable resale 'al#e6 for instance6 aircraft or 'e0icles-

10e most common form of operating lease is known as contract 0ire:ssentially6 t0is gains t0e c#stomer t0e #se of t0e asset toget0er wit0 added ser'ices- A 'ery common e*ample of an asset on contract 0ire wo#ld be a fleet of 'e0icles,ndian p0armace#tical scene is fast c0anging- Cons#mer e*pectations are going #p leading to more diffic#lties for p0armace#tical marketing professionals- C0ange in t0e c0aracter profile of t0e doctors wit0 socio-economic c0anges 0a'e also affected many p0armace#tical companies- 10#s )anba*y s0o#ld also concentrate on following areas to strengt0en market position2 Do ,a$Cet Audit 10e company s0o#ld carryo#t an a#dit of all its acti'ities- 10is acti'ity analyses different marketing acti'ities and s#ggest t0e benc0 mark for t0e company- 10is is a self s#pporti'e st#dy as t0e marketing a#dit gi'es lot of a'en#es in streamlining t0e operations and c#tting t0e cost- ,t also 0elps to remo'e #nnecessary acti'ities6 w0ic0 may be red#ndant for tomorrow- 10is gi'es also an insig0t to t0e f#t#re scenarioSales ,ana'ement Audit and P$e#a$ation of Ne& Sales St$ate'* $ales /anagement plays a 'ery important role in p0armace#tical ind#stry- /edical )epresentati'e or Area /anager is t0e key person in impro'ing t0e sales- /edical )epresentati'e and /anager6 if are not 0appy6 and not properly directed can lead to c0aotic conditionsGJ-IMT,MOHALI &9 of 94 ANUJ KUMAR SRIVASTAVA Page

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T$ainin' )eorientation of t0e field force and manager is a m#st- 1raining plays a 'ery important role in moti'ating representati'es as well as managers- ,t 0elps t0em to s0arpen t0eir tools and de'elop confidenceA series of refres0er co#rse s0o#ld be organi7ed in order to #pdate managers on t0e medical skills and t0e selling skills- 10e net benefits of a training program may be s#mmari7ed as #nder2 iConfidence le'el of t0e medical representati'es goes #p- 10ey added lot of key c#stomers w0om t0ey were not meeting earlier,ncrease in c#stomer base wit0 also reg#lar 'isit to key c#stomers led to impro'ement in o#tp#t,mpro'ement in strike rate J con'erting Non P$esc$ibin' Potential Docto$s to I$$e'ula$ P$esc$ibin' Docto$s DuicCe$+ 10is leads to impro'ement in t0e prod#cti'ity1raining 0elps in accelerating prod#cti'ity and o'erall growt0 in t0e Company-

ii-

iii-

/orale of t0e people if kept 0ig0 t0en anyt0ing can be ac0ie'ed1oday as per t0e st#dy cond#cted in ,ndia6 ma&ority of t0e people works at 40F of its energy le'el- A positi'e attit#de wit0 proper work c#lt#re will not come only t0ro#g0 lect#res b#t t0ere s0o#ld be ade4#ate reward systemsO#timi(ation of Resou$ces )eso#rces a'ailable today are becoming scarce- 10erefore6 for t#rning aro#nd t0e company6 optimi7ation of reso#rces does play a 'ery important role- 10e acti'ities like rationali7ing of to#r programme6 defining t0e 0ead 4#arters working norms6 proper planning of inp#t plans like samples6 gifts based on contrib#tion6 core doctors 'isit analysis6 application of AC: approac0 and inp#t-o#tp#t model led to increase in profitability-

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CO CLUSIO
10e s#ccessf#l strategy for )anba*y .aboratories .td- in a post 2010 world will incl#de2 DaE DbE DcE DdE DeE DfE DgE D0E DiE D&E Attain rig0t prod#ct-mi* A#gment skills Cse /NA options for eit0er companies or prod#cts3#ilding G,nno'ation8 :ngine at )N> $#stain growt0 momement#m in C$AAttain critical mass in :#rope and .atin America$pecialty prod#cts foc#s for @3randA marketing5ortifying 0ome b#siness J le'erage ,ndia 3ase$eeding t0e "apanese market;etworking6 licensing and ac4#isitions-

DkE 1ec0nology6 new market entry 'e0icles6 brands9 proprietary prod#cts DlE Klobal talent pool to f#el growt0-

10e increasing importance of biotec0 ind#stry and its symbiotic relations0ip to p0arma will also be 'ery rele'ant in )anba*y8s strategy- ?owe'er )anba*y s0o#ld not close its eyes on t0e e'er increasing Klobal competition6 w0ic0 is a big t0reat for t0e company10e entry of international and new domestic players wo#ld intensify t0e competition significantly5#rt0er t0ere is t0reat from ot0er low cost co#ntries like C0ina and ,srael- ?owe'er6 on t0e 4#ality front6 ,ndia is better placed relati'e to C0ina- $o6 differentiation in t0e contract man#fact#ring side may wane- 10e s0ort-term t0reat for t0e p0arma ind#stry is t0e #ncertainty regarding t0e implementation of A1- 10o#g0 t0is is likely to 0a'e a
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negati'e impact in t0e s0ort-term6 t0e implications o'er t0e long-term are positi'e for t0e ind#stry10e ,ndian p0armace#tical ind#stry is at t0e center stage in t0e global 0ealt0care arena and )anba*y endea'ors to be at t0e forefront in deli'ering t0e ,ndia centric ad'antages to t0e ad'anced and de'eloping co#ntries of t0e world5rom a small domestic company at inception6 )anba*y 0as grown formidably to be a 3illion dollar instit#tion t0at was en'isioned by .ate >r Par'inder $ing06 C0airman and /anaging >irector6 )anba*y in early +0Is,t is wit0 t0e #nwa'ering I dedication I and t0e I will to win I of 1eam )anba*y across t0e globe t0at )anba*y 0as tra'ersed t0is &o#rney so far- 10e management feels t0at t0e ne*t leag#e is a greater c0allenge6 as t0e company 0as ot0er milestones to ac0ie'eL0ilst )anba*y contin#es to en0ance t0e moment#m of its generics b#siness in its key geograp0ies6 parallel to t0at it is also accelerating its dr#g disco'ery program- 10e company is committed to pro'ide 4#ality generics at affordable prices to t0e patients worldwide wit0 a 'iew to 0elp bring down t0e 0ealt0care costs- )anba*y8s management is confident t0at its efforts wo#ld see t0e Company emerge as a leading player in t0e global generic space in t0e years to comeAs t0e company mo'es a0ead towards its mission to become a )esearc0 based ,nternational P0armace#tical Company- 10e management belie'es t0at6 it is t0e spirit of 1eam )anba*y t0at wo#ld enable )anba*y to reac0 o#t to ision 2012

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!i1,iograp)2
CE!SITES6?

www-ranba*y-com

O LI E DOUR ALS6? - Cygn#s 3#siness Cons#lting N )esearc0 Indian Pharmaceutical Industry-Oct-Dec 2008 - 5,CC, )eport for ;ational man#fact#ring Competiti'eness Co#ncil D;/CCE

!OOES6? - 5inancial /anagement D,C5A, Cni'ersityE - 5inancial /anagement D5o#rt0 editionE 3y /-=-H0an N P-H-"ain D1ata /cKraw ?ill P#blis0ing Company .td-E - 5inancial /anagement D$i*t0 editionE 3y Prasanna C0andra D1ata /cKraw ?ill P#blis0ing Company .td-E - 5inancial /anagement D5o#rt0 editionE 3y )a'i / His0ore

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