VIDYASAGAR UNIVERSITY JOURNAL OF COMMERCE

VOL. 13 MARCH, 2008 

VIDYASAGAR UNIVERSITY 

JOURNAL OF COMMERCE 

Journal of 

The Department of Commerce with Farm Management 

Vidyasagar University

Editorial Board 

EDITOR-IN-CHIEF 

K. C. Paul 

Vidyasagar University 

EXECUTIVE EDITOR 

Arindam Gupta 


T. L. Khan 


ASSOCIATE EDITORS 

S. Ghosh 


D. P. Pande 

Formerly, 


MEMBERS 

D. Obul Reddy 

Formerly, 

Osmania University 

Asish K. Bhattacharyya 

I. I. M. Calcutta 

Jaydeb Sarkhel 

University of Burdwan 

Sudipti Banerjea 

University of Calcutta 

K. V. Achalapathi 

Osmania University 

Ranjan Kr. Bal 

Utkal University 

Badar Alam Iqbal 

Aligarh Muslim University 

Dilip Roy 

University of Burdwan 

D. V. Ramana 

XIM Bhubaneswar 

Abhijit Sinha 


T. N. Sahu 


Members of the Editorial Board and the Department of Commerce with Farm 

Management, Vidyasagar University are not responsible for any of the views 

expressed by the contributors in the Vidyasagar University Journal of Commerce.

CONTENTS 

Sl. No. Title of Article Page No. 

1. CORPORATE GOVERNANCE AND TRANSPARENCY SCENARIO IN 

ASIA 

Dr. Madan Bhasin 

2. A SURVEY ON THE RECAPITALISATION, MERGERS AND 

ACQUISITIONS OF THE NIGERIAN INSURANCE INDUSTRY 

Mr. S.A. Aduloju 

Mr. A.L. Awoponle 

Mr. S.A. Oke 

3. SHG - BANKING IN INDIA – EMPIRICAL EVIDENCES OF 

BANKERS’ PERCEPTION AND PROBLEMS 

Prof. Samirendra Nath Dhar 

Mr. Kiranjit Sett 

Mr. Soumitra Sarkar 

4. ENHANCING PROFITABILITY AND SHAREHOLDER VALUE 

THROUGH MERGER – A CASE STUDY OF ICICI BANK 

Prof. Arindam Gupta 

Mr. Debashis Kundu 

5. CORPORATE RESTRUCTURING THROUGH MERGERS AND 

ACQUISITIONS: A CASE STUDY 

Dr. Debdas Rakshit 

Mr. Chanchal Chatterjee 

6. WTO AND INDIA: TIME FOR RENAISSANCE OF FARM SECTOR 

Mr. Vijay Kumar Mishra 

7. A DISCRIMINANT ANALYSIS AND PREDICTION OF LIQUIDITY- 

PROFITABILITY 

Dr. Amalendu Bhunia 

REPORT OF THE RAPPORTEURS OF THE NATIONAL SEMINAR 

ON “CURRENT TRENDS IN INDIAN BANKING” 

Mr. Subrata Mukherjee 

Dr. Rabindranath De Dalal 

REPORT OF THE EXTENSION LECTURE PROGRAMME 


1 

35 

54 

66 

79 

91 

100 

107 

112

EDITORIAL 

Welcome to the present issue of this journal. One gets knowledge-rich by 

gaining experience which is surely a repository of hurdles and challenges. The 

passage to this thirteenth annual issue is not an exception; but we are sure it speaks 

for us as to how strategic we were in overcoming those hurdles and in gainfully 

utilizing that experience for gradual improvement. Maintaining continuity, though an 

uphill task, is an important aspect in the life of a journal for its sustenance. That in 

turn depends on three basic factors – contribution from the authors (the input), 

editorial functions (the processing mechanism), and acceptance by the users (the 

output). We have undertaken the task of performing the editorial functions and 

thereby remain grateful to both the authors and the users for their continued and 

stronger support for longer sustenance. We are specially grateful to the two foreign 

authors on this count. 

Two important features of this journal, to reiterate, are the ‘blind review’ 

process to maintain and improve the quality, and an earmarked space for ‘Students’ 

Section’ meant ‘for the students and by the students’. We apologise to those 

contributors whom we could not accommodate in this volume due to lack of 

sufficient time to re-process and to get the revised version of their contributions. We 

hope to find them in the next volume. We also apologise to the users for our failure 

to present any write up in the ‘Students’ Section’. 

This volume contains seven articles – one on Corporate Governance in the 

Asian sub-continent, three on different aspects of Mergers and Acquisitions, and one 

each on Microfinance, effects of WTO in Indian Farm sector, and on prediction of 

Liquidity and Profitability. Dr. Madan Bhasin has written on Corporate Governance. 

As to Mergers and Acquisitions, i) recapitalisation issue in Nigerian Insurance 

industry has been studied jointly by Mr. S. A. Aduloju, Mr. A. L. Awoponle, and Mr. 

S. A. Oke; ii) a study jointly by Prof. Arindam Gupta and Mr. Debashis Kundu 

analyses the effectiveness in enhancing Profitability and Shareholder Value Creation; 

and iii) Dr. Debdas Rakshit jointly with Mr. Chanchal Chatterjee has studied the 

effectiveness in Corporate Restructuring. Bankers’ perception about Microfinance 

has been analysed jointly by Prof. Samirendra Nath Dhar, Mr. Kiranjit Sett, and Mr. 

Soumitra Sarkar. Mr. Vijay Kumar Mishra has taken the endeavour to identify the 

possibility of renaissance in the Farm sector under WTO regime and finally Dr. 

Amalendu Bhunia has tried to predict the Liquidity and Profitability by Discriminant 

Analysis. Apart from the articles, this volume also presents the highlights of the

National Seminar on ‘Current Trends in Indian Banking’ by Mr. Subrata Mukherjee 

and Dr. Rabindra Nath De Dalal and of the Extension Lecture programme by Prof. 

Arindam Gupta as Head of the Department, organized by the Department during the 

year. 

I must appreciate the gesture of my colleagues in cooperation and sharing of 

the editorial tasks. Prof. Arindam Gupta deserves special mention for his 

commendable role in his capacity as the Executive Editor towards continuous quality 

improvement and timely publication. I cannot leave without recognizing the role of 

our Mentor, Prof. S. K. Pramanick, the honourable Vice-Chancellor of our 

University. In the end, Mr. Achinta Marik, the Proprietor of M/s. Mithu Enterprise 

deserves equal credit for crashing the printing time without sacrificing its quality. 

We’ll perceive our efforts to be successful only if this journal is well accepted by the 

readers. 

Dated: Midnapore 

The 31 st March 2008 

Sd/- K. C. Paul 

Editor-in chief

Vidyasagar University Journal of Commerce 

Vol. 13, March 2008 

CORPORATE GOVERNANCE AND TRANSPARENCY SCENARIO IN ASIA 

Madan Bhasin * 

ABSTARCT 

CG in Asia have assumed greater limelight with the series of corporate failings and 

scandals, following which the markets, investors and society at large have begun to 

loose faith in the infallibility of these systems. It provides an overview of the CG 

practices and transparency scenario prevalent in the Asia region, duly supported by 

empirical data. No doubt, several initiatives have been undertaken by various 

national and international agencies, and CG scenario have considerably improved, 

but much work still remains to be done, and the ethos of CG culture has yet to sink 

in fully. We highly appreciate the timely and bold initiative taken by the Council of 

the ICAI to agree to fully converge with IFRS standards on or after 1 April 2011. 

This article seeks to present a series of suggestions aimed to improve CG practices 

in India. Most notably, India must reform how its boards of directors function, 

improve its enforcement mechanisms, redefine its corporate laws, and embrace CG 

as a philosophy. The country should be proud of what it has achieved in CG 

practices but, of course, much more needs to be done. Thus, CG in India and Asia 

remains a work-in-progress requiring some rethinking. 

Introduction 

The term ‘governance’ has been derived from the word ‘gubernare’, which means “to rule or 

steer”. Governance is the general exercise of authority, and the process by which a society or 

an organization ‘steers’ itself. However, over the years it has found significant relevance in 

the corporate-sector on account of growing number and size of corporations, the widening 

base of their shareholders, increasing linkages with the physical environment, and overall 

impact on the society’s well-being. Corporate Governance (CG) is the system of structural, 

procedural and cultural safeguards designed to ensure that a company is run in the ‘best’ 

long-term interests of its shareholders, as well as, other stakeholders. This alignment requires 

a ‘commitment’ to sustained interactions between a company and its principal stakeholders. 

The separation of ownership (the shareholder) and control (the management) in corporate 

enterprises brings about “agency” problem in which management may take actions that 

compromise the interests of its shareholders. The primary CG mechanism, in fact, is the 

board of directors, and its primary purpose is to combat the familiar ‘agency’ problem—the 

* Associate Professor of Accounting, SKK School of Business, SungKyunKwan University, Seoul, 

South Korea, e-mail : madan.bhasin@rediffmail.com


tendency and ability of senior managers to put their personal interests above those of the 

company’s shareholders and stakeholders. It is the responsibility of the board of directors, in 

fact, to ensure ‘good’ CG. This involves a set of relationships between the management of a 

corporation, its board, its shareholders and other relevant stakeholders. Accordingly, the 

board must agree on the corporation’s purpose (what it is for), its ethical values (what it 

stands for), and the strategy to achieve its purpose. In the practical sense, CG involves the 

“nuts and bolts” of how corporations should fulfill their responsibilities to their shareholders 

and other stakeholders. 

“Good” CG requires that the board must govern the corporation with integrity and enterprise 

in a manner, which entrenches and enhances the ‘license’ it has to operate. This license is 

not only regulatory but embraces the corporation’s interaction with its shareholders and 

other stakeholders, such as, the communities in which it operates, bankers, other suppliers of 

finance and credit, customers, the media and public opinion makers and pressure groups. 

While the board is accountable to the owners of the corporation for achieving the corporate 

objective, its conduct in regard to factors, such as business ethics and the environment, for 

example, may have an impact on legitimate societal interests (stakeholders) and thereby 

influence the reputation and long-term interests of the business enterprise. However, an ideal 

governance structure should give management sufficient room to exercise their talent, while 

simultaneously controlling their behavior. 

During the 1990s, a number of high-profile corporate scandals (viz., Enron, WorldCom, 

Tyco, etc.) in the US and elsewhere (viz., Parmalat, Ahold, Alstom, etc.) triggered an indepth 

reflection on the ‘regulatory’ role of the government in protecting the interests of 

shareholders. The Enron scandal, for example, has sparked numerous debates on issues 

relating to transparency, accountability and disclosure. For the US—a strong proponent of 

transparency and good CG—a scandal like Enron is certainly an embarrassment. The energy 

giant surprised the market by announcing that it was forced to recognize losses of US$ 1.01 

billion. These losses were related to the unwinding of partnerships controlled by Enron’s 

CFO. As a result the company would eliminate more than US$1 billion in shareholder 

equity. This led to a securities class-action lawsuit on behalf of all persons who acquired 

Enron’s stock during 2000-01. “The lawsuit alleges that Enron’s management: (a) misled 

investors by failing to disclose material information about the company’s risk position, (b) 

issued false and misleading information to potential investors, and (c) disposed of over 

US$73 million of their stock to unsuspecting investors.” What transpired next was a 

corporate soap-opera: bankruptcy, suicide, political patronage, cronyism, more allegations 

and even more denials? Ferris et al., (2007) concludes as: “We find that the incidence of 

‘derivative’ lawsuits is higher for firms with a greater likelihood of “agency conflicts”. 

Derivative lawsuits are associated with significant improvements in the board of directors: 

the proportion of outside representation on the board increases.” To redress the problem of 

corporate misconduct, ensuring sound CG is believed to be essential to maintaining investor 

confidence and good performance. 

A growing number of empirical studies have demonstrated that good CG contributes to 

better investor protection (la Porta et al., 2000), lower costs of capital (Ashbaugh-Skaife et 

2 Vidyasagar University Journal of Commerce

Madan Bhasin 

al., 2004), reduced earnings manipulations (Xie et al., 2001), increased company market 

value (Black et al., 2004; Brown and Caylor, 2004), improved stock returns (Gompers et al., 

2003; Bauer et al., 2003) and even economic growth (Maher and Anderson, 1999). “Wellgoverned 

companies with actively traded shares should be able to raise funds from noncontrolling 

investors at significantly lower cost than poorly governed companies because of 

the premium potential investors can be expected to demand for taking the risk to invest in 

less well-governed companies. CG continues to be seen by some as relatively unimportant in 

developing countries, in large part because of the small number of firms there with widely 

traded shares,” (Charles Oman, 2005). The purpose of CG, in nutshell, is to build and 

strengthen accountability, credibility, transparency, integrity and trust. Under CG system, 

effective checks and balances are exercised by the followings: shareholders voting system; 

appointment of independent directors; establishment of nomination, audit, ethics, CG and 

remuneration committees; using internal audit; and appointment of an effective and powerful 

chairman and CEO. In the practical sense, CG involves the nuts & bolts of how corporations 

should fulfill their responsibilities to their shareholders and other stakeholders. 

CG practiced by some corporations, unfortunately, have turned out to be an annual ‘ritual,’ 

involving “check-box” of items around legislative requirements (e.g., provisions for board 

composition in terms of executive and non-executive directors, setting up independent audit 

and CG committees, CEO/CFO certification of financial statements, legal compliance 

monitoring, internal controls, etc.). Realizing the need for ‘good’ governance, corporations 

from all over the world must attempt to ‘evolve’ gradually from the traditional “compliance” 

approach to a “conscience” one. There has been recognition of the need to ‘balance’ interests 

of not just shareholders but different stakeholders, who are equally important for the health 

of a company. Undoubtedly, CG has assumed greater limelight with the series of corporate 

failings, across the globe, following which the markets, the investors and the society at large, 

have begun to lose faith in the infallibility of these systems. For instance, Badawi (2005) 

portrays the situation as: “The recent wave of corporate fraudulent financial reporting has 

prompted global actions for reforms in CG and financial reporting, by governments and the 

accounting & auditing standard-setting bodies in the U.S. and internationally (including the 

European Union, the International Federation of Accountants, the OECD, and others) in 

order to restore investor confidence in financial reporting, the accounting profession and 

global financial markets.” 

CG refers to that blend of law, regulation, and appropriate ‘voluntary’ private-sector 

practices, which enables the corporation to attract financial and human capital, perform 

efficiently, and thereby perpetuate it by generating long-term economic value for its 

shareholders, while respecting the interests of other stakeholders and society as a whole. The 

principal characteristics of effective CG are: transparency (disclosure of relevant financial 

and operational information and internal processes of management oversight and control); 

protection and enforceability of the rights and prerogatives of all shareholders; and directors 

capable of independently approving the corporation’s strategy and major business plans and 

decisions, and of independently hiring management, monitoring management’s performance 

and integrity, and replacing management when necessary. Similarly, the Asian Development 

Vidyasagar University Journal of Commerce 3


Bank (1999) defines ‘good governance’ as based on four pillars: transparency, 

accountability, predictability and participation, recognizing that “their application must be 

country-specific and solidly grounded in the economic, social and administrative capacity 

realities of the country”. 

“CG comprehends that structure of relationships and corresponding responsibilities among a 

core group consisting of shareholders, board members, corporate managers designed to 

‘best’ foster the competitive performance required to achieve the corporation’s primary 

objective,” observes Organization for Economic Cooperation and Development (OECD). It 

is concerned with wider accountability and responsibility of the directors towards ‘key’ 

stakeholders of the corporations, viz., employees, consumers, suppliers, creditors and the 

wider community. Oman and Blume (2005) have aptly pointed out, “Corporations around 

the world are realizing that better CG adds considerable value to their operational 

performance. The poor quality of local systems of CG lies at the heart of one of the greatest 

challenges facing most countries in the developing world.” 

In developing nations, both ‘voluntary’ guidelines and more ‘coercive’ codes of best practice 

have already been issued. For example, both “the Code of Best Practices” issued by the 

Brazilian Institute of Corporate Directors and the “Code of Corporate Governance” issued 

by the Corporate Governance Committee of the Mexican Business Coordinating Counsel are 

wholly ‘aspirational’ and not linked to any ‘listing’ requirements. Similarly, the 

Confederation of the Indian Industry (CII’s Code) and the Stock Exchange of Thailand Code 

are designed to build awareness within the corporate sector of governance best practice, but 

are not, at this time, linked to stock exchange listing requirements. In sharp contrast to these, 

Malaysia’s Code on Corporate Governance, the Code of Best Practice issued by the Hong 

Kong Exchange, and South Africa’s King Commission Report on CG, all contemplate 

mandatory disclosures concerning compliance with their recommendations. Many 

companies are now thinking of governance as something more than just an area reporting to 

the Corporate Secretary or Legal Counsel. Recently, the rise of the “Chief Governance 

Officer” mirrors the appointment of the Chief Ethics Officer by many companies that have 

been plagued by scandal or crisis (e.g. MCI). As these roles become institutionalized, they 

will emerge as the engines of the next generation of governance ‘best’ practices designed to 

add value, instead of simply complying with external regulations and codes. 

Many aspects of a company’s structure, behavior, ethical standards and culture, and the 

legal, regulatory, community and media environments in which it operates, impacts the 

governance structure of a company. ‘Good’ governance is not simply a matter of adopting a 

set of rules, but a continuous process of implementing tailored strategic initiatives to 

maximize long-term value. The rules does matter, of course, but rules have changed 

significantly in recent years, with the introduction of many national, international regulations 

and codes defining ‘best practice’. While some of the country ‘specific’ recommendations 

may vary, most best-practices prescriptions focus on improving practices and disclosure in 

five ‘core’ areas as outlined in Box-1. “The Combined Code, 2003 (of the UK) is a practical 

implementation of this idea comprising two parts: principles of good governance and a code 

of best practice,” (Chang et al., 2006). 


Core Areas 

Board Structure 

Audit and 

Financial 

Controls 

Executive 

Compensation 

Shareholder 

Rights 

Market for 

Control 

Madan Bhasin 

Box-1: Good Governance Best Practices—Key Areas 

Recommendations 

• Establish at least a majority of independent non-executive 

directors 

• Install a non-executive chairman, rather than a Chairman- 

CEO 

• Hold non-executive director meetings without management 

present 

• Install a non-executive chairman on all major board 

committees 

• Establish a unitary board structure where all directors 

represent all shareholders, rather than a two-tiered structure 

• Establish procedures to ensure clear, accurate and timely 

financial disclosure, including the valuation of intangible 

assets 

• Require independent outside auditors, free from potential 

conflicts of interest 

• Establish an audit committee 100% comprised of 

independent directors with the resources to ensure proper 

financial oversight 

• Strengthen ethical guidelines and internal control 

mechanisms 

• Link compensation to long-run improvements in operating 

performance relative to specific benchmarks 

• Require ‘clawback’ provisions for recouping compensation 

paid based on false results 

• Ensure that all shareholders have one vote per share 

• Eliminate multiple class of stock with divergent rights 

• Provide shareholders with the ability to nominate potential 

directors 

• Remove excessive anti-takeover mechanisms such as poison 

pills, classified boards, golden shares and preference shares. 

It is a matter of great satisfaction that moves are afoot globally to promote ‘convergence’ of 

good CG practices. “Codes on Corporate Governance” issued internationally by the OECD, 

World Bank, Australia, South Africa, France, Common Wealth Secretariat, etc. are all 

promoting a “convergence of CG practices”. The International Accounting Standards, with 

linkages to the International Organization of Securities Commission (IOSCO), which 

represents most of the world’s regulating stock exchanges, are pulling towards a 

‘harmonization’ of desirable CG practices. Yet the sober truth is that CG practices in various 



countries still remain divergent, despite all these major initiatives for convergence. Despite 

some incidences of abuse in the UK, controls on CG are better developed than in other 

European countries. This is because companies listed in Britain are subject to the “Combined 

Code on Corporate Governance,” and also the Directors’ Remuneration Report Regulations, 

passed in 2002. No equivalent level of disclosure, however, is required in Germany, Spain, 

Austria or Belgium, and it seems that the British regime has formed a blueprint for new 

European Commission recommendations. The Commission is keen to increase standards of 

CG across all member states and its recent recommendations focus on directors’ 

remuneration and the role of non-executive directors. 

The Commonwealth Association for Corporate Governance (CACG), assisted by the 

Commonwealth Secretariat and the Commonwealth Fund for Technical Co-operation, has 

undertaken a pioneering role in the field of CG. In fact, extensive work has already been 

undertaken by the OECD, of which a number of commonwealth countries are also members. 

In preparing the CACG Guidelines, however, reference was made to the OECD “Principles 

of Corporate Governance”. Moreover, the G-7 countries also endorsed it as an acceptable 

level of CG standards with universal application, and which has formed the basis of the joint 

World Bank/OECD initiative to form the ‘Global Corporate Governance Forum.’ The 

Commonwealth is a participant in this initiative too. 

There have been several leading CG initiatives launched in India since the mid-1990s. The 

first was by the Confederation of Indian Industry (CII), which came up with the first 

voluntary code of CG in 1998. The second was by the Securities and Exchange Board of 

India (SEBI), now enshrined as Clause 49 of the listing agreement. The Naresh Chandra 

Committee and Narayana Murthy Committee reports followed it in 2002. Based on some of 

the recommendation of these committees, SEBI revised Clause 49 of the listing agreement in 

August 2003. The Department of Company Affairs had set up “National Foundation for 

Corporate Governance” (www.nfcgindia.org) in partnership with CII, ICAI, and ICSI. In CG 

practices, India can be proud of what it has achieved so far, initially voluntarily and later 

under guidance of various regulators, while recognizing that obviously much more needs to 

be done. 

Ultimately, CG in any country can be improved by making corporate operations more 

transparent, without sacrificing business strategy and secrets, which are absolutely necessary 

for success in the ‘competitive’ market place (Greer et. al., 2006). More and more Indian 

corporations (for example, Hero Honda, Hindustan Lever, Tata group, Larsen & Toubro, 

Infosys, Wipro, etc.) are being tested on ‘minimum’ ethical standards laid down by 

‘shastras’ and by several regulatory agencies. They have to meet both ethical and legal 

norms in the conduct of their day-to-day operations. The objectives of the present paper are 

two-fold: (a) can we look to Indian Shastras for ethical concepts and values, which may 

prove to be the cornerstone of CG? (b) Why improving transparency in the CG, especially in 

the Asia, is labelled as the ‘biggest’ problem? An attempt will be made here to search for 

answers to both these issues. 


Madan Bhasin 

Corporate Governance Scenario in the Asian Countries 

CG has received much attention in recent years, partly due to the “financial crisis” in the 

Asia. In fact, Asia is a very ‘diverse’ region in terms of levels of economic development and 

institutional regimes. There are commonalities across the economies; however, most 

importantly the prevalence of family ownership and relationship-based transactions. The CG 

work on Asia so far shows that the combination of ownership structure and property rights 

system (law and enforcement) fundamentally delineates the incentive, policy and 

performance of managers and their firms. While Asia has some ‘specific’ CG issues, there 

are many CG issues in Asia ‘generic’ to other countries, most importantly the role of family 

ownership concentration and the degree of minority rights protection. Conventional CG 

mechanisms (takeovers and board of directors) are not strong enough to relieve the agency 

problems in Asia. Firms do employ other mechanisms to mitigate their agency problems 

(such as, employing reputable auditors), but even these have only limited effectiveness. The 

overall low transparency of Asian corporations relates to these agency problems, with the 

prevalence of connection-based transactions, increasing desires among all owners and 

investors to protect rents (with rents often arising from government actions) including a large 

safety net provided to the financial sector. Resulting forms of crony capitalism, i.e., 

combinations of weak CG and government interference, not only lead to poor performance 

and risky financing patterns, but also are conducive to macro-economic crises. Another 

lesson is that group and diversification structures are associated with agency problems that 

may more than offset any beneficial effects from transactions in internal markets and 

learning by doing within the same organization. While work on Asia has clarified some CG 

issues, many important issues are still unknown. 

No doubt, CG guidelines and codes of best practice arise in the context of, and are affected 

by, differing national frameworks of law, regulation and stock exchange listing rules, and 

differing societal values. Although boards of directors provide an important internal 

mechanism for holding management accountable, effective CG is supported by and 

dependent on the market for corporate control, securities regulation, company law, 

accounting and auditing standards, bankruptcy laws, and judicial enforcements. Therefore, to 

understand one nation’s CG practices in relation to another’s, one must understand not only 

the “best practice” documents but also the underlying legal and enforcement framework. An 

attempt will be made here to survey the CG scenario in the Asian countries. 

The financial crisis that overran much of Asia in the late 1990s prompted most of the 

countries to give improved CG a priority. “CG Watch,” an annual collaborative study of the 

CG landscape of the Asian markets undertaken by independent stockbroker CLSA Asia 

Pacific Markets and the Asian Corporate Governance Association (ACGA) offers the most 

comprehensive assessment of CG standards, and progress for both regulators and companies 

within the Asia region. They introduced a detailed survey and scoring methodology in 2004, 

made the methodology more rigorous in 2005 and enhanced the methodology further in 

2007. However, no survey was done in 2006. The CG scores for companies is based on 

“seven” key categories. Six of the key categories—discipline, transparency, independence 



accountability, responsibility and fairness—are unchanged from our previous year’s scores, 

with the seventh category this year being the score for the “clean & green” survey that 

replaced the previous social responsibility category. Under each of these categories, we 

assess the companies on issues that are ‘key’ to constituting good CG. Our CG score is based 

on how we rate a company on 54 issues under six main aspects, each with a 15% weighting, 

that we take to constitute the concept of CG, to which we add the C&G score with a 10% 

weighting. The CG scores for Asian markets during 2003 to 2007 are shown in Table-1. 

Table-1: Corporate Governance Watch Scores 

Market 2003 2004 2005 2007 

1. Hong Kong 73 67 69 67 

2. Singapore 77 75 70 65 

3. India 66 62 61 56 

4. Taiwan 58 55 52 54 

5. Japan -- -- -- 51 

6. South Korea 55 58 50 49 

7. Malaysia 55 60 56 49 

8. Thailand 46 53 50 47 

9. China 43 48 44 45 

10. Philippines 37 50 48 41 

11. Indonesia 32 40 37 37 

In 2007, the ACGA team has taken a bigger role in the scoring, building up the country 

criteria to 87 issues under five categories: CG rules and practices, enforcement, political and 

regulatory environment, accounting and auditing standards, as well as overall CG culture. As 

in our last survey, absolute scores have fallen for most markets primarily because of the 

following changes made to the methodology: (a) New questions: Our last survey had 76 

questions across the five categories. This year, we have scored against 87 questions. First 

category not just CG rules, but also practices; and (b) Scoring system: The scores are now 

based on the following gradations: Yes (1 point); Largely (0.75 points); Somewhat (0.5 

points); Marginally (0.25 points); and No (zero point). Wording of some questions are also 

made more precise. 

The ACGA has tightened its ranking criteria. “The more one looks the less one finds: 

country scores have generally declined. Hong Kong and Singapore top the 11 markets we 

surveyed; Indonesia and the Philippines at the bottom”. Country ratings are trending 

downwards not because of any decline in their CG standards or less efforts on the part of 

regulators. Jamie Allen (2005) observes: “Substantial improvements on the basis of key 

determinants of CG had taken place in the Asian countries markets rankings for CG. 

Countries in Asia were scored against these issues and a weighting to each category applied 

to arrive at an overall country score.” It is encouraging that most markets in 2007 scored 


Madan Bhasin 

higher for “CG Culture,” indicating that the level of CG-related activity among companies, 

investors, CG associations, academics, director institutes and other professional bodies is 

increasing. This should provide a foundation for continued improvements in the years to 

come. 

Table-2 shows that in Singapore, Malaysia, Indonesia and Thailand regulators require 

companies to report their annual results within two months of the fiscal year-end. Similarly, 

quarterly reporting is mandatory in most Asian markets (except Hong Kong) where strong 

resistance to change appears to persist among many of the territory’s large companies. All 

markets (except Taiwan and the Philippines) require the disclosure of stakes (5% or more) in 

companies, and some markets also require the disclosure of individual directors’ 

compensation. Most markets also insist on the disclosure of audit and non-audit fees paid to 

external auditors. Other areas of improvement include enforcement, where there is evidence 

in most markets of increased resources being applied in this area. However, most markets 

have improved their accounting and auditing standards largely in line with international 

standards, although there are discrepancies in Taiwan, China and Indonesia. Auditing 

standards are pretty much inline with international standards, other than in China. Singapore 

has already taken the big lead in its efforts to regulate the accounting profession. Matthias, 

Lawrence and Wilson (2005) have portrayed pessimistic scenario: “Securities regulation in 

many markets has been updated and strengthened, especially in the area of dealings in 

securities by directors and related-party transactions. However, we do not see the legal 

system allowing minority shareholders cost-effective access to courts in Hong Kong, India, 

Malaysia, the Philippines, Thailand or Indonesia.” Nowadays, agreement is growing at least 

in principle on what ‘good’ governance entails, and most countries in the region have 

adopted ‘explicit’ governance codes. 

Table-2: Asian Governance Regimes 

Country* Ranking Criteria 

China 

Hong Kong 

India 

Indonesia 

Korea 

Malaysia 

Philippines 

Singapore 

Taiwan 

Thailand 

RULES AND REGULATIONS 

Most companies report their annual results N N N Y N Y N Y N Y 

within 2 months? 

Have reporting deadlines been shortened in the N N Y Y N Y N Y N S 

past 3 years? 

Is quarterly reporting mandatory? S N Y Y Y Y Y Y S Y 

Do securities laws require disclosure of 

Y Y Y S Y Y N Y N Y 

ownership stakes above 5%? 

Do securities laws require prompt disclosure of Y Y Y N Y Y Y Y S Y 



share transactions by directors and controlling 

shareholders? 

Are class-action lawsuits permitted? S N N N Y N N N S N 

Is voting by poll mandatory for resolutions at N S N N N N N N S N 

AGMs? 

Can shareholders easily remove a director who S S N S N S S Y Y N 

has been convicted of fraud or other serious 

corporate crimes? 

Will share option expensing become mandatory N Y S S N N Y Y S N 

over the next 10 month? 

ENFORCEMENT 

Is there an independent commission against N Y S N S S N Y N N 

corruption (or its equivalent) that is seen to be 

effective in taking public and private sector 

companies? 

POLITICAL AND REGULATORY 

ENVIRONMENT 

Is the statutory regulator (i. e., securities 

S Y S N S S S S S S 

commission) autonomous of government (not 

part of the Finance Ministry)? 

ACCOUNTING AND AUDITING 

Do the rules require disclosure of consolidated Y Y Y Y Y Y Y Y S Y 

accounts? 

Do the rules require segment reporting? Y Y Y S Y Y Y Y S Y 

Do the rules require disclosure of audit and nonaudit 

Y Y Y N Y Y S S Y Y 

fees paid to the external auditor? 

Do the rules require disclosure of connected Y Y Y Y Y Y S Y Y Y 

transactions? 

Does the government or the accounting regulator Y Y S S S Y Y Y S Y 

have a policy of following international 

standards on auditing? 

INSTITUTIONAL MECHANISMS AND 

CORPORATE CULTURE 

Are institutional investors engaged in promoting N S S N S S N S S S 

better corporate governance practices? 

Are any retail investors engaged in promoting N Y S N Y S N Y N N 

better corporate governance practices? 

Have retail investors formed their own 

N N Y S Y S N Y N N 

shareholder activist organization? 

[*Japan was not covered in this survey. Keys: Y = Yes, N = No, S = Somewhat] 

So far so much for what is good in Asian CG regulation. There is continued reluctance 

among many Asian markets not to shorten their annual reporting deadlines, especially in 

Hong Kong, Korea, Taiwan and Indonesia. Only South Korea has introduced comprehensive 


Madan Bhasin 

class-action litigation to assist investors to fight securities violations. China and Taiwan 

already have systems that allow a degree of class action, and Thailand is having a bill under 

consideration. Unfortunately, no market has yet introduced mandatory “voting by poll,” 

rather than a simple “show of hands,” for all resolutions at shareholders meetings. Hong 

Kong and Taiwan, however, are rare examples of markets that require voting by poll for 

some major resolutions. Still, very few Asian markets require directors’ remuneration to be 

disclosed on a named, individual basis. Most markets permits disclosure to be made in 

aggregate (or by way of bands). Similarly, independent board committees (except audit 

committees) have not found strong support among regulators and no market makes it easy 

for minority shareholders to nominate independent directors. As Wong and So (2005) states, 

“Worryingly, only Singapore, Taiwan and, to a lesser degree, South Korea, have regulations 

that make it easy to remove directors convicted of fraud or other serious corporate crimes.” 

South Korea now requires the largest conglomerates (or chaebols) to issue “combined 

statements”, including all companies under their control, regardless of whether they have a 

direct equity interest. The independence of external auditors is being boosted too. In 2002, 

South Korea’s Securities and Futures Commission took the unprecedented step of punishing 

the local affiliate of a global accounting firm for negligence by reducing the number of 

companies, it could serve as external auditor. 

According to Panjwani (2005), “The country CG score for India for 2005 is 6.2, or third in 

the region after Singapore (7.5) and Hong Kong (6.7), as shown in Table-3. While India 

scores over most other Asian markets in areas of rules & regulations, and their enforcement, 

it scores lower than most on adoption of international auditing standards.” Malaysia 

improved its ranking by two places as a result of improved accounting standards, better 

enforcement, and higher score for its political and regulatory environment, while Philippines 

marginally leapfrogged China due mainly to its higher score for accounting and auditing. 

Indonesia remains firmly rooted at the foot of the table. Leahy (2004) concludes, “Securities 

laws and listing requirements of stock exchanges have been strengthened, regulatory 

authorities have enhanced powers, and the media are becoming inquisitive and probing. 

However, the institutions needed to ensure good governance (viz., judicial systems, capital 

markets, long-term institutional investors that can push for better governance) continues to 

be underdeveloped in most of these countries.” 

Markets 

Table-3: Markets Ranked by Corporate Governance in Asia 

Rules & 

Regulations 

(15%) 

Enforcement 

(25%) 

Political & 

Regulatory 

(20%) 

Vidyasagar University Journal of Commerce 11 

IGAAP 

(20%) 

CG Culture 

(20%) 

Country 

Score 

(2005) 

Country 

Score 

(2004) 

Singapore 7.9 6.5 8.1 9.5 5.8 7.5 7.7 

HongKong 6.6 5.8 7.5 9.0 4.6 6.7 7.3 

India 6.6 5.8 6.3 7.5 5.0 6.2 6.6 

Malaysia 7.1 5.0 5.0 9.0 4.6 6.0 5.5 

Korea 6.1 5.0 5.0 8.0 5.0 5.8 5.5


Taiwan 6.3 4.6 6.3 7.0 3.5 5.5 5.8 

Thailand 6.1 3.8 5.0 8.5 3.5 5.3 4.6 

Philippines 5.8 3.1 5.0 8.5 3.1 5.0 3.7 

China 5.3 4.2 5.0 7.5 2.3 4.8 4.3 

Indonesia 5.3 2.7 3.8 6.0 2.7 4.0 3.2 

New forms of CG behavior will undoubtedly take considerable time to become ingrained in 

the thinking and culture of more and more companies. Governments, corporate leaders, 

investors, and regulators in most of the Asian countries do realize that CG practices would 

not change overnight, so patience is needed. Getting companies to comply with CG rules 

across Asia is a daunting task requiring greater transparency and better enforcement, not to 

mention a cultural upheaval in boardrooms. But given the vast amount of differences in 

ownership structures, business practices and enforcement capabilities, merely adopting CG 

requirements en masse from the U.S. or Europe would be a foolish mistake. Asian 

governments should rank their reforms, from time to time, in order of priority and tailor 

them to the country’s specific needs. Ensuring that local laws and CG codes are consistent 

with the OECD “Principles of CG,” we personally feel would be a good starting point. In this 

context, Witherell (2004) very appropriately pointed out: “Policy makers, investors, 

corporations and stakeholders, worldwide have used these principles to tackle a broad set of 

relevant issues common to all, such as, the need for transparent reporting, having informed 

shareholders, and accountable boards of directors.” However, we are of the firm opinion that 

it is better to enforce ‘basic’ reforms vigorously rather than to adopt requirements that would 

go totally unheeded. 

Since CG is an evolving concept in most parts of Asia, raising awareness is vital to any 

reform efforts to succeed. Region-wide organizations, such as the Asian Corporate 

Governance Association, have been formed to promote understanding, sharing countryspecific 

experiences & problems, and stimulating corporate reforms in the right direction. As 

Barton and Coombers (2005) observed: “Several regional groups, including CLSA Emerging 

Markets (a regional brokerage firm), Thai Rating and Information Services, and India’s 

ICRA, to name a few, publicly rate the governance practices of listed companies.” In 

addition, we have several national and international organizations (viz., World Council for 

Corporate Governance, Global Corporate Governance Forum, World Bank’s Corporate 

Governance and International Finance Corporation, OECD’s Corporate Governance, 

National Foundation For Corporate Governance, Commonwealth Association for Corporate 

Governance, etc.) which are sharing their country-specific rich experiences, and providing 

guidance and impetus for improvements in the sphere of CG. The CACG Guidelines have 

been structured on a basis complimentary to the OECD Principles of Corporate Governance. 

Over the past few years, a range of initiatives—public and private—have been launched with 

a view to improving CG and ethics in Asia. But it is clear that CFOs consider many of these 

measures to be works in progress, requiring further development to be truly effective. For 

example, the Malaysian Code of Corporate Governance, first introduced in March 2000, has 


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been a success in ensuring a high level of compliance with the CG principles and best 

practices (CG Survey Report 2004). In 2004, the government established the Malaysian 

Institute of Integrity, whose role is to facilitate and execute the National Integrity Plan in 

both the private and public sectors. Whistle-blowing laws have also been introduced across 

every sector. The Securities Laws were amended in 2005 to include whistle-blowing 

provisions for both offices of the companies and external auditors. The Companies 

Commission of Malaysia is also looking at such provisions. 

Not to be outdone, Singapore’s government launched its Council on Corporate Disclosure 

and Governance in 2002, to prescribe accounting standards and strengthen the existing 

framework for reporting practices. And in November 2004 the Hong Kong stock exchange 

published a final report on its new Code on CG Practices, along with a new set of rules 

requiring issuers to include a ‘CG Report’ in their annual reports. Private efforts include the 

KPMG-backed HK Audit Committee Institute, which opened at the end of 2002 to serve as a 

resource for audit committees and senior management, and groups such as the Minority 

Shareholders Watchdog Group in Malaysia. Published guidance and standards, such as those 

issued by COSO, are influential too. COSO is a voluntary private sector organization, 

founded in 1985 by professional bodies in the US that promotes better financial reporting 

through business ethics, effective internal controls, and corporate governance. 

Transparency Scenario in the Asian Countries 

Long renowned for their opaque business practices, Asia’s corporations are undergoing a 

dramatic transformation on the CG front. One of the major pillar of ‘good’ CG is 

“transparency” (projected through a code of governance), which incorporates a system of 

checks and balances between key players—board of directors, senior level of management, 

auditors and other stakeholders. As Islam (2006) rightfully observes: “Transparency requires 

enforcement of “right to information”—nature, timeliness, and integrity of the information 

produced at each level of interface.” All this can succeed when the responsibilities of each 

segment of the corporate entity, and their interface is clearly defined and understood by all. 

If CG is concerned with better ethics and principles, it is only natural that the focus should 

be on ‘increasing’ transparency. In fact, transparency is measured by the ability of outsiders 

to assess true position of a company—availability of firm specific information to those 

outside publicly traded firms. We conceptualize corporate transparency within a country as 

the joint output of a multifaceted system whose components collectively produce, gather, 

validate, and disseminate information to market participants outside the firm. The framework 

categorizes country-level measures of information mechanisms under three headings: (a) the 

corporate reporting regime, including measures of intensity, measurement principles, 

timeliness, and audit quality of financial disclosures, and the intensity of governance 

disclosures (i.e., identity, remuneration, and shareholdings of officers and directors, and 

identity and holdings of other major shareholders); (b) the intensity of private information 

acquisition, including measures of analyst following, and the prevalence of pooled 

investment schemes and insider trading activities; and (c) information dissemination, 



including a measure of the extent of media penetration in an economy. To sum up, key 

components of transparency on the CG front comprises of the followings: 

• Timely release of Annual Report 

• Timely release of semi-annual financial announcements 

• Timely release of quarterly results 

• Prompt disclosure of results with no leakage ahead of announcement. 

• Clear and informative results disclosure 

• Accounts presented according to international GAAP 

• Prompt disclosure of market-sensitive information 

• Accessibility of investors/analysts to senior management 

• Websites where announcements updated promptly 

• Sufficient disclosure of any dilutive instruments 

• Waivers applied on disclosure rules for the market 

It is encouraging that most Asian markets have scored higher for “CG Culture and IGAAP”, 

indicating that the level of CG-related activities among companies, investors, corporate 

governance associations, academics, director institutes, accounting bodies and other 

professional bodies is increasing. This should provide a foundation for continued, albeit 

gradual, improvements in the years to come. To sum up, “Generally, high standards of 

financial and non-financial reporting, frequency and timeliness of financial reporting is 

world class, with high quality quarterly reporting, and audited results within 60 days. 

Accounting and auditing standards, more or less, in line with international norms, plus 

regulation of the auditing profession is being strengthened.” Table-4 highlights the 

transparency scenario (accounting and auditing framework) prevalent in the Asian countries. 

Table-4: Transparency Scenario in Asia: Accounting and Auditing Frameworks 

International Generally Accepted 

Accounting Principles (IGAAP) 

China 

Hong Kong 

India 

Indonesia 

Japan 

Korea 

Malaysia 

Philippines 

Singapore 

Thailand 

Taiwan 

1 Does the government or the accounting 

regulator have a policy of following IAS/IFRS 

accounting standards? 

2 Are local accounting rules largely in line with 

the international standards? 

3 Are accounting practices among large listed 

companies in line with international best 

practices? 

4 Are accounting practices among small and 

medium sized listed companies in line with 

Y Y Y Y Y Y Y Y Y Y Y 

L Y L S L S L Y Y L L 

S Y L S Y L L S Y L L 

M S M M S M M M L S S 


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international best practices? 

5 Do the rules require disclosure of consolidated Y Y Y Y Y M Y Y Y Y L 

accounts? 

6 Do the rules require segment reporting? Y Y Y L S L Y Y Y Y Y 

7 Is disclosure of audit and non-audit fess paid Y Y Y N N Y Y S S Y S 

to the external auditor required? 

8 Does the government or the accounting Y Y Y Y Y L Y Y Y Y Y 

regulator have a policy of following 

international standards on auditing? 

9 Are local auditing rules in line with 

L Y L S L L Y Y Y L L 

international standards? 

10 Are auditing practices among large listed L Y L L L L L L Y L Y 

companies in line with international best 

practices? 

11 Are auditing practices among small and M L M S S M M S S M S 

medium sized listed companies in line with 

international best practices? 

12 Is the government or the accounting regulator S M S S S Y Y S Y S Y 

actively implementing new international best 

practices on the independence of external 

auditors? (e.g., by introducing limits on the 

non-audit work that external auditors can do; 

requiring for audit-partner rotation; 

whistleblower protection for auditors; etc.) 

13 Must the CEO, CFO or directors sign and Y L Y Y Y Y Y Y L Y Y 

certify a company’s annual accounts? 

14 Is the government strengthening the regulation M M M S S M N M L M N 

of the accounting profession? (e.g., by setting 

up an independent oversight board) 

15 Is the expensing of share-based payments Y Y Y Y Y Y Y Y Y N N 

mandatory? 

[Keys: Y = Yes (+ 1 point); L= Largely (+ 0.75 points); N = No (+ 0 points); S = Somewhat (+ 0.5 points); 

M = Marginally (+ 0.25 points); X = Data unavailable (+ 0 point)]. 

Another research study undertaken by JP Morgan (2005) highlights just how varied Asian 

markets are in timeliness of their financial reporting. They analysed 172 large and liquid 

Asian companies in order to calculate ‘average’ number of days taken between close of 

books and reporting variety of data, including quarterly, semi-annual, and consolidated 

annual results (see Table-5). “Surprisingly, Hong Kong companies faired worse than their 

Asian counterparts in the reporting of ‘interim’ results—they took an average of 66 days 

between book close and reporting. For consolidated annual reports, Hong Kong companies 

were fourth slowest with an average of 97 days (only Indonesian, Korean and Taiwanese 

firms taking more time 132, 100, 114 days, respectively).” While Hong Kong companies did 



score extremely well in quarterly reporting (18 days against international average of 35 

days), the sample size was extremely small (only 3 companies) because quarterly reporting 

is not mandatory. It is a matter of great pride that some Indian companies (like Infosys 

Technologies and Hughes Software Systems) stand out for being much faster (25 days) at 

quarterly reporting, while those in Taiwan (30 days) and Thailand (31 days) also do well. 

But when it comes to ‘consolidated’ annual reports, only one country (Australia with 63 

days) comes close to the international average of 59 days. Thai companies lead the Asian 

pack at just 71 days, while Singapore and Indian firms report after an average of 83 and 84 

days, respectively. Unfortunately, Indonesian companies give investors the longest wait— 

132 days. Further, Morgan study singled out certain Asian companies (viz., Infosys 

Technologies and Hughes Software from India, TSMC from Taiwan, and ST Engineering 

from Singapore) for exceeding required regulatory standards and taking CG very seriously. 

Looking ahead, reporting deadlines are likely to shorten in Asia. Ramaswamy (2005) adds 

here: “Under the US Sarbanes-Oxley Act, 2002 the SEC will cut filing periods in phases 

over 2003-06. The deadline for annual reports, for example, will be cut from the original 90 

days to just 60 days for fiscal years ending on or after December 15, 2006. It can be easily 

anticipated that these new requirements will raise the bar on reporting standards and will put 

pressures on regulators in Asia to force improvements soon.” 

Table-5: Average Days between Close of Books and Reporting 

Country Quarterly Semi-annual Annual report 

(consolidated) 

Australia 20* 51 63 

China 32* 60 90 

Hong Kong 18* 66 97 

India 25 25 84 

Indonesia 48 58 132 

Korea 37 37 100 

Malaysia 57 57 87 

Philippines 49* 49 86 

Singapore 42 40 83 

Taiwan 30 52 114 

Thailand 31 31 71 

International 

Average # 35 N/a 59 

* Only 7 or fewer companies report quarterly in firms sampled. 

# Comprises 8 selected US & European blue-chips. 

Melendy and Huefner (2007) have recently advocated the constitution of “Compliance 

Committees” to improve CG transparency scenario. Without greater transparency in CG, 

laws and governance codes will do little to build investors’ confidence in the long-run. 

Notwithstanding recent reforms, accounting standards in many Asian countries remain 

weak—enough trained professionals are not available (with an in-depth understanding of 


Madan Bhasin 

local & international accounting standards), and accounting self-regulatory organizations are 

lax in enforcements (Parker, 2007). As Choi (et al., 2007) remarks: “Disclosure requirements 

and auditing practices, however, are improving slowly since national financial reporting 

standards are gradually being “harmonized” with international standards. The sober truth is 

that CG practices in various countries still remain divergent despite major initiatives for 

convergence.” Although most Asian countries are strengthening their accounting standards 

and adopting minimum CG rules, many are still lagging behind in their effective 

enforcements: lack investigative powers and political will, enforcement staffs, or big budgets 

to conduct rigorous investigations. Most governments are augmenting their resources to 

monitor companies and enhancing the authority of their regulators, some of which are now 

getting tougher. Box-2 summarizes the Regional CG Disclosure Strengths and Weaknesses. 

Box-2: Regional CG Disclosure Strengths and Weaknesses 

Strengths: 

• Improving financial reporting: frequency, speed, substance, consolidation of accounts, 

director pay, stock-option expensing. 

• Quality of auditing and investor communications among large issuers is generally 

good and improving. 

• Regulators seem to have got the message on enforcement. 

• Regulatory and stock exchange information communication (e.g., in use of websites) is 

improving rapidly in many markets. 

• Professional and director training strong/growing. 

Weaknesses: 

• The quality of financial and non-financial reporting among small- and mid-cap listed 

firms is lagging. 

• Late reporting deadlines in certain markets. 

• Continuous disclosure of price-sensitive information needs to improve. 

• Blatant misuse of the “personal reasons” explanation when a director resigns. 

• Inadequate rules on disclosure of takeover bids. 

• Draft IPO prospectuses provided only to certain investors and analysts in some 

markets. 

• Some regulators still vet company announcements. 

• AGM agendas and circulars often lack sufficient detail. 

• Publication of detailed AGM vote results often non-existent. 

In response to recent CG scandals, governments have already responded by adopting a 

number of regulatory changes. One component of these changes has been increased 

disclosure requirements. For example, Sarbanes-Oxley (SOX), adopted in response to Enron, 

WorldCom, and other public governance failures, required detailed reporting of off-balance 

sheet financing and special purpose entities. Additionally, SOX increased the penalties to 

executives for misreporting. The link between governance and transparency is clear in the 



public’s (and regulator’s) perceptions; transparency was increased for the purpose of 

improving CG. The ‘new’ regulations put in place through the “Sarbanes-Oxley Act” in the 

USA and the “Combined Codes” in the UK have helped to introduce much-needed reforms, 

particularly with regard to CG transparency. Table-6 pinpoints some of the implications of 

SOX for Asia. 

Table-6: Sarbanes-Oxley’s Echoes in Asia 

Question 

China 

Hong Kong 

India 

Indonesia 

Korea 

Malaysia 

Philippines 

Singapore 

Taiwan 

Thailand 

Disclosure of audit and non-audit fees to Y Y Y N Y Y S Y Y Y 

external auditor? 

Following international standards on the S Y Y S S S Y Y Y Y 

independence of external auditors? 

Must CEO, CFO, or directors certify the Y S Y Y Y M Y S S Y 

annual accounts? 

Strengthening regulation of the accounting S S M S S S S Y S S 

and auditing profession? 

[Keys: Y = Yes; S = Somewhat; M = Marginally; N = No] 

Massive governance failures at a few companies have destroyed the “reputation” capital of 

the corporate sector as a whole, and made governance as a topic of growing interest to 

academics and practitioners alike. Nonetheless, weaknesses still remains, which continue to 

tarnish the reputation of many companies and put downward pressure on their share prices. 

Beyond simply complying with these “new” regulations, companies that care about their 

reputation must also care about how their governance structures and policies are perceived 

by the investors and the wider stakeholder community that continuously monitors their 

activities. As Fombrun (2006) asserts: “The fact that only eight of GMI’s 33 top-rated 

companies have high visibility and that of these only four (Eastman Kodak, Home Depot, 

Procter & Gamble, and Xerox) receive high reputation quotient (RQ) scores indicates that 

strong governance policies alone do not necessarily translate to high visibility and 

perception.” Not only must they implement policies that align with the ‘best practice’ 

models proposed nationally and internationally, but they must ensure that the internal 

practices they put in place are strictly adhered to and communicated to their many interested 

and concerned stakeholders. Companies that do are increasingly finding that adopting “bestin-class” 

governance not only helps them avoid regulatory scrutiny and risk, but also 

provides a springboard for the implementation of value-adding strategies. Having a senior 

‘governance officer’ responsible for consistency in putting these practices in place is crucial. 


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Having a senior ‘reputation officer’ in charge of orchestrating communications and 

initiatives that convey transparency about these practices is also vital. 

There has been a resurgence of interest in ethics in reaction to the CG scandals at the 

beginning of the decade. The accounting profession globally has taken steps to enhance the 

importance of ethical behavior and decision making. The International Federation of 

Accountants (IFAC) has launched a revised code of ethics based on a set of fundamental 

principles to be adopted by individual accountancy bodies. Accountants in business, 

particularly at board or at top management level, are often regarded as the keepers of the 

ethical conscience of their organizations. As well as following their own professional codes 

of ethics, accountants set an ethical example to others. According to a research report (2006) 

prepared by CFO Asia in collaboration with ACCA: “Good ethics are vital to good corporate 

governance. Company boards too are now becoming much more aware of the need to have 

the right ethical culture. The culture of an organization is probably the most important aspect 

of its system of internal control, and it is the foundation for other internal controls. 

Management may set out the policies and procedures which it wants followed, but it is the 

corporate culture which determines when they are followed, amended or ignored.” 

No doubt, CG has improved to some extent in the Asia region and some countries 

(Singapore in particular) have made significant progress in this direction. The next step is to 

instil “new governance” behavior, and it will take considerable time in the near future. Many 

corporate leaders, investors, and regulators in Asia articulate the benefits of effective CG. 

They judiciously understand that enduring reforms would not be achieved overnight, and 

that, in the short term, many practical impediments and disincentives may block or slow 

down the necessary changes. Thus, to move ahead in the right direction with consistent pace, 

across the Asian region, both governments and companies must play their respective roles. 

In this context, Leahy (2004) once remarked: “Governments should provide a strong legal 

and regulatory framework to underpin the reforms. Companies, on the other hand, should 

create stronger and more purposeful boards; enhance the scope, accuracy, and timeliness of 

financial reporting; and pay more regard to the rights and interests of minority shareholders.” 

While country-specific provisions will differ from one country to the next, any reform effort 

must include following core elements: robust corporate and securities laws, tough 

accounting standards, strong regulators, efficient judicial systems, and determined efforts to 

clamp down on ‘corruption’. Without sustained progress in the foundations of CG, any 

improvement focused at individual companies level will fall far short of its potential. 

CG in the Asian Countries—Strengths and Weaknesses 

An attempt will be made in this section to examine the CG scenario in 2007, and summarize 

the major strengths and weaknesses of the Asian markets. The CLSA and ACGA’s report 

titled as “The CG Watch 2007” scores show slightly better average CG improvement for 

companies in India, China and Indonesia, while a slight deterioration in the average score in 

Taiwan. Japan, a new entrant, has a higher average CG score for its firms than the rest of the 



sample. Of the larger-cap companies, CG commitment appears highest, reflected in scores at 

over 80% for HSBC, Sharp, HK Exchanges, TSMC, Infosys and CLP Holdings. Although 

the absolute CG scores in 2007 may not be high, the survey does highlight that each country 

has some genuine strengths on which it can build, if it chooses to do so and can muster the 

necessary political support. Table-6(a) gives a breakdown of the average scores of the 

companies in each country by scores for each of the seven categories in the CG score. 

Table-6(a): Average CG Category Scores by Asian Countries in 2007 

(%) Disciplinparency 

Trans- 

Indepen- Account- Respon- Fairness Clean & Overall 

Dence Ability Sibility 

Green CG 

Japan 55.3 89.3 42.3 27.7 76.0 72.1 45.0 58.9 

Thailand 51.3 92.9 62.5 51.1 32.6 66.9 31.8 56.7 

Hong Kong 56.3 79.7 47.3 56.8 57.2 69.2 12.0 56.2 

Taiwan 68.4 57.2 42.6 51.9 62.6 59.9 28.9 54.3 

India 65.4 83.8 43.1 43.1 41.2 49.2 27.5 51.6 

Malaysia 63.4 85.3 57.6 37.1 44.4 46.4 13.2 51.4 

Singapore 57.6 84.2 72.7 27.2 50.6 36.3 10.6 50.3 

Korea 50.3 71.9 42.8 49.2 42.3 59.4 23.4 49.7 

Philippines 39.1 65.1 63.1 35.7 26.7 60.4 20.5 45.5 

China 45.5 66.6 45.8 44.6 28.6 45.7 7.9 42.3 

Indonesia 59.6 44.9 49.1 38.8 21.0 39.6 9.8 38.9 

Average 55.7 74.6 51.7 42.1 43.9 55.0 21.0 50.5 

Japan, with a relatively small sample of 40 companies, had higher average scores in 

particular for transparency, responsibility, fairness and on clean & green (C&G). Thai 

companies score well on transparency, fairness and accountability, and also had the highest 

average score for C&G in the Asia ex-Japan sample. This is mainly because there is a large 

representation of petrochemical companies in its sample, which are already aware and 

addressing issues of emissions. Hong Kong companies score better on fairness, 

responsibility and accountability, while Malaysian companies have higher average scores 

against the overall sample for transparency and discipline. Singapore companies also score 

well on transparency and independence but are dragged by lower than average scores for 

accountability and fairness. Taiwanese firm’s average scores are pulled down on 

accountability, fairness and independence. The somewhat unexpected result of mainland 

China companies having higher average CG scores is mainly because Taiwanese companies 

are exceedingly poor on accountability on average 32ppt lower for this category than for 

Chinese companies. Indonesian companies have lower than average scores for C&G, 

responsibility and transparency. 

It is a matter of great pride that some exemplary companies can be found in Asia also. For 

instance, CLP (Hong Kong), Posco (South Korea), Public Bank (Malaysia), Siam Cement 

(Thailand) and Singapore Telecommunications (Singapore), to name a few, have been 


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recognized by several publications and organizations in the past for their good CG practices. 

Three Hong Kong companies (i.e., HSBC, HK Exchanges and CLP) dominate at the very 

top of the list of companies with the highest CG scores in 2007. Of the top-30 CG scores, 10 

are Japanese companies (see Table-7). However, of the top five companies in the high CG 

large cap list (which score above 80%) only one company (Sharp) is from Japan. Other 

Japanese companies CG scores are below 80%. In all, seven of the top-30 CG companies are 

from HK. The other two companies in this list at the top for CG are TSMC and Infosys. For 

instance, Infosys Technologies from India discloses the extent of its compliance with 10 CG 

codes, reconciles its financial statements with eight accounting standards (including the US 

and UK GAAP), and has a board with a majority of independent directors, as well as, wholly 

independent audit, nominations, corporate governance, ethics and compensation committees. 

In this list of top-30, South Korea has six companies (viz., Hynix Semiconductor, LG Philips 

LCD, Kookmin Bank, Hana Financials, Posco, and Shinhan Financial) but unfortunately 

none of them scored above 80%--top companies have ‘good’ but not ‘excellent’ CG scores. 

Table-7: Top-CG companies among large-caps (sorted by CG ranking in 2007) 

Company Country Sector 

HSBC Hong Kong Financial services 

Sharp Japan Technology 

HK Exchanges Hong Kong Financial services 

Taiwan Semiconductor Taiwan Technology 

Infosys India Technology 

CLP Hong Kong Power and gas 

MSI Japan Financial services 

Nintendo Japan Technology 

Hynix Semiconductor Korea Technology 

LG Philips LCD Korea Technology 

Esprit Hong Kong Consumer 

Inpex Japan Petroleum & Chemicals 

Bharti India Telecoms 

Kookmin Bank Korea Financial services 

Mitsubishi Estate Japan Property 

China Steel Taiwan Materials 

Li & Fung Hong Kong Consumer 

Swire Hong Kong Property 

Toyota Motor Japan Automotive 

United Microelectronics Taiwan Technology 

Standard Chartered Hong Kong Financial services 

Hana Financial Korea Financial services 

Posco Korea Materials 

Shinhan Financial Korea Financial services 



Nine Dragons Paper Hong Kong Miscellaneous 

Mitsubishi Electric Japan Technology 

Resona Japan Financial services 

Wipro India Technology 

Hindustan Lever India Consumer 

Honda Motor Japan Automotive 

[Source: CLSA Asia-Pacific Markets, CG Watch 2007, page 43] 

No doubt, some Asian countries have a higher ratio of strengths to weaknesses than others. 

Appendix-1 highlights the major strengths and weaknesses regarding CG scenario prevalent 

in the Asian Countries. But certainly all the Asian countries are in a much better shape now, 

from a CG perspective, than they were at the start of this decade. The challenge, at present, 

is to keep going and avoid the temptation to sit back and relax. 

A Time for Rethinking 

Ethics is an ‘inspirational’ objective, and should represent the ‘intrinsic’ cultural values of 

the society in which a corporation operates, as well as, the behavior expected of the 

corporation in all its dealings with shareholders and other stakeholders generally. Where a 

corporation sees fit to codify ethical conduct, such guidelines should be succinct but 

sufficiently detailed to give a clear direction to the behavior of those to whom it is directed. 

Ethical practices and issues are both complex and vexed; no single or universal model can be 

defined or prescribed. It should be clearly noted that the notion of having “one size fits all” 

type of universal CG code is not only inappropriate but undesirable also. In any event, a 

number of countries, where the private enterprise sectors are relatively developed, have 

individually established national codes to address their own special requirements—namely, 

United Kingdom (Cadbury, Greenbury and Hampel Reports), Australia (Borsch Report), 

South Africa (King Report), Canada (Dey Report), India (CII) and Malaysia. 

Modern society is afflicted by “moral pollution,” which is not confined to the corporate 

sector alone, but is all pervasive. In such a climate, mere gimmicks of reforming the 

corporate sector would not automatically guarantee good CG. What is required is an 

evolution of a culture of social consciousness. As per Indian Shastras, “improvement in the 

quality of governance can improve only if each and every individual starts culturing human 

values in the inner world of himself. Search for effectiveness by culturing human values is a 

journey within the individual, within the self.” The global debate is gradually ‘converging’ 

very much in favor of having “Code of Ethics and Values,” but the challenge is how to 

successfully implement it. The Indian Vedas had stated long back, how to do it with the help 

of an example: “A business should benefit from business like a honey bee, which suckles 

honey from the flower without affecting its charm and beauty,” thereby indicating that 

adopting ethical values and principles are the only solutions to prosperity and welfare of the 

society in the long-run. 

Undoubtedly, the starting point for reform in Asia is very different from the starting point in 

Europe or North America. Asian governments, corporate leaders, investors and regulators 


Madan Bhasin 

realize that “CG practices would not change overnight, so lot of patience is needed.” Getting 

companies in Asia to comply with new rules is a challenging task requiring greater 

transparency and better enforcement, not to mention a cultural upheaval in boardrooms. 

Agreement is growing, at least in principle, on what good CG entails, and most countries in 

the region have adopted CG Codes. “Securities laws and the listing requirements of stock 

exchanges have been strengthened, regulatory authorities have enhanced powers, and the 

media is more inquisitive.” Since the Asian crisis, all the countries in the region have seen an 

overhaul in their auditing/accounting standards. Consequently, there has been a convergence 

of local auditing standards with international best practices. Not only does this mean that 

there is standardization across the region, which facilitates comparisons, it also shows a 

heartening dedication to transparency and openness. Yet the progress is uneven. Across 

Asia, too many companies remain unconvinced of the value of good CG. Moreover, the 

institutions needed to ensure good governance—judicial systems, capital markets, long-term 

institutional investors that can push for better governance—continue to be underdeveloped in 

most of the region. Laws and regulations are not enforced rigorously. The years following 

the Asian financial crisis have seen the implementation of more rigorous CG standards but it 

is questionable whether the new rules have actually permeated corporate practices. 

Now, the challenge is to move away from the ‘philosophical’ debate on CG to dealing with 

the “hard” issues of practical implementation, and the application of good CG practices 

throughout the world. It will be necessary to analyze the particular circumstances of each 

country, their legal and regulatory systems, structures of business enterprise, inherent 

cultural characteristics and heritage, before defining any specific approaches to addressing 

issues of CG. Naturally, each country must define for itself what its special circumstances 

and priorities are within this context. The next phase of activities will include establishment 

of “Centres of Excellence” in collaboration with the World Bank to provide training at 

regional and country level in the various elements constituting a suitable CG framework. 

Maintaining the momentum for CG reforms in Asian countries, thus, will require some 

rethinking on ‘basic’ questions. First, what major rule changes or changes to the legal system 

are needed to allow market participants to fully engage in CG reform and to complement the 

efforts of regulators? If we want robust and effective CG, we need robust and well-crafted 

rules, and vigorously enforcing them. Secondly, do any existing procedural rules inhibit 

investors from exercising their most basic rights, such as, voting and participating in annual 

general meetings? The answers in many parts of the region are amply clear, that they do. 

Thirdly, are any existing rules inherently self-defeating and incapable of producing the 

intended outcomes? Weak definitions of “independent director” are a good example. Fourth, 

are we creating potential conflicts or managerial inefficiencies within companies by grading 

new global best practices onto traditional company law structures without reforming them? 

A good example here is the introduction of independent directors into the quasi two-tier or 

dual-board system of China, Indonesia, Japan and Taiwan. 

Benz and Frey (2007) conclude: “We proposed that CG can learn from four cornerstones of 

public governance. First, we argue that CG can gain from realigning managers’ 

compensation with the practice prevalent in the public sector—namely, fixed compensation 



not dependent on pay-for-performance. Second, we consider the advantages of relying on the 

basic democratic idea of division of power in CG. Third, we can learn from how rules of 

succession prevalent in the political sphere can be applied so as to devise better governance 

rules. And, fourth, we propose that CG can be improved by relying on institutionalised 

competition in core areas of the firm. 

CG is not just “compliance” but goes further, as we sometimes describe it as “beyond 

compliance towards building a good governance culture, instilling an environment of trust 

and confidence.” CG stems from the culture and mindset of management and cannot be 

regulated by legislation alone; too many legal provisions and their intricacies would make 

the real objective worthless. Perhaps the most important challenge we face, at present, is the 

mindset of the people and the organizational culture. This change should come from within, 

not by force. The government or the regulatory agencies, at best, can provide certain 

environment which will be conducive for such a mindset taking place but the primary 

responsibility is of the ‘managerial people’ (the elite and more powerful class) especially the 

members of the board of directors and the top management. Further, the spirit of CG is more 

important than the form—substance is more important than style. Ethical values are the 

essence of CG and these will have to be clearly articulated, and systems and procedures 

devised so that these values are practiced ‘willingly’ by the corporate world. Inevitably, the 

question of CG boils down to “morality and respect for the shareholders’ right”. We are of 

the firm opinion that some initiatives have been taken by various national agencies in Asia, 

but much work still remains to be done (see Table-8), and the ethos of CG culture has yet to 

sink in. Full convergence with international accounting and audit standards, better protection 

of minority investors, stronger enforcement of existing laws & regulations, actual 

independence of the supposedly independent, non-executive directors, etc., are some of the 

grey areas requiring improvements in CG scenario in the Asian countries. In nutshell, we can 

say that CG scenario in Asia remains at best a gradual work-in-progress, and how soon it 

will attain perfection only future will tell us. 

Table-8: Shareholder Rights--a Work-in-progress in Asia 

Question 

China 

Hong Kong 

India 

Indonesia 

Japan 

Korea 

Malaysia 

Philippines 

Singapore 

Taiwan 

Thailand 

Can minority shareholders easily elect an N M M N N N N N M M N 

independent executive director? 

Are pre-emption rights for minority N M M L N M M N M M S 

shareholders family protected? 

Is there a trend of large listed companies S Y M N N N N N N N S 

voting by poll? 

[Keys: Y = Yes; S = Somewhat; M = Marginally; N = No] 


Madan Bhasin 

References 

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Corporate Governance Association, Hong Kong, pp.60-69. 

2. Allen, J. 2006. “Weak Rules Hinder Corporate Governance Reform in Asia,” 

International Financial Law Review, November, pp.17-18. 

3. Athreya, M. B. 2005. “Business Values For The 21st Century,” in the book “Corporate 

Governance and Business Ethics,” editors, All India Management Association, Excel 

Books, New Delhi, pp. 4-12. 

4. Badawi, I. M. 2005. “Global Corporate Accounting Frauds and Action for Reforms,” 

Review of Business, Vol. 26, March, pp. 8-14. 

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Quarterly, No.2, pp. 24-38. 

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Public Governance?” Academy of Management Review, Volume 32, No. 1, pp. 92-107. 

7. Binoy, J. K. and Binoy, N. 2005. “Better Corporate Governance is the Need of the 

Hour,” The Chartered Accountant, November, pp.762-771. 

8. CFO Asia (2006). “Corporate Governance, Business Ethics and the CFO,” CFO 

Publishing Corp., Hong Kong, June, pp. 1-32. 

9. Chang, Chou and Wang 2006. “Characterizing the Corporate Governance of UK Listed 

Construction Companies,” Construction Management and Economics (June), No. 24, pp. 

647-656. 

10. Charles Chow Hoi Hee (2007). “A Holistic Approach to Business Management: 

Perspectives from the Bhagavad Gita,” Singapore Management Review, Volume 29, No. 

1, pp.73-84. 

11. Choi, Jong-Hag and Wong, T.J. 2007. “Auditors’ Governance Functions and Legal 

Environments: An International Investigation,” Contemporary Accounting Research, 

Spring, Volume 24, Issue 1, pp. 13-46. 

12. CLSA Asia-Pacific Markets, 2007. “CG Watch 2007: CG in Asia,” in collaboration with 

the Asian Corporate Governance Association, Hong Kong (visit www.clsa.com for 

details). 

13. Ferris, S.P. Jandik, T., Lawless, R.M., and Makhija, A. 2007. “Derivative Lawsuits as a 

Corporate Governance Mechanism: Empirical Evidence on Board Changes Surrounding 

Filings,” March, Journal of Financial and Quantitative Analysis, Vol. 42, No. 1, pp. 143- 

166. 

14. Fombrun, C.J. 2006. “Corporate Governance,” Corporate Reputation Review, Volume 8, 

No. 4, pp. 267-271, Palgrave Macmillan Ltd. 

15. Greer Lesley and Tonge, Alyson 2006. “Ethical Foundations: A New Framework for 

Reliable Financial Reporting,” Business Ethics: A European Review, July, Volume 15, 

No. 3. 

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17. Matthias, M. B., Lawrence, W. B. and Wilson, G. P. 2005. “Broadening Indonesia’s 

Reform Agenda,” The McKinsey Quartely, No. 3, pp. 32-40. 



18. Melendy, S. R., Huefner, R. J. 2007. “The Role of the CPA in Corporate Governance 

Committees,” The CPA Journal, February, available at www.nysscpa.org. 

19. Morgan, JP 2005. “Region Show Me The Numbers,” reported in the ACGA News Briefs 

(Q 3, 2005), pp. 49-67. 

20. Oman, C. and Blume, D. 2005. “Promoting Growth Through Corporate Governance,” 

February issue of the US Stae Department’s electronic journal “Economic 

Perspectives,”pp. 1-10. 

21. Panjwani, R. 2005. “India—Tightening the Screws,” in “Corporate Governance Watch 

2005: Spreading the Word”, Asian Corporate Governance Association, pp. 60-69. 

22. Parker, L.D. 2007. “Financial and External Reporting Research: The Broadening 

Corporate Governance Challenge,” Accounting & Business Research, Volume 37, No. 

1, pp. 39-54. 

23. Rao, S. L. 2005. “A Work Ethic” in the book “Corporate Governance and Business 

Ethics,” editors, All India Management Association, Excel Books, New Delhi, page 22- 

35. 

24. Ramaswamy, V. 2005. “Corporate Governance and the Forensic Accountant,” The CPA 

Journal, March, available at www.nycpa.org. 

25. Sheikh, S. and Chaterjee, S. K. 2001. “Perspectives on Corporate Governance,” in the 

book titled “Corporate Governance and Corporate Control,” Cavendish Publishing Ltd. 

London, page 7. 

26. Witherell, B. 2004. “Corporate Governance: Stronger Principles for Better Market 

Integrity,” OECD Observer, April, available at www.oecd.org. 

27. Wong, F. and Soo, V. 2005. “Reforms Gain Headway as Scandals Hurt Reputations,” 

The Standard, January 3. 

Appendix-1 

CG Scenario in the Asian Countries: Strengths and Weaknesses 

Hong Kong 

Strengths 

• Relatively high standards of financial and non-financial reporting. Accounting 

and auditing standards in line with international norms. 

• Good disclosure of director share transactions, individual director 

remuneration, and reasonably good disclosure of material transactions. 

• Voting by poll is mandatory for certain resolutions at EGMs and is now 

regularly carried out for all resolutions at AGMs by most large caps. 

• Protection of minority shareholders in takeovers and privatizations is strong. 

• Regulatory and stock exchange Web sites are good source of information on 

laws, regulations, public enforcement activities, and company 

announcements/reports. 


Madan Bhasin 

Weaknesses 

• Frequency of financial reports remains limited to annual and interims, while 

reporting deadlines (120 days for audited annuals) is well below international 

best practice. 

• Legal remedies available to investors are extremely limited and costly. 

• Definition of “independent director” is artificially designed and weak, which 

undermines the value of this role. 

• Enforcement powers of both the main securities commission and the stock 

exchange are insufficient. Enforcement and disciplinary proceedings drag on 

for years. 

• Most institutional investors are not voting their shares or taking an active 

interest in CG issues. Almost none attend AGMs. 

• No organized retail shareholder association. 

Singapore 

Strengths 

• Accounting and auditing standards in line with international norms, plus 

regulation of the auditing profession is being strengthened. 

• Generally high standards of financial and non-financial reporting. Frequency 

and timeliness of financial reporting is world class, including high quality 

quarterly reporting and audited annual results within 60 days. 

• Companies provide reasonably good disclosure of material transactions. 

• Regulatory deterrence against insider trading is improving. 

• Scope of information on regulatory Web sites, especially as regards public 

enforcement activities by the Monetary Authority, has grown. 

• A small group of institutional investors are actively voting their shares, 

attending AGMs and asking questions. 

• Singapore has an organized retail shareholder association. 

Weaknesses 

• There is limited disclosure of individual-director remuneration in Singapore. 

• Independent directors in most listed companies need not be independent of the 

controlling shareholder. 

• Legal remedies available to investors are extremely limited. 

• Voting by poll is not mandatory and rarely practiced, even by major listed 

companies. 

• Rules governing takeovers and privatizations are quite strong, except that the 

approval process for voluntary de-listings does not adequately protect minority 

shareholders (since all shareholders, including the controlling shareholder and 

directors, may vote). 

• The deadline for releasing AGM notices and detailed agendas is still only 14 

days, which is well below global best practice. 

• Finding data on enforcement activities on the stock exchange Web site is not 



easy, while the organization of company announcements could be greatly 

improved. 

India 

Strengths 

• Financial and non-financial reporting standards among the largest companies 

are high (in some cases, truly world class). 

• Release of audited annual results by these companies is quick (within 60 days). 

• Disclosure of individual director remuneration is required and companies 

release their detailed AGM agendas relatively early (at least 21 days). 

• The main securities commission (SEBI) is independent of government (more 

so than in most Asian markets). 

• Regulatory Web sites contain large amount of information on laws and 

regulations. 

• The media is extremely free to report on and debate CG issues. 

• India has some excellent examples of well-governed firms and a national 

industry body (CII), which spreads the word via reports, conferences and 

training courses. 

Weaknesses 

• Huge disparity between the high standards of many large caps and the rest of 

the market (made up of thousands of small listed firms). 

• Despite the good reputation of Infosys, HDFC Bank and some others, the true 

level of commitment to good governance among India’s large caps is less than 

advertised. 

• Various disclosure rules have weaknesses (e. g, those relating to quarterly 

reporting, material transactions, and share transactions by directors). 

• Legal remedies for shareholders are in theory quite strong, but in practice 

extremely weak due to an inefficient court system. 

• Public corruption and disorganization is rife. 

• There is virtually no voting by poll at AGMs, even among the large caps, and 

meetings are often held in remote locations. 

• Regulatory enforcement is improving, but resources and results still limited. 

• Minimal involvement of institutional investors in CG issues. Greater 

involvement by retail groups, but their efforts are piecemeal, fragmented and 

localized (no real national shareholder association). 

Taiwan 

Strengths 

• Financial reporting standards are reasonably close to international norms and 

are improving (e. g, quarterly reports will be consolidated from 2008). The 

same for accounting and auditing standards. 

• Major improvements have been made to company and securities laws, as well 

as ancillary regulations, over the past two years. 

• Regulatory enforcement has taken a step forward, especially with regard to 


Madan Bhasin 

corporate fraud and insider trading. 

• Taiwan is one of the few places in Asia that requires directors convicted of 

fraud to resign their positions on boards. 

• The scope of regulatory and corporate information on regulatory Web sites is 

wide and improving. Finding English translations of major laws and rules is 

easy. 

• The judiciary is fairly independent and generally clean, while media freedom 

is strong. There is active involvement of academics and certain non-profit 

organizations in CG reform. 

• There is a quasi-government agency, the Securities and Futures Investor 

Protection Centre, undertaking law suits on behalf of minority shareholders. 

Weaknesses 

• Non-financial reporting standards could improve, as could disclosure of 

substantial shareholding stakes and share transactions by directors. 

• Voting by poll is normally carried out for the election of directors at AGMs, 

but not for all resolutions, and voting results are not made public. 

• Indeed, the entire apparatus of annual meetings in Taiwan—from sending out 

notices, to finalizing agendas, to voting and publishing results—needs an 

overhaul. 

• Institutional investors routinely cite Taiwan as one of the most difficult 

markets in Asia to vote in. 

• Regulatory enforcement has improved, regulatory agencies are underresourced 

and there is a lack of cross-fertilization between the market and 

certain agencies (such as the Securities and Futures Bureau) in terms of 

recruitment. 

• The main statutory regulator, the Financial Supervisory Commission, is not 

independent from the Taiwanese government and often exposed to strong 

parliamentary and political pressure. 

• The judiciary is improving, but lacks the depth of skill needed to deal with 

complex securities cases. 

Japan 

Strengths 

• Global standards of CG, financial and non-financial reporting practices are 

quite high, especially among the larger companies. Quarterly reports are fairly 

robust and detailed, while rules on disclosure of substantial shareholding 

stakes and share transactions by controlling shareholders have recently been 

improved. 

• Past two years have witnessed major legislative changes—new and 

modernized Company Law, Securities law, Financial Instruments and 

Exchange Law. 

• Regulatory enforcement has become more vigorous in recent years, but is not 



always consistent or fairly applied. 

• Disclosure of public enforcement activities is relatively good, while private 

enforcement by the market is on the rise (e. g, through the voting of shares at 

AGMs and investor engagement with companies). 

• Japan has an active Pension Fund Association and is the only country in Asia 

to have a working electronic voting system. 

Weaknesses 

• While listed companies have been willing to improve their disclosure practices 

and enhance communication with shareholders, they have felt less compelled 

to change their organizational structures and open themselves to outside 

scrutiny by, for example, independent directors and minority shareholders. 

• Japan has no real concept of “independent director”, nor does it have a proper 

national code on CG (unlike other Asian markets). 

• It promotes modern CG ideas in a rather fragmented way through various parts 

of its company and securities laws, regulations and listing rules. This may be a 

necessary compromise, but it creates a fair degree of ambiguity around 

government policy. 

• There are many areas where standards could be improved, but which appear to 

be neglected at present, including: cutting the deadline for releasing audited 

annual results from the current 90 days to 60 days; requiring all listed 

companies to publish their AGM agendas earlier (the rule is still 14 days); 

requiring the results of poll votes to be published; and so on. 

South Korea 

Strengths 

• Financial and non-financial reporting practices among the larger listed 

companies have improved. Government has been taking notice of new 

international best practices on auditor independence and whistle blowing 

protections. 

• Public enforcement, most noticeably in the activities of public prosecutors and 

the judiciary, has also improved. 

• Korea is unusual in having had a vigorous retail activist movement and 

minority shareholders willing to take companies to court. 

• One of the few countries to pass a law permitting class-action lawsuits for 

accounting fraud. 

• Media is quite free to report on CG issues, although not always impartial. 

• Korea now has a corporate governance focus fund. 

Weaknesses 

• Financial reporting and accounting standards still some way from international 

norms (e. g, lack of consolidation for interims and quarterly reports; deadline 

for audited annual results is still 90 days; valuation still based on cost rather 

than fair value). 


Madan Bhasin 

• Rules on disclosure of share transactions by directors and individual director 

remuneration are well below global best practice. 

• Class-action lawsuits may be permitted, but a range of restrictions have 

nullified the impact of this law. Directors convicted of fraud are not required to 

resign from boards, except in banking and financial firms. 

• There is virtually no voting by poll at the AGMs of listed companies (even 

among the large ones). 

• The position of independent directors remains weak (as in most markets). 

• In light of the above, it is not surprising that the government’s policy on CG 

comes across as highly inconsistent. 

Malaysia 

Strengths 

• Financial reporting and accounting standards have improved in recent years 

and the reporting practices of large caps are close to international best 

practices. 

• Quarterly reporting is fairly sound. 

• Regulatory bodies are well-staffed and have strong powers of investigation and 

enforcement. 

• Disclosure of public enforcement activities is good, while regulatory and stock 

exchange web sites are informative and provide access to all major laws, 

regulations, corporate announcements, and so on. 

• The Malaysian government has been taking account of, and implementing, 

new international best practices on auditor independence and whistle blowing 

protections. 

• Professional bodies are quite actively promoting CG and related training, while 

the Minority Shareholder Watchdog Group, which is still government-funded, 

has been revamped and given a sharper focus. 

Weaknesses 

• The quality of financial reporting among small listed companies is poor, while 

the standards of non-financial reporting among all companies leaves a lot to be 

desired. 

• Few companies report their audited annual results within 60 days. 

• Securities laws do not appear to provide a credible deterrent against insider 

trading. Legal remedies for shareholders are limited. 

• There is virtually no voting by poll at AGMs. 

• There is little confidence in the market that independent directors are 

genuinely independent in Malaysia. 

• While public enforcement efforts have improved, regulators do not have a 

reputation for treating all companies and individuals equally. 

• Private enforcement by the market is limited (at both the institutional and retail 

level), with many investors having a low opinion of the ethical standard of the 



average listed company. 

Thailand 

Strengths 

• Financial and Non-financial reporting rules are in line with international norms 

and reporting practices among large companies are largely in line with global 

standards. 

• Companies report audited annual results within 60 days, and quarterly 

reporting is quite robust. 

• Regulators have made greater efforts to improve enforcement in recent years 

(and disclose what they are doing) and have undertaken some quite innovative 

measures (e.g., a director “white list”; an AGM assessment program). 

• Companies are starting to vote by poll voluntarily at their annual meetings 

(although in a slightly strange hybrid way: votes are not counted 

confidentially, but anyone who wants to vote against raises their hand and 

his/her vote is deducted from the total). 

• There is an active director training program organized by the Thai Institute of 

Directors. 

Weaknesses 

• The current military government has not taken a big interest in the equity 

market or CG reforms. 

• Major legislative amendments to both the Public Companies Act and the 

Securities and Exchange Act continue to languish in the system, and hold back 

the introduction of improvements to Thailand’s CG regime. 

• Regulatory enforcement may be improving, but some of the innovative efforts 

(such as the “white list”) are proving harder to implement than expected— 

since neither the securities commission nor the stock exchange has the power 

to remove a director not on the white list. 

• Meanwhile, investor confidence in its corporate-governance regime seems to 

be at its lowest point for more than five years. 

China 

Strengths 

• One of China’s main strengths is an ability to make bold moves when you least 

expect it. Witness the announcement in early 2006 that it would bring its 

accounting and auditing standards rapidly into line with international norms. 

• Although there are countless practical problems associated with this move— 

lack of trained accountants and experienced auditors, difficulties over 

measuring fair value, and so on—it should help to build confidence in the 

quality of listed company accounts in China over the long term. 

• Major legislative amendments to both the Company Law and the Securities 

Law in 2005 should also lay a stronger foundation for CG. 

• Large listed companies in China often do vote by poll (although are not 


Madan Bhasin 

required to by law) and they release their detailed AGM agendas earlier than 

most companies in the region (20 days). 

• Surprisingly, while few large A-shares report their audited annual results 

within 60 days, some of the mid caps do. 

• Meanwhile, regulatory websites have improved hugely over the past two years, 

especially in the quantity and timeliness of English-language material. 

Weaknesses 

• The quality of financial reporting among large caps is quite high, especially 

among those listed overseas, the value of non-financial reporting is much 

lower (e.g., disclosure of director remuneration is often quite vague and 

misleading, not to mention inconsistent from company to company). 

• Quarterly reports are more limited in scope than in many other markets. 

• Rules governing disclosure of share transactions by directors and material 

transactions are not up to international standard, securities laws appear to 

provide little deterrent effect against insider trading and market manipulation. 

• Access to the legal system is restricted and the competence of the judiciary to 

adjudicate difficult securities cases is an issue. 

• Little scope for minority shareholders to organize themselves into an 

independent association to protect their interests. 

Philippines 

Strengths 

• Financial-reporting practices among large caps are common, including the 

quality of quarterly reports. 

• Listed Philippine companies produce some of the most detailed AGM circulars 

in the region, with some of the better ones releasing them quite early. 

• Regulatory web sites are informative and media has considerable freedom to 

report on CG issues. 

• Focus on bringing its accounting and auditing rules into line with international 

standards. 

• Providing for director’s training. 

Weaknesses 

• The quality of non-financial reporting is not high, even among larger firms. 

They take 105 days to report audited annual results. 

• Disclosure rules relating to material transactions could be improved. 

• The regulatory system does not deter insider trading. 

• Class-action lawsuits are permitted, but rarely initiated. 

• Voting by poll is non-existent and is seen by companies as difficult and timeconsuming. 

• After a strong start early this decade, the Securities Commission seems to have 

lost its focus regarding CG policy. 

• Enforcement is seen as woeful and regulators lack resources to do a proper job. 



• The influence of the market (i.e., investors) is extremely limited. 

Indonesia 

Strengths 

• Given the poor to uneven state of financial reporting in Indonesia, the quality 

of many quarterly reports is actually good. 

• Indonesia offers some of strictest protection for minority shareholder preemption 

rights in the region (indeed, its rules are probably too restrictive). 

• The present government’s anti-corruption drive is yielding some results. 

• Indonesia continues to try to improve its CG regime through, for example, 

revising its national code of best practice and bringing in a new CG code for 

banks. 

Weaknesses 

• While the government may be amending its CG codes few believe it is truly 

serious in its efforts. 

• The anti-corruption drive aside, the Indonesian government has a deeply 

entrenched credibility problem. 

• This malaise is echoed in market: in the low quality overall of financial 

reporting; weak disclosure of material events and share transactions by 

directors; the scope for insider trading; the lack of investor involvement; and 

the antipathy showed by many companies to CG. 

• Extremely weak enforcement record of regulators and the lack of 

independence of the main securities regulator. 




A SURVEY ON THE RECAPITALISATION, MERGERS AND 

ACQUISITIONS OF THE NIGERIAN INSURANCE INDUSTRY 

S.A. Aduloju * 

A.L. Awoponle** 

S.A. Oke*** 

ABSTRACT 

The reaction of the insurance underwriters towards the recapitalization exercise in 

Nigeria is investigated. Fifty-four questionnaires were properly filled and returned 

from members of staff of some selected insurance companies, upon which descriptive 

analytical tools and chi-square statistical tool were used. From the analysis, 

recapitalisation has been enhancing the development of insurance industry and 

mergers and acquisitions have remained a viable option for them to remain in 

business. Based on the findings recommendations were made; insurance industry 

should not wait until they are compelled by law to increase their capital base. 

Recapitalised insurance companies should have strategic alliance with the 

multinationals in the country for technical and business support for the local 

underwriters. Also, the industry’s regulatory mechanism should produce a strong 

pressure group to make a presentation to the government for legislation to conserve 

our foreign earnings and retained insurance premiums paid to the foreign underwriters 

who absolutely control some of our insurance business in Nigeria. 

Introduction 

In recent times, the world financial system has experienced considerable economic shocks 

due to unprecedented system failures, and increasing insiders’ abuse (Irukwu, 2005). Thus, 

government’s intervention is continually noticed with the aim of repositioning the emerging 

companies for better service and enhances their capacity to acquire a larger share of the 

market. For insurance and re-insurance companies in Nigeria, the positive drive by 

government for repositioning seems to be beneficial both to the organisations and the 

∗ Department of Actuarial Science and Insurance, University of Lagos, Nigeria, 

** Department of Actuarial Science and Insurance, University of Lagos, Nigeria, 

e-mail:awoponle2000@yahoo.com, 

***Department of Mechanical Engineering, University of Lagos, Nigeria, 

e-mail: sa_oke@yahoo.com.

A SURVEY ON THE RECAPITALISATION, MERGERS AND ACQUISITIONS OF THE NIGERIAN INSURANCE INDUSTRY 

Nigerian community at large (Aghoghobvia, 2005; Isimoya, 1999). Insurance and 

reinsurance companies that are perceived as safe and well managed in the market place are 

likely to obtain more favourable terms and conditions in its relationship with investors, 

creditors, insureds, reinsurers / retro-cessionaries and other counter parties than one that is 

perceived as weak and more risky (The Risk Shield Magazine, 2005a,b). 

In Nigeria, the minimum paid up capital of life insurance companies were raised to N2 

billion (representing an increase of 1,233.33%) while the capital base of non-life insurance 

companies was increased by 1,400% to N3 billion. Composite insurance companies 

underwriting have their capital base increased by 1,328.57% to N5 billion, while the 

reinsurance companies were required to shore up their minimum paid up capital to N10 

billion, (representing an increase of 2,575.14%). Thus, adopting the merger and acquisition 

option remains a critical decision for business owners (Bashorun, 2003; Bashorun, 2003a,b; 

Ladipo-Ajayi, 2005). 

In the Nigerian insurance industry, the decline in goodwill is exemplified by the sharp fall in 

gross premium income of all insurance companies in Nigeria from N14,792.0 million in 

1999 to N1,567.8 million in 2000. Thus, the Nigerian insurance industry is in crisis, 

exemplified by shrinking market share and reduced growth. In the past, the Nigerian 

insurance companies have lost much premium whereby multinational companies and 

operators in the oil and gas sector prefer to insure their risk overseas with attendant capacity 

flight, tactical delay of claims payment and other financial obligations to the public (Uranta, 

2004). Thus, insurance companies, must strive to improve on their collective public image, 

which has been battered by these factors by improving on their service delivery. It is 

observed that the quantum of claims was greater than the paid up capital of all insurance 

companies; it may well be that some insurance companies were not financially strong 

enough to meet the claims of client, thereby creating a crisis of confidence in the entire 

industry. This may be the reason why reinsurance business was introduced in Nigeria in 

1976. 

This study investigates into the reactions of the insurance underwriters towards the 

recapitalization exercise; examines how mergers and acquisitions will enhance the 

sustainability of some insurance companies who are unable to meet the new capital base 

(Ladipo-Ajayi, 2005); and also examines the factors responsible for low contribution of 

insurance industry to the nation’s growth (Thomas, 2004; Sunday, 2006). This research will 

also recommend some likely solution to the insurance experts and the government that 

makes enactment regarding the insurance industry. 

A great number of papers have investigated into the recapitalisation problem of the insurance 

industry in Nigeria. The following is a brief account of them. Irukwu (2005) decries 

recapitalization order by arguing that it was wrong for the government to call for another 

round of recapitalization in the insurance industry when the operators were yet to recover 

from the previous one. Ladipo-Ajayi (2005) stated that the recent capital base set by the 

federal government of Nigeria for the insurance and reinsurance companies should be seen 

as a possible magnet that could enable local players take jobs outside the shores of the 

country after the consolidation exercise. 

36 

Vidyasagar University Journal of Commerce

S.A. Aduloju, A.L. Awoponle, S.A. Oke 

Aghoghovbvia (2005) stated that it is not surprising that the insurance industry has not been 

able to support the economy to the extent that it should. He listed some of the challenges 

facing the industry to include shortage of skilled manpower; difficulties in the collection of 

balances; lack of innovation by operators as well as the low level of information technology 

leverage in the industry. In order to cope with these challenges facing the industry and take 

full advantage of opportunities likely to emerge after the recapitalization exercise, they 

should improve upon the underwriting, marketing, operations and financial aspects of their 

management. 

The challenge to the insurance industry has become much stronger with the emergence of 

universal banking which has, in effect, expanded the scope of activities of banks to include a 

good measure of insurance. Indeed, in developed countries, insurance is regarded as a major 

component of the financial services industry. A large company, having multi-billion naira 

assets, would not be unduly sentimental when arranging for the insurance of its assets. Such 

a company would rather target a large insurance company with strong asset base to provide 

the necessary cover. 

Given the prevailing realities in our insurance industry, very few insurance companies can 

justifiably claim to be in a position to insure assets whose value runs into billions of Naira. 

The fact that reinsurance is available to cushion the devastating effect of large claims does 

not detract from the basic need to have very strong and viable players in the industry. The 

structure of many of the small and hardly viable insurance companies does not encourage 

resorting to take-overs because the proprietors of such companies would easily prevent any 

take-over bid which does not enjoy their support. It is also difficult to comprehend how such 

proprietors would readily accede to a request or a merger with another company, particularly 

where such merger may terminate their direct involvement in the industry. Perhaps a 

practical solution may be found in a statutory and regulatory apparatus which makes it 

practically impossible for any company which has not gotten a very solid financial base to 

operate in the insurance industry. Such an apparatus would simply compel the merger of 

companies whose only other alternative is to get out of the industry altogether through the 

sheer inability to meet with the basic requirements of the statutory and regulatory apparatus. 

In conclusion, if necessary care is taken in effecting the schemes, which are likely to be put 

in place consequent upon an increase in the tempo of business activities in the country, the 

entire economy will certainly benefit from the exercise. However, if the processes are again 

caught in the usual lackadaisical and, sometimes, narrow-minded approach to important 

issues and characteristics of our society, then the future of this basically beneficial 

machinery for economic development may be bleak in this country. It is only to be hoped 

that we are already bargaining to learn our lessons regarding the imperative need to adopt a 

pragmatic approach to those things, which are useful vehicles for the economic development 

of our society. Therein lies the future of the great country of our dream. 

A close study of the trends of mergers and acquisition of insurance companies in the United 

Kingdom from January to August 1998 noted that the growth in the sizes establishment in 

other parts of the world outside the United Kingdom, arose from the financial muscles they 

achieved via mergers and acquisition. The diversity into other businesses also led to the 



growth. Mergers and Acquisitions, and branching out into other parts of the world, continued 

to be part of the insurance business culture from year to year in the United Kingdom. For 

instance, in 1984 only 11 companies were involved in bids for mergers and acquisitions, and 

in 1987 and 1988, the numbers were 69 and 79 respectively. But in 1992 and 1993, the 

figures were 33 and 32 respectively (Samuel, 2003). 

Furthermore, in 1997 and 1998, the numbers were 68 and 67 respectively. It did not mean 

that most of the bids were successful, but it, at least, showed the process of dynamic 

evolution through mergers and acquisitions up and down. While many bid deals succeeded, 

some were not concluded and thus failed. The numbers of bids from period to period in the 

United Kingdom depended on periods of economic booms and recessions. Unfortunately, it 

has become very difficult to get mergers and acquisitions taking place in Nigerian insurance 

industry, among other businesses. The probable part of the reason is the lack of the will to let 

go what had always belonged to us. The fear of losing the business prevails irrespective of 

the merits of mergers and acquisitions. The culture needs a change. It is believed that in the 

light of the benefits, which could accrue to the industry through mergers and acquisitions, all 

concerned directors, shareholders, management of insurance and reinsurance companies, 

regulatory arms of the government etc., should take this opportunity to seriously restructure 

the Nigerian insurance industry. 

It is not necessary that companies needing additional capital need to be merged or acquired. 

We could even have a reinsurance group, aiming to be as big as Swiss Re, etc. Royal and 

Sun Alliance do not merge to comply with any legislation, nor did they need the capital to 

continue to function. They merged to become one of the top United Kingdom insurance 

companies. The compression or merger of these small insurance companies in Nigeria into 

formidable companies will even make the work of the supervisory authority easier, as it is 

stated earlier, and all these rate cutting and purchase of premium may disappear. There will 

be a better confidence and improved image of the industry in the minds of members of the 

public. 

Methodology 

Research Methodology 

Information for the purpose of this work will be collected from various sources like 

questionnaires with a mixed grill of respondents in the private and public sectors of the 

economy. This will actually target the relevance of recapitalization and how mergers and 

acquisitions can be applied effectively (Asika, 1991; Richard, 2006). A survey research will 

be carried out which involved a representative portion of the insurance companies, stratified 

sampling method will be applied in such companies, whereby the management will be 

stratified into top management, middle management and lower management. Chi-square was 

used to test the stated hypothesis. The previous items of information will be supplemented 

with returns made available to Nigeria Insurers Association (NIA) by the insurance 

companies, insurance journals, and publications. In data processing, simple frequency count 

will be used and the statistical computation done manually (Murray, 2003; Sirkin, 1995). 

38 



The current global economic recession and inflationary situations have accentuated the 

challenges posed by the rapidly changing information technology and dynamics of the 

business environment while the purchasing power of consumers and the market share of 

insurance companies have suffered severe diminution, their real paid up capitals are also 

facing the same fate. In order to overcome these inevitable challenges, corporate integration 

strategies have been evolved to enable insurance companies increase their resource risks, 

expand their market share through the elimination of vicious competition and ultimately, 

enhance their earning abilities. Thus, mergers and acquisitions, have become a business 

imperative due largely to the desire by corporate entities to benefit from synergy associated 

with the economies of scale, acquisition and use of new technology, enhanced access to 

financial resources and new markets, availability of large pool of skilled personnel, etc. The 

above-mentioned benefits are what this research investigates into whether this will enhance 

the development of the industry or not. 

The scope of this research work is limited to recapitalization of insurance industry and how 

mergers and acquisitions will be an option for insurance companies to remain in business. 

The limitations of this work include time, finance, and apathy to the filling of the 

questionnaires by the insurance companies and other operators in the industry. 

The magnitude of this research study requires making use of the survey type of research 

design. Consequently, preliminary investigations were made to ascertain some of the 

established and listed insurance companies on the Nigeria Stock Exchange. At the time of 

investigation a number of twenty-two insurance companies were listed. Stratified sampling 

method is applied in the company, whereby the management is stratified into top level 

management, middle level management and low level management. The simple random 

sampling method was used in selecting sample of the insurance company’s staff. Every staff 

in the survey was given equal opportunity of being included in the sample. This method was 

used to produce a representative sample of the population so that meaningful conclusion can 

be drawn on the population. 

Definition of certain terms 

Capitalization: This is the capital structure of a company or an organization. 

Recapitalization: It is the change in the capital structure of a company or an organization. 

Merger: This is a situation where, for many strategic and economic reasons, two or more 

companies come together to form a larger company. 

Acquisition: This entails a buy-over of one company usually by a bigger company. The 

company bought over normally loses its identity, in the case of a merger, it may be agreed 

that the larger formed company may retain their individual names to form the final name of 

the merged company. 

Insurance: It can be defined as a social scheme which provides financial compensation for 

the occurrence of a misfortune. 

Reinsurance: This is a form of insurance whereby an underwriter or direct insurer can 

transfer to another insurer all or part of the risks or liabilities already insured. 



Underwriting: It is the process of undertaking to bear all or part of possible loss by signing 

an agreement about insurance and the representative of the syndicate who is the signatory is 

called underwriter. 

Risk: This is the possibility of an unfortunate occurrence as the chance of loss, “as the 

uncertainty as to the occurrence of an economic loss”. 

Statement of research questions 

The following research questions are stated so as to give sharp focus to the study: 

(i) Can insurance industry benefit from this recapitalization exercise? 

(ii) Are insurance companies ripe for another recapitalization? 

(iii) Would mergers and acquisitions be a solution for insurance companies to remain in 

business? 

(iv) Does the insurance industry generate enough business to justify the current level of 

recapitalization, let alone being prepared for a fresh exercise? 

(v) Can insurance companies settle their differences in practice while adopting mergers 

and acquisitions? 

(vi) Is recapitalization responsible for the development of insurance companies? 

(vii) Do insurance companies need such huge amount to run their operations? 

Statement of the research hypotheses 

The researcher worked with the following hypotheses and the hypotheses formulated were 

equally tested at the end of the study. 

H o : Recapitalization will not aid the development of insurance companies 

H 1 : Recapitalization will aid the development of insurance companies 

H o : Mergers and acquisitions will not be a solution for some insurance companies to 

remain in business 

H 1 : Mergers and acquisitions will be a solution for some insurance companies to remain 

in business 

The instrument that was used to carry out primary data is the questionnaire. Items in the 

questionnaires were designed in two forms: 

(a) Open-ended Questions: The open-ended form which may be referred to as the 

“unstructured questionnaires” permits respondents to answer the questions freely and fully in 

their words and their own frame of preference. 

(b) Close Form: This includes a list of questions with their possible answers from which 

respondents select relevant options. This form is easy to complete, it directs the respondents 

mind to the subject of study and aids the process of tabulation and analysis. 

Method of data analysis 

The data collected via the questionnaires will be presented in a tabular form and analyzed 

with the use of simple percentage to make comparison of data easy. The Chi-square 

statistical procedure will be used to test the true position of the issues raised in the 

40 



hypotheses. Accurate and appropriate interpretation based on the findings from the analysis 

and test will be made with relevant conclusions and recommendations. The sources of data 

for the study are both primary and secondary. Due to the nature of the study, most of the data 

will be collected by the use of questionnaires. The data will be collected from selected 

insurance companies. These questionnaires were specifically designed for the management 

of these companies. These are termed as primary data. The secondary data used in this 

research study was gathered from magazines, journals, books, articles, and business 

publications. These were obtained from: (1) University of Lagos Library, and (2) Chartered 

Insurance Institute of Nigeria Library. A total of sixty (60) questionnaires were administered 

to the staff of the companies. 

Data Analysis 

Interpretation of results 

This section presents data collected from the respondents and the analysis of the data. From 

table 1 that follows, it is reviewed that 59.26% of the respondents were males and 40.74% of 

them were females. From table 2, it is observed that 35-39 age bracket of the respondents 

were 36.74% which is the highest percentage, followed by 25-29 age bracket with 30.61%, 

40 years and above age bracket with 26.57%, 30-34 age bracket with 9.26% and below 25 

age bracket with 6.12%. From table 3, 51.85% of the respondents were married, 44.44% 

were single, and 3.71% did not specify their marital status. Table 4 shows that 16.67% of the 

respondents were top managers, 55.56% were functional managers, and 27.77% were lower 

managers. From table 5, 57.41% of the respondents had OND/HND/B.Sc., 31.48% had 

M.Sc./MBA, 9.26% had professional qualification while 1.85% of the respondents had 

WAEC/GCE. 

From table 6, 72.22% of the respondents spent less than 10 years in the organization, 29.93% 

spent between 10 and 20 years while 1.85% of the respondents spent above 20 years in 

organization. From table 7, it could be seen that 40.74% of the respondents disagreed that 

the former capital base was adequate, 37.04% strongly disagreed, 3.71% were indifferent, 

but 14.82% strongly agreed while 3.71% agreed. From table 8, 57.41% of the respondents 

strongly agreed that the increase in capital base was necessary, 35.19% agreed, 1.85% were 

indifferent but 1.85% disagreed while 3.70% strongly disagreed. The table 9 revealed that 

64.82% of the respondents strongly agreed that recapitalization would increase the capacity 

of insurance companies, 33.33% agreed, while 1.85% were indifferent. Table 10 shows that 

61.10% of the respondents strongly agreed that insurance companies underwriting oil and 

energy require a larger capital, 20.37% agreed but 9.26% were indifferent while 1.85% 

disagreed and 7.41% strongly disagreed. Table 11 shows that 46.30% of the respondents 

strongly agreed that recapitalization will improve the public image of the insurance industry, 

38.89% agreed but 5.56% were indifferent while 5.56% disagreed and 3.70% strongly 

disagreed. From table 12, it could be seen that 48.15% of the respondents agreed that 

recapitalization improve the operational efficiency of insurance companies, 35.19% strongly 

agreed, 7.41% were indifferent but 7.41% disagreed and 1.85% strongly disagreed. 



Table 13 shows that 50.00% of the respondents agreed that mergers and acquisitions were 

good sources of large capital base, 38.39% strongly agreed, 5.56% were indifferent but 

3.70% disagreed and 1.85% strongly disagreed. From table 14, 33.33% of the respondents 

disagreed that mergers and acquisitions posed a greater threat to the unity of operation of the 

constituent companies, 29.63% were indifferent, 20.37% strongly disagreed but 14.80% 

agreed while 1.85% strongly agreed. Table 15 shows that 40.74% of the respondents 

strongly disagreed that it was better for some insurance companies to close operations than 

getting involved in mergers and acquisitions, 27.78% disagreed, 16.67% were indifferent but 

11.11% agreed while 3.70% strongly agreed. Table 16 shows that 25.93% of the respondents 

were indifferent on raising capital through the Stock Exchange and public offer is better than 

mergers and acquisitions, 25.93% strongly disagreed, 24.07% disagreed but 20.37% agreed 

while 3.70% strongly agreed. Table 17 revealed that 40.74% of the respondents agreed that 

there was a problem of merging the various units of the companies involved in mergers and 

acquisitions, 22.22% disagreed, 18.52% were indifferent but 16.67% strongly disagreed 

while 1.85% strongly agreed. Table 18 shows that 48.15% of the respondents agreed that by 

merging with and acquiring other insurance companies, the underwriting performance will 

improve, 25.93% strongly agreed, 12.96% were indifferent but 9.26% disagreed while 

3.70% strongly disagreed. From table 19, it could be seen that 35.19% of the respondents 

disagreed that the premium income generated by insurance companies justified the recent 

recapitalization exercise, 29.63% strongly disagreed, 22.22% agreed but 9.26% were 

indifferent while 3.70% strongly agreed. 

Table 20 shows that 51.850% of the respondents agreed that insurance companies can meet 

up with the recapitalization requirement without any sharp practices, 18.52% strongly 

agreed, 12.96% were indifferent but 11.11% strongly disagreed while 5.56% disagreed. 

From the table 21, it could be seen that 33.33% of the respondents agreed that the last 

recapitalization exercise is too close to the recent recapitalization exercise, 20.07% 

disagreed, 16.67% strongly disagreed but 14.82% were indifferent while 11.11% strongly 

agreed. Table 22 shows that 35.19% of the respondents disagreed that differences in work 

practices by the insurance companies would have negative effect, 25.93% strongly 

disagreed, 20.37% were indifferent but 16.67% agreed while 1.85% strongly agreed. From 

table 23, it could be seen that 35.19% of the respondents disagreed that the insurance 

industry is not ripe for a new round of recapitalization, 25.93% strongly disagreed, 20.37% 

were indifferent but 16.67% agreed while 1.85% strongly agreed. Table 24 shows that 

37.04% of the respondents agreed that there was a positive relationship between the level of 

capitalization and the level of development in the insurance industry, 33.33% strongly 

agreed, 12.96% strongly disagreed but 9.26% were indifferent while 7.41% disagreed. 

42 


Table- 1: 


Sex Distribution of Respondents 

Sex No. of respondents Percentage (%) 

Male 32 59.26 

Female 22 40.74 

Total 54 100.00 

Table- 2: 

Age Distribution of Respondents 

Age No. of respondents Percentage (%) 

Below 25 years 3 6.12 

25-29 years 15 30.61 

30-34 years 5 9.26 

35-39 years 18 36.74 

40 and above 13 26.57 

Total 54 100.00 

Table- 3: 

Distribution of Marital Status of the Respondents 

Marital status No. of respondents Percentage (%) 

Single 24 44.44 

Married 28 51.85 

No response 2 3.71 

Total 54 100.00 

Table- 4: 

Distribution of Designation of the Respondents 

Designation No. of respondents Percentage (%) 

Top level management 9 16.67 

Middle level management 30 55.56 

Lower level management 15 27.77 

Total 54 100.00 

Table- 5: 

Distribution of Educational Background of the Respondents 

Educational background No. of respondents Percentage (%) 

WAEC/GCE 1 1.85 

OND/HND/B.Sc. 31 57.41 

M.Sc./MBA 17 31.48 

Professional Qualification 5 9.26 

Total 54 100.00 



Table- 6: 

Distribution of Length of Service of the Respondents 

Length of service No. of respondents Percentage (%) 

Less than 10 years 39 72.22 

10-20 years 14 29.93 

Above 20 years 1 1.85 

Total 54 100.00 

Table- 7: 

The Former Capital Base is Adequate 

Response No. of respondents Percentage (%) 

Strongly Agree 8 14.82 

Agree 2 3.71 

Indifferent 2 3.71 

Disagree 22 40.74 

Strongly Disagree 20 37.04 

Total 54 100.00 

Table- 8: 

The Increase in Capital Base is Necessary 



Agree 19 35.19 




Total 54 100.00 

Table- 9: Recapitalization will Increase the Capacity of Insurance Companies 



Agree 18 33.33 


Total 54 100.00 

Table-10: Insurance Companies Underwriting Oil and Energy require a Larger Capital 



Agree 11 20.37 




Total 54 100.00 

44 



Table- 11: Recapitalization will improve the public image of the Insurance Industry 



Agree 21 38.89 




Total 54 100.00 

Table-12: Recapitalization will improve the operational efficiency of the 

Insurance Companies 



Agree 26 48.15 




Total 54 100.00 

Table-13: ‘Mergers and Acquisitions’ is a good source of large capital base 



Agree 27 50.00 




Total 54 100.00 

Table- 14: Mergers and Acquisitions pose a greater threat to the unity of 

operation of the constituents companies 



Agree 8 14.80 




Total 54 100.00 



Table- 15: It is better for some insurance companies to close operations than getting involved in 

mergers and acquisitions 



Agree 6 11.11 




Total 54 100.00 

Table- 16: Raising Capital through the Stock Exchange and public offer 

is better than mergers and acquisitions 



Agree 11 20.37 




Total 54 100.00 

Table- 17: There is a problem of merging the various units of the companies 

involved in mergers and acquisitions 



Agree 22 40.74 




Total 54 100.00 

Table- 18: 

By merging with and acquiring other insurance companies, 

the underwriting performance will improve 



Agree 26 48.15 




Total 54 100.00 

46 



Table- 19: 

The Premium income generated by insurance companies justified 

the recent recapitalization exercise 



Agree 12 22.22 




Total 54 100.00 

Table- 20: 

Insurance Companies can meet up with the Recapitalization 

requirement without any sharp practices 



Agree 28 51.85 




Total 54 100.00 

Table- 21: The last Recapitalization exercise is too close to the recent 

recapitalization exercise 



Agree 18 33.33 




Total 54 100.00 

Table- 22: Differences in work practices by the Insurance Companies will have negative effect 



Agree 9 16.67 




Total 54 100.00 



Table- 23: The Insurance Industry is not ripe for a new round of recapitalization 



Agree 9 16.67 




Total 54 100.00 

Table -24: There is a positive relationship between the level of capitalization 

and the level of development in the insurance industry 



Agree 20 37.04 




Total 54 100.00 

Hypotheses testing 

The chi-square method of testing the goodness of fit was used by the researcher to test all 

carefully formulated hypotheses in section one. The degree of freedom (DF) of empirical 

chi-square (χ 2 ) is obtained using the formula: 

(r T - 1) (c T - 1) 

where r T = the row total, and c T = the column total 

Therefore, degree of freedom for the purpose of this paper is (5-1)(2-1) = 4. 

The expected frequency is computed using the formula: 

e = r T x c T 

G T 

Where r T = the total row, c T = the total column, and G T = the grand total which is the 

number of cases. While the chi-square (χ 2 - test) is given as: χ 2 = ∑ (O - E) 2 

Where O = observed frequencies, and E = expected frequencies. 

The degree of freedom (DF) is measured against 95% level of significance. This means that 

the critical ratio of 2.776 is obtained using the chi-square table while tracing the degree of 

freedom under the deviation value of 5% or q(0.05). 

Decision Rule: The decision rule under this study is as follows: 

(1) The hypothesis is accepted if the critical ratio (q) is greater than test at 5% statistics. 

(2) The hypothesis is rejected if test statistics (TS) is less than critical ratio (q) at 5% value. 

E 

48 



Hypothesis 1 

Null Hypothesis (H o ): Recapitalization will not aid the development of insurance companies. 

Alternative Hypothesis (H i ): Recapitalization will aid the development of insurance 

companies. 

Table-25: Combination of questions 5 and 18 were used to test stated hypothesis 

ITEM SA A U D SD TOTAL 

O E O E O E O E O E 

5 25 13 21 11 3 2 3 2 2 1 54 

18 18 9 20 10 5 3 4 2 7 4 54 

TOTAL 43 41 8 7 9 108 

Computation of expected frequency: 

e = r T x c T 

G T 

E 1 = 13, E 2 = 11, E 3 = 1.5, E 4 = 1.5, E 5 = 1.0, E 6 = 9, E 7 = 10, E 8 = 2.5, E 9 = 2.0, E 10 =3.5. 

Application of chi-square statistical tool for hypothesis testing: 

O E (O - E) (O - E) 2 (O - E) 2 /E 

25 13.00 12.00 144.00 144.00/13.00 = 11.08 

21 11.00 10.00 100.00 100.00/11.00 = 9.09 

3 1.50 1.50 2.25 2.25/1.50 = 1.50 

3 1.500 1.50 2.25 2.25/1.50 = 1.50 

2 1.00 1.00 1.00 1.00/1.00 = 1.00 

18 9.00 9.00 81.00 81.00/9.00 = 9.00 

20 10.00 10.00 100.00 100.00/10.00= 10.00 

5 2.50 2.50 6.25 6.25/2.50 = 2.50 

4 2.00 2.00 4.00 4.00/2.00= 2.00 

7 3.50 3.50 12.25 12.25/3.50 = 3.50 

χ 2 = 51.17 

The test statistic (TS) = 51.17, the corresponding χ 2 at 4 DF which has q(0.05) = 2.776. 

Since TS > q(0.05), H o is rejected, while H i is accepted. It thereby follows that 

recapitalization will aid the development of insurance companies. 

Hypothesis 2 

Null Hypothesis (H o ): Mergers and acquisitions will not be a solution for some insurance 

companies to remain in business. 

Alternative Hypothesis (H i ): Mergers and acquisitions will not be a solution for some 

insurance companies to remain in business. 



Table - 26: Combination of question numbers 7 and 9 were used to test the above 

stated hypothesis 

ITEM SA A U D SD TOTAL 

O E O E O E O E O E 

7 2 1.0 6 3 9 4.5 15 7.5 22 11 54 

9 21 10.5 27 13.5 3 1.5 2 1 1 0.5 54 

TOTAL 23 33 12 17 23 108 

Computation of expected frequency 

e = r T x c T 

G T 

E 1 =1, E 2 = 3, E 3 = 4.5, E 4 = 4.5, E 5 = 11, E 6 = 10.5, E 7 = 13.5, E 8 = 1.5, E 9 = 1.0, E 10 = 0.5. 

Application of chi-square statistical tool for hypothesis testing: 

O E (O - E) (O - E) 2 (O - E) 2 /E 

2 1.00 1.00 1.00 1.00/1.00 = 1.00 

6 3.00 3.00 9.00 9.00/3.00 = 3.00 

9 4.50 4.50 20.25 20.25/4.50= 4.50 

15 7.50 7.50 56.25 56.25/7.50 = 7.50 

22 11.00 11.00 121.00 121.00/11.00= 11.00 

21 10.50 10.50 110.25 110.25/10.25= 10.25 

27 13.50 13.50 182.50 182.50/18.50 = 13.50 

3 1.50 1.50 2.25 2.25/1.50= 1.50 

2 1.00 1.00 1.00 1.00/1.00= 1.00 

1 0.50 0.50 0.25 0.25/0.50 = 0.50 

χ 2 = 53.75 

The test statistic (TS) = 53.75, the corresponding χ 2 at 4 DF which has q(0.05) = 2.776. 

Since TS > q(0.05), H o is rejected, while H i is accepted. It thereby follows that mergers and 

acquisitions will be a solution for some insurance companies to remain in business. 

Conclusion 

The paper revealed how recapitalization has been enhancing the development of insurance 

industry and how mergers and acquisitions can be an option for some insurance companies 

to remain in business. Insurance and reinsurance companies that are perceived as safe and 

well managed in the market place is likely to obtain more favourable terms and conditions in 

its relationship with investors, creditors, and other parties than one that is perceived as weak 

and more risky. The recent capital base set by the Federal Government of Nigeria for the 

insurance and reinsurance companies should be seen as an opportunity that could enable 

local players take jobs outside the country after the consolidation exercise. The insurance 

50 



operators should create an attitude to set up mega insurance and reinsurance companies that 

will be able to compete internationally. Recapitalization was not a bad idea for the industry 

but only the frequency and magnitude of the increase that was too demanding for insurance 

and reinsurance companies to raise. 

It is important to point out here that recapitalization was not the final problem of insurance 

industry as there were several other areas that needed to be looked into otherwise “the 

insurance industry will never get it right”. The future of the insurance industry in Nigeria is 

very bright. Within the last few years, the industry has experienced unprecedented growth. If 

the insurance industry can be successful in developing an insurance culture in our economy, 

we can expect increased patronage from them in the near future. It will be difficult if not 

impossible for some companies to optimize recapitalization. Companies that view the 

exercise as a good business decision are likely to look beyond compliance with the statutory 

requirements. The constructive and systematic increase in capital base is likely to be more 

beneficial to the company than those compelled by legislation. 

At the end of the recapitalization exercise, the research reviewed that fewer insurance 

companies will emerge through mergers and acquisitions, driven by regulation, improved 

innovation, creativity and healthy competition as companies vie to capture the retail end of 

the market whilst making themselves attractive to shareholders. One of the objectives of this 

study is not only to periscope the recapitalization and the insurance industry, where ‘mergers 

and acquisitions’ is an option for survival, but also to make recommendations for 

improvement and highlight steps necessary to achieve the much desired advancement. The 

most glaring limitation of the local underwriting firms is their very low capital base unless it 

is compelled by law to do so (Olawoyin, 2003). The various methods of improving the 

financial strength of an insurance company through capitalization are: (a) Introduction of 

fresh capital by existing owners: Here existing shareholders are advised to bring more funds 

to beef-up the capital base. This may be in the form of rights issue of shares proportional to 

existing holding. (b) Fresh capital from new shareholders. This is an invitation of new 

investors to invest in the visions and dreams of the company. It may take the form of a 

public offer for sale or subscription of the company’s shares if it is a public quoted company. 

It may also be by private placement. (c) Introduction of fresh capital from company’s 

reserve: funds reservoir of a company may include contingency reserve, general reserve, 

revaluation reserve, premium reserve, etc. A part of these reserves can be capitalized and 

converted to fund the issue of bonus shares to existing shareholders, thus enhancing the 

capital base of the company. (d) Mergers and acquisitions: mergers involved the coming 

together of two or more companies to form a single stronger, more competitive entity while 

acquisition involves the buy over or integration of an existing weaker firm by a stronger one. 

It will lead to growth by generation of large capital base to enhance technical marketing, 

management and business opportunity, efficiency, image and reputation. This will sure 

strengthen the local firms to be able to underwrite oil and gas risks. 

The local underwriter can go into corporate alliance with the insurance multinationals who 

underwrite business of oil and gas under an international business strategic alliance 



arrangement. This will provide technical and business support to local underwriters, provide 

an avenue for training of technical and managerial expertise in the oil and gas insurance 

business, and also enable local underwriters to be listed as corporate members of reputable 

petroleum insurance giants in the world. The industry regulatory mechanism of Chartered 

Insurance Instate Of Nigeria (CIIN), the Nigeria Insurers Association (NIA), the 

Professional Reinsurance of Association of Nigeria (PRAN), The Nigerian Corporation of 

Insurance Brokers (NCIB), etc. should produce a strong pressure group to make a 

presentation to the government for legislation to conserve our foreign earnings and retain 

insurance premium paid to the foreign underwriters who absolutely control some of our 

insurance business in Nigeria. Underwriters should endeavour to put in effort to improve the 

perception and acceptability of Nigeria insurance market in the international arena. This will 

improve the image of the industry. 

References 

1. Aghoghobvia (2005), “Critical Success Factor for Profitable Management of Insurance 

Institutions”, presented at the Nigerian Insurers Association Workshop in Lagos, 2005. 

2. Asika, N. (1991), Research Methodology in the Behavioural Science, Lagos: 

Longman. 

3. Bashorun, J. K. (2003), “Mergers and Acquisition: A Survival Strategy for the 

Insurance Industry”, The Nigerian Insurer. 

4. Ezekiel, O. C. (2003a), “Mergers and Acquisition”, The Nigerian Insurer, Nov. 

5. Ezekiel, O. C. (2003b), “Guides to Mergers and Acquisition”, The Nigerian Insurer. 

6. Isimoya, O. A. (1999), Fundamental of Insurance, Lagos: Management Science 

Publishing Limited. 

7. Irukwu (2005), “Changes in Industry - Good for Nigeria”, The Punch Newspapers, 

November, 29, 2005, p. 25. 

8. Ladipo-Ajayi, S. (2005), “Look Beyond New Capital Base”, The Punch Newspapers, 

November 15, 2005, p. 25. 

9. Murray, R. S. (2003), Probability and Statistics, Schaum’s Outline Series, New York: 

McGraw-Hill Book Company. 

10. Olawoyin, G. A. (2003), “Legal Process Involved in Mergers and Acquisition, The 

Nigerian Insurer. 

11. Richard, U. U. (2006), “Business Communication and Research Methodology”, ICAN 

Study Pack, Lagos: VI Publishing Limited. 

12. Samuel, E. (2003), “Strategies for Developing an Insurance Culture in a Rural 

52 


Environment”, Journal of CIIN. 


13. Sirkin, R. M. (1995), Statistics for the Social Sciences, California, Sage Publications. 

14. Sunday, O. (2006), “Recapitalization: The Bumpy Road Begins”, The Punch 

Newspapers, January 3, p. 24. 

15. The Risk Shield Magazine 2005, Vol. 6, October, 2005. 

16. The Risk Shield Magazine 2005, Vol. 7, No. 62. 

17. Thomas, O. S. (2004), “Maximizing the Gain of Recapitalization”, presented at CIIN 

Special MCPP Programme, 25th February, 2004. 

18. Uranta, J. C. (2004), “The Development of Oil and Gas Insurance in Nigeria”, Journal 

of CIIN. 




SHG- BANKING IN INDIA- 

EMPIRICAL EVIDENCES OF BANKERS’ PERCEPTION AND 

PROBLEMS. 

Samirendra Nath Dhar* 

Kiranjit Sett** 

Soumitra Sarkar*** 

ABSTARCT 

The article looks into the perceptions and problems of bank officers and employees 

regarding SHG – banking activities related to the SGSY and suggests policy 

prescriptions based on the findings. 

Introduction 

Promotion of self-employment is being prioritised as one of the main policy initiatives for 

economic and social development in most developed countries and in many less-developed 

nations. Self-employment is recognized as one means of bringing a person into the 

mainstream of the society as a productive and contributing individual. For self-employment, 

micro-enterprises were considered as a double edged weapon to play a significant role in 

increasing the income level of the poor as well as contributing to their social empowerment, 

especially for women. However, setting up and running micro-enterprises is easier said than 

done because the presence of a host of constraints. The most glaring problems, however 

seems to be inadequacy of finance relating to fixed and working capital and ignorance about 

the success of finance, margin money, collaterals, application of loan etc. (Brugger, 1995). 

The problem gets more compounded for women because “formal financial institutions are 

less receptive and welcoming to female entrepreneurs.” ILO observed in 1998 that collateral 

requirements, bureaucratic loan application and disbursement procedures, the time and 

resources necessary to visit the banks and discriminatory banking culture virtually exclude 

poor women clients. 

* Professor of Commerce, University of North Bengal, Raja Rammohunpur, Darjeeling, 

e-mail: sndhar@sancharnet.in, 

** Lecturer in Commerce, University of North Bengal, Raja Rammohunpur, Darjeeling, 

and 

*** Research Scholar in Commerce, University of North Bengal, Raja Rammohunpur, 

Darjeeling.

Samirendra Nath Dhar, Kiranjit Sett, Soumitra Sarkar 

Kulshrestha (2000) identified that in spite of administration of many poverty alleviation 

programmes lack of capital was a serious constraint to development of women microentrepreneurs 

in rural areas. Kaladhar (1997) revealed that though micro enterprises 

generally have very small start up capital and they cannot provide collateral for loan and 

therefore micro-entrepreneurs depend on their friends / relatives or moneylenders for their 

credit needs. The moneylenders have traditionally provided credit to the rural poor, usually 

at excessively high rate of interest leading to considerable destitution and impoverishment of 

borrowers, including undesirable and illegal practices like bonded labour. The financial 

institutions did not have an adequate credit system for micro businesses, in place (both for 

saving and lending). However, the difficult procedures and requirements withheld the micro 

businesses from approaching traditional financial institution. Saving opportunities in FIs 

were very limited and it was seen that in many part of the country, saving with the 

moneylenders was prevalent. 

This situation, being prevalent worldwide, warranted establishment of alternative sources of 

finance for sustainable development of micro enterprises and fuelled the emergence of 

microfinance programmes in over a hundred countries. “ In India group based programmes 

have engaged first and foremost as a mechanism to allow the poor access to financial 

services that they have historically been denied” (Sen, 2003). Such programmes have been 

administered for the last two decades in a variety of forms and have multiplied rapidly. The 

SHG approach of lending was introduced to banks as a new micro finance approach with 

innovativeness and flexibility. Presently, the SHG-based microfinance is the main form of 

microfinance in India and it is well integrated into the formal banking system in India. The 

group based microfinance schemes have been introduced by the banks to cater cost effective 

finance to micro-entrepreneurs, the bulk of whom are women living below the poverty lines. 

Banking for Self Help Groups or SHG- Banking has developed into a new segment of 

banking for commercial banks, regional rural banks and cooperative banks. 

SHG- Banking – Features, Objectives and Advantages 

Large-scale outreach of microfinance services to the poor in India have been made possible 

through SHGs and the existing decentralised formal banking network including several 

organisations in the formal and non-formal sectors through SHG-Banking. These banking 

services are made accessible to the poor, especially women at minimal costs and are flexible 

enough to meet their needs. SHG-Banking has been designed and is being operated as an 

annexe cubicle of well established traditional banking practices. Traditional banking 

mandates written contracts with individuals, a clear amorphous project and activity for loan 

use, compulsory legal identification of the borrower, provision of collateral, etc. whereas in 

SHG Banking, the most rigid requirements of the formal banking system have been 

overthrown; SHG-Banking is need based and multiple credit injection system with ‘bankers 

to the poor’ approach. SHG Banking is a novel approach in banking where the effectiveness 

of microfinance activities lies in the extent of outreach to the poor and creating a sustainable 

means of livelihood for them. The focus of SHG banking is to operate in the low income 

client market segment which was considered as un-bankable so far. It operates with a vibrant 


SHG- BANKING IN INDIA-EMPIRICAL EVIDENCES OF BANKERS’ PERCEPTION AND PROBLEMS. 

and more unfettered service design and most flexible credit product design in order to fully 

meet the requirements of the low income strata, particularly of women. 

The SHG-Bank linkage Programme has its origins in a Gesellschaft fur Technische 

Zusammenarbeit (GTZ)-sponsored project in Indonesia. As a beginning in India, National 

Bank for Agriculture and Rural Development (NABARD), introduced a pilot project in 

Karnataka for linking 255 SHGs with formal banks. This BANK-SHG Linkage project was 

introduced after thorough discussion with the Reserve Bank of India, commercial banks and 

NGOs. NABARD provides refinance facilities to banks for collateral free loans to groups, 

progressively up to four times the level of the group's savings deposits. Thus "linked" SHGs 

became micro-banks and were able to access funds from the formal banking system. Similar 

linkages were provided after the Swarnajayanti Gram Swarozgar Yojana (SGSY) was 

launched for rural poor, especially women in 1999 and the Swarnajayanti Sahari Rozgar 

Yojana (SJSRY) in 1997 for urban poor women building up self employment generating 

micro-enterprises. The total number of SHGs linked to different banks under NABARD 

scheme have grown to 22,94,380 in 2006-07 from a miniscule 255 groups in 1999 showing 

a compounded annual growth rate of 92% and the linkage through the SGSY has grown 

from 2,92,426 in 1999-2000 to 25,01,623 groups in 2006-07 showing a compounded 

annual growth rate of 36% . 

The linkages have been provided by the vast network of commercial banks, cooperative 

banks and regional rural banks in India. 209 co-operative banks, 191 regional rural banks 

and 44 commercial banks are involved as SHG-Banking partners, with 17,085 participating 

branches. There can be no doubt about the programme’s outreach to the poor; but is it viable 

for the banks? 

Seibel and Dave (2002) have shown that Non-performing loans to SHGs were 0%, testifying 

to the effectiveness of group lending to the very poor. In contrast, consolidated Non 

Performing Loan (NPL) ratios ranged from 2.6% to 18%; and of Cash Credit (CC) and 

Agricultural Term Loans (ATL) up to 55% and 62%, respectively. Returns on average assets 

of SHG Banking ranged from 1.4% to 7.5% compared to -1.7% to 2.3% consolidated. Other 

researchers and practitioners have studied various aspects of SHG-Bank Linkage programme 

and identified a list of emerging issues. Some of them, Wilson (2002), Harper (1998), 

Fernandez (1998), Jayaraman (2001) Tankha (2002), Karmakar (1999), Puhazhendhi & 

Satyasai (2000), Satish (2000), Dasgupta (2001), Sharme, Ahmed and Rashid (2002), 

Puhazhendhi & Badatya (2002) etc. have explored into viability, performance and prospects 

in the field of SHG- Bank Linkage system. 

These studies have found that SHG-Banking system provides a new dimension for the 

formal bank branches and bank branch managers. They feel comfortable and safe in their job 

with the new flexible SHG- Banking practice. This group based microfinance system has 

created a new vistas for the bank staff and manager to interact with the rural vulnerable 

section specially women. Some studies have found SHG Bank Linkage Programme 

approach is free from all kind of deficiencies of the Government directed credit programmes. 

The frustration of the traditional ordinary bank staff has not been transferred into the SHG 

Bank Linkage Programme approach. Kropp & Suran (2002) observed that “a steady growth 

56 



in number of new SHGs, an increase of the amount of loans disbursed and an excellent loan 

recovery performance has created a new job satisfaction among the bankers.” It is a vital 

source of attainment of emotional needs of the bankers. Many bankers show great 

satisfaction to report about the socio-economic achievements of their groups. There are a 

number of indicators that highlight the relative advantages of SHG banking and show that 

the gap between formal bankers and rural poor has been bridged. These studies have shown 

that there has been externalisation of a part of the work items of the credit cycle i.e., 

assessment of credit needs, appraisal, disbursal, supervision and repayment, reduction in the 

formal paperwork involved and a consequent reduction in transaction costs and improvement 

in recoveries from groups. 

However, very little empirical evidences have been provided to show how the bankers 

involved in SHG-banking perceive the system and the problems they face while operating in 

this new arena. This study is an attempt to dig out these evidences based on survey research. 

Objectives, Scope and Methodology of the Study 

The success of any programme depends largely on the participants who steer the course of 

actions necessary for implementation and operation of the programme. Micro- finance 

delivery in India largely depends on the active participation, enthusiasm, dedication and 

knowledge and awareness of bankers who are involved in making their banks effective 

financial intermediaries. These attributes of the bankers depend on their views and 

perception about the microfinance programme being operated and the problems they face 

while playing their role in the deliverance mechanism. Negative perceptions about 

microfinance programmes and hindrances in their normal operations can stand in the way of 

making SHG-banking effective. Landy and Becker (1987) opine that a person is motivated 

to work better for a programme when he or she is aware of what is important and the 

circumstances in which he or she works. According to psychologists Locke et.al (1981), the 

natural human inclination to set and strive for goals is useful only if the individual 

understands the particular goal, perceives it to be good and accepts it. The social information 

processing model of motivation argues that employees adopt attitudes and behaviours in 

response to the social cues received by them from others with whom they have contacts 

(Robbins, 2005). Banks involved in SHG- banking or planning to expand this activity to 

more branches therefore need to understand the problems and perception of their personnel. 

This study aims to delve into this aspect and find out what officers and employees of banks 

think about this emerging area of banking. 

The main objective of this study is to gauge the perceptions and problems of bank officers 

and employees regarding SHG- Banking activities related to the SGSY and suggest policy 

prescriptions based on the findings. 

For the purpose of the study a mix of interviews and administration of questionnaires were 

made to a random sample of 150 officers and employees working in 154 branches of various 

commercial and regional rural banks in 13 blocks in Jalpaiguri district and 5 blocks in 

Siliguri subdivision. The questionnaires having structured questions on a five point Likert 

scale was personally administered to the sample. Jalpaiguri and Siliguri was chosen as the 



catchment area of the study because of the rapid growth of SHGs under SGSY and linkage 

of a large number of 1 st and 2 nd graded groups linked to these banks. Before administering 

the final questionnaire a pilot survey was made and various aspects were discussed with 

personnel handling SHG linkage operations. The number and nature of statements were 

finalised on the basis of the pilot survey and discussions. The banks covered under the study 

were Uttar Banga Kshetriya Gramin Bank, State Bank of India, Central Bank of India, 

United bank of India and other banks mentioned in the table below. Eighteen filled in 

questionnaires had to be rejected due to technical flaws and incompleteness. The final 

sample of respondents therefore stood at 132. The findings of the study are reported below. 

Findings of the Study 

(a) Growth of SHGs linked to Banks 

The study has principally dealt with the empirics of perception and problems of bankers. 

Before reporting on these findings it would be pertinent to have a bird’s eye view of the 

growth of SHGs linked to banks in the catchment area under study. Table I gives a 

comprehensive picture of growth of the SHGs linked to different banks with respect to the 

year of inception of SGSY and up to March 2007. 

Table-1: SHGs linked with different banks under SGSY in Jalpaiguri District and 

Siliguri Subdivision (Cumulative figures) 

No. of 

Branches 

No. of 

SHGs 

No. of 

SHGs 

SHGs linked 

up to 06-07 

CAGR 

(%) 

C/C and RF 

disbursed 

Banks linked with 

SHGs under 

SGSY 

linked in 

1999-2000 

linked upto 

2006-07 

(% of Total) 

upto Dec 

2006 

(Rs. Lakhs) 

CBI 46 11 5,739 29.68 144.4 4221.4 

SBI 26 22 3,758 19.44 108.4 3248.4 

UBI 14 8 554 2.87 83.2 817.1 

UCO 4 4 441 2.28 95.7 465.2 

ALLB 6 3 336 1.74 96.2 287.4 

PNB 3 0 196 1.01 ----- 264.8 

SYND 1 0 174 0.90 ------ 291.7 

IB 1 0 25 0.13 ------ 22.25 

BOI 2 2 250 1.29 99.3 281.5 

Union Bank 1 8 60 0.31 33.4 N.A. 

UBKGB 50 54 7,803 40.35 103.4 8283.5 

Total 154 112 19,336 100 108.4 

Compiled from reports of DRDCs of Jalpaiguri and Siliguri for different years. 

58 



Though the table is self explanatory, some points need to be highlighted. There is no doubt 

that the growth of SHGs linked to different banks have witnessed an exponential growth and 

the quantum jump in the linkages well signify the spread of SHG- Banking in this region. 

While Uttar Banga Kshetriya Gramin Bank is clearly the leader in terms of number of SHGs 

linked and having more than 40% of total SHGs under its wings, Central Bank of India is a 

close follower with about 30% of the SHGs linked to it. The following diagram gives a 

distinct view of the share of different banks in respect of number of SHGs linked in the 

region under the study. 

No of SHGs linked with Banks upto 2006- 

41 

The compounded annual growth rates are also noticeable as they have surpassed the CAGR 

of all India growth rate by more than three times in five cases. The growth rates of other 

banks are also exceptionally high. These statistics are an indicator of how the SHG- bank 

linkage programme has caught up in these areas after the SGSY was launched. With respect 

to the Cash Credit and Revolving Fund disbursed, the figures in the table show that UBKGB 

is the leader in this respect also, the amount disbursed being nearly twice that of CBI and 

nearly 1.5 times of the cumulative amount disbursed by other commercial banks shown in 

the table. These figures therefore also indicate the superiority of regional rural banks over 

commercial banks in respect of linking of SHGs. 

(b) Perception of Bank Personnel regarding operational and viability aspects of SHG 

linkages: 

The perception of bank personnel, both officers and employees handling SHG banking have 

been measured by a series of 16 statements administered on a five point Likert’s scale. The 

scale used for all the statements were Strongly agree, Agree, No opinion, Disagree and 

Strongly Disagree. Values of 2, 1, 0, -1 and -2 respectively were assigned to these points so 

as to have a quantitative measure of the perceptions of each of these statements. Scores of 

each statement were summated for all the respondents and the mean score reported. A value 

higher than zero for the mean score would denote a positive attitude of the bankers working 

with SHG- banking. To test the response it was hypothesised that the mean score for 

perception (MS p ) of each aspect related to the statements administered would exceed zero, 

the neutral value on the five point scale. 

Vidyasagar University Journal of Commerce 59 

3 

19 

30 

CB 

SB 

UB 

UC 

ALL 

PN 

SYN 

I 

BO 

Union 

UBKG


The hypothesis framed was as follows: 

H o : Mean Score for Perception of Bankers (MS ip ) = 0 

H 1 : Mean Score for Perception of Bankers (MS ip ) > 0 where ( i= 1 to 16) 

The results are reported below 

Table-2: Perception of bankers regarding SHG- Banking under SGSY 

Mean t- values 

Statements 

score 

1. SGSY is a better micro-credit programme than previous 

21.515 a 

1.76 

credit programme like IRDP 

2. Savings of SHGs have resulted in more deposit for banks 1.57 22.750 a 

3. Recovery rates are excellent. 1.88 17.41 a 

4. Establishing savings & credit linkage of SHGs with bank 

9.65 a 

1.21 

has resulted in better business for your branch 

5. The amount financed through your bank are utilised 

1.578 c 

0.12 

properly for micro-entrepreneurial activities by SHGs 

6. Previous IRDP defaulters are restricted from having 

9.81 a 

1.02 

finance under SGSY. 

7. Beneficiaries understand all the operations and 

0.938 

0.08 

documents of savings credit linkage. 

8. Only the group leaders / treasurers understand all the 

5.405 a 

0.80 

operations and documents of savings credit linkage. 

9. It is difficult to explain the operation and maintenance 

6.557 a 

0.80 

documents to the SHG leader or treasurer. 

10. The SGSY will prove to be a sustainable micro-credit 

8.920 a 

0.76 

delivery system in the long run. 

11. SHG- banking operations are different from commercial 

8.155 a 

0.88 

banking activities 

12. Frequent interactions with SHG members are essential 

20.869 a 

1.44 

for SHG- Banking 

13. Special training programmes need to be conducted for 

9.836 a 

1.20 

personnel engaged in SHG- Banking 

14. A separate cell needs to be created in each Bank branch 

3.218 a 

0.42 

for SHG- Banking 

15. Experience in SHG- Banking will lead to better job 

4.342 a 

0.68 

opportunities in other MFIs 

16. Your respect and social recognition has increased due to 

17.816 a 

1.24 

involvement in SHG- Banking 

Note: a denotes significance at 1% level and c at 10% level. 

Source : Field Survey 

60 



The table given above clearly and pertinently depicts the perception of the bankers regarding 

SHG banking. Responses regarding the increase in the amount of deposits and the recovery 

of loans by banks are very positive and significant at 1% level, indicating that the bankers 

believe that the banks are doing good business through SHG banking. This is complemented 

by the fact that the bankers also believe SGSY to be a better programme than IRDP. 

Moreover the fact that they have perceived SHG- Banking to increase their respect and 

social recognition is a positive signal in the direction that this recognition will motivate them 

to work better for programmes linked to SHG- Banking. However, the bankers are quite 

sceptical about the end use of their services which is identifiable from the response to the 

statement regarding establishing microenterprises from bank finances. Further, operational 

difficulties are perceived by the bankers from the fact that beneficiaries did not understand 

the documents and procedures very well and the group leaders required some amount of 

training for dealing with banking operations for SHGs. However, informal discussions with 

the officers and staff revealed that they were not very worried about this feature as they 

knew that they were dealing with women customers from the poorest sections of society and 

were denied the facilities of basic education for generations. They opined that with the 

passage of time and frequent literacy drives, these operational hurdles could be overcome. In 

addition to this, responses were significantly on the positive side regarding the fact that 

SHG- banking was quite different from normal banking operations and required further 

training for personnel engaged in SHG-banking activities and also frequent interactions with 

the beneficiaries. However, responses regarding opening up of special cells for SHGbanking 

and prospect of better job opportunities were only lukewarm, though statistically 

significant. On the whole, the responses of the bankers show an overall positive attitude 

towards the new dimension of banking that has emerged during the last decade. The other 

side of the coin, however, is not unblemished as operational difficulties and problems 

continue to pose hindrances for bank personnel engaged in SHG-banking operations. 

Discussions regarding the problems are made in the following section. 

(c) Perception of Bank Personnel regarding problems related to SHG-Banking 

The perception of bank personnel regarding the problems they encounter while handling 

SHG banking have been measured by a series of 6 statements administered on a five point 

Likert’s scale. The scale used for all the statements were very high, and moderately high, no 

opinion, moderately low and very low. Values of 2, 1, 0 -1 and -2 respectively were assigned 

to these points so as to have a quantitative measure of the perceptions of each of these 

statements. Scores of each statement were summated for all the respondents and the mean 

score reported. A value higher than zero for the mean score would denote that bankers have 

a perception that the stated problem was serious and needed attention. To test the response it 

was hypothesised that the mean score for perception (MS pr ) of each aspect related to the 

statements administered would exceed zero, the neutral value on the five point scale. The 

hypothesis framed was as follows: 

H o : Mean Score for Perception regarding problems of SHG- Banking (MS ipr ) = 0 



H 1 : Mean Score for Perception regarding problems of SHG- Banking (MS ipr ) > 0 

where ( i= 1 to 6) 

The results are reported below : 

Table-3: Perception of bankers regarding problems related to SHG- Banking 

Statements 

Mean t- values 

score 

1. Problem of staff shortage to cater to SHG work. 1.44 13.85 a 

2. Knowledge gap of bank staff about SGSY. 0.94 11.25 a 

3. Problems due to frequency of receiving guidelines 

8.78 a 

1.22 

from head office. 

4. Problems of non co-operation from DRDC. 0.08 1.52 

5 Problems of non co-operation from panchayats. 1.22 14.35 a 

6. Extra workload due to SHG- Banking 1.42 13.65 a 

a denotes significance at 1% level. 

Source: Field Survey. 

The commonly perceived problems as shown in the above table are significant in all the 

cases except problems regarding cooperation from DRDC. Shortage of staff assigned for 

SHG- Banking and extra work load are the most concerning problems. Discussions revealed 

that in many bank branches, there was staff shortages and extra work load even when there 

was no SHG- banking. The introduction of this new system has multiplied the problems. In 

many branches, especially in the rural areas, bank personnel had to handle both normal 

commercial banking activities and SHG-banking activities including visit to groups during 

formation and grading. Further many branches, especially in case of the RRB, majority of 

the branches under study had no computerised operating systems. Thus maintenance of SHG 

accounts, deliverance of cash credit and revolving funds, accepting pay-in and withdrawal 

slips of the groups at the same teller station posed hurdles in everyday operations. These 

difficulties were topped up with the number of guidelines, notices and circulars flowing in 

from the head office and the DRDC. The contents of these documents were always not 

comprehensible to all the staff and some of the respondents were even puzzled at the 

changes that were being made in the SGSY guidelines regarding cash credit, revolving fund 

etc. Many respondents stated that they did not find suitable time to read so many guidelines 

and circulars in details and carried on the work with the instructions served by the manager 

of the branch. On the other dimension, though the bank personnel did not perceive the 

DRDCs to be non-cooperative, they felt that there were grey areas regarding cooperation 

from Panchayats. Discussions revealed that the main problems were timely communication 

with these bodies, lack of understanding of banking operations by the members, faulty 

identification of beneficiaries etc. 

Any phenomenon that brings in change in the operating system of an organisation carries 

with it the problems and associated constraints. The same is the case with SHG- Banking 

62 



which made its advent only eight years ago in relation to SGSY. However, if these problems 

can be addressed well in time and with proper consideration, the rough edges can be 

smoothened out gradually. The next section strives to put some suggestions in this context. 

Suggestions and Conclusion 

SHG- banking has resulted in the success of microfinance programmes through out India. 

The same story replicates itself in Jalpaiguri district and Siliguri subdivision. This is evident 

from the growth in number of SHGs linked to banks in these areas. Such a boom would not 

have been possible without the positive attitude and cooperation of the bankers. The bankers 

do have a positive outlook of banking for SHGs and this has been aptly corroborated by the 

findings of this study. Their positive outlook is bound to be a sine quo non for sustainability 

of this type of banking operations. However, roses do not bloom without thorns and 

problems can put spokes in the wheels of SHG-banking. Some of the suggestions given 

below may be able to address the problems encountered by the staff. 

• Sensitisation and awareness programmes should be organised frequently for 

personnel handling SHG- banking operations so that they can conceive the 

objectives and rationale behind microfinance programmes and also grasp the 

nuances of the operations related to linkage of SHGs. 

• Qualified microfinance practitioners can be employed by banks. In addition to 

making microfinance operations by banks smoother, the pressure on existing staff 

can be reduced and these qualified professionals can help the other staff to master 

the techniques of SHG- banking. 

• Complaints of additional workload can be catered to by employing additional staff 

on contract basis and upgrading manual documentation and accounting systems to 

computerised systems. 

• Where this is not possible it may be worthwhile to have a special banking day for 

SHG Banking. However, if for any reason the staff that were given the responsibility 

for SHG-banking activities, could not attend the special banking day and members 

of SHGs would have to wait for a week. This could adversely affect the group’s 

economic activities and in the interval they may have to take recourse to 

moneylenders. This could lead to loosing confidence on the banking system. 

Depending on the number of SHGs linked to the bank and the number of staff 

available the management could arrange for special SHG-banking hours twice or 

thrice a week. 

• Where SHG linkage operations are hampered due to the perception of heavy 

workload, management can conduct counselling sessions to the staff to convey to 

them that SHG banking under SGSY leads to a ‘win- win’ situation. On the one 

hand the SHGs benefit from higher level of group corpus and on the other hand the 

banks can benefit from excellent recovery and lower number of accounts due to 

opening of group accounts instead of small individual accounts. 

• Where difficulties in interpretation of guidelines and circulars are common, there 

such information may be provided in audio- visual mode for better comprehension. 



This suggestion was received from some bankers during the course of the survey. 

Moreover programmes can be organised by DRDC with the representatives of 

different banks and Government officials to bring uniformity and simplicity in the 

documents required for banking activities. 

• Recognition for devotedness to SHG- banking can be given to employees in the 

form of awards, citations and highlighting performances in annual reports. This can 

act as a definite motivator for the bankers. 

• Problems of dearth of cooperation from the local bodies can be resolved by forming 

joint action committees at the local levels consisting of the bankers and the panchyat 

members. This will increase the frequency of their interactions, lead to better 

communication and assure timely cooperation. 

Microfinance and SHG-banking activities are multidimensional; therefore, strategies and 

policies often need to be framed not only on the basis of Government guidelines, but also on 

the basis of the local area characteristics, demographics and needs. The suggestions given 

above are broad based and need to be fine tuned according the requirements of each branch, 

number of SHGs linked to the branch and the staff working in the branch. A batch of 

motivated staff can be the pillars on which SHG- banking can sustain and facilitate 

microfinance systems to penetrate deep into the most poverty stricken segments of society. 

References 

1. Brugger, E.A. and Rajapatriana, S. (eds.) (1995): “ New perspectives on Financing Small 

Business In developing Countries”, ICS Press. 

2. Dasgupta, R. (2001): “Rural banking and credit - tale of many committees”. EPW, 

March. 

3. Fernandez, A.P. (1998): The MYRADA Experience: Alternative Management System 

for Savings and Credit of the Rural Poor, Mysore Resettlement and Development 

Agency, Bangalore. 

4. Harper, M. (1998): “Profit for the Poor - Cases in Micro-Finance”. Oxford and IBH 

Publishing Co. Ltd., New Delhi. 

5. Jayaraman, B (2001): “Micro Finance: Retrospect and Prospects”, Occasional Paper-20, 

National Bank for Agriculture and Rural Development, Mumbai. 

6. Karmakar, K. G. (1999): “ Rural Credit and SHG- Microfinance Needs and concepts in 

India”, Sage Publications India Pvt. Ltd., New Delhi. 

7. Kropp, E.W. and Suran,B.S, (2002): Linking Banks and Self Help Groups in India-An 

Assessment- Paper presented at the Seminar on SHG-bank Linkage Programme at New 

Delhi, 25 and 26 November, 2002 

8. Kulshrestha, Laxmi (2000): “Micro-finance: the new development paradigm for poor 

rural women”. Kurukshetra, November, 2000, pp. 22-25. 

9. Landy and Becker (1987): “Motivation Theory Reconsidered”, in L. Cummins and 

B.Staw (eds), Research in Organisational Behaviour, vol 9 (Greenwich, CT: JAI Press) 

p-12. 

64 



10. Locke, E.A. Shaw, K.N., Saari, L.M. & Latham, G.P., (1981): “ Goal Setting and Task 

Performance 1969-80” Psychological Bulletin 90, pp 125-26 

11. Puhazhendi & Badatya (2002): “SHG-Bank Linkage Programme for Rural Poor – An 

Impact Assessment”. Paper presented at the Seminar on SHG-bank Linkage Programme 

at New Delhi on 25th and 26th November, 2002 NABARD. 

12. Puhazhendhi,V and Satyasai, K.J.S., ( 2000): “Micro Finance for Rural people - An 

Impact Study”. National Bank forAgriculture and Rural Development, Mumbai. 

13. Robbins, S.P. (2005): “ Organisational Behaviour”, prentice-Hall of India Private 

Limited, New Delhi. 

14. Satish, P (2000): “Some Issues in the formation of Self Help Groups” Indian Journal of 

Agricultural Economics, Vol 56, No.3, July- September, Mumbai. 

15. Seibel, H. D. and Dave, H. R. (2002): “Commercial Aspects of SHG Banking in India” 

Paper presented at the Seminar on SHG-bank Linkage Programme at New Delhi, 

November, 2002 

16. Sen, M. (2003): “ A Study of SHGs and Microfinance in West Bengal” A Report of 

SIPRD, West Bengal. 

17. Sharma, M. Ahmed,A. and Rashid, S. (2002): Group-based financial institutions for the 

rural poor in Bangladesh: An institutional and household level analysis. Research Report 

No.120. International Food Policy Research Institute, Washington, D.C. 

18. Tankha, A. (2005): SHG as financial intermediation in India: cost of promotion, 

sustainability and impact”. A study prepared for ICCO and Cordaid, The Netherlands 

19. Wilson, (2002): “The new MF- An easy on the SHG movement in India.” 

http://www.esd.worldbank.org 




ENHANCING PROFITABILITY AND SHAREHOLDER VALUE 

THROUGH MERGER – A CASE STUDY OF ICICI BANK 

Arindam Gupta * 

Debashis Kundu ** 

ABSTRACT 

The study uses one of the high profile mergers of the Indian banking industry to 

measure the amount of wealth actually created for shareholders by such a merger, 

using the valuation tools like MVA, EVA, etc. and also the relative profitability 

measured from variables like Spread and Burden. Attempt has also been made 

further to find out the relative impact first of variables like EVA, market 

capitalization, total capital employed, yield, relative profitability, return on net 

worth, etc. on MVA; secondly of total capital employed, yield, relative profitability, 

return on net worth, etc. on EVA and finally of variables like EVA, total capital 

employed, yield, return on net worth, etc. on relative profitability. 

Why a Case Study on the Merger of a Banking Institution? 

The Indian banking sector is a key constituent of the Indian economic scenario. It is still the 

major supplier of funds for industrial activities. But this industry itself is in a transition 

phase. The banking sector is seeing many changes like imposition of international prudential 

norms, greater competition among banks, entry of new private sector banks, more fee-based 

services along with diversity in offering of services, among others. So the public sector 

banks are currently in the process of restructuring while the private sector banks are busy in 

consolidating themselves through mergers and acquisitions. On the other hand, due to 

increasing participation in the share capital from outside (other than government), the issues 

of profitability of operations and shareholder value creation have become more important in 

case of the nationalized banks. In case of private sector banks, the issues were always 

important. 

This churn in the banking industry has thrown up further a new challenge in the form of 

measuring profitability and valuation of these banks. The traditional tools like market 

capitalization and profit margins are supplemented with new measures like Spread, Burden, 

* Professor and Head, Department of Commerce with Farm Management, Vidyasagar 

University, Midnapore – 721 102, e-mail: arindam_finance@rediffmail.com, 

** Part-time Lecturer, Department of Commerce, Sivanath Sastri College, Kolkata, 

e-mail : debkundu_2000@ yahoo.com.

Arindam Gupta, Debashis Kundu 

EVA 1 (Economic Value Added) and MVA 2 (Market Value Added). This article attempts to 

appraise the case of one of the premier banking institutions of the country, ICICI Bank, just 

before and after merger using a mixture of traditional and non-traditional tools like Spread, 

Burden, relative profitability, EVA, MVA, etc.. This, at the same time, helps to highlight the 

amount of profit generated and wealth created for shareholders due to the merger process. 

Further, attempt has also been made further to find out the relative impact first of variables 

like EVA, market capitalization, total capital employed, yield, relative profitability, return on 

net worth, etc. on MVA; secondly of total capital employed, yield, relative profitability, 

return on net worth, etc. on EVA and finally of variables like EVA, total capital employed, 

yield, return on net worth, etc. on relative profitability. 

ICICI-ICICI Bank Merger – The Story 

Industrial Credit and Investment Corporation of India Limited (hereinafter, referred to as 

ICICI Ltd.) 3 was set up in 1955 as a public limited development financial institution (DFI) 4 

to provide foreign currency loans to Indian companies. ICICI Ltd. was able to quickly grasp 

the emerging opportunities thrown up by the economic liberalisation of India in 1991 and 

grew to be a formidable force in the Indian financial scene. It expanded its activities into the 

areas of project finance, underwriting, venture capital, and mutual funds and established 

various subsidiaries including that of ICICI Bank in 1994. Subsequently ICICI Ltd. closed 

down many of its subsidiaries. It merged SCICI 5 with itself in 1996, ITC Classic Finance 

and Anagram Finance in 1998 and Bank of Madura in 2001. 

ICICI Banking Corporation Limited (hereinafter, referred to as ICICI Bank) was set 

up as a scheduled commercial bank in 1994 by ICICI Ltd. as its wholly owned 

subsidiary. In 1999, the Bank became the first Indian company and the first financial 

institution from non-Japan Asia to be listed in the New York Stock Exchange 

(NYSE). ICICI Bank soon diversified its product portfolio. It set up five Strategic 

Business Units (SBUs), namely, ICICI Prudential Life Insurance, ICICI Lombard 

General Insurance, ICICI Ventures, ICICI Securities, and Prudential ICICI Asset 

Management Company. 

1 EVA is a registered trademark of Stern Stewart Company. It has been referred to as ‘economic 

profit’. A slight variation of the same is known as ‘residual income’ which is more often used to avoid 

plenty of adjustments that have been originally advocated. 

2 MVA is a tool to measure shareholder value at a particular moment that was introduced by Stewart 

in 1991. MVA is the additional market capitalization over and above the book value of equity. 

3 ISIN Code: INE005A01011, Website: www.icicibank.com. 

4 Development banks (also called DFI), an integral part of India’s organized financial system, provide 

finance and related services to domestic industries on lenient terms in line with the planning priorities. 

5 SCICI is Shipping Credit and Investment Corporation of India. 


ENHANCING PROFITABILITY AND SHAREHOLDER VALUE THROUGH MERGER – A CASE STUDY OF ICICI BANK 

Reserve Bank of India (RBI), India’s central bank, first mooted the idea of merging all 

existing development banks and some weak commercial banks with healthier commercial 

banks way back in 2000. ICICI Bank was the first to take advantage of this policy and 

submitted a detailed scheme to reverse merge itself with its development bank counterpart 

on 1 st October, 2001. As both ICICI Bank and ICICI Ltd. were listed in the Indian and US 

markets, effective communication to a wide range of investors was a critical part of the 

merger process. The merger was approved by shareholders of both the companies in January 

2002, by the High Court of Gujarat in March 2002, and by the High Court of Judicature at 

Mumbai and ultimately by RBI in April 2002. The ratio for the merger was fixed at one 

equity share of ICICI Bank of Rs.10 each for two shares of ICICI Ltd. of the face value of 

Rs.10 each. While the merger became effective on May 2002, in accordance with the 

Scheme of Amalgamation, the appointed date of merger was 30 March, 2002. 

Post-merger, ICICI Bank became India’s first ‘universal bank’ acting as a one-stop supplier 

for all financial products and activities such as deposits, short-term and long-term loans, 

insurance, venture capital, and investment banking. It is now the second-largest Indian bank 

after State Bank of India (India’s number one commercial bank) with total assets of about 

Rs. 3,447 billion (as at 31 March, 2007). It has a network of 755 branches and extension 

counters and 3,271 Automated Teller Machines (ATMs) across the country. Further, it has 

taken bold steps towards diversifying its basic banking business into Business Process 

Outsourcing (through ICICI OneSource – now renamed Firstsource Solutions Ltd.) and 

international banking operations in various countries around the world. 

Profitability and Wealth Creation – Targets set at the time of merger 

The compulsions that led ICICI Ltd. to reverse merge with ICICI Bank had much to do with 

the changing global and national banking environment as with its internal dynamics. Hence 

the reasons for the reverse merger merely reflect the dilemma faced by the entire Indian 

banking community in general and the development banking sector in particular. 

The reverse merger was expected to enhance profits for the shareholders of ICICI Ltd. and 

ICICI Bank. This was expected to come from an expanded scale of operations, access to 

ICICI Ltd.’s strong corporate relationships built up over five decades, entry into new 

business segments, higher market share in various business segments, growth in fee-based 

services, and access to the vast talent pool of ICICI Ltd. and its subsidiaries. 

Once profitability improves, the market is then expected to give a higher discounting (in 

terms of higher P/E ratio) to its share price and substantially increase its market 

capitalisation. 

Objectives of the Study 

The principal objective of the study is to use one of the high profile mergers of the Indian 

banking industry to measure the profitability actually generated and wealth created for the 

shareholders by such a merger, using the tools like Spread, Burden, EVA, and MVA. 

The secondary objective is to find out the relative importance of the selected explanatory 

variables that include EVA as the most representative non-traditional measure and some 



other conventional performance measures which may help to measure the change in MVA. 

The importance of non-market linked variables like total capital employed, yield, return on 

net worth, etc. first on EVA and then on relative profitability have also been examined into 

to find out the relative impact of these variables over economic profit and profitability 

respectively. 

Literature Survey 

There are a large number of studies concerning shareholder value creation. But for the 

purpose of this paper, only those articles focusing on the application of new market-oriented 

techniques to generate shareholder wealth have been looked into. 

Kohli and Chawla (2006) have used the concepts of burden, spread, apart from some 

selected ratios to study the trends in profitability of selected Indian banks. While income, 

spread and net profit grew for all the banks, the private sector banks reported diminishing 

burden but increasing spread and non-interest income as compared to the public sector 

banks. 

The study conducted by Stewart (1991) on the statistical association between MVA and 

EVA was based on a sample of 613 US companies over the period from 1984 to 1985 in 

relation to the period from 1987 to 1988. The author reports strong positive relation between 

the average standardized values of EVA and MVA. However the results do not seem to 

support the relation between negative EVA and negative MVA. 

O’Byrne (1996) regresses firm value on EVA and earnings measured in the form of NOPAT 

(net operating profit after tax). The study considers a total of 6651 firm-years over the period 

from 1985 to 1993. Two types of regressions are used where the market value divided by the 

capital is the dependent variable. After a series of adjustments to the EVA regression, the 

author reports the robustness of EVA in explaining firm values. 

Grant (1996) identifies the ‘wealth-creators’ and the ‘wealth-destroyers’ among a set of 

firms with the help of EVA/Capital employed and MVA/Capital employed measurements. 

The findings indicate that the ratio, EVA/Capital employed can explain approximately 32% 

of the variation in MVA/Capital employed. 

Dodd and Chen (1996) in their paper have studied the correlation between stock returns and 

EVA, residual income, RoA, RoE and EPS. It is based on a sample of 566 US companies 

over the period from 1983 to 1992. The adjusted EVA was found to offer few advantages 

over unadjusted EVA or residual income. The incremental tests also suggested that the 

components of EVA only add marginal information to earnings. The results hence do not 

support the notion that EVA dominates earnings in relative information content. 

A case study on the relative statistical significance of market capitalization and EVA as an 

effective valuation tool conducted by Chattopadhyay and Gupta (2001) found that EVA 

did not prove to be a better tool than the traditional measure like market capitalization. The 

study used correlation analysis, Runs test and simple regression on EVA and market 

capitalization of Hindustan Lever Limited over a nine-year period from 1991 to 1999. 

In another Indian study, Prakash Singh (2005) first tests the robustness of the new tools of 

shareholder wealth measurement – EVA and MVA. He then goes on to test the efficacy of 



these two techniques on 28 Indian banks over a five-year period from 1999 to 2003. He finds 

that in India, EVA does not happen to be a better wealth measurement tool as compared to 

traditional performance measures. But he finds significant statistical relationship between 

EVA and MVA. 

Methodology 

The study is composed of three parts. The first part measures the profitability of operations 

of ICICI Bank through Spread and Burden over the seven-year period. 

The second part computes the EVA and MVA over a seven-year period from 2001 to 2007. 

The third part carries out correlations, Runs tests and a series of regressions. 

Key variables 

MVA is the difference between the Firm Value [total market value of the firm’s capital (both 

debt and equity)] and the total capital employed by it. 

MVA = Firm Value – Capital Employed 

EVA is the amount of economic value (or profits) generated by a company over a specific 

period in excess of its cost of capital. It is calculated as the difference between NOPAT (net 

operating profit after tax) and the product of weighted average cost of capital (WACC) with 

total capital employed. 

EVA = NOPAT – (WACC × Capital Employed) 

It can also be defined as the excess returns (i.e., RoCE – WACC) generated from operations 

multiplied with the quantum of capital employed. 

EVA = (RoCE – WACC) × Capital Employed 

[where, RoCE = return on capital employed] 

In case of the first formula, NOPAT and Capital Employed may have to be adjusted with 

about 150 reverse journal entries. However, in practice, about 5-10 adjustments are done for 

the calculation in case of a company. 

Market capitalization (MCap) indicates the total market value of the equity shares of a 

company (bank). 

Total capital employed (CapEmp) by company considers both its Tier-I and Tier-II capital 

as at the end of the year. Tier 1 capital, as the core measure of a bank's financial strength, 

comprises of equity capital, irredeemable and non-cumulative preference capital, and 

retained earnings. Tier II capital comprises of undisclosed reserves, revaluation reserves, 

general provisions, hybrid instruments and subordinated debt. 

Relative Profitability (Rel. Pr.) is ‘profitability’ in absolute amount divided by total 

income. This is similar to the margin ratios as calculated for a company. ‘Profitability’ is the 

difference between Spread and Burden. Spread is the excess of interest earned from lending 

operations by the bank over the interest paid on borrowing funds. It may be indicated either 

in absolute amount or in percentage. 

Spread = Interest Income – Interest Expense 



Burden, on the other hand, is the difference between non-interest expense (summation of 

establishment expenditure, other current and non-current expenditure) and non-interest 

income (summation of commission, exchange, brokerage, and such other income). It can 

also be indicated either in absolute amount or in percentage. 

Burden = Non-Interest Expense – Non-Interest Income 

Interest yield (Yield) indicates the total earnings of the bank from advances expressed in 

the form of percentage. 

Return on Net Worth (RONW) is a profitability measure obtained by dividing net 

profit after tax (with adjustment of tax savings on interest) by tangible net worth. 

Scheme of Investigation 

All the variables have been either directly obtained or calculated using their standard 

formula since 2001, the year just prior to the merger. The year-end share price has been 

sourced from National Stock Exchange (NSE) and has been used to calculate the year-end 

market capitalization. 

The first part of the study highlights the effect on profitability of the company due to 

changes in Spread and Burden over the years. The figures are indicated in absolute amount 

with the growth in percentage form. The actual difference between Spread and Burden 

indicates the profitability of the Bank. 

In the second part, the percentage change from year to year in MVA and EVA highlights 

respectively the quantum of shareholder wealth and ‘economic’ profits created through the 

reverse merger process. It thus points to the extent of success of the merger from the 

viewpoint of the shareholder. 

The third part examines the degree of association between MVA with each of the other 

variables with the help of correlation coefficients. Pearson’s (to find the magnitude of 

correlation), Spearman’s (to find the ranking of the magnitudes) and Kendall’s (to find the 

nature of the associated changes) correlation coefficients and their appropriate statistical 

tests are used for this purpose. 

The result of these correlations may be due to simply the chance factor. In order to test for 

this chance factor, Runs test are performed on each of the variables. If the Runs tests prove 

to be significant in one-tail (since the variables are supposed to be directly related) even at 

5% level of significance, it indicates that the series is non-random and contains a systematic 

part. The systematic part may come from respective trend effects that can be eliminated with 

the help of a trend equation. The trend equation is fitted first with the help of three 

alternative trend equations, viz., linear (y = a + bt + ut), log-linear (ln y = a + bt + ut) and 

log-quadratic (ln y = a + bt + ct 2 + ut) [where, Y is the dependent variable and t is time]. A 

particular form is chosen on the basis of adjusted R 2 and the Durbin-Watson (D-W) statistic. 

Then the residual values of the concerned variables are calculated by deducting the expected 

values as per the best-fitted trend equation from the actual observed values. 

Now, the variables with their residual values are taken into multiple regression with other 

variables with their original values. Incremental regression analyses are carried out by 

increasing one independent variable at every stage. At first, MVA is taken as the dependent 



variable as its value is expected to depend on the other performance measures like EVA, 

total capital employed, market capitalization, relative profitability, interest yield, and return 

on net worth (RoNW). The final multiple regression analysis contains all the independent 

variables regressed on the single dependent variable, MVA. 

In the next two cases of multiple regression, the effect of some non-market variables on 

EVA and relative profitability has been looked into. Hence the effect of residual market 

capitalization and residual MVA have not been considered. So, variables like total capital 

employed, yield, relative profitability, and return on net worth have been regressed on EVA 

and finally the variables like EVA, total capital employed, yield, and return on net worth 

have been regressed on relative profitability. 

All the equations are followed by its adjusted coefficient of determination (R 2 ), F-value, and 

student’s t-value apart from the coefficients of each of the variables. Statistical significance 

up to 10% level has been considered for all the tests. The statistically significant cases are 

indicated with star mark/s. 

Post-Merger – Findings 

The analysis of profitability from the trends of Spread and Burden over the years (from the 

pre-merger period to the post-merger one) does point to a successful merger, but not an 

exciting one. Financial year 2002-03, the year just after the merger, reported the most 

encouraging outcome of the merger – a massive rise in Spread with a fall in Burden. 

However, the next four years saw a modest growth in Spread but a highly erratic change in 

Burden. This has put pressure on profitability leading to an average growth rate of around 

26% annually over this period. 

One of the reasons behind the merger was to increase shareholder wealth. ICICI Bank 

submitted its proposal for reverse merger on 1/10/2001 to Reserve Bank of India. Its share 

price has risen from Rs. 72.00 as on that date to Rs. 124.00 as on 29/3/2002, just prior to the 

merger. This 76% gain appeared to take place just from the news of the merger. This trend 

continued even after the merger. The price of one ICICI Bank share (as on 31/03/2007) is 

Rs. 853.10. This translates to a gain of another 588% over these five years. (Source: 

Capitaline Plus database, Capital Market Publishers Pvt. Ltd., Mumbai.) 

Table 2 also highlights the EVA and MVA generated by the company over a seven-year period 

from 2001 to 2007. The reverse merger actually took place on March 30, 2002. ICICI Bank 

reported positive growth in EVA since 2001 except during 2002 and 2004. The same growth 

pattern was witnessed in case of MVA except in 2002 and 2007. The Bank reported a modest 

growth in its net operating profit after tax (NOPAT) in 2002, which was overshadowed by the 

rise in its cost of capital causing a drop in its EVA. In 2004 there was a decline in its NOPAT 

and hence the decline in EVA. MVA declined in 2002 and again in 2007 due to a greater 

increase in capital employed as opposed to the growth in its Firm Value. 

The correlation analyses using all the three tests of Pearson’s, Spearman’s and Kendall’s 

indicate statistically significant relation between MVA with EVA, market capitalization, 

relative profitability, total capital employed and interest yield. The only other variable of 

RoNW does not exhibit similar statistically significant relation with MVA (Table 3). This 



study thus supports the findings of most of the earlier studies that EVA is very closely 

related to MVA. 

Incremental regression analyses are carried out next taking into account one additional 

independent variable at each next stage. This has just been presented to compare the results 

between two sets of variables, the present set having their original values with no exercise of 

making them trend-free and the other set with some variables likely with their residual 

values after eliminating the trend effect along with the other variables with their original 

values. After this analysis being undertaken, it is observed that EVA does not appear to be 

significant in all cases of inclusion yet in most cases. (Tables 4 and 7) 

The results of the Runs tests at the 5% level of significance indicate that four variables, viz., 

MVA, Market Capitalization, Capital Employed and Yield have significant runs in their 

series of values. Hence these variables are interpreted to be non-random in nature with 

significant influence of time. (Table 5) 

At the next stage, log-linear trend was found to be best-fitted for MVA and Market 

Capitalization whereas ordinary least square (OLS) trend was found to be best-fitted for 

Capital Employed and Yield on the basis of a mutual judgment of the Adj. R 2 and D-W 

statistic values of the three alternative trend equations for all the four non-random variables. 

(Table 6) 

After considering therefrom the residual values of the four non-random variables and the 

original values of the other remaining random variables, as described in an earlier paragraph 

as the other set, incremental regression analyses are carried out taking into account one 

additional independent variable at each next stage. Residual value of Market Capitalization 

appears to be the most significant variable in all the stages. (Table 7) 

In both sets of variables, due to insufficient data of a case study like work, the final 

regression results do not give a clear picture when all the explanatory variables are taken into 

consideration. (Tables 4 and 7) 

Since EVA is known to depend on variables like capital employed, yield, relative 

profitability etc., the next table (Table 8) regresses those variables on EVA. Residual yield is 

found to have the only statistically significant effect on EVA among all the other variables. 

However, in the next multiple regression, (Table 9), none of the explanatory variables turn 

out to be statistically significant. 

Conclusion 

The above findings point out the success of the merger both for the Bank and also for its 

shareholders. The five completed years since the merger shows that though ICICI Bank was 

able to successfully consummate the first reverse merger of India, its effect on profitability 

was not much to talk about. But for the shareholders, the story was a bit different. 

Both EVA and MVA – the new generation wealth measurement tools – have shown robust 

growth over the 7-year period. The brief anomaly in a single year was merely due to the 

adjustment process the Bank was going through. On the question of profitability in its 

absolute term, the bank has shown satisfactory result in the post-merger time period. Hence 

it can be safely concluded that the reverse merger of ICICI Ltd. with ICICI Bank was able to 



generate wealth for its shareholders both from an economic as well as from market 

perspective. 

MVA and EVA are seen to have a negative relationship, though not significant in most of 

the cases. Yield, contrary to the expectation, has shown negative significant relationships to 

MVA, EVA, and also to relative profitability. This suggests that the interest rate hike in bank 

advances create a negative impact on bank business resulting in poor market reaction, 

profitability (in absolute amount), and economic profit. Economic profit and profitability, 

separately as dependent variables, do not have any significant influencing variable. 

EVA does not prove to be a better performance measure so far as its significant correlations 

are observed with MVA. Though it requires more data even for a case study for making a 

safe conclusion like this. It is again always better to go through a cross section of companies 

for finding out the true predictive value of EVA. This has been earlier attempted and also is 

going to be attempted in many other studies by various researchers. This had not been, 

however, the main objective of the present study. 

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pages. 

10. Kroll, Karen M. (1997); “EVA and creating value”, Industry Week, pp.102-109. 



11. Lehn, K. and Makhija, A. K. (1996); “EVA and MVA: As performance measures 

and signals for strategic change”, Strategy and Leadership, pp. 34-38. 

12. Gupta, Arindam and Kundu, Debashis (2005); op. cit., pp. 750-758. 

13. Singh, Prakash (2005); “Indian Banks: maximizing shareholders wealth through 

value creation”, Conference Vol. on Research in Finance and Accounting, Indian 

Institute of Management, Lucknow, March 17-18. 

14. www.nse-india.com. 

Table-1: Trends in Spread, Burden and Profitability of ICICI Bank 

Year Spread Burden Profitability Relative 

Profitability 

Amount Change in Amount Change in Amount Change in In 

(Rs. bn.) percent (Rs. bn.) percent (Rs. bn.) Percent Percent 

2000-01 4.04 - 2.43 - 1.61 - 0.11 

2001-02 5.93 46.62 3.35 37.54 2.58 60.34 0.09 

2002-03 14.24 140.14 2.18 -34.90 12.06 366.97 0.10 

2003-04 18.79 31.93 2.42 10.92 16.37 35.73 0.14 

2004-05 28.39 51.11 8.34 253.28 20.05 21.26 0.15 

2005-06 41.87 47.48 16.47 92.90 25.40 27.95 0.14 

2006-07 66.36 58.48 35.26 114.06 31.10 22.45 0.11 

Table-2: Calculating EVA and MVA 

Particulars 2001 2002 2003 2004 2005 2006 2007 

Average cost of funds (%) 8.03 7.52 8.91 7.10 5.80 5.80 6.60 

Interest yield (%) 10.91 9.68 10.21 9.00 8.10 8.00 8.30 

NOPAT (Rs. bn.) 2.58 4.80 29.97 21.12 24.34 41.34 93.92 

Yield spread (%) 2.88 2.16 1.30 1.90 2.30 2.50 2.3 

Total capital employed (Rs. bn.) 

(both Tier I and Tier II capital) 

14.47 90.12 91.46 94.01 159.03 278.43 338.96 

Cost of capital (Rs. bn.) 1.16 6.77 8.15 6.67 9.22 16.15 22.37 

No. of shares (in bn.) 0.22 0.22 0.61 0.61 0.74 0.89 0.89 

Equity share capital (Rs. bn.) 2.20 2.20 6.13 6.13 7.37 8.90 8.99 

Closing market price (Rs.) 165.50 123.90 133.75 296.30 392.80 589.03 853.1 



Closing market capitalization 36.41 27.26 81.59 180.74 290.67 524.24 759.26 

(Rs. bn.) 

Firm Value (Rs. bn.) 48.68 115.18 166.92 268.62 442.33 793.77 759.26 

EVA (Rs. bn.) 1.42 -1.97 21.82 14.45 15.12 25.19 71.55 

Change in EVA (%) - -238.73 -1207.61 -33.78 4.64 66.61 184.02 

MVA (Rs. bn.) 34.21 25.06 75.46 174.61 283.30 515.34 420.30 

Change in MVA (%) - -26.75 201.13 131.41 62.25 81.90 -18.44 

Table-3: Results from Bi-variate Correlations 

Pearson’s MVA EVA MCap CapEmp Rel. Pr. Yield RoNW 

MVA 1.000 0.679 0.916 0.918 0.575 -0.874 0.307 

Sig. Level . 0.047** 0.002* 0.002* 0.088 0.005* 0.252 

(1-tailed) 

Kendall's 

MVA 1.000 0.714** 0.905* 0.810* 0.551** -0.714** 0.048 

Sig. Level . 0.012 0.002 0.005 0.045 0.012 0.440 

(1-tailed) 

Spearman's 

MVA 1.000 0.857* 0.964* 0.929* 0.673** -0.857* 0.143 

Sig. Level . 0.007 0.000 0.001 0.049 0.007 0.380 

(1-tailed) 

N 7 7 7 7 7 7 7 

* Correlation is significant at the 0.01 level (1-tailed). 

** Correlation is significant at the 0.05 level (1-tailed). 

*** Correlation is significant at the 0.10 level (1-tailed). 

Table-4: Coefficients of Regression equations 

Constant EVA MCap CapEmp Rel. Pr. Yield Ro 

NW 

MVA 104.18 5.41*** 

(1.29) (2.07) 

42.54 -5.62 1.08** 

(1.31) (-2.55) (5.60) 

25.18 -5.42 0.90 0.41 

(0.46) (-2.15) (1.82) (0.42) 

-254.04 -2.47 0.34 1.08 2237.3 

(-1.44) (-0.91) (0.65) (1.20) (1.64) 

-1761.61 -2.25 -0.15 2.88 5302.15 108.32 

(-7.21) 

-2528.55 

(-) 

(-3.72) 

-0.62 

(-) 

(-1.09) 

-0.67 

(-) 

(8.21) 

4.10 

(-) 

(9.18) 

6800.75 

(-) 

(6.25) 

160.59 

(-) 

2.47 

(-) 

Adj. 

R 2 

F 

0.35 4.27*** 

0.91 30.71* 

0.88 16.30** 

0.93 19.76** 

1.00 324.69** 

1.00 - 



(t-values are provided in parenthesis) 

* value is significant at 0.01 level 

** value is significant at 0.05 level 

*** value is significant at 0.10 level 

Table-5: Results from Runs Test 

Total 

Cases 

Number of 

Runs 

Z (test 

statistic) 

Monte 

Carlo Sig. 

(2-tailed) 

10% level 

MVA EVA MCap CapEmp Rel. Pr. Yield RoNW 

7 7 7 7 7 7 7 

2 4 2 2 3 2 5 

-1.637*** .000 -1.637*** -1.637*** -0.380 -1.637*** 0.06 

0.102 1.000 0.102 0.102 0.704 0.102 0.952 

[*** significant at 10% level] 

Table-6: Estimated trend equations of non-random variables 

Trend MVA Mcap 

Equation Adj.R 2 D-W Estimated trend 

Adj.R 2 D-W Estimated trend 

Linear 0.84 2.14 Yt = -116.91 + 83.81 t 0.86 0.86 Yt = -210.20 + 20.41 t 

0.89 2.01 ln Yt = 2.75 + 0.53 t 0.94 2.41 ln Yt = 2.68 + 0.58 t 

0.87 2.23 ln Yt = 2.37 + 0.79 t – 0.93 2.40 ln Yt = 2.69 + 0.57 t + 

0.0032 t 2 0.001 t 2 

Trend CapEmp Yield 

Equation Adj.R 2 D-W Estimated trend 

Adj.R 2 D-W Estimated trend 

Linear 0.87 1.16 Yt = -50.17 + 50.63 t 0.79 2.25 Yt = 11.07 – 0.48t 

Loglinear 

Logquadratic 

Loglinear 

Logquadratic 

0.80 2.15 ln Yt = 2.92 + 0.44 t 0.79 2.25 ln Yt = 11.07 – 0.48 t 

0.80 2.22 ln Yt = 2.29 + 0.86 t – 0.80 2.47 ln Yt = 11.80 – 0.96 t 

0.0053 t 2 + 0.006t 2 



Table-7: Coefficients of Regression equations [Dependent variable: Residual MVA] 

(considering trend effect in selected variables) 

Res. 

MVA 

Cons 

tant 

0.09 

(0.48) 

0.08 

(0.88) 

0.06 

(0.64) 

-0.69 

(-1.69) 

1.73 

(4.62) 

EVA 

-0.004 

(-0.63) 

-0.004 

(-1.29) 

-0.003 

(-0.94) 

-0.004 

(-1.7) 

- 

0.03*** 

(-7.79) 

Res. 

MCap 

1.19* 

(4.73) 

1.08** 

(3.18) 

0.91*** 

(3.40) 

1.73** 

(12.73) 

Res. 

CapEmp 

-0.001 

(-0.58) 

-0.0005 

(0.24) 

-0.003 

(-4.37) 

Rel. 

Pr. 

6.55 

(1.88) 

-18.82 

(-4.85) 

Res. 

Yield 

-0.0001*** 

(-6.65) 

Ro 

NW 

Adj. 

R 2 

F 

-0.11 0.39 

0.79 12.20** 

0.75 6.90*** 

0.86 10.41*** 

0.99 197.19** 

1.06 -0.02 1.50 -0.002 -11.61 -0.0001 -0.003 1.00 - 

(-) (-) (-) (-) (-) (-) (-) 

[Res. = residual] 


*significant at 1% level **significant at 5% level ***significant at 10% level 

Table-8: Coefficients of Regression equation [Dependent variable: EVA] 


Constant Res. Rel. Pr. Res. RoNW Adj. R 2 F 

CapEmp 

Yield 

EVA 73.55 -0.18 -791.84 -0.005*** 0.004 0.69 4.26 

(1.43) (-0.73) (-1.50) (-3.67) (1.00) 



***significant at 10% level 

Table-9: Coefficients of Regression equation [Dependent variable: Rel. Pr.] 


Constant EVA Res. Res. RoNW Adj. R 2 F 

CapEmp Yield 

Rel. 0.09* -0.0007 -0.0003 -0.00005 0.0004 0.70 4.57 

Pr. (9.53) (-1.50) (-2.00) (-2.29) (0.58) 



*significant at 1% level 




CORPORATE RESTRUCTURING THROUGH MERGERS AND 

ACQUISITIONS: A CASE STUDY 

Debdas Rakshit∗ 

Chanchal Chatterjee** 

ABSTRACT 

With the rapid expansion of Liberalization, Privatization and Globalization (LPG) in 

global economy, mergers and acquisitions have become an important and effective vehicle 

of corporate restructuring. Mergers and Acquisitions aim at achieving optimum utilization 

of all available resources, accelerating the company’s growth with the help of removing 

the problem of paucity of resources including human resources, winning over competitive 

forces, achieving economies of scale, expanding sales volume, increasing the operational 

efficiency, achieving synergies, forming formidable human resource base, obtaining tax 

benefits with the help of proper tax planning, diversifying the business risk, installing an 

integrated research platform, reducing competition in the market, removing sickness, 

achieving savings in administrative costs and ultimately enhancing the value of the firm. In 

this backdrop, the present paper seeks to explain how a company restructures its business 

through mergers and acquisitions. A case study is also presented here to examine the 

efficiency of strategic decision taken by ICICI Bank, a leading private bank in India, in 

ensuring its overall value creation. 

Introduction 

With the rapid expansion of Liberalization, Privatization and Globalization (LPG) in world 

economy, Merger and Acquisition has become an important and effective vehicle of 

corporate restructuring in several sectors of the economy including the banking sector. 

Banking sector is the most vital sector of the economy and the construction as well as 

expansion of this sector contribute significantly towards the development of the economy of 

any nation. The strategy of merger and acquisition is also prevalent in this banking sector 

around the world. Companies pursue this strategy of corporate restructuring with a view to 

achieve multidimensional benefits arising from such strategy like – 

(1) Accelerating the company’s growth with the help of removing the problem of paucity of 

resources, (2) Enhancing the economics of scale, expanding sales volume, increasing the 

∗ Senior Lecturer in Commerce, University of Burdwan, Golapbag, Burdwan,Pin-713104, 

e-mail: debdas_rakshit@yahoo.co.in., 

**Lecturer in Accounting and Finance,St. Xavier’s College (Autonomous), Kolkata, 

e-mail: chanchal_chatterjee2007@yahoo.co.in.

CORPORATE RESTRUCTURING THROUGH MERGERS AND ACQUISITIONS: A CASE STUDY 

operational efficiency etc. (3) Achieving synergistic benefits, (4) Obtaining several forms of 

tax benefits available under the Income Tax Act 1961 with the help of proper tax planning, 

(5) Diversifying the business risk with the help of merger between unrelated firms and 

thereby reducing or eliminating the fluctuation of income due to seasonal or economic cycles 

and consequently stabilizing the income flow, (6) Reducing competition in the market and 

capturing the most significant part of the market and above all (7)Enhancing the value of the 

firm and ensuring the long run survival, existence and growth of the enterprise in this everchanging, 

competitive and dynamic business world. 

In India, the fever of mergers and acquisitions took place after the declaration of the New 

Economic policy in 1991 where Indian economy was made free from unnecessary 

bureaucratic control of the Government. Private sector participation was allowed to welcome 

the tide of industrialization by following the strategy of LPG in order to integrate the Indian 

economy with the world economy. In such a changing scenario, several banking institutions 

started restructuring themselves by resorting to the strategy of mergers and acquisitions. For 

instance, there have been 34 merger deals in Indian banking industry from 1969 (i.e., the 

year of starting the bank nationalization) to 2004. [See Annexure for details]. 

In this backdrop, the present study has been conducted with reference to ICICI Bank Ltd., 

which was merged with the Bank of Madura on 10 th March 2001. This study basically aims 

at evaluating the performance of this bank before and after the merger with the help of some 

ratios and also by utilizing the technique of profitability measurement under the traditional 

and modern concept. There are many systems of traditional performance measurement, such 

as Net Profit Margin, Operating Profit Margin, Earning Per Share, Return on Investment 

(ROI) etc.. In this study, ROI and EPS have been used for measuring performance under the 

traditional system. However, ROI is the best among all the traditional performance 

measurement vehicles since it considers the four major dimensions of performance 

measurement viz, Profitability, Liquidity, Capital Structure and Turnover position. Under the 

modern approach, performance has been measured with the help of Economic Value Added 

(EVA) which is a modern technique and is claimed to be a much more clear indicator of 

corporate surplus. EVA is generally defined as any profit earned over and above the cost of 

capital. Some ratios used here for measuring performance are Return on Assets (ROA), 

Return on Net Worth (RONW), Net Profit to Total Funds, Interest Income / Total Funds etc. 

This article has been designed into eight sections. Section II provides a brief picture of the 

company’s profile. Section III highlights the objectives of the study. The review of relevant 

literatures has been shown in Section IV. Section V deals with the Database and 

Methodology used in this study. Section VI has been devoted to the making of SWOT 

analysis of the banks. Major computations and findings have been shown in Section VII and 

finally Section VIII spells out the overall conclusion of the study. 

Company Profile 

ICICI Bank is a commercial bank promoted by ICICI Ltd., an Indian Financial Institution. It 

is the second largest bank in India, having 562 branches and extension counters across India 

and 1910 ATMs. 


Debdas Rakshit, Chanchal Chatterjee 

The bank offers a wide spectrum of domestic and international services to facilitate trade, 

investment banking insurance, venture capital, asset management, cross border business & 

treasury and foreign exchange services besides providing a full range of deposit and 

ancillary services for both individuals and corporates through various delivery channels and 

specialized subsidiaries. Its branches are fully computerized with the state of art technology 

and systems, networked through VSAT technology. The bank is connected to the SWIFT 

International network. The bank has 14 subsidiaries across India and other countries like 

U.K., Canada and Russia. 

The bank has gained favourable acceptance from its customers for its initiatives in businessto-business 

and business-to-customer solution. The bank has introduced the concept of 

mobile ATMs in the remote rural areas. In 2000-01, the Bank of Madura (BOM) got merged 

with ICICI Bank. With this merger, the ICICI Bank has become one of the largest private 

sector banks in India. 

In the wholesale banking segment, the bank has achieved a significant milestone in the 

market making activity by expanding the product suited to include foreign exchange options 

against Indian Rupee as RBI allowed them to be traded w.e.f. 07.07.2003. The bank has 

emerged as one of the largest market – makers in merchant as well as inter-bank markets for 

this product. 

Objectives 

The study has been conducted with the following two main objectives: 

1. To evaluate the pre-merger and post merger performance of the concerned bank and 

2. To evaluate the effectiveness of such merger, i.e. whether this strategy of corporate 

restructuring has become successful or not. 

Review of Literature 

Various studies have been conducted from time to time regarding bank-mergers throughout 

the globe. A brief explanation regarding some of such studies is shown in the following 

paragraphs: 

Bae and Aldrich examined eight mega-mergers of equals in the banking industry during the 

1987-1996 period to ascertain whether a merger of equal banks is a viable alternative in 

improving bank’s performance and is beneficial to shareholders. Their analysis showed that 

only three out of eight mergers of equal banks were viewed as successful, and previous 

mergers of equals have not been overwhelming successes. Olson and Pagano conducted a 

study, which attempted to study the mergers of publicly traded bank holding companies 

during 1987-1997. They have concluded that the acquiring firm’s sustainable growth rate is 

an important determinant of the cross-sectional variation in the merged entity’s long-term 

operating and stock performance. Cornett and Mc Nutt made a study to examine the 

operating performance around commercial bank mergers. Their study revealed that industry 

adjusted operating performance of merged banks increases significantly after the merger. 

They have also concluded that the large bank mergers produce greater performance gains 



than small bank mergers. Pilloff and Santomero undertook a study on bank mergers and 

they observed a little evidence of bank mergers obtaining efficiency gains or other related 

performance or wealth enhancing gains. In another study conducted by Cornett and 

Tehranian (1992), some superior post merger performance was registered. This study was 

conducted on 30 bank acquisitions for the period from 1982 to 1987 including increased 

cash flows on assets, enhanced employee productivity and asset worth. Kwan and Eisenbeis 

(1999) analyzed bank consolidations between 1989 and 1996 in their study. The have 

reported mixed evidence of efficiency as well as performance effects. Schenk examined the 

performance of mergers in banking institutions with the help of ex-ante and ex-post data. He 

concluded that mergers among large banks and takeover of small banks by large banks are in 

a position to create positive returns for shareholders. 

Date base and Methodology 

The present study has been conducted on ICICI Bank Ltd. This study is mostly based on the 

financial data procured from secondary sources. Several reliable and authentic authorities, 

books, corporate financial reporting and articles have been consulted for collecting data. 

Moreover, “CAPITALINE 2000” database package has also been used for procuring 

financial data used in this study. This study has covered a period of 10 years from 1995-96 

to 2004-05. The first five-year period (1995-96 to 1999-2000) corresponds to the pre-merger 

period and the next five-year period (2000-01 to 2004-05) is related to the post-merger 

period. 

In this study, EVA is calculated with the help of the following formula: 

EVA=NOPAT – WACC * (CE), 

where NOPAT denotes Net Operating Profit After Tax, 

WACC represents Weighted Average Cost of Capital, and 

CE stands for Capital Employed. 

Cost of equity and cost of debt have been calculated for computing WACC. Following the 

Stern- Stewart recommendation, cost of equity has been derived under the CAPM model. 

According to CAPM, K e =R f +ß (R m -R f ), 

where R f = Risk free rate of return. 

R m = Market return, and 

K e = Cost of equity. 

In the present study, 10-year treasury gold bond rate has been taken as risk free rate, which is 

9%. For eliminating volatility of market return, long-term market return has been considered 

here. For computing market return, J.R. Verma Committee used data for the period 1.7.1990 

to 31.06.1998, which model has been considered in this study. Mallik and Rakshit (2005) 

conducted a study to compute market return. They have calculated annualized daily return 

(%), annualized weekly return (%), annualized monthly return (%) and yearly return. They 

have noticed wide fluctuation in all types of returns, which are caused mainly due to 



volatility of share prices. Since, market return in different years had been highly volatile, the 

same could not be used as reference return for deriving cost of equity. Hence, a company 

should take a long run view while determining cost of equity under CAPM. In this study, for 

computing market return, we have calculated market return from 01.04.1991 to 31.03.2005, 

then averaged and result is 24.16%. 

Beta (ß) is the slope of regression line. It is used as risk indicator and is calculated as: 

ß im = cov im / δ 2 m, 

where cov im denotes covariance of return of individual share with index return and δ 2 m is 

the variance of market return. In our study, for computing beta, we have considered market 

return and share price return form 14.09.1997 to 31.03.2005 and the result is 0.40. SWOT 

analysis for both the banks has been made with a view to identify the Strengths, Weaknesses, 

Opportunities and Threats of the banks and also to search the reasons behind such strategy of 

corporate restructuring. 

The definitions of the ratios used for measuring performance of the company are as follows: 

Return on Assets (ROA): It implies the net income as a percentage of average total assets. 

Return on Net worth (RONW): It is the net income as a percentage of net worth. 

Net profit Margin (NPM): It is computed as Net profit before interest but after taxes divided 

by the total revenue. 

Interest income to Total Funds: Calculated as interest income divided by total funds i.e. 

interest income as a percentage of total funds. 

Interest Expended to Total Funds: Computed as amount of interest expended divided by total 

funds. 

Cash / Deposit: This is the amount of cash as a percentage of deposits. 

SWOT Analysis 

With a view to realize the philosophy behind that merger, SWOT analysis has been 

undertaken which may be expected to provide comprehensive picture of the reasons behind 

this strategy of corporate restructuring. This analysis has been made separately on both the 

banks under study, which is pointed out below one by one. 

SWOT Analysis- ICICI Bank 

Strengths: 

i) The bank is growing at a faster rate compared to the industry growth rate, 

ii) Getting the advantage of the reputed brand, ICICI, 

iii) Based on excellent modern technology and providing distinct competitive edge, 

iv) Good services to customers with largest number ATMs in the country. 

v) Orientation towards excellent services with latest technology based infrastructure, 

having Internet Banking Service in India for the first time, 

vi) Reservoir of good human resources and diversified lines of portfolio. 



Weaknesses: 

i) The proportion of operational expenditures to total revenue is high compared to other 

banks in the private sector, 

ii) Low spread operation and high cost of funds in comparison with competitors, 

iii) New bank; so lack of adequate experience in that field, 

iv) Lack of strong presence in several states. 

Opportunities: 

i) Possibility of tapping the potential market of the western region, which is claimed as the 

leader in banking business, 

ii) Liberalization of the capital account may be expected to generate effective seeds of 

opportunities, 

iii) Technology - based infrastructure facilitates in reducing costs, reducing HR requirement 

and bringing higher efficiency. 

Threats: 

i) As per the legal requirements, Indian banks are required to lend a substantial portion of 

funds to the priority sectors, and about half of such loans remains uncollected (default), 

ii) Huge competitions from multinational banks due to globalization, 

iii) Competitive pressure on lending as well as borrowing activities, which results in 

lowering the spreads for banks. Efficient fund management may play a vital role here to 

maximize such spreads. 

SWOT Analysis- Bank of Madura 

Strengths: 

i) Highly networked bank with adequately staffed. 

ii) Long (57 Years) experience as a profit-making bank with a huge customer base of 1.2 

million. 

iii) One of the lowest costs of deposits facility in India with an efficient Cash Management 

System. 

iv) Linkage with foreign banks in providing correspondent banking services. 

Weaknesses: 

i) Declining trend in profitability, 

ii) Lack of technology - based infrastructure; Only 43% of branches computerized, 

iii) A major part (80%) of incomes generated from computerized branches only, 

iv) Very old private sector bank with lack of diversified product portfolio, 

v) Bank’s client base is mainly retail client base. 

Opportunities: 

i) Capital account convertibility may generate good opportunities, 

ii) Opportunity of opening new centers in foreign markets. 

Threats: 

i) Tough competitions from globalized multinational banks, 

ii) Difficulty and pressure in conducting banking activities (lending & borrowing) resulting 

in reduction of spreads for banks. 



From the above analysis, the most worth mentioning point is that, there are some areas 

where ICICI Bank has some weaknesses but Bank of Madura has strengths over such areas. 

For instance, ICICI Bank lacks adequate experience in banking business but the other one 

(i.e., Bank of Madura) has long experience (over 57 years) in this field. High cost of funds is 

the most significant weakness of ICICI Bank while Bank of Madura was enjoying the 

strength arising out of the lowest cost of deposits around the country with the help of 

efficient cash management system. On the other side of the coin, Bank of Madura has 

limitations over some segments but ICICI Bank enjoys strengths on such segments. For 

example, Bank of Madura was suffering from the severe problem of declining trend in 

profitability but ICICI Bank is growing at a faster rate compared to the industry growth rate 

with excellent profitability. Secondly, Bank of Madura lacked adequate and modern 

technology based infrastructure. On the other hand, ICICI Bank has adopted excellent, 

modern and updated technology and is providing distinct competitive edge and excellent 

customer services. Moreover, Bank of Madura did not have diversified lines of product 

portfolio, while ICICI Bank has such quality (i.e., diversified lines of portfolio). Hence, the 

weaknesses of one bank can be set off against the strengths of the other bank and thereby the 

total value of the merged enterprise can be enhanced with the help of the strategy of 

corporate restructuring through merger. ICICI Bank has adopted this strategy of corporate 

restructuring for achieving such benefits. 

Computations and Major Findings 

Table- 1: 

Financial Year Earning Per ROI EVA (Rs in crore) 

Share (EPS) (Rs.) (%) 

1995-1996 1.10 6.65 -4.57 

1996-1997 2.68 8.80 44.18 

1997-1998 2.95 7.20 62.28 

1998-1999 3.72 6.92 146.08 

1999-2000 5.21 6.17 124.84 

2000-2001 7.96 4.91 201.90 

2001-2002 11.52 1.94 -1645.00 

2002-2003 18.73 4.37 -141.83 

2003-2004 25.43 4.56 568.84 

2004-2005 25.99 3.77 532.97 

From the above table, it is evident that, there is a continuous increasing trend in earnings per 

share of the company. The average EPS of the post-merger period is Rs 17.73, which is 

almost 6 times of the average EPS corresponding to the pre-merger period (Rs 3.13). Hence, 

if EPS is taken as a measure of profitability of the bank then the study has registered a 

continuous improving trend in corporate profitability. However, the average ROI of the postmerger 

period (3.97%) is almost half of the average ROI of the pre-merger period (7.15%). 



So, a decreasing trend in corporate profitability is evident so far as ROI is concerned. The 

reason behind this type of opposite image in corporate profitability can be identified by 

studying the position of capital structure of the company during the period under study, 

which is as follows: 

Table – 2 : 

(All figures are in Crores) 

Sources of 2004-05 2003-04 2002-03 2001-02 2000-01 1999- 1998-99 1997-98 1996-97 1995-96 

funds 

2000 

Capital 1086.76 966.4 962.66 962.55 196.82 196.82 165 165 150 150 

Reserves & 11813.2 7394.16 6320.65 5632.41 1092.26 952.69 143.33 101.75 31.88 6.75 

surplus 

Deposits 99818.77 68108.58 48169.31 32085.11 16378.21 9866.02 6072.94 2629.02 1347.6 727.94 

Borrowings 33544.5 30740.24 33178.53 48681.21 1032.79 491.47 199.89 192.23 92.99 210.95 

Other 22172.11 18940.17 19129.12 17598.18 1036.51 565.63 400.52 191.43 159.4 61.62 

Liabilities & 

Provisions 

Capital 168435.34 126149.55 107760.27 104959.46 19736.59 12072.63 6981.68 3279.43 1781.87 1157.26 

Employed 

The above scenario indicates that the amount of Capital Employed has increased rapidly 

over the study period but the concerned bank failed to utilize its assets properly. So the 

improper utilization of company’s assets may be responsible for lowering the ROI over the 

study period. Hence, even if the profitability of the company has amazingly been improved 

in the post-merger period from shareholder’s point of view, the overall performance ability 

measured in terms of ROI has been declined considerably after the merger. The modern 

concept of measuring corporate surplus (i.e., EVA) is also supporting this argument. 

In the case of EVA is also found a rapid declining trend in corporate surplus. The average 

EVA of the pre-merger period was Rs.74.56 crores (approx) whereas the average EVA of 

the post-merger period is Rs. (–) 97 crorers. It is the indication of the deterioration of 

corporate surplus during the study period. In this context, the most worth-mentioning point is 

that, under traditional concept of profitability measures, EPS and ROI have shown positive 

profits during the year, 1995-96, 2001-02 and 2002-03. But in these years corporate value 

has been deteriorated indicating negative EVA values as per the modern concept of 

profitability measurement. Hence, a question may be raised regarding the suitability of the 

techniques used for measuring Corporate Performance. 


Year 

ROA 

(%) 

RONW 

(%) 


N.P/Total 

funds 

(%) 

Table-3: 

Interest to 

Total funds 

(%) 

Cash/Deposit 

(%) 

Interest 

expended/ 

Total funds 

1995-1996 0.00 6.48 2.05 14.39 19.27 10.52 

1996-1997 2.73 23.7 2.73 12.43 12.27 7.97 

1997-1998 1.53 22.39 1.98 10.26 11.58 7.38 

1998-1999 0.91 22.04 1.23 10.60 8.92 8.29 

1999-2000 0.87 14.45 1.11 8.95 7.45 7.00 

2000-2001 0.82 13.21 1.01 7.81 7.44 5.27 

2001-2002 0.67 7.23 0.42 3.47 6.20 2.50 

2002-2003 1.13 18.87 1.14 8.84 8.30 7.50 

2003-2004 1.31 21.91 1.40 7.70 8.85 6.00 

2004-2005 1.59 19.51 1.36 6.39 7.00 4.46 

From the above table, it is evident that the average ROA of the post-merger period (1.10%) 

is lower than that of the pre-merger period (1.21%). Similar type of picture has been found 

for other three ratios also. The average RONW (16.5%), average Net Profit to Total Funds 

(1.07%) and average Interest to Total Funds (6.84%) of the post-merger period are lower 

than that of the pre-merger period (17.81%, 1.82% and 11.33% respectively). This is an 

indication of the bank’s inability in improving its overall performance after merger. 

Compared to the pre-merger period, the extensively lower average values of ROA, NP to 

Total Funds, and Interest to Total Funds in the post-merger period indicate the company’s 

inability regarding proper utilization of assets or funds as was reflected by ROI also. Hence, 

to improve the overall performance of the company, due attention should be given by the top 

management in this sensitive area. However, so far as the case of Interest Expended to Total 

Funds ratio is concerned, the company has registered significant improvement in managing 

its operational activities in cost angle. This is so because the average of this ratio 

corresponding to the post-merger period (5.15) has been reduced considerably compared to 

the pre- merger period (8.23). This is nothing but the indication of the enhancement of 

operational efficiency of the company after the merger. Moreover, the average of 

Cash/Deposit ratio (%) in the pre-merger period was 11.90%. But it has been reduced to the 

level of 7.56% in the post- merger period. It reflects the efficiency of cash management of 

the concerned bank after the merger. The reason behind that can be well-understood by 

observing the investment pattern of the company during the study period. The investment 

scenario of the company was as follows: 



Table-4 : 

(Investment figures in different years are in Rs. crores) 

04-05 03-04 02-03 01-02 00-01 99-00 98-99 97-98 96-97 95-96 

50487 42742 5462.3 35891 8186.7 4416.7 2861.2 1023.4 435.4 262.8 

From the above table, it is seen that the average investment of the post-merger period 

(Rs.34554 crores) is almost 19 times higher than that of the average investment 

corresponding to the pre-merger period (Rs.1799.88 crores). This implies that the company 

is increasing its investment and at the same time it is enjoying the benefit of liquidity 

through the system of E-BANKING and that is why it has been able to reduce its 

unnecessary cash holding with the help of efficient cash management system. In a nutshell, it 

is the indication of the efficiency of operational activities of the company under study. 

Conclusion 

The present study basically aimed at evaluating the effectiveness as well as success of the 

strategy of corporate restructuring through merger. From the overall study, it has been found 

that the ICICI Bank could not obtain the fruit of such strategy of corporate restructuring 

immediately after the merger because, its actual value as indicated by EVA had been 

deteriorated (EVAs were negative in the years 2001-02 and 2002-03). This was actually 

nothing but the consequence of improper asset management by the company. However, after 

these two years, the company has become successful in achieving its objectives of merger 

and reported positive values of corporate surplus (EVA). More specifically, from our study it 

is evident that, ICICI Bank reported highly negative EVA (Rs. -1645 crore) in the year 

immediately after the year of merger, which is nothing but the indication of the deterioration 

of corporate surplus. However, in the next year, the company reduced the quantum of 

negative EVA (Rs. -141.83 crore) and thereafter the company registered positive value of 

EVA (Rs.568.84 crore in 2003-04 and Rs. 532.97 crore in 2004-05). This indicates that the 

ICICI Bank has started obtaining the fruits of its strategy of corporate restructuring and at 

the same time it may also be expected that the company will be successful in obtaining the 

benefits of this strategy and ultimately the company will be able to cerate value in near 

future. Moreover, from this study, it would be unwise to draw any generalized inference 

regarding the overall success of this strategy of corporate restructuring that demands a broad 

based research study. 



References 

1. Sung, C. and Bae. Herb, S. Aldrich, “Mergers of equals in the US Banking Industry: A 

Performance analysis”,(Source: www.kif.re.kr/ps/jjkwon/link), 

2. Gerard T. Olson. and Michael, S. Pagano, “ The Long-term impact of Bank mergers on 

sustainable growth and shareholders Return” 

(Source: http://207.36.165.114/denever/papers/bank20% merger % paper% 2009), 

3. Cornett, M.C. and Nutt, John: “ Performance changes around Bank mergers: revenue 

Enhancements versus cost Reductions” (Source: http://economics.sbs.ohiostate.edu/jmcb/), 

4. Schenk, H., “ On the performance of Banking Mergers- Some Propositions and Policy 

Implications” (source: www.intech.unu-edu/research/post_research/2004-2005), 

5. Pilloff, S.J. ,1996, “Performance Changes and Shareholders Wealth Creation Associated 

with mergers of Publicly Traded Banking Institutions”, Journal of Money, Credit, and 

Banking 28 (August), Pp. 194-310, 

6. Mallik, A, Rakshit, D,“ EVA based Segmental Reporting: A Case Study”, Research 

Bulletin, ICWAI, Vol. XXVI, January 2005, Pp. 12-27. 



Annexure: I 

Sl. 

No. 

Merging Banks / NBFCs Merged with Year 

1 Bank of Behar State Bank of India 1969 

2 National bank of Lahore State Bank of India 1970 

3 Eastern Bank Ltd. Chartered Bank 1971 

4 Krishnaram Baldeo Bank Ltd. State Bank of India 1974 

5 Lakshmi Commercial Bank Ltd. Canara Bank 1985 

6 Bank of Cochin Ltd. State Bank of India 1985 

7 Miraj State Bank Ltd. Union Bank of India 1985 

8 HindustanCommercial Bank Ltd. Punjab National Bank 1986 

9 Traders bank Ltd. Bank of Baroda 1988 

10 United Industrial Bank Ltd. Allahabad Bank 1990 

11 Bank of Tamilnadu Indian Overseas Bank 1990 

12 Bank of Thanjavur Indian Bank 1990 

13 Parur Cntral Bank Ltd. Bank of India 1990 

14 Purbanchal Bank Central Bank of India 1991 

15 New Bank of India Punjab National Bank 1994 

16 Bank of Karad Ltd. Bank of India 1994 

17 Hasinath Seth Bank State Bank of India 1996 

18 SCICI ICICI Ltd 1996 

19 ITC Classic Finance ICICI Ltd 1997 

20 Bari Doab Bank Oriental Bank of Commerce 1997 

21 Punjab Cooperative Bank Oriental Bank of Commerce 1997 

22 Anagram Finance Ltd. ICICI Ltd 1998 

23 20 th Century finance Corporation Centurion Bank 1999 

24 Bareilly Corporation Bank Bank of Baroda 1999 

25 British bank of Middle East HSBC 1999 

26 Sikkim Bank Ltd. Union Bank of India 1999 

27 Times Bank HDFC Bank 2000 

28 Bank of Madura ICICI Bank 2001 

29 ICICI Ltd. ICICI Bank 2002 

30 Benaras State Bank Bank of Baroda 2002 

31 Nedungali Bank Punjab National Bank 2003 

32 South Gujrat Local Area bank Bank of Baroda 2004 

33 Bank of Muscat SAOG Centurion bank 2004 

34 Global trust Bank Oriental Bank of Commerce 2004 




WTO AND INDIA: TIME FOR RENAISSANCE OF THE FARM SECTOR 

Vijay Kumar Mishra * 

ABSTRACT 

Indian farm sector and Indian economy complement each other in growth. To 

understand Indian economy, it is necessary to understand the farm sector. Indian farm 

sector was once the pride of the nation and is now in a languishing state. The farm 

sector reached its peak in the last century and the glorious era earned sobriquet of 

“Green Revolution”. Last decade is known for introducing eminent changes in the 

economy which were the economic reforms of 1991 and joining of the WTO. The 

reforms were responsible for creating an era of liberalized economic policy regime 

which has played a decisive role in changing the performance of the industry and 

services sector but no eminent change has been created in the farm sector. The WTO 

agreements are promoting free and fair trade among the member nations by way of 

removal of obstacles in trade. Indian farm sector, after the last decade’s policy 

changes, is in a crucial juncture. The criticality of this sector could be more illustrious 

with the fact that even after sixty years of independence the population dependence 

on farm sector has very marginally declined but its share in the GDP has significantly 

declined. The farm sector at this juncture is facing the issues of low production and 

low productivity which have not improved after the reforms and the external 

environmental change in post-WTO regime. This paper tries to analyze the issues of 

concerns and care required for making renaissance of the farm sector. 

Introduction 

Indian economy has travelled a long journey. The journey is full of ups and downs and twists 

and turns. Indian economy and Indian democracy have successfully completed sixty years. 

The two very significant years for the country are 1947 when the country got political 

freedom and 1991 when the economy got liberation from the controls and regulations of the 

government. The post – 1991 era or the post – reform era, as is commonly known, has 

created eminent changes in the economy. These changes have crated a new economic 

environment in the country. The new environment has been positively received by different 

sectors of the economy. This is being reflected in the growth figures. The GDP has grown by 

9.4 % in 2006-07 and is again expected to grow approximately at the same pace in 2007-08. 

The main growth drivers of the 9 % plus GDP growth are industry and service sectors. The 

∗ Research Scholar, Department of Economics, MGKVP, Varanasi, 

e-mail: vijjaymi@rediffmail.com

Vijay Kumar Mishra 

farm sector, on the other hand, has not reacted positively to the changes in the economic 

environment and actually its performance has declined. 

Farming is the soul of Indian economy. Its status-quo has still not changed. Farming is a source 

of supply of raw material to some of the farm – based industries besides the supply of basic 

necessities of life i.e. food. Even after sixty years of independence, this sector has significantly 

larger proportion of population dependent on it. During the last decade, the economy has also 

shifted its approach from state domination to a liberal economy. The impact of this shift is 

eminently visible. Farming has not actually gained with the economic reform process. The 

reforms are about to complete two decades of its inception but no eminent impact is visible on 

the farm sector and the deceleration of its performance continues. 

The farm sector is in a critical situation in the post-reform era. The post-reform era is also 

known for another significant policy decision and it was the country’s decision to join World 

Trade Organization (WTO). The organization has been formed to promote free and fair trade 

among member nations by way of removal of obstacles to trade. The objective behind this 

formation was to encourage growth of world trade in goods and services. The post-reform 

era is witnessing a crucial situation for the farm sector and with the WTO’s agreement on 

agriculture the farm sector would be exposed to added challenges. The internal problems of 

farming are less production and low productivity and at the same time, the farm sector will 

now have to operate in an environment of external challenge in terms of overseas 

competition in the post-WTO era. The ground reality is that Indian farm sector is now placed 

at a position to face challenges and in terms of competencies, this sector is not competent 

enough to face the competition. 

Indian Farm Sector – A Macro Determinant 

The economic growth of a country is associated with the industrialization of the economy. 

Due to this rationality more and more efforts and resources have been directed towards 

industrialization during the last few decades. The outcome is visible in terms of explosive 

growth of the industrial sector. In the last fiscal year (2006-07) it was the driving factor for a 

booming 9.4 % GDP growth. In the year 2006-07, the industrial sector has grown by 10.9 % 

and services have grown by 11.0 %, and farming by a mere 2.7 %. The farm sector is very 

vital for the economy as it is the biggest employer in the country but its growth is not 

encouraging. Farm sector’s progress is a pre-requisite for the overall growth and 

development of the economy. Keeping this in view, we can understand that farm sector’s 

growth is an essential part of the overall economic growth of the country. The dependency 

burden of approximately 60 % of population on it also highlights another significant fact that 

if the farm sector grows and prospers, it can provide an impetus to the growth and 

development of the overall economy and if this sector underperforms, other sectors may be 

adversely affected consequently. 

Indian farm sector is playing a significant role as an employment provider and also (though 

less significant) as a source of contributor to the GDP. The sector is also vital for industrial 

growth. It provides raw materials for farm-based industries and simultaneously is also as a 

consumer of industrial products. The farm and industry have a well defined complementary 



relationship. This theoretical concept has not worked out well in Indian economy, where one 

sector’s (industry) growth is on a continuous acceleration and the other sector’s (farm) 

growth is on a continuous deceleration. Hence, the mutual dependence has not proved 

prolific in the last few years. Indian farm sector is also playing a significant role in the 

international trade. The export of farm products constitutes a significant portion of the total 

exports. In percentage terms, agricultural products constituted 10.95 % of total national 

export in 2005-06. 

Indian farm sector has still not entered the phase of take-off. Besides the conventional 

challenges of inadequate production and less productivity, new challenges are also posing 

newer threats. The WTO agreement at this juncture is also enhancing the criticality of the 

farm sector by way of its Agreement on Agriculture (AoA) clause. The AoA clauses 

specifically ask for withdrawing domestic and export subsidies, and allow market 

accessibility to member nations. Both the internal and external challenges are issues of 

concern for the farm sector. Indian farm sector has not matured enough in the last few 

decades. The following table (Table-1) highlights the facts on probably all important 

characteristics viz., area, production, yield and percentage coverage under irrigation. The 

contemporary scenario suggests that time has come for renaissance of farm sector to meet 

the challenges and grab the opportunities created in the post-reform and WTO era. 

Table-1: All-India Area, Production and Yield of Food grains from 1991-92 to 2006-07 

(along with percentage coverage under Irrigation) 

Area – Million Hectares, 

Production – Million Tonnes & 

Yield – Kg. /Hectare 

Year Area Production Yield % Coverage under 

irrigation 

1991-92 121.87 168.38 1382 37.4 

1992-93 123.15 179.48 1457 37.4 

1993-94 122.75 184.26 1501 38.7 

1994-95 123.86 191.50 1546 39.6 

1995-96 121.01 180.42 1491 40.1 

1996-97 123.58 199.44 1614 40.0 

1997-98 123.85 192.26 1552 40.8 

1998-99 125.17 203.61 1627 42.4 

1999-00 123.10 209.80 1704 43.9 

2000-01 121.05 196.81 1626 43.4 

2001-02 122.78 212.85 1734 43.0 

2002-03 113.86 174.77 1535 42.8 

2003-04 123.45 213.19 1727 42.2 

2004-05 120.00 198.36 1652 NA 

2005-06 121.60 208.60 1715 NA 

2006-07* 124.07 211.78 1707 NA 

* Advance Estimates as on 04.04.2007 

Note: The yield rates given above have been worked out on the basis of production & area figures taken in 

’000 units. 



Source: Department of Agriculture and Cooperation, Ministry of Agriculture, Govt. of India. 

WTO and Farming – Encouraging Liberalization 

World Trade Organization is an internationally recognized trade organization, created by an 

international treaty, established in 1995. It has a legal status and has a right to enforce the 

rules of international trade. Its basic objective is to promote trade in the international market 

by the removal of barriers. India is one of the founder members of WTO and also hopes to 

garner the advantages associated with its association. WTO replaces GATT and promotes 

multilateral trade in goods, services, protection of intellectual property rights, foreign 

investments, etc. . It has fixed a set of rules and regulations which are mutually agreed upon 

by the member-nations. Agreements by member-countries are binding on all the membernations 

of WTO and if any member dishonours them then complaint can be lodged with the 

Dispute Settlement Body of WTO. 

India’s joining of WTO was not a bandwagon effect, it was a rational discretion based on the 

advantages associated with it. Economic reforms came in 1991 and Liberalization, 

Privatization and Globalization (LPG) process was initiated. To make the LPG process 

realize its full potential it was imperative to join WTO. It promises to help in the process of 

enhancing the foreign trade, increasing the inflow of foreign investments, inflow of better 

technology and most importantly the end of quota system. The biggest advantage associated 

with an organization like WTO is reaping the benefits of multilateral trade i.e., when a trade 

agreement is signed between member-countries, it promotes foreign trade of one country 

with all other member-countries which have signed this agreement. Before the formation of 

WTO, trade was bilateral whereas WTO new promotes multilateral trade. If the multilateral 

trading system would not have happened due to WTO then India would have to enter into 

separate trade agreements with each nation. The process of Indian economy’s globalization 

also got further momentum with WTO’s promotion of free trade through the trading 

agreements. India also benefitted with the inflow of foreign investments due to globalization 

process. 

WTO’s Agreement on Agriculture (AoA) talks of rules and regulations regarding trade in the 

farm sector products. The AoA relates to domestic subsidies, export subsidies and market 

access commitments. The agreement asks for withdrawing domestic and export subsidies 

and opening up of the national markets for international competition. To further enhance 

trade the agreement promotes the replacement of non-tariff barriers with tariff and the same 

to be progressively reduced in a stipulated time period. The basic objective regarding 

reducing government support (via subsidies) is to check overproduction of goods. The 

surplus products are generally disposed of through export subsidies and this discourages the 

main aim of WTO, which is free and fair trade. The subsidies issues are still under 

negotiations and it is hoped that a consensus would be arrived at soon. Once the level 

playing field is made, huge options will emerge for the growth of the farm sector. In essence, 

the AoA asks for liberating the farm sector from the government support to operate it 

optimally. 



Concerns of the Farm Sector 

Indian farm sector is now at the crossroads. It is now standing at a juncture where hurricane 

efforts are required for its revival. Continuous decline in its performance has attracted the 

attention of all policy makers. Farming is now at the centre of attention more than ever 

before. It is still the backbone of the economy due to the high dependency on it and also due 

to supply of basic necessity of life i.e., food. Government gave priority for the growth of the 

farm sector and adopted several measures but nothing prominent came out of it. The biggest 

concerns of the farm sector are low production and low productivity. India is ranked second 

after China in terms of its population growth. Due to low production and high growth rate of 

population, the per capita availability of foodgrains is also on a decline. 

Indian farm sector’s concerns of low production and low productivity are the impacts of 

problems existing in the farm sector. The real concern ranges from the pressure of 

population to land reforms. The first and foremost reason of low productivity of farm sector 

is the excess pressure of population on farming. Insufficient irrigation facility and 

corresponding enhanced reliance on monsoon, which again is highly uncertain and uneven 

create challenge on production and productivity. The nature of the soil is also not uniform. 

Some farm lands are more fertile and some are less. Farmers with lack of financial and 

technical support are able to do less for the replenishment of lost fertility. The soil health and 

water management are the principal reasons for the low production and low productivity 

besides other causes. The other issues are inadequate finance with the Indian farmers to use 

improved inputs, small size of land holdings which are even less than the average size to use 

mechanized farming, and cropping pattern, which is need based and not on the suitability of 

their land. The following table (Table-2) highlights the fluctuating foodgrains production 

pattern from 1990-91 to 2005-06, and the subsequent table (Table-3) highlights the 

productivity of India vis-à-vis the world. 

Group/ 

Commodity 

Unit 1990- 

1991 

Table-2: Production of Major Crops 

1999- 

2000 

2000- 

2001 

2001- 

2002 

2002- 

2003 

2003- 

2004 

(In Million Tonnes) 

2004- 

2005 

2005- 

2006* 

Cereals Tonnes 162.1 196.4 185.7 199.5 163.6 198.3 185.2 195.2 

Rice Tonnes 74.3 89.7 85.0 93.3 71.8 88.5 83.1 91.0 

Wheat Tonnes 55.1 76.4 69.7 72.8 65.8 72.2 68.6 69.5 

Pulses Tonnes 14.3 13.4 11.0 13.3 11.1 14.9 13.1 13.1 

Oil-Seeds** Tonnes 18.6 20.7 18.4 20.6 14.8 25.2 24.4 27.7 

Cotton Bales@ 9.8 11.5 9.5 10.0 8.6 13.7 16.4 19.6 

Sugarcane Tonnes 241.0 299.3 296.0 297.2 287.4 233.9 237.1 278.4 

* - 4 th Advance Estimates, ** - Include groundnut, rapeseed & mustard, sesamum, linseed, castorseed, nigerseed, 

safflower, sunflower and soybean, @ - Bale of 170 Kgs. 

Sources: 1. Directorate of Economics & Statistics, Department of Agriculture & Cooperation, Govt. of 

India. 



2. Ministry of Commerce & Industry, Govt. of India. 

3. Economic Survey, 2006-07. 

Table-3: International Comparisons of yield of Selected Commodities - 2004-05 

(Metric tonnes/ hectare) 

Rice/Paddy Wheat Cotton Major Oilseeds 

Egypt 9.8 China 4.25 China 11.10 Argentina 2.51 

Myanmar 2.43 France 7.58 USA 9.58 Brazil 2.48 

Japan 6.42 Iran 2.06 Uzbekistan 7.98 China 2.05 

India 2.9 India 2.71 India 4.64 India 0.86 

Korea 6.73 Pakistan 2.37 Brazil 10.96 Germany 4.07 

Thailand 2.63 UK 7.77 Pakistan 7.60 USA 2.61 

USA 7.83 Australia 1.64 Nigeria 1.04 

World 3.96 World 2.87 World 7.33 World 1.86 

Source: Ministry of Agriculture and Cooperation & Economic Survey, 2006-07 . 

The renaissance of farming is of utmost importance due to its significance. Its significance is 

significantly larger as it fulfils the basic necessity of life for a person i.e., food. Out of the 

three basic necessities of life for a person, food is the most important necessity than clothing 

and shelter. Survival of life is not possible without sufficient amount of food. India is the 

second most populated country of the world after China. Due to populous country, food 

requirement of the country is also increasing day-by-day and the production of food grains 

remains short of the requirements. Though the production of food grain has increased by a 

considerable amount in the last few years, yet we are importing food grains by a reasonable 

amount. The per capita per year availability of food grains is on a decline. This is evident 

from the following table (Table-4). This adds up to the concerns of farm sector. The 

productivity of our farm sector is quite low in comparison with other countries and 

production is also quite fluctuating. In this background of farm sector and the contemporary 

open economy competitive environment due to globalization and WTO agreements, farm 

sector’s renewal and revival have become the appropriate priority. 

Table-4: Net Availability of Foodgrains (Per Annum) in India from 1991 to 2005 

(Kgs. per capita per year) 

Year Rice Wheat Cereals Pulses Per capita 

Food grains 

1991 80.9 60.0 171.0 15.2 186.2 

1992 79.2 57.9 158.6 12.5 171.1 

1993 73.2 51.2 156.2 13.2 169.4 

1994 75.7 58.2 158.4 13.6 172.0 



1995 80.3 63.0 167.0 13.8 180.8 

1996 74.6 64.3 161.5 12.0 173.5 

1997 78.1 65.4 170.1 13.5 183.6 

1998 73.1 55.3 151.2 12.0 163.2 

1999 74.2 59.2 156.7 13.3 170.0 

2000 74.3 58.4 154.3 11.6 165.9 

2001 69.5 49.6 141.0 10.9 151.9 

2002 83.5 60.8 167.4 12.9 180.4 

2003 66.2 65.8 149.1 10.6 159.7 

2004 71.3 59.2 155.8 13.1 168.9 

2005(P) 64.7 56.3 142.7 11.5 154.2 

Source: Department of Agriculture and Cooperation, Ministry of Agriculture, Govt. of India. 

Time for Renaissance of the Farm Sector 

The farm sector occupies a very vital position in our economy. It is a contributor to the 

overall economic growth. On the one hand it supplies food, raw material and exportable 

goods and on the other hand, most important is, it provides a fairly large market for nonfarm 

goods and services. Its significance can hardly be exaggerated. The significance of the 

farm sector is much wider than a mere supplier of food grains. Dependence of a very large 

proportion of population further adds to its significance. Its share in the GDP though is 

declining, but it still commands approximately 20 % share of the GDP. The farm sector is 

also known as a source of earner of foreign exchange by exporting its products. In essence, it 

can be said that, farming is detrimental for the inclusive economic growth of the country. 

The farm sector’s growth is a detrimental factor for the inclusive growth of the economy as 

it employs a significantly larger economically active population. This proportion of 

population can create a thrust for the economic growth by creating a substantial demand for 

goods and services which can put the economy on the path of a demand-led growth. WTO is 

changing the international trade environment and farm sector can also take the advantages of 

the same by way of exporting its products to WTO’s member nations. Once the farm sector 

is revived for growth of farm exports, it can have a multiplier effect for the growth of 

economy. 

The farm sector is the backbone of Indian economy. Indian economy has grown by 9.4 % 

during 2006-07 and it is also expected that the growth rate would be touching a 9 % mark in 

2007-08. The service and industrial sectors are the main push factors for this growth. The 

economy is growing; growth is phenomenal and visible but not inclusive. The reason is the 

underperformance of the farm sector. The sector on which approximately 60 % of our 

population depends is at a crisis. The farm sector has not reacted positively to the 

reformative polices and has actually declined in its performance. The farm sector at this 

juncture is asking for a stimulant for the production and productivity. The following table 

(Table-5) highlights the growth of agriculture sector vis-à-vis other sectors during the ninth 

and the tenth plans. The table also highlights the targets for the different sectors for eleventh 

plan. 



Table-5: Growth in Different Sectors 

Ninth Plan Tenth Plan 

(1997-2002) (2002-2007) 

Eleventh Plan* 

(2007-2012) 

GDP growth (%) of which 5.5 7.0 9.0 

Agriculture 2.0 1.8 4.1 

Industry 4.6 8.0 10.5 

Services 8.1 8.9 9.9 

* Target 

Source: Approach Paper to 11 th Five year Plan, Planning Commission, GOI 

The eleventh plan draft talks about the faster and more inclusive growth agenda. The 

inclusive growth cannot be experienced if the farm sector is not revived. The growth of 

agriculture sector was not encouraging during the ninth and the tenth plans. The above table 

(Table-5) highlights the fact in statistical terms. The eleventh plan has chosen a 4 % annual 

growth target for agriculture sector. If the 4 % growth target is realized, a 9 % GDP could 

become the reality. The eleventh plan is giving its prime priority to the growth of the farm 

sector. The growth target of the eleventh plan appears to be challenging, keeping in view the 

past performance of the sector. During the ninth and tenth plans, the growth of the sector 

was just around 2 % and the eleventh plan document is targeting a 4 % growth of the sector. 

The bigger question which arises at this juncture is: can it be possible? During the ninth and 

the tenth plans it was only the agriculture sector which has not grown but the other sectors 

have grown. This reminds us the fact that a major thrust is required to attain a 4 % target 

during the eleventh plan. If the sector fails to deliver then other sector needs to perform more 

than their targets to achieve a 9 % GDP growth. Declining agriculture growth will also 

increase the reliance on exports for the growth of the economy. 

India’s farm sector needs to be pushed like the industrial sector. The 4 % growth of the 

sector could become a reality with the hurricane reforms of the sector. The farm sector is 

desperately asking for reforms which could lead to a second green revolution in the country 

and make farming a vibrant sector. Irrigation is the backbone of farming and hence the need 

is to work for watershed development programme. Revival of co-operative farming is also 

necessary at this juncture. The other issue which needs attention is an enhanced interaction 

between farmers and agricultural universities to solve the grass-root level problems. The 

farmer’s indebtedness is also an obstacle in the holistic development of farming. Easy and 

cheap credit can help them to grow. Besides these conventional problems, the other issues of 

early origin are of declining ground water level, improvement of soil health and usage of 

allowing low biological potential area for non-farm purposes. The farm land cannot increase 

due to huge urbanization and hence by increasing the productivity, the problem of adequate 

production can be solved. Modernization, marketing orientation and most importantly an 

encouragement to public-private partnership can boost the sector at this juncture. The 

rational discretion in the above issues can put the farm sector towards its renaissance and the 

same could lead to the renaissance of the fate of approximately 60 % of the population. 



Conclusion 

Indian farm sector has travelled a long journey of topsy-turvy situations. The peak of the sector 

came at the time of green revolution in 1960’s and today the sector has come at a critical 

juncture. The sector is facing the issues of less production and low productivity. The net 

availability of food grains is on a decline in the post-reform era. Besides the internal problems of 

the farm sector which has placed it at a critical juncture, the WTO’s AOA clauses at this juncture 

are sufficient to add up the criticality of the sector. The WTO’s agreements of open market for 

farm product could make the things more difficult for the already critical farm sector. 

Indian farm sector is a bread earner for our approximately 60 % of population which depends 

directly or indirectly on it. Growth and development of the farm sector could make a visible 

impact on the lives of the people which are dependent on it and hence on the overall economy. 

The inclusive growth will be visible with the growth of farm sector. The farm sector is significant 

for many reasons and the most detrimental at this juncture would be the potentiality of this sector 

in generating the domestic demand for non-farm products and hence the dependence on foreign 

demand for generating the growth momentum for the economy could be reduced. Farm sector is 

a huge demand base for the farm and non-farm sector’s goods and hence renaissance of farm 

sector at this juncture could make a push in the economy by maintaining or even going beyond a 

9 % GDP growth. 

The AOA would be the trend-setter in the history of our economic system. It would definitely be 

playing a bigger role in the promotion of free trade whose benefits would be realized by the 

economy in the future. The share of developing countries like India would increase in the world 

trade once the level playing field is developed. This is not an euphoric conclusion but a rational 

assumption. To realize these benefits, the need is to seriously review the issues of concern. The 

farm sector at this point is not in a position to get the benefits of the AOA clause. Once the 

concerning issues are addressed to the farm sector, besides being a significant contributor to 

GDP, it will also become a significant source of foreign exchange earned from export. The 

opportunities will actually benefit the farm sector in the international trade once the preparations 

to grab it are completed. The probability of growth of farm sector is very near to the realization 

of this possibility. 

References 

1. Mishra, S. K. and Puri, V. K. (2004), Indian Economy, Himalaya Publishing House, 

2. Datt, Ruddar & Sundharam K. P. M. (2006), Indian Economy, S. Chand & Company Ltd., 

3. Jhingan ML (2004), International Economics, Vrinda Publications (P) Ltd., 

4. Yojna - A Development Monthly, April 2007, 

5. Yojna - A Development Monthly, May 2007, 

6. Publication Division, India 2007 - The Reference Annual, Ministry of Information and 

Broadcasting, Government of India, 

7. www.wto.org, 

8. http://agricoop.nic.in, 

9. www.planningcommission.nic.in, 

10. www.indiabudget.nic.in, 

11. Government of India, Planning Commission, Approach paper of 11 th Five Year Plan, 

12. Government of India (2006-2007), Economic Survey, 

13. http://dacnet.nic.in/eands/Area,%20Production%20and%20Yield%20of%20Principal%20Crops.htm. 




A DISCRIMINANT ANALYSIS AND PREDICTION OF LIQUIDITY- 

PROFITABILITY 

Amalendu Bhunia * 

ABSTRACT 

This paper examines predictive ability in respect of liquidity and profitability 

position of a company through discriminant analysis. Using two liquidity and 

profitability ratios each as input, the study has developed an index through the 

technique of discriminant analysis and at the same time liquidity and profitability 

performance have been tested on the basis of D-score and cut off score. For the 

purpose of analysis Indian private sector pharmaceutical companies have been used. 

Introduction 

In the changing economic scenario, every business strives hard for survival of the business 

competence. Survival of the business in the modern world is possible, only when apart from 

other things, it has sufficient finance. The financial requirements of a business must be 

sufficient to meet its long-term and short-term commitments. To meet long-term 

commitment, it needs permanent capital and short-term commitment, it needs working 

capital. Thus, finance is a significant facet of every business. Both excessive as well as 

inadequate finance positions are dangerous from the business point of view. In other words, 

finance is the backbone of any business. Any business without finance is a wingless bird. 

Therefore, the financial analyst is responsible to monitor the financial position of the 

business regularly. The performance of the company is judged through its financial 

statements, which throws light on the operational efficiency and financial position of the 

company. 

Due to intense competition among the business community, everyone is doing something 

better than others to capture the business, therefore monitoring the financial health of a 

company by checking its sales and profit growth which may not be sufficient today. It is 

necessary to benchmark the efficiency of utilisation of capital and assets, return to 

shareholders as well as predicting financial distress. The prediction and prevention of 

financial distress is one of the major factors, which will help to avoid bankruptcy. There are 

several indicators and information sources that can help in the prediction and prevention of 

* Senior Lecturer in Commerce, Fakir Chand College, Diamond Harbour, South 24- 

Parganas, West Bengal, e-mail: amalendu_bhunia@rediffmail.com.

Amalendu Bhunia 

financial distress. Financial statement analysis is one of the methods that can be used in 

predicting financial distress, which focuses on financial variables. 

Discriminant analysis is a statistical technique supportive for taxonomy principles. It has 

relevance in several areas of financial analysis. To express a fundamental considerate of 

discriminant analysis, we shall take up the assumptions : (i) There are two discreet groups; 

(ii) Two variables combined in a linear mode would be used for discriminating two discreet 

groups (i.e., discriminant function: D = a 1 X 1 + a 2 X 2 ) and (iii) These two variables arise from 

multivariate normal populations. 

To evaluate the liquidity and profitability conditions of a company, the financial analyst 

needs certain yardsticks. Among the various tools employed in analysing the pecuniary 

information contained in the financial statements, ratio analysis is a widely used tool, which 

is relevant in assessing the predictive ability of a firm in respect of liquidity and profitability. 

In addition to this, it helps to predict the financial distress of the business. An attempt has 

been made in the present study to have an insight into the examination of financial health of 

pharmaceutical company in India. 

Healthcare is one of the basic needs of humanity at large. The neglect of healthcare reduces a 

person’s capacity to take part in the various activities within the society. Besides this, such 

neglect reduces the capacity of the whole society in the future. Therefore, healthcare is not 

only an object of development by itself, but a pre-requisite for the development of future 

generations. 

This is the time to evaluate and analyse the predictive ability in respect of liquidity and 

profitability of pharmaceutical companies and it will help the policy makers to take on 

further development of these banks. In this paper, an attempt has been made to understand 

the liquidity and profitability position of the selected private sector pharmaceutical 

companies in India. 

Objectives of the Study 

The main objective of the present work is to make a study on the predictive ability in respect 

of liquidity and profitability in operating selected twenty (ten profit-making and ten lossmaking) 

private sector pharmaceutical enterprises in India. More specifically, it seeks to 

dwell upon mainly the following issues: 

• To assess the liquidity and profitability position with the help of discriminant score of 

the selected companies under the study; 

• To assess the financial performance of the selected pharmaceutical companies under 

the study; 

• To observe the financial health of the operational companies. 

Methodology of the Study 

We select twenty (ten profit-making and ten loss-making) private sector pharmaceutical 

companies operating in India in the study. For the purpose of study, data have been collected 

only for those companies which are available in the database software of Centre for 

Monitoring Indian Economy (CMIE). Only those companies are considered for which 


A DISCRIMINANT ANALYSIS AND PREDICTION OF LIQUIDITY-PROFITABILITY 

balance sheet figures as on 31 st march, 2008, as published in the data book (CMIE) on 8 th 

January 2008 are available. Thus, 20 companies are selected. Out of these, based on 

operating profit, 10 companies are profit-making and 10 are loss-making. In the course of 

analysis in this study, twelve financial ratios are selected which cover liquidity and 

profitability viz. current ratio (CR), cash position ratio (CPR), return on investment ratio 

(ROIR), earning per share (EPS). Among statistical tools, Arithmetic Mean, D-scorediscriminant 

analysis (DA), etc. have been applied. The values of the ratios are taken as 

published or calculated from the figures published. The uses of all these tools at different 

places have been made in the light of requirement of analysis. 

Limitations of the Study 

The study suffers from certain limitations. These are written as follows : 

• Study solely depends on the published financial data, so it is subject to all limitations 

that are inherent in the condensed published financial statements. 

• We have selected twenty private sector pharmaceutical companies only. 

• Again our study is based on the data and information relating to the year 2006-07. 

Findings of the Study 

Liquidity Position based on Discriminant Analysis 

• The purpose of discriminant analysis is to identify liquidity position from two 

liquidity ratios (i.e., CR and CPR) as inputs which are relevant in distinguishing 

between profit-making and loss-making companies. The mean values of the 

ratios for both the groups are shown in Tables 1 and 2. 

• Table 3 reveals the coefficients of discriminant function for the selected two 

ratios. It is thus expressed as : D = 1.18 X 1 – 0.91 X 2 . 

Table-1: Liquidity Indicators of Selected Profit-making Companies 

Profit-making companies 

Liquidity ratios 

1. Cadila Healthcare Ltd. 

2. Cipla Ltd. 

3. Glaxosmithkline Pharma Ltd. 

4. Ipca Laboratories Ltd. 

5. Lupin Ltd. 

6. Nicholas Piramal India Ltd. 

7. Panacea Biotec Ltd. 

8. Ranbaxy Laboratories Ltd. 

9. Torrent Pharmaceuticals Ltd. 

10. Wockhardt Ltd. 

Mean 

S.E. of mean 

CR 

1.41 

2.78 

1.30 

1.89 

2.47 

1.05 

2.50 

1.11 

2.42 

3.46 

2.04 

0.26 

CPR 

0.03 

0.25 

0.14 

0.05 

0.99 

0.09 

1.12 

0.04 

0.07 

2.22 

0.50 

0.23 



Table-2: Liquidity Indicators of Selected Loss-making Companies 

Loss-making companies 

1. Matrix Laboratories Ltd. 

2. Ambalal Sarabhai Enterprises Ltd. 

3. Gujarat Themis Biosyn Ltd. 

4. Karnataka Malladi Biotics Ltd. 

5. Lyka Labs Ltd. 

6. Morepen Laboratories Ltd. 

7. Pharmaids Pharmaceuticals Ltd. 

8. Torrent Gujarat Biotech Ltd. 

9. Unjha Formulations Ltd. 

10. Vista Pharmaceuticals Ltd. 

Mean 

S.E. of mean 

CR 

1.08 

0.64 

0.23 

0.21 

0.96 

0.91 

3.91 

1.85 

1.85 

0.80 

1.09 

0.35 

Liquidity ratios 

CPR 

0.19 

0.03 

0.03 

0.00 

0.25 

0.43 

0.04 

1.60 

0.01 

0.08 

0.35 

0.15 

Table-3: Statistical results and discriminant Function of liquidity 

Liquidity 

ratios 

d 2 x 1 d 2 x 2 dx 1 x 2 dx 1 dx 2 

CR (X 1 ) and 1.042 0.378 0.302 0.95 0.01 

CPR (X 2 ) 

Function D = 1.18 X 1 – 0.91 X 2 

• The discriminant score is designed for each company to classify it as profitmaking 

or loss-making company and it is given in Table-7. The cut off point on 

discriminant score is taken as the mean value of the mean discriminant score of 

each group for the purpose of classification. The simple A.M. of the two scores 

i.e., the cut off score is 1.9054. Any company having a D-score higher than the 

cut off score is identified as a profit-making company with sufficient liquidity, 

at the same time a company with a D-score less than the cut off score will be 

classified as a loss-making company with poor liquidity. 

• The discriminant analysis along with providing a single index for classifying 

companies as profit-making and loss-making brings to light the most important 

indicators of liquidity. The results of discriminant analysis can be used as a 

predictor of future liquidity. Therefore, an upward trend in the discriminant 

score predicts higher liquidity and a downward trend predicts ill-liquidity. 



Profitability Position based on Discriminant Analysis 

• The purpose of discriminant analysis is to identify profitability position from 

two profitability ratios (ROIR and EPS) as inputs which are relevant in 

distinguishing between profit-making and loss-making companies. The mean 

values of the ratios for both the groups are shown in Tables 4 and 5. 

• Table 6 reveals the coefficients of discriminant function for the selected two 

ratios. It is thus expressed as D = - 0.0468 X 1 + 0.0662 X 2 . 

• The discriminant score is deliberated for each company to classify it as profitmaking 

or loss-making company and it is given in Table-7. The cut off point on 

discriminant score is taken as the mean value of the mean discriminant score of 

each group for the purpose of classification. The simple A.M. of the two scores 

i.e., the cut off score is 1.0362. Any company having a D-score higher than the 

cut off score is identified as a profit-making company, at the same time a 

company with a D-score less than the cut off score will be classified as a lossmaking 

company. 

Table-4: Profitability Indicators of Selected Profit-making Companies 


Profitability ratios 


2. Cipla Ltd. 



5. Lupin Ltd. 






Mean 

S.E. of mean 

ROIR 

22.50 

31.12 

49.60 

30.94 

21.93 

27.09 

30.63 

13.81 

21.36 

19.50 

26.85 

3.10 

EPS 

33.03 

42.45 

33.97 

73.09 

14.92 

39.23 

22.29 

17.98 

23.42 

49.34 

34.97 

5.50 

Table-5: Profitability Indicators of Selected Loss-making Companies 


Profitability ratios 




ROIR 

-10.55 

-15.54 

-223.25 

EPS 

--22.56 

-3.86 

-10.36 










Mean 

S.E. of mean 

0.00 

-22.26 

-18.64 

-13.55 

-33.76 

-12.29 

-8.00 

66.47 

21.02 

-3.87 

-11.56 

-29.21 

-1.42 

-14.99 

-1.36 

-0.66 

9.80 

3.10 

Profitability 

ratios 

Table-6: Statistical results and Discriminant Function 

d 2 x 1 d 2 x 2 d x 1 x 2 d x 1 d x 2 

ROIR (X 1 ) and 

EPS (X 2 ) 

3170.94 720.74 782.65 - 39.62 25.17 

Function D = - 0.0468 X 1 + 0.0662 X 2 

Table-7: D-score and ranking of selected companies under the study 

Name of the Companies 

On the basis of 

Liquidity ranking Profitability ranking 



2. Cipla Ltd. 



5. Lupin Ltd. 






Mean 







1.6365 

3.0529 

1.7056 

2.6194 

2.5818 

1.3986 

2.5058 

1.5287 

3.3485 

2.8584 

2.3236 

1.1015 

0.8751 

0.2970 

0.2961 

1.1261 

10 

3 

9 

5 

7 

12 

8 

11 

2 

4 

15 

18 

19 

20 

14 

1.1336 

1.3538 

- 0.0725 

3.3906 

- 0.0386 

1.3292 

0.0421 

0.5440 

0.5507 

2.3537 

1.0587 

- 0.9998 

0.4718 

9.7623 

- 0.2562 

0.2765 

6 

4 

17 

2 

16 

5 

15 

9 

8 

3 

10 

12 

1 

18 

14 








Mean 

0.8918 

5.4767 

1.1525 

2.5994 

1.0552 

1.4871 

17 

1 

13 

6 

16 

- 1.0613 

0.5401 

0.5877 

0.4852 

0.3307 

1.0137 

20 

10 

7 

11 

13 

• The discriminant analysis along with providing a single index for classifying 

companies as profit-making and loss-making brings to light the most important 

indicators of profitability. The results of discriminant analysis can be used as a 

predictor of future profitability. Therefore, an upward trend in the discriminant score 

predicts higher profitability and a downward trend predicts incipient sickness. 

Profit making companies 

Loss making companies 

Cut-off point = 

Table-8: Mean discriminate score of each group 

On the basis of 

Liquidity 

2.3236 

1.4871 

1.9054 

1.0587 

1.0137 

1.0362 

Profitability 

Conclusions of the Study 

• The ‘D’ score of discriminant analysis revealed a significant variation concerning 

the extent of liquidity standing of different companies during the study period. It 

was concluded to be efficient and inefficient liquidity management on the basis of 

cut off score. 

• The ‘D’ score of discriminant analysis disclosed a noteworthy disparity concerning 

the size of profitability standing of different companies during the study period. It 

was concluded to be efficient and inefficient liquidity management on the basis of 

cut off score. 

References 

1. Altman, E.I. (1968), “Financial Ratios, Discriminant Analysis, and Prediction of 

Corporate Bankruptcy”, Journal of Finance, Sep., pp. 20-32. 

2. Deakin, E.B. (1972), “A Discriminant Analysis of Predictors of Business Failures”, 

Journal of Accounting Research, (Spring). 

3. Khanka, S.S. and Roy, C. (1999), “Working Capital Management of Public Enterprises”, 

Indian Publishers’ Distributors, Delhi. 

4. Sur, D. (1997), “Working Capital Management in Colgate Palmolive (India) 

Ltd.- A case study”, The Management Accountant, vol. XI. 




REPORT OF THE RAPPORTEURS OF THE NATIONAL SEMINAR ON 

“CURRENT TRENDS IN INDIAN BANKING” 

Subrata Mukherjee* 

Rabindranath De Dalal** 

A national seminar was organized by the Department of Commerce with Farm Management, 

Vidyasagar University, Medinipur on 23 rd March, 2008 at B. C. Mukherjee Hall. The theme 

of the seminar has been “Current Trends in Indian Banking”. The seminar was inaugurated 

by Prof. Amit Kumar Mallik, Hon’ble Vice Chancellor, University of Burdwan, Burdwan, 

West Bengal. At the inaugural speech, Prof. Mallik nicely elaborated the need of discussion 

of a topic like this in presence of the industry people. He also highlighted the ongoing 

banking practices which have emerged from the banking sector reforms. The inaugural 

session was chaired by Prof. S. P. Singha, Dean of the faculty of Arts and Commerce of the 

university. 

The Chairman of the technical session (and also Guest of Honour in the Inaugural Session) 

was Prof. Samson Moharana, Professor and Head, Dept. of Commerce, former Dean, 

Faculty of Commerce and Management, and Director, M.F.C. Programme, Utkal University, 

Bhubaneswar. The keynote speakers were Mr. U.K. Mishra, Zonal Manager, UCO Bank, 

Mr. Girish Dubey, Assistant Vice President and Cluster-Head, Midnapore Agri Business 

Cluster, Axis Bank Ltd., and Mr. J.P. Julka, Zonal Manager, Punjab National Bank. The 

Chairman pointed out the various modern banking practices in operation and the expected 

changes in near future due to liberal economic scenario. He also pointed out the forces which 

will bring in new opportunities and as well as new threats for the banks. 

Mr. U.K. Mishra addressed on the “Current trends and strategies in Indian banking” and 

explained the historical perspective on the development of Indian banking and explained 

how the liquidity facility available with the banks motivates to deal and transact with banks 

to other financial institutions like post office. 

Mr. Girish Dubey addressed on “Current Trends in Indian Banking” and stressed upon the 

transition in the objectives of the banks from banking in urban to rural areas with adoption of 

new technology. 

Mr. J.P. Julka addressed on ‘Reforms, Challenges and Strategies in Indian Banking”. He 

stressed on the importance on the human resource perspective being the facilitator of 

∗ Lecturer in Commerce, Mugberia Gangadhar Mahavidyalaya, Bhupatinagar, Purba 

Medinipur, West Bengal. e-mail : subrata9019@rediffmail.com. 

** Lecturer in Commerce, Bankura Sammilani College, Bankura, West Bengal, 

e-mail : rabin_de@rediffmail.com.

REPORT OF THE RAPPORTEURS OF THE NATIONAL SEMINAR ON “CURRENT TRENDS IN INDIAN BANKING” 

adoption of changes in the functioning of the commercial banks and discussed on the new 

changes being brought in the banking industries. 

A joint paper was presented by Dr. Amit Kumar De, Reader in Commerce, P.K. College, 

Contai and Mr. Arindam Jana, Part time Lecturer, Department of Economics, P.K.College, 

Contai, entitled, “Efficiency of Banks in India: A Brief Study”, in which highlighted the 

performance of Indian banks through the use of various statistical ratios and suggested 

measures on improvement in the performance level of the Indian banks. 

Dr. Amit Kumar De, Reader in Commerce, P.K. College, Contai, in another jointly-authored 

paper, entitled “Management of NPAs in Indian Banking Scenario: An Overview” with Mr. 

Sudipta Ghosh and Mr. Tamal Basu, both Lecturers in Commerce, P.K.College, elaborated 

how the concept of NPA was introduced in banking and examined its impact. The authors 

have suggested the measures of managing the NPAs efficiently and effectively. 

Mr. Amitesh Chowdhury, Research Scholar, Department of Commerce with Farm 

Management of this University, in his paper, “Consolidation through Merger and 

Acquisition in the Banking Sector – A Critical Approach” highlighted the impact of merger 

on the stakeholders. They emphasized the consolidation through mergers and acquisitions is 

considered one of the best way of restructuring for effectively facing competition. 

Mr. Anannya Deb Roy, Lecturer (Marketing Management), Department of Management and 

Social Science, Haldia Institute of Technology, in his paper, “Service Quality: Present Trend 

in Indian banking” stated how retail banking has developed with change in demographic 

profile of the customers and the demand for consumer finance, and how the banks are 

adopting new technologies to cater the needs of the customers. The author suggested the 

methods for measuring the service quality of the banks and the impact on the customer 

satisfaction. 

Mr. Anirban Mazumdar, Sr. Lecturer, Department of Business Administration, Future 

Institute of Engineering and Management, Sonarpur, Mr. Pradip Kumar Samanta, Sr. 

Lecturer, Department of Commerce, University of Kalyani, Kalyani and Mr. Sumantra 

Bhattacharya, Sr. Lecturer, Department of Business Administration, Management Institute of 

Durgapur, Durgapur, in their paper, “Reverse Mortgage: Financing Senior Citizens” 

discussed the various aspects of reverse mortgage and how it is used to ensure the cash flow 

in the hand of senior citizens to meet up their financial needs in their old age. 

Mr. Anupam Parua, Sr. Lecturer, K.D. College of Commerce & General Studies and Ms. 

Anindita Dey, Former G.T., Department of Commerce with Farm Management, Vidyasagar 

University, in their paper, “A Study of the Profitability Trends in selected Commercial 

Banks operating in India” discussed on various parameters affecting the performance of the 

public, private and foreign banks. The authors have suggested that with the decrease in 

spread banks are required to explore non-interest income for increasing the profitability. 

Dr. Arindam Gupta, Professor & Head, Department of Commerce with Farm Management, 

Vidyasagar University, in his paper, “Banking Sector Reforms in India” highlighted various 


Subrata Mukherjee, Rabindranath De Dalal 

aspects of reforms brought about in structural aspect and in banking operations through the 

various committees on the banking sector. 

Ms. Arundhuti Basu, AICWA, in her paper, “The Recent Trend and Progress of Banking in 

India” discussed on regulatory and supervisory policies being taken for strengthening the 

financial institutions, improving bank governance and information disclosures and further 

highlighted the development of payment and settlement system through RTGS. 

Dr. Brajaballav Pal, Lecturer, Panskura Banamali College, in his paper, “Banking Sector in 

India: An Overview” stated about the reforms brought in by technological changes in Indian 

banking and the challenges and opportunities being posed by the new entrants in the Indian 

banking system. 

Dr. Debdas Ganguly, Professor, Department of Management and Social Science, Haldia 

Institute of Technology, in his paper, “Management of Borrowed Funds in Indian 

Commercial Banks in perspective of growing Debt Ratio” stated about the importance of 

debt market in the formation of capital in the economy and how management of the banks 

can optimize the return without posing liquidity problem through diversification of its 

liabilities. 

Dr. Debdas Rakshit, Lecturer (Sr. Scale), Department of Commerce, The University of 

Burdwan and Mr. Sujit Kumar Ghosh, Lecturer (Sr. Scale), Department of Commerce, 

Umesh Chandra College, Kolkata in their paper, “Are the Public Sector Banks pushed to the 

Back Sear?” presented an analysis of relative performance of public and private sector banks 

in India for the past twelve years and highlighted the reform measures adopted by the public 

sector banks since liberalization to face competition from private banks. 

Ms. Indrani Dasgupta, Lecturer, Department of Commerce, Fakir Chand College and Dr. 

Sharmistha Banerjee, Reader, Department of Business Management, University of Calcutta 

in their paper, “Information Asymmetry and Small Firm Finance” discussed on Information 

Asymmetry caused by absence of mandatory disclosures of small enterprises in India 

creating enough friction in the lending process and suggested policy prescription for the 

Indian Banks to provide funds to the small firms using a combination of both the credit 

scoring technology and relationship lending. 

Mr. Indranil Deb Gupta, Former M.Phil. Student, Department of Commerce, The University 

of Burdwan, Mr. Kaushik Mandal, Lecturer, Department of Management Studies, National 

Institute of Technology, Durgapur and Mr. Partha Sarkar, Lecturer in Business 

Administration (Human Resource Management), Centre for Management Studies, The 

University of Burdwan in their joint paper, “In Search of the Nature of Relationship between 

Internal Marketing and Performance in the Indian Banking Industry: An Empirical Study” 

highlighted the importance need and of orientation of the employees (termed as internal 

marketing) in achieving customer satisfaction for gaining business success. 

Dr. Kalpataru Bandopadhyay, Lecturer (Sr. Scale) in Commerce, Memari College and Mr. 

Souvik Bandopadhyay, Lecturer in Statistics, Memari College in their joint paper entitled, 


REPORT OF THE RAPPORTEURS OF THE NATIONAL SEMINAR ON “CURRENT TRENDS IN INDIAN BANKING” 

“Comparative Risk Analysis of Scheduled Commercial Banks of India: Application of Mix 

Model on Net Interest Margin” discussed on the need for analyzing the different risk 

parameters of all the schedule commercial banks of India through statistical model. 

Mr. Premasish Roy, Lecturer, Department of Management and Social Science, Haldia 

Institute of Technology, in his paper, “Performance of Public Sector Banks in India in 

Perspective of Core Business Model and Changing Trend in Organizational Culture” 

presented an expected model likely to be adopted by foreign banks after being allowed to 

function in India at par with other banks for targeting customer service, managing resources, 

risk management and managing costs. 

Dr. S.M. Imamul Haque, Reader, Department of Commerce, Aligarh Muslim University and 

Mr. Shahnawaz Ahmad Dar, Research Scholar, Department of Commerce, Aligarh Muslim 

University in their joint paper entitled, “IT in Banking – The way you Encounter” discussed 

on the need and use of information technology in banking and the need for fullproof security 

mechanism to be developed. The authors emphasized on the development of the work 

culture as the employees are the facilitator of the implementation of the new technology. 

Mr. Saptarshi Ray, Research Associate, Department of Case Studies, ICFAI University and 

Prof. Arup Choudhuri, Professor, Department of Finance and Accounting, ICFAI University, 

in their paper, “Consolidation in Indian Banking Industry: A Study on State Bank of India” 

stated that consolidation in the banking sector is the only way for survival of Indian banks 

after the Indian banking industry is set to open up fully to the foreign participants by April 

2009. The paper highlighted the benefits of SBI after merger with its associates and the 

resistance being faced involving the HR issues and socio-economic challenges. 

Dr. Samir Ghosh, Reader, Department of Commerce with Farm Management, Vidyasagar 

University and Mr. Subrata Mukherjee in their paper, entitled “Performance of Central 

Cooperative Banks in India and in West Bengal in Liberal Economic Scenario” highlighted 

the need of the cooperative banks in socio-economic development of the country and 

analysed the performance of the district central cooperative banks in India and in West 

Bengal and suggested the measures for improving the financial performance of the district 

central cooperative banks. 

Prof. Samirendra Nath Dhar, Professor of Commerce, University of North Bengal, Mr. 

Kiranjit Seth, Lecturer in Commerce, University of North Bengal and Mr. Soumitra Sarkar, 

Research Scholar, Department of Commerce, University of North Bengal, in their paper, 

“SHG-Banking in India: Empirical Evidences of Bankers’ Perceptions and Problems” 

highlighted the results of the case study conducted in Jalpaiguri and Siliguri sub-divisions of 

West Bengal how SHGs have been made accessible to the poor, especially women for 

banking and creating a sustainable means of livelihood for them. 

Mr. Swarnabha Das, Sr. Lecturer & Head, Department of Business Administration, Burdwan 

Institute of Management & Computer Science, in his paper, entitled “Core Banking System 

in India – A case study” discussed on the need of the core banking system for fulfilling the 


Subrata Mukherjee, Rabindranath De Dalal 

aspirations of today’s customers. The author highlighted different aspects of core banking 

system as introduced by State Bank of India since May’2002. 

Prof. K.C. Paul and Mr. Tagar Lal Khan offered vote of thanks respectively at the end of the 

Inaugural Session and Technical Session. Mr. Abhijit Sinha acted as the Co-ordinator of the 

whole programme. Prof. Arindam Gupta, Head of the Department and the Organizing 

Secretary offered the Grand vote of thanks at the end. The seminar was attended by over two 

hundred delegates. 




REPORT OF THE EXTENSION LECTURE PROGRAMME 

Arindam Gupta* 

The second extension lecture programme was organized by the Department of Commerce 

with Farm Management, Vidyasagar University, Medinipur on 20 th March, 2008 at B. C. 

Mukherjee Hall consisting of two lectures. The first lecture was delivered by Prof. Arup 

Choudhuri, Associate Dean, The ICFAI Business School, Salt Lake City, Kolkata and was 

chaired by Prof. K. C. Paul, a Professor of the department. The lecture theme was “Some 

cases of Mergers & Acquisitions in India” which spanned over one and half hours. After 

Prof. Paul introduced the theme before the audience, which largely constituted the students, 

research scholars, and faculty members of the university, Prof. Choudhuri went on citing 

contemporary real-life cases of mergers and acquisitions in India. Because of his hands - on 

experience in dealing with some of the mergers as a consultant, he was actually able to 

analyse the intricacies of the mergers much vividly. At the end of his lecture, some questions 

were asked from the audience and answered by him. 

The lecture programme which was inaugurated by Prof. Santosh Kr. Ghorai, Director, 

Directorate of Distance Education of the university was also attended by a few teachers of 

the affiliated colleges and also from some neighbouring colleges. 

The second lecture on the same day was on “Derivatives Trading in India – An Overview” 

which was delivered by Prof. Arup Kr. Chattopadhyay, Dean of the Faculty of Arts, 

Commerce, etc. and Professor of Economics, University of Burdwan, Burdwan and was 

chaired by Prof. P. S. Das, Professor, Vinod Gupta School of Management, I. I. T. 

Kharagpur. Prof. Chattopadhyay also lucidly delivered his lecture first starting with the 

historical perspective of the derivatives instrument, then going for its various types, then 

touching in brief the mathematical aspects inside a derivative instrument, and finally 

elaborating the trading part. The lecture was highly appreciated by the Chairman in 

particular and the audience in general. 

Prof. Arindam Gupta, the Head of the Department offered a hearty vote of thanks at the end. 

∗ Professor and Head, Department of Commerce with Farm Management, 

Vidyasagar University, Midnapore – 721 102. 

e-mail: arindam_finance@rediffmail.com.

NOTES TO CONTRIBUTORS 

VIDYASAGAR UNIVERSITY JOURNAL OF COMMERCE invites contributions on all 

aspects of Commerce, Management, Economics and Finance. Articles should be accompanied 

by a declaration that they have not been published or submitted for publication elewhere. These 

should be sent to the Executive Editor in duplicate in hard copy and soft copy with one and half 

space typing along with an abstract of not more than 100 words (in any wordprocessing 

software). 

Academicians, Experts from Industry and Professionals are welcome to submit data-based 

papers for consideration. 

Articles should be written in English and preferably be below 4000 words in length. Articles 

should be prepared and presented following the style mentioned below. 

Diagrams may be used only if absolutely essential. 

Authors of published articles will receive five free reprints. In case of joint authors, each author 

will receive three free reprints. 

Title of the article 

Author/s 

Author's Affiliation 

Abstract 

Section heading 

STYLE OF PRESENTATION 

Upper case, Font 12, Bold, Normal, Times New Roman, Middle Justified. 

Title case, Font 11, Bold, Italic, Times New Roman (*, **), Right Justified. 

*, **, Title case, Font 11, Normal, Times New Roman, On the first page of 

the write-up as a foot-note, E-mail id if any should be given at the end in 

italics. 

The word ABSTRACT in Font 11, Bold, Normal, Times New Roman, 

Middle Justified, Upper case. Text of Abstract in Sentence case, Font 10, 

Normal, Times New Roman, Centrally aligned below Title and Author. 

Immediately after ABSTRACT the main write-up will start giving a 

paragraph gap. 

Title case, Font 12, Bold, Normal, Times New Roman, Left Justified. 

Sub-section heading Title case, Font 11, Bold, Normal, Times New Roman, Left Justified. 

Main article Font 11, Times New Roman, Normal. 

Reference (i) Book : Khan, M. Y. (1997), Financial Services, Tata McGraw-Hill 

Publishing Co., New Delhi, p. 56. 

(ii) Journal: Gray, S. J. and Street, D. L. (2001), "Acceptance and 

Observance of International Accounting Standards : Prospects and 

Problems", Indian Accounting Review, June, pp. 4-6. 

(iii) Website : www.wto.org. 

Tables and Figures Table description in Title case Bold, Normal, Times New Roman, Left 

Justified in Font 12 at the top of content of the table after giving Table No. 

as Table-1 : ... ... ... 

Figure description in Title case Bold, Normal, mes New Roman, Left 

Justified in Font 12 at the bottom of the figure after giving Figure No. as 

Figure-1 : ... ...

VOL. 13 MARCH, 2008 


OTHER PARTICULARS ABOUT JOURNAL 

Printer's Name 

Nationality 

Address 

Place of Publication 

Periodicity of Publication 

Publisher's Name 

Nationality 

Address 

Name of the Editor-in-Chief 

Nationality 

Address 


Indian 

Department of Commerce with 

Farm Management, 

Vidyasagar University, 

Midnapore, 

Pin - 721102. 

Midnapore, W.B., India 

Annual 

Dr. Ranajit Dhar 

Indian 

Registrar, 


Midnapore, 

Pin - 721102. 

Prof. Kartick Chandra Paul 

Indian 

Department of Commerce with 

Farm Management, 


Midnapore, 

Pin - 721102. 

I, Dr. Ranajit Dhar, hereby declare that the particulars given above are true to the best 

of my knowledge and belief. 

(Sd/-) Dr. Ranajit Dhar 

Signature of Publisher 

Printed in India by Prof. Arindam Gupta at Mithu Enterprise, Post Office Road, 

Midnapore - 721102 and Published by the Registrar on behalf of the 

Department of Commerce with Farm Management, Vidyasagar University, 

Midnapore, Pin-721102, West Bengal, India. 

ISSN 0973–5917 

Price : Rs.50 (for Institutions) 

: Rs.30 (for Individuals) 

: Rs.20 (for Students)

VIDYASAGAR UNIVERSITY JOURNAL OF COMMERCE

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