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### Legal and Regulatory Framework for the Corporate Sector — reform context and purpose
- India launched a series of economic reforms in 1991 in response to a severe balance of payments crisis; reforms liberalized the corporate sector by easing restrictions on firms’ activities and enhancing competition.
- Key outcomes of reforms:
  - End of the “license raj,” liberalization of the foreign trade regime, opening of the financial sector.
  - Freeing of capital markets and entry of foreign investors increased new financing and ownership opportunities and significantly raised the volume of new equity issues.
  - Financial-sector and legal reforms induced firms to improve cash and debt management.
- Caveat: observations for 2001 and 2002 are from a smaller sample of firms than earlier years.

### Key empirical findings on corporate performance and vulnerabilities (1989–2002)
- Dynamics and trends:
  - First half of the 1990s: high sales growth, improved profitability, strengthened finances.
  - Second half of the 1990s: reversal in some trends; increased variation in performance and wider gap between best and worst performers.
  - Evidence of improvement in almost all indicators during 2002; recovery signs in 2002 and in 2003.
- Balance-sheet risks and vulnerability indicators:
  - Aggregate interest coverage implied potential NPLs as high as 38 percent in 1999, and down only slightly in recent years.
  - More than 30 percent of the companies were unable to generate enough cash to cover their interest payments in 2002 (based on ICRs).
  - Stress test: a 200 basis points increase in the interest rate would have resulted in approximately 4 percentage points increase in the share of potential NPLs (averaged over the period 2000– — table reference truncated in source).

### Size, composition, and structural features of the corporate sector
- Registered companies and paid-up capital (selected years):
  - 1982: 72,402 firms; estimated paid-up capital 189.4 (In Rs. billion).
  - 1987: 140,670 firms; estimated paid-up capital 439.7.
  - 1992: 250,361 firms; estimated paid-up capital 846.4.
  - 1997: 450,950 firms; estimated paid-up capital 1,905.2.
  - 2002 2/: 589,246 firms; estimated paid-up capital 3,870.2; 16.9 (source formatting retained).
  - Approximately 619,000 registered companies as of June 2003 (from earlier summary).
- Sectoral and ownership composition:
  - About 40 percent of registered companies are in the manufacturing sector.
  - Private limited companies comprise the majority of firms but account for less than one–third of total paid up capital.
  - Group companies represent 34 percent of the companies in the sample and tend to be more diversified than stand-alone companies.
- Equity market and ownership:
  - Total market capitalization of US$131 billion at end–2002, equivalent to 26 percent of GDP.
  - Promoters’ share in manufacturing in 2002: 48 percent of paid up capital for all companies; 71 percent for government-owned enterprises.
  - India’s annual turnover ratio at end–2002: 165 percent.

### Box 1 — Legal and regulatory framework prior to the 1991 reforms (highlights)
- Principal pre-1991 laws:
  - Companies Act of 1956; Capital Issues (Control) Act, 1947; Industries Development and Regulation (IDR) Act, 1951; Industrial Policy Resolution of 1956; Monopolies and Restrictive Trade Practices Act of 1969.
- Policy environment:
  - Small-scale industry reservations (statutory since 1984 amendment to IDR Act).
  - Import substitution with high tariffs and multiple import licenses.
  - Three DFIs: IDBI, IFCI, ICICI; interest rates regulated; public financial institutions dominant lenders with limited monitoring incentives.
- Sources of corporate finance and macro links:
  - Indian companies averaged 67 percent reliance on external sources of finance during 1990–2002.
  - For year ending March 2002, external financing accounted for 56 percent of total corporate funds raised; slightly more than two–fifths from capital markets.
  - Large fiscal deficits: general government fiscal deficit estimated at 10½ percent of GDP in fiscal year (April–March) 2002/03.
  - Sizable government debt estimated at 83 percent of GDP.

### Leverage, debt structure, foreign exposure, and liquidity
- Leverage and trends:
  - Average debt-to-equity ratio: bottomed at 1.2 in 1996; rose to 1.4 in 2002.
  - For the median company during 1989–2002, average rates of growth: Net worth: 8 percent; Gross borrowing: 4 percent.
  - About one-quarter of companies experienced consistent increase in debt-to-equity since 1989 and are currently considered highly leveraged.
- Debt maturity and foreign currency debt:
  - Aggregate long-term debt share: almost 90 percent in 1989; about 70 percent in 2002.
  - Share of foreign currency debt in total debt: 8 percent in 1990; more than 16 percent in 2002.
  - In 2002: only 17 percent of companies had any foreign currency denominated borrowings; less than 5 percent had any foreign debt.
  - Firms with foreign currency denominated debt in 2002 accounted for 66 percent of sales, 75 percent of net worth, and 71 percent of total assets.
- Liquidity:
  - Aggregate current ratio dropped from 1.64 in 1990 to 1.49 in 2001.
  - Share of companies with current ratio below 1 rose from 11 percent in 1989 to 27 percent in 2002 (including 58 percent of government-owned enterprises), representing 40 percent of total assets in 2002.

### Interest Coverage Ratio (ICR), potential NPLs, and stress indicators
- ICR definition: EBITDA over interest expenses.
- ICR trends and distribution:
  - ICR dropped from 2.7 in 1997 to 2.0 in 2001, and improved to 2.3 in 2002.
  - Share of companies with ICR < 1 rose from 15 percent in 1989 to 31 percent in 2002, representing 28 percent of total assets, 20 percent of total sales, and 13 percent of net worth.
  - Incidence of ICR < 1 by group in 2002: government-owned enterprises: 55 percent; small companies: 38 percent.
  - Median ICR fell below aggregate ICR in the second half of the 1990s; after 1999 median ICR of government-owned enterprises dropped below 1.0.
  - 31 percent of companies recorded a negative ICR.
- Potential NPLs and persistence:
  - Aggregate potential NPLs (share of total borrowings) doubled between 1989 and 1999 to 38 percent.
  - Persistence sample (2,924 companies with full data 1995–2000): 8 percent had ICR < 1 for 1995–97 (accounting for 7 percent of borrowing at end-1997); 22 percent had ICR < 1 for 1998–2000 (accounting for 11¼ percent of borrowing at end-2000).
  - Since 2000, measure of potential NPLs shows modest decline consistent with corporate restructuring and improved performance; uptick in 2002 may be biased by smaller sample.
- Sensitivity analysis (selected figures from liquidity table):
  - Share of implied NPLs in total advances to companies (1989–2002): 18.4; 16.2; 18.0; 18.4; 18.5; 18.0; 14.6; 15.9; 19.2; 23.7; 38.2; 36.2; 33.5; 37.4.
  - Share of implied NPL after a 1 percentage point increase in interest rate (1989–2002): 24.6; 22.7; 22.1; 22.7; 22.3; 22.8; 18.1; 18.4; 23.2; 28.5; 42.1; 39.7; 41.1; 38.4.
  - Share of implied NPL after a 3 percent drop in PBDIT (1989–2002): 18.9; 16.7; 18.5; 19.3; 20.9; 20.3; 14.9; 16.4; 19.5; 24.3; 38.6; 36.5; 34.2; 37.8.

### Profitability, corporate–financial nexus, and sources of debt finance
- Profitability (1989–2002):
  - 1991–1996: aggregate profitability improved rapidly.
  - Second half of the 1990s: profitability declined below pre-reform levels; signs of recovery in 2002.
  - Measures used include operating profits over net sales; PBDIT over sales; PBDIT over gross fixed assets (PBDIT preferred).
- Corporate–financial linkages and liability structure:
  - Public sector banks held about 75 percent of total commercial bank assets at end-2002.
  - Combined share of loans from commercial banks and other FIs reached 57 percent in 2002.
  - Share of short-term bank borrowing increased from 51 percent in 1989 to 70 percent in 2002.
  - Use of commercial paper and debentures increased (see source tables for series).
- Sources of debt financing (selected series, percent of total debt financing):
  - Borrowing from banks (1989–2002): 25.7; 29.5; 30.6; 25.3; 29.6; 25.7; 29.6; 34.6; 33.9; 33.2; 32.5; 35.9; 33.1; 36.8.
  - Short-term borrowing as percent of bank borrowing (1989–2002): 51.1; 75.1; 82.0; 81.6; 86.3; 85.5; 80.3; 79.8; 78.2; 72.2; 69.1; 74.2; 74.6; 72.5.
  - Commercial paper and debentures (1989–2002): 12.3; 12.8; 13.0; 13.4; 14.7; 18.7; 16.0; 14.4; 14.8; 16.1; 17.7; 17.2; 18.9; 21.4.
  - Total borrowings of the corporate sector (in Rs. billion, 1989–2002): 506.1; 654.2; 803.1; 960.7; 1,160.4; 1,342.4; 1,584.3; 1,935.4; 2,392.3; 2,816.4; 3,040.9; 3,207.4; 3,275.5; 2,761.5.
  - Total borrowings (percent of GDP, 1989–2002): 10.8; 11.9; 12.7; 13.3; 14.0; 13.8; 13.8; 14.6; 16.2; 16.7; 16.2; 15.5; 14.6; 11.5.

### Corporate governance, enforcement, and insolvency framework
- Legal framework and recent reforms:
  - Main laws: Companies Act of 1956 (and amendments); Securities Contracts (Regulation) Act of 1956; SEBI Act of 1992; SICA.
  - Late 2000 amendments to Companies Act: more stringent disclosure norms (quarterly filings of shareholding data, segmented reporting, related party transaction disclosure/treatment, mandatory appointment of an officer for monitoring share transfers, establishment of audit committees).
  - Committee on Corporate Audit and Governance (late 2002) recommended tighter financial reporting, restrictions on auditors’ income-generation from clients, stricter protocols for forwarding auditors’ reports to SEBI, and requirements for independent directors.
- Enforcement gaps and penalties:
  - World Bank ROSC (2000) found practices fall short of OECD standards.
  - Enforcement needs strengthening; disclosure standards tightened; penalties for violations raised.
  - Examples of maximum penalties under the Companies Act cited in source: a fine of no more than Rs. 2,000 or six months imprisonment or both for violations; maximum penalty Rs. 1,000 if auditors’ signed reports are not in conformity with the law.
- Insolvency and corporate restructuring:
  - SICA flaws: strict definition of financial distress; time-consuming bankruptcy procedures; indefinite stays on creditor claims; existing management often allowed to run bankrupt company during reorganization.
  - Corporate Insolvency Law (passed early 2003) provisions (from source):
    - Sets ground for repealing SICA and replacing BIFR with National Companies Law Tribunal (NCLT).
    - Tightens qualifications for being declared a sick company.
    - Imposes a 24–month time limit (subject to extension by NCLT) on resolution actions.
    - SICA was repealed by the lower house of Parliament in late 2003.
  - Definition of sick industrial company in source: (i) annual accumulated losses greater than or equal to 50 percent of average net worth during four years immediately preceding the financial year; or (ii) failed to repay its debts within any three consecutive quarters on demand made in writing for repayment by a creditor or creditors.

### Cross-sectional and industry breakdowns; sample and data notes
- Sample and coverage:
  - Data source: CMIE Prowess database; dataset begins in 1989.
  - Total of 4,175 different companies included for at least one year in Prowess.
  - Listed companies account for more than 70 percent of organized industrial sector activity.
  - Stand-alone companies are more than half of company count but account for 12 percent of total assets, sales, and net worth.
  - Sample size by year (1989–2002): 1,073; 1,219; 1,546; 1,757; 2,116; 2,679; 3,184; 3,319; 3,316; 3,322; 3,450; 3,633; 3,167 (2001 provisional); 2,093 (2002 provisional).
- Industry concentration (average 1989–2002, constant 1993 prices):
  - Total companies: 4,175; Total assets: 4,485.0 (In Rs. billion); Sales: 4,060.2; Net worth: 1,258.2.
  - Chemicals: 765 companies; assets 759.0 (16.9 percent of total assets); sales 609.8 (15.0 percent).
  - Basic metals: 371 companies; assets 813.0 (18.1 percent); sales 462.6 (11.4 percent).
  - Coke, refined petroleum products, etc.: 37 companies; assets 487.3 (10.9 percent); sales 850.1 (20.9 percent).

### International comparisons (end-2002, as presented)
- Key ratios (Debt/equity; Long-term/total debt; Foreign/total debt; Interest coverage 1/):
  - India 2/: 1.27; 0.63; 0.16; 2.00.
  - China: 0.50; 1.00; 0.05; 2.37.
  - Korea: 1.31; 0.60; 0.13; 1.05.
  - Malaysia: 0.47; 0.81; 0.17; 1.41.
  - Singapore: 0.16; 0.79; 0.23; 2.56.
  - Thailand: 0.58; 0.80; 0.31; 1.99.
  - France: 1.00; 0.49; 0.33; 5.38.
  - Germany: 1.90; 0.48; 0.26; 3.97.
  - Japan: 0.99; 0.75; 0.09; 4.58.
  - United States: 1.12; 0.77; 0.05; 5.64.
- Notes: 1/ For 1998. 2/ India estimates not directly comparable to other India estimates in the paper due to different data sources.

### Policy implications and priorities (as reflected in source analysis)
- Continue reforms to strengthen corporate governance and enforcement:
  - Strengthen enforcement of disclosure standards and raise penalties for violations.
  - Increase board independence and transparency; improve access to shareholder information.
- Financial-sector measures and monitoring:
  - Monitor corporate foreign exchange exposure despite low aggregate foreign debt, given concentration among larger firms.
  - Monitor and address persistence of low ICRs and rising short-term borrowing risks.
- Insolvency and restructuring:
  - Implement quicker, more effective insolvency resolution mechanisms consistent with Corporate Insolvency Law reforms (24–month time limit on resolution actions; replacement of BIFR by NCLT).
- Labor and product-market reforms:
  - Further progress needed in reforming labor laws to allow flexibility in employment decisions in line with market conditions.
- Financial market development:
  - Continue development of capital markets and nonbank financing instruments (commercial paper, certificates of deposit, inter-corporate deposits) to diversify corporate funding sources.

*Source: _wp0464 (PDF chapter/section) — extracted material from CMIE Prowess database and author’s estimates as presented in the source document.*

### 1. Legal and Regulatory Framework for the Corporate Sector

### 1. Legal and Regulatory Framework for the Corporate Sector

### Introduction: reform context and purpose
- India launched a series of economic reforms in 1991 in response to a severe balance of payments crisis; many reforms directly or indirectly liberalized the corporate sector.
- Reforms aimed at easing restrictions on firms’ activities and enhancing overall competition by putting an end to the “license raj,” liberalizing the foreign trade regime, and opening the financial sector.
- The freeing of capital markets and entry of foreign investors brought new financing and ownership opportunities and significantly raised the volume of new equity issues.
- While India withstood the Asian financial crisis of 1997–98 comparatively well, the crisis demonstrated that the corporate sector can transmit financial shocks and put the financial sector at risk through balance sheet mismatches.
- The paper uses firm-level data to examine performance of India’s nonfinancial corporate sector since 1989 and evaluate financial vulnerabilities through 2002.
- Caveat: Observations made for 2001 and 2002 are subject to the caveat that data for these two years are from a smaller sample of firms than for earlier years.

### Key empirical findings on corporate performance and vulnerabilities (1989–2002)
- The 1990s were a dynamic period for most Indian companies:
  - First half of the 1990s: high sales growth, improved profitability, and strengthened finances.
  - Second half of the 1990s: some reversal of these trends; variation in performance increased and the gap between best and worst performers widened as firms faced greater competition.
- Despite weakening signs, most indicators remain at comfortable levels, with evidence of improvement in almost all indicators during 2002.
- Balance-sheet risks:
  - An increasing number of firms could face problems servicing their debt obligations, posing some risk to lenders.
  - Aggregate interest coverage of the nonfinancial corporate sector indicates a share of potential NPLs in total corporate borrowings of as high as 38 percent in 1999, and down only slightly in recent years.

### Size, composition, and structural features of the corporate sector
- India’s corporate sector has grown steadily over the past two decades in number of registered companies and amount of paid up capital.
- Approximately 619,000 registered companies as of June 2003.
- About 40 percent of registered companies are in the manufacturing sector.
- Corporate forms:
  - Private limited (closely held) and public limited (publicly held) companies compose the sector.
  - Private limited companies comprise the majority of firms but account for less than one–third of total paid up capital.
- Ownership and group structure:
  - Among private limited companies, subdivision into family-run business group companies and stand-alone companies exists.
  - Group companies represent 34 percent of the companies in the sample and tend to be more diversified than stand-alone companies.
- Government-owned enterprises (both public and private limited) are comparatively few.

### Legal, regulatory, and financial-sector reforms affecting firms
- Legal and regulatory reforms:
  - Abolition of the Industries Development and Regulation Act (1951) and amendments to the Companies Act and several other major laws reduced the heavy legal and regulatory burden on the corporate sector.
  - More recent steps include dereserving a number of small-scale industries (particularly those with greatest export potential) and enactment of a more modern competition law that focuses on anti-competitive practices and abuse of market dominance rather than firm size per se.
  - Further progress is needed in reforming labor laws to allow flexibility in employment decisions in line with market conditions.
- Trade and investment liberalization:
  - Foreign trade regime reforms included cuts in tariff rates, reductions in nontariff barriers, and streamlining of import licenses.
  - Foreign investment opportunities were increased; shareholders’ rights were improved.
  - Indian companies were allowed greater freedom to enter joint ventures with multinational enterprises, import new technologies and capital goods, expand productive capacity, and introduce new products without industrial licenses.
- Financial-sector reforms (as laid out by the Narasimham Committee on Financial Sector Reforms):
  - Deregulation of interest rates.
  - Easing of restrictions on private and foreign banks.
  - Removal of consortium lending requirements.
  - Liberalizing of bank branch licensing.
  - Entry of private sector mutual funds and foreign institutional investors.
  - Financial sector reforms induced firms to improve cash and debt management during the reform period.

### Organization of the broader analysis (as presented in the source)
- Section II: overview of India’s corporate sector through 2002 — size and composition, regulatory framework, and recent reforms.
- Section III: analysis of financial performance (1989–2002) using firm-level data — capital structure, profitability measures, and debt repayment capacity to ascertain financial vulnerability.
- Section IV: conclusions and policy implications drawn from empirical results.

*Source: _wp0464 - 1. Legal and Regulatory Framework for the Corporate Sector (PDF chapter) — IMF*

### Box 1. India: Legal and Regulatory Framework for the Corporate Sector Prior to

### Box 1. India: Legal and Regulatory Framework for the Corporate Sector Prior to the 1991 Reforms

### Legal and regulatory framework (pre-1991)
- Main legislative acts prior to the 1991 reform:
  - The Companies Act of 1956 established the modern legal and regulatory framework for the corporate sector, giving power to the central government to monitor, regulate, and control the affairs of companies, including establishing the types and structure of companies and registration and reporting requirements.
  - The Capital Issues (Control) Act, 1947 required any firm seeking to issue securities to obtain approval from the central government.
  - The 1951 Industries Development and Regulation (IDR) Act put in place a system of mandatory licenses limiting firms’ ability to expand capacity, change product mix, introduce new processes, and import machinery and equipment without various licenses from the central government.
  - The Industrial Policy Resolution of 1956 reserved certain industries for the public sector, creating a large state-owned industrial and services sector.
  - The 1969 Monopolies and Restrictive Trade Practices Act established an asset-based classification of monopoly and paved the way for widespread nationalization of Indian companies by applying only to the private sector.

### Government policies and institutions shaping corporate development
- Policies and institutional features:
  - Small-scale industries were specifically encouraged since 1967; many product lines were reserved for the small-scale sector. This policy was put on a statutory footing by amending the IDR Act in 1984.
  - A policy of import substitution was implemented with high tariffs and a requirement of multiple import licenses, shielding domestic firms from foreign competition.
  - Three development finance institutions (DFIs) set up to foster industrialization: the Industrial Development Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI), and the Industrial Credit and Investment Corporation of India (ICICI), whose mission was to lend to industrial enterprises, often at below-market interest rates.
  - Interest rates were regulated by the government, limiting competition among financial institutions. Public financial institutions supplied the vast majority of loans to the public sector and had little incentive to monitor lending, which led to excess leveraging.

### Ownership structure and equity markets
- Ownership concentration and control:
  - Ownership of India’s corporate sector tends to be concentrated in the hands of firm promoters and, to a lesser extent, small investors.
  - Focusing on the manufacturing sector in 2002:
    - Promoters’ share was 48 percent of paid up capital for all companies.
    - Promoters’ share was 71 percent for government-owned enterprises.
  - Share of equity held by small (public) investors in India was 32 percent (noted as comparable to the United States and United Kingdom), but inter-corporate holdings in India are much higher.
  - Financial institutions (FIs) in India hold a much smaller share of equity compared with other countries and have been characterized as largely passive shareholders.
- Equity market structure and size:
  - There are 23 registered stock exchanges in India, with total market capitalization of US$131 billion at end–2002, equivalent to 26 percent of GDP (compared with 21 percent in 1990).
  - The equity market is dominated by the Bombay Stock Exchange and the National Stock Exchange (NSE).
  - The NSE began operations in 1994.
  - At end–2002 India’s annual turnover ratio was 165 percent, and according to the Global Stock Markets Factbook 2003, India ranked 19th in market capitalization, 17th in total value traded, and 2nd in number of listed companies.

### Sources of corporate finance and macro implications
- Reliance on external finance:
  - Indian companies averaged 67 percent reliance on external sources of finance during 1990–2002.
  - For the year ending March 2002, external financing accounted for 56 percent of total corporate funds raised, with slightly more than two–fifths of this from capital markets (including bonds and debentures).
  - New financial instruments gaining popularity included commercial paper (including private placements), certificates of deposit, and inter-corporate deposits; external commercial borrowing also began to appear.
- Macro-level vulnerabilities linked to financing structure:
  - Large fiscal deficits: general government fiscal deficit estimated at 10½ percent of GDP in fiscal year (April–March) 2002/03.
  - Sizable government debt: estimated at 83 percent of GDP (a majority domestic and largely held by government-owned banks and FIs), with potential to crowd out private investment and slow growth.

### Leverage, debt structure, and firm-level heterogeneity
- Aggregate and median leverage:
  - The average debt-to-equity ratio for Indian companies bottomed out at 1.2 in 1996, but rose to 1.4 in 2002, close to the 1990 level.
  - For the median company during 1989–2002, average rates of growth were:
    - Net worth: 8 percent.
    - Gross borrowing: 4 percent.
- Firm-level divergence:
  - The majority of companies have become less leveraged over the sample period, but about one-quarter of companies (representing one-quarter of total assets) experienced a consistent increase in their debt-to-equity ratios since 1989 and are currently considered highly leveraged.
  - Highly-leveraged companies have tended to be less profitable; the trend is more pronounced among government-owned companies and small enterprises.
- Maturity structure of debt:
  - Aggregate long-term debt accounted for almost 90 percent of total debt in 1989, but was down to about 70 percent in 2002.
  - The decline in long-term debt share was most pronounced among private independent companies (long-term debt below 60 percent of total debt by 2002).
  - A plausible explanation is the decline in DFIs’ lending activities and commercial banks’ limited uptake of long-term lending.
- Foreign currency debt and external exposure:
  - Share of foreign currency debt in total debt rose from 8 percent in 1990 to more than 16 percent in 2002.
  - In 2002:
    - Only 17 percent of companies had any foreign currency denominated borrowings.
    - Less than 5 percent of companies had any foreign debt.
  - Between 1989 and 2002:
    - 28 percent of all firms reported having foreign currency denominated debt at some point.
    - 8 percent reported borrowing abroad at some point.
  - Concentration of foreign exposure:
    - Firms with foreign currency denominated debt in 2002 accounted for 66 percent of sales, 75 percent of net worth, and 71 percent of total assets.
    - Firms with foreign borrowings in 2002 accounted for 43 percent of sales, 47 percent of net worth, and 45 percent of total assets.
  - Correlation and hedging: there is a highly significant positive correlation between foreign exchange earnings and foreign exchange borrowings after controlling for industry and time fixed effects, company size, and ownership structure, suggesting corporations with foreign exposure are mostly naturally hedged.
  - Reserve position and policy: given relatively low recourse to foreign borrowing and a comfortable foreign reserves position, external vulnerability of India was assessed as low, but foreign exchange exposure of the corporate sector requires careful monitoring.
  - Regulatory limits: the Reserve Bank of India (RBI) imposed ceilings and restrictions on external commercial borrowing; most firms can borrow abroad up to US$50 million through the automatic route, with larger amounts subject to restrictions and new limits effective November 2003 on use of funds.

### Liquidity
- Current ratio:
  - The aggregate current ratio (current assets to current liabilities) dropped from 1.64 in 1990 to 1.49 in 2001, indicating a slight weakening in firms’ ability to meet short-term obligations through quick sale of liquid assets.

*Source: IMF staff analysis as presented in the Box titled "India: Legal and Regulatory Framework for the Corporate Sector Prior to the 1991 Reforms."*

### 1.32 for the median company) (Figure 4), although it is still at a relatively healthy level when

### Interest Coverage and Potential NPLs

### Current Ratio: trends and distribution
- The share of companies with current ratio below 1 rose from 11 percent of the companies in the sample in 1989 to 27 percent of the companies in 2002 (including 58 percent of government-owned enterprises), representing 40 percent of total assets in 2002 (Table 6).
- The distribution of the current ratio widened substantially over time (Figure 5).
- Aggregate and median current ratios are shown by ownership category and company size (Figures 4 and 5), with government-owned enterprises and smaller firms exhibiting weaker positions.

### Interest Coverage Ratio (ICR): levels, trends, and heterogeneity
- ICR defined as earnings before interest, taxes, depreciation, and amortization (EBITDA) over interest expenses.
- The ICR dropped from 2.7 in 1997 to 2.0 in 2001, and improved to 2.3 in 2002 (Figure 6).
- The share of companies unable to generate enough cash to meet interest payments rose from 15 percent of the companies in the sample in 1989 to 31 percent of the companies in 2002, representing:
  - 28 percent of total assets,
  - 20 percent of total sales,
  - 13 percent of net worth.
- Incidence of ICR < 1 (difficulty servicing debt) by group in 2002:
  - government-owned enterprises: 55 percent,
  - small companies: 38 percent.
- Among private companies in 2002, ICR < 1 was greatest in wood products, food and beverages, and textiles; least in tobacco, refined petroleum products, and precision instrument manufactures.
- The median ICR fell below the aggregate ICR in the second half of the 1990s, signaling growing distress among smaller companies; after 1999 the median ICR of government-owned enterprises dropped below 1.0.
- The distribution of ICR widened substantially over time (Figure 7); 31 percent of companies recorded a negative ICR.

### Comparative context
- Comparison to the United States: average ICRs in 1996 were 2.5 (India) and 8.0 (United States) (Kang, 2001).
- In the United States in 1996, coverage ratio of companies rated AAA by Standard and Poors was 20.3 and B rated was 2.3 (Haksar and Kongsamut, 2002).

### Linking ICR to potential nonperforming loans (NPLs)
- Methodology note: companies with less than 100 percent interest coverage (ICR < 1) assumed could default on some or all debt service obligations; an upper limit to implied NPLs is the entire liabilities side of such companies’ balance sheets. Caveats:
  - ICRs do not account for all resources a company may have to meet debt service.
  - Persistence rather than incidence of low ICR may be a more useful stress indicator.
  - Other liquidity indicators (e.g., current ratios) are needed for a complete picture.
  - The measure of potential NPLs from ICRs is not a substitute for banking-data NPL measures but serves as an additional indicator.
- Key empirical observations for India:
  - The aggregate level of potential NPLs (as a share of total borrowings by the nonfinancial corporate sector) doubled between 1989 and 1999 to 38 percent.
  - Persistence in low ICRs increased: among 2,924 companies with full data for 1995–2000:
    - 8 percent of firms in 1995–97 (accounting for 7 percent of total reported borrowing at end-1997) had ICR < 1 for each of the three years.
    - 22 percent of firms in 1998–2000 (accounting for 11¼ percent of total reported borrowing at end-2000) had ICR < 1 for each of the three years.
  - Since 2000, the measure of potential NPLs has shown signs of a modest decline consistent with corporate restructuring and improved performance; the uptick in 2002 may be biased by a significantly smaller sample size.
  - Potential NPLs based on corporate ICRs are broadly in line with other measures of NPLs based on banking system data (Figure 8), though differences exist across countries and measures.
- Interest rates and ICR dynamics:
  - The decline in ICRs in the 1990s does not appear driven by a rise in interest rates faced by the corporate sector: the effective interest rate remained relatively constant, with some convergence across company types due to structural decline in market-determined rates and loss of preferential funds for government-owned companies (Figure 9).
  - Companies rapidly accumulated debt in the early and mid-1990s to expand capacity, but this was not matched by an equivalent rise in profits; profits declined for three consecutive years in the second half of the 1990s, increasing interest burdens and reducing ICR.
- Stress test / scenario analysis:
  - A 200 basis points increase in the interest rate would have resulted in approximately 4 percentage points increase in the share of potential NPLs if the effect is averaged over the period 2000– (table reference truncated in source).

*Source: IMF working paper (CMIE, Prowess database; author’s estimates; figures and tables as cited in the source document).*

### 2002. However, a 3 percent decline in profits would have almost no effect on the potential

### _wp0464 - 2002. However, a 3 percent decline in profits would have almost no effect on the potential

### Profitability
- Period covered: 1989–2002.
- Aggregate findings:
  - During 1991–1996, aggregate profitability improved rapidly, spurred by strong economic growth.
  - In the second half of the 1990s, profitability declined to below pre-reform levels, with some signs of recovery in 2002.
  - The aggregate return on assets (measured by profit before interest, tax and depreciation over gross fixed assets) generally followed the trend in profitability.
- Distributional findings:
  - Government-owned enterprises and smaller companies were the hardest hit and had already tended to generate lower profits.
  - The profitability gap between weaker and stronger firms widened during the decade.
  - The median firm experienced a steady decline in returns over the sample period, attributable to a relatively rapid accumulation of assets and a falling marginal product of capital in the Indian corporate sector in the first half of the 1990s.
- Measures used:
  - Operating profits over net sales.
  - Profits before interest, depreciation and taxes (PBDIT) over sales.
  - PBDIT over gross fixed assets.
  - Note: PBDIT was the preferred measure due to lack of solid understanding of accounting standards for recording depreciation in income statements.

### Corporate–Financial Nexus
- Channels of linkage between corporate and financial sectors include bank loans and guarantees, equity holdings, and common directorships.
- Ownership and financial-sector involvement:
  - Large companies and companies belonging to business houses have higher equity participation by FIs and foreign investors and greater concentration of equity ownership than small and stand-alone companies.
  - FIs in India hold much smaller blocks of equity than FIs in other countries (Sarkar and Sarkar, 1999).
  - Public sector banks held about 75 percent of total commercial bank assets at end-2002.
  - Public FIs are more likely to act as a single block holder in India than FIs in other countries.
- Liability structure and trends (Table 7 summary):
  - Combined share of loans from commercial banks and other FIs reached 57 percent in 2002.
  - The share of short-term bank borrowing increased from 51 percent in 1989 to 70 percent in 2002.
  - Increased use of commercial paper and debentures noted as positive developments.
  - Overall conclusion: no overwhelming evidence that the corporate sector is entirely dependent on one particular source of debt finance.

### Corporate Governance in India
- Main laws regulating corporate governance:
  - Companies Act of 1956 (and amendments).
  - Securities Contracts (Regulation) Act of 1956.
  - Securities and Exchange Board of India (SEBI) Act of 1992.
  - Sick Industrial Companies (Special Provision) Act (SICA).
- Reforms and gaps:
  - World Bank ROSC (2000) found India’s corporate governance practices generally fall short of OECD standards.
  - Late 2000 amendments to the Companies Act imposed more stringent disclosure norms (quarterly filings of shareholding data, segmented reporting, disclosure/treatment of related party transactions, mandatory appointment of an officer for monitoring share transfers, establishment of audit committees).
  - Under existing laws:
    - All shares carry proportional voting rights and are equal within one class; proxy voting allowed; all shares and share transfers must be registered.
    - Shareholders can sue management or apply to the SEBI, but court delays can last up to 20 years.
    - Boards are single tiered with executive and nonexecutive members; directors appointed by shareholders at the annual general meeting.
    - As of March 2001, a mandatory requirement introduced requiring a minimum percentage of directors to be independent.
    - Boards must meet at least once every three months and disclose board members’ shareholdings and interests.
    - Companies must prepare audited annual reports signed by certified accountants; audit committees set up; auditors appointed/removed at the annual general meeting.
    - Consolidated statements not mandatory, but if ownership interest >50 percent, annual report must contain abridged data of the subsidiary.
    - Disclosure of price sensitive information to stock exchanges and SEBI is mandatory.
    - Remuneration disclosure required in aggregated form, and beginning in 2001, a further breakdown must be provided.
    - Companies must be rated by approved credit agencies before issuing any securities.
- Enforcement and structural issues:
  - Enforcement needs to be strengthened; disclosure standards tightened; penalties for violations raised.
  - Lack of independent directors: boards often filled with representatives of promoters.
  - Accessing shareholder information remains difficult due to cross-holdings across companies controlled by business groups, complicating tracking of insider trading.
  - Specific penalties cited under the Companies Act examples:
    - Maximum punishment for violating the Companies Act: a fine of no more than Rs. 2,000 or six months imprisonment or both.
    - If auditors’ signed reports are not in conformity with the law, the maximum penalty is Rs. 1,000.
  - Studies cited:
    - Goswami (2002) finds boards of top 100 listed private companies are numerically dominated by executive directors; boards often packed by retired corporate executives, government bureaucrats, family members and well wishers.
- Upcoming and enacted legal changes:
  - Committee on Corporate Audit and Governance (late 2002) prompted consideration of tighter financial reporting, restrictions on auditors’ income-generating activities from client companies, stricter protocol for forwarding auditors’ reports to the SEBI, and requirements that at least half of all directors of large companies be independent and receive training before appointment.
  - SICA flaws: definition of financial distress (erosion of net worth) is strict; bankruptcy procedures time consuming and cumbersome; indefinite stays on creditor claims; frequent violations of absolute priority rule; existing management often allowed to run bankrupt company during reorganization; liquidation under Companies Act is complicated with long court delays; laws afford little effective protection for creditors.
  - Corporate Insolvency Law (passed early 2003):
    - Sets the ground for repealing the SICA and replacing BIFR with the National Companies Law Tribunal (NCLT).
    - Tightens qualifications for being declared a sick company.
    - Imposes a 24–month time limit (subject to extension by the NCLT) on resolution actions.
    - SICA was repealed by the lower house of Parliament in late 2003.

### Conclusion
- Overall corporate-sector performance:
  - The performance of India’s corporate sector weakened after 1997; many promising developments following the 1991 reforms were partially reversed.
  - Aggregate leverage increased and the maturity structure of debt shifted slightly toward short-term borrowing.
  - Companies suffered from declining profitability.
  - More than 30 percent of the companies were unable to generate enough cash to cover their interest payments in 2002 (based on analysis of ICRs).
  - Disaggregated data show significant differences across companies and a widening distribution of financial ratios after reforms.
- Resilience and outlook:
  - Despite weakening, most indicators remained at comfortable levels with signs of improvement in almost all indicators in 2002 and in 2003, aided by a soft interest rate regime and ongoing economic recovery.
  - Stress tests suggest the corporate sector would be moderately affected by adverse interest rate shocks.
  - Exposure to foreign exchange risk is generally low given the comparatively low level of foreign debt and India’s strong foreign exchange reserve position.
  - Changes in the legal and regulatory framework post-1991 have promoted greater competition, reduced regulatory burden, and recently strengthened corporate governance—factors important for India’s growth prospects.

- Key exact figures and time points preserved from source:
  - Sample period: 1989–2002.
  - Recovery signs in 2002 and in 2003.
  - Public sector banks held about 75 percent of total commercial bank assets at end-2002.
  - Combined share of loans from commercial banks and other FIs reached 57 percent in 2002.
  - Share of short-term bank borrowing increased from 51 percent in 1989 to 70 percent in 2002.
  - More than 30 percent of the companies were unable to generate enough cash to cover their interest payments in 2002.
  - Maximum penalties under Companies Act examples: Rs. 2,000 and Rs. 1,000.
  - Corporate Insolvency Law: 24–month time limit on resolution actions.
  - Definition of sick industrial company: (i) annual accumulated losses greater than or equal to 50 percent of average net worth during four years immediately preceding the financial year; or (ii) failed to repay its debts within any three consecutive quarters on demand made in writing for repayment by a creditor or creditors.

*Sources: CMIE, Prowess database; and author’s estimates.*

### 3. All companies

### 3. All companies

### Registered companies: counts and paid-up capital (selected years)
- 1982: 72,402 firms; estimated paid-up capital 189.4 (In Rs. billion); 11.2 (note: formatting in source line).
- 1987: 140,670 firms; estimated paid-up capital 439.7; 14.1.
- 1992: 250,361 firms; estimated paid-up capital 846.4; 13.0.
- 1997: 450,950 firms; estimated paid-up capital 1,905.2; 13.9.
- 2002 2/: 589,246 firms; estimated paid-up capital 3,870.2; 16.9.
- Sources: Government of India, Ministry of Finance, Department of Company Affairs, Forty-Sixth Annual Report on the Working and Administration of the Companies Act, 1956; and author's estimates.
- Notes:
  - 1/ As of end-March.
  - 2/ Provisional.

### Composition of firms and paid-up capital by public/private (as of end-March 2002)
- Public limited companies:
  - Number of firms: 659; Estimated paid-up capital: 499.8 (In Rs. billion).
  - Number of nongovernment firms: 75,619; Estimated paid-up capital: 1,843.0.
  - Total all companies: 76,278; Estimated paid-up capital: 2,342.8.
  - (In percent of total) 0.1; 14.7; 12.9; 54.2; 13.1; 68.9 (as presented in source).
- Private limited companies:
  - Number of firms: 603; Estimated paid-up capital: 392.8.
  - Number of nongovernment firms: 507,303; Estimated paid-up capital: 662.4.
  - Total all companies: 507,906; Estimated paid-up capital: 1,055.2.
  - (In percent of total) 0.1; 11.6; 86.8; 19.5; 86.9; 31.1.
- Sources: Government of India, Ministry of Finance, Department of Company Affairs, Annual Report 2001–2002.
- 1/ As of end-March 2002.

### Pattern of equity ownership of registered companies in 2002 (Mean Equity Holding in percent)
- Private stand-alone companies: Implied government share 43.6; Banks and FIs 9.8; Mutual funds 5.0; Promoters 2.7; Foreign 1.0; Other 3.9; Public share 36.7.
- Private companies belonging to a business group: 50.3; 8.2; 7.4; 7.0; 2.6; 9.6; Public share 27.8.
- Government-owned companies: 70.7; 4.1; 4.2; 7.9; 3.0; (missing entry) 72.0; Public share 12.3.
- Foreign companies: 65.2; 3.7; 55.6; 4.5; 2.3; 6.9; Public share 20.6.
- Large companies: 52.9; 5.5; 14.5; 10.2; 4.1; 20.0; Public share 22.7.
- Medium companies: 52.2; 8.4; 10.3; 4.7; 1.8; 7.2; Public share 28.7.
- Small companies: 42.3; 9.9; 6.7; 2.6; 0.8; 3.7; Public share 37.9.
- Large private companies: 49.3; 6.3; 7.9; 10.5; 4.0; 14.5; Public share 24.7.
- Medium private companies: 50.7; 8.9; 6.3; 4.8; 1.9; 6.7; Public share 29.6.
- Small private companies: 41.5; 10.0; 5.2; 2.6; 0.8; 3.6; Public share 38.5.
- All companies (mean): 48.1; 8.7; 9.3; 4.5; 1.7; 7.4; Public share 31.8.
- Sources: Centre for Monitoring the Indian Economy (CMIE) (Prowess database); and author's estimates.
- 1/ The implied government share is the same as direct government holdings, holdings of banks and financial institutions, and holdings of mutual funds and UTI.

### International comparison of key financial ratios of the corporate sector (end-2002)
- Ratios presented: Debt/equity; Long-term/total debt; Foreign/total debt; Interest coverage 1/.
- India 2/: 1.27; 0.63; 0.16; 2.00.
- China: 0.50; 1.00; 0.05; 2.37.
- Korea: 1.31; 0.60; 0.13; 1.05.
- Malaysia: 0.47; 0.81; 0.17; 1.41.
- Singapore: 0.16; 0.79; 0.23; 2.56.
- Thailand: 0.58; 0.80; 0.31; 1.99.
- France: 1.00; 0.49; 0.33; 5.38.
- Germany: 1.90; 0.48; 0.26; 3.97.
- Japan: 0.99; 0.75; 0.09; 4.58.
- United Kingdom: 0.52; 0.50; 0.3? (source shows "0.36" under interest coverage column with formatting ellipsis); ...
- United States: 1.12; 0.77; 0.05; 5.64.
- Sources: CMIE (Prowess database); Bank for International Settlements; Begum and Schumacher, 2001 (based on the Worldscope dataset); Claessens, Djankov, and Lang, 1998; International Finance Corporation; and author's estimates.
- Notes:
  - 1/ For 1998.
  - 2/ The estimates for India are not directly comparable to the author's estimates in other sections of the paper because of different data sources used to compute financial ratios.

### Debt structure of corporate sector, 1990–2002 (shares in percent of total debt)
- Long-term borrowing (Total):
  - 1990: 73.7
  - 1991: 66.4
  - 1992: 66.6
  - 1993: 66.1
  - 1994: 66.3
  - 1995: 65.6
  - 1996: 64.7
  - 1997: 64.8
  - 1998: 64.4
  - 1999: 64.0
  - 2000: 62.4
  - 2001: 63.0
  - 2002: 62.6
- Long-term borrowing (Median company in sample):
  - 1990: 77.8
  - 1991: 74.8
  - 1992: 79.1
  - 1993: 73.9
  - 1994: 76.1
  - 1995: 76.1
  - 1996: 72.3
  - 1997: 73.2
  - 1998: 75.4
  - 1999: 76.2
  - 2000: 71.9
  - 2001: 73.5
  - 2002: 70.9
- Long-term borrowing by ownership/type (selected series, 1990–2002):
  - Private stand-alone companies (1990–2002): 65.3; 59.9; 60.5; 59.7; 59.7; 61.7; 61.3; 60.7; 59.1; 58.0; 57.8; 58.1; 56.4.
  - Private companies belonging to a business group: 74.1; 67.5; 69.0; 67.9; 70.0; 69.8; 67.7; 69.1; 68.5; 68.5; 66.6; 66.5; 66.6.
  - Government-owned companies: 100.0; 95.4; 90.7; 87.2; 82.6; 81.5; 83.9; 83.8; 83.8; 83.3; 82.1; 80.2; 80.3.
  - Foreign companies: 66.7; 62.2; 61.8; 66.3; 67.3; 63.7; 61.9; 65.2; 67.7; 69.4; 67.1; 72.6; 64.9.
- Foreign currency borrowing (Total):
  - 1990: 8.4
  - 1991: 9.4
  - 1992: 13.7
  - 1993: 12.5
  - 1994: 12.2
  - 1995: 12.5
  - 1996: 12.0
  - 1997: 14.3
  - 1998: 16.1
  - 1999: 14.3
  - 2000: 15.9
  - 2001: 15.0
  - 2002: 16.1
- Foreign currency borrowing (Median company in sample): all years 0.0 as presented.
- Share of companies with foreign currency borrowing (in percent):
  - 1990: 17.4
  - 1991: 18.1
  - 1992: 17.9
  - 1993: 15.7
  - 1994: 15.5
  - 1995: 16.8
  - 1996: 17.3
  - 1997: 17.9
  - 1998: 19.9
  - 1999: 18.3
  - 2000: 15.3
  - 2001: 15.9
  - 2002: 17.3
- Sources: CMIE (Prowess database); and author's estimates.

### Liquidity analysis of corporate sector, 1989–2002 (In percent of sample companies with a ratio < 1.00, unless otherwise indicated)
- Current ratio: All companies (1989–2002): 10.6; 13.5; 15.8; 15.6; 19.3; 17.5; 16.5; 16.2; 18.9; 22.8; 27.0; 28.6; 28.4; 27.4.
- Current ratio by category (selected highlights):
  - Government-owned companies: 18.4; 23.1; 29.8; 25.9; 37.4; 37.0; 37.3; 41.4; 43.3; 50.8; 50.0; 52.6; 53.1; 57.7.
  - Small companies: 18.4; 25.5; 27.8; 24.6; 29.9; 24.3; 22.3; 19.8; 23.7; 28.2; 31.8; 33.0; 32.6; 29.2.
- Interest coverage ratio: All companies (1989–2002): 15.0; 12.3; 12.3; 12.9; 15.5; 14.1; 13.5; 17.5; 24.3; 29.6; 33.7; 32.8; 32.5; 31.0.
- Interest coverage by category (selected highlights):
  - Government-owned companies: 39.2; 38.8; 39.6; 36.0; 40.7; 44.0; 46.3; 43.3; 47.6; 53.7; 56.3; 56.3; 55.9; 54.9.
  - Small companies: 22.7; 23.3; 22.9; 18.7; 21.7; 18.3; 18.1; 24.9; 34.1; 40.0; 40.8; 38.9; 39.9; 37.5.
- Share of implied nonperforming loans (NPLs) in total advances to companies (in percent):
  - 1989–1995: 18.4; 16.2; 18.0; 18.4; 18.5; 18.0; 14.6.
  - 1996–2002: 15.9; 19.2; 23.7; 38.2; 36.2; 33.5; 37.4.
- Share of NPLs in total loans by scheduled commercial banks (in percent) 1/ (selected years from source):
  - 1996: 23.0
  - 1997: 25.0
  - 1998: 20.0
  - 1999: 18.0
  - 2000: 15.7
  - 2001: 14.4
  - 2002: 14.7; 12.7; 11.4; 10.4 (source formatting shows multiple values in sequence).
- Sensitivity analysis:
  - Share of implied NPL after a 1 percentage point increase in interest rate (1989–2002): 24.6; 22.7; 22.1; 22.7; 22.3; 22.8; 18.1; 18.4; 23.2; 28.5; 42.1; 39.7; 41.1; 38.4.
  - Share of implied NPL after a 3 percent drop in PBDIT 2/ (1989–2002): 18.9; 16.7; 18.5; 19.3; 20.9; 20.3; 14.9; 16.4; 19.5; 24.3; 38.6; 36.5; 34.2; 37.8.
- Sources: CMIE (Prowess database); Reserve Bank of India, Statistical Tables Relating to Banks of India and Trend and Progress of Banking in India (various issues); and author's estimates.
- Notes:
  - 1/ For 1993–1997, public sector banks only.
  - 2/ PBDIT is profits before depreciation, interest payments, and taxes.

### Source of debt financing of corporate sector, 1989–2002 (In percent of total debt financing, unless otherwise indicated)
- Borrowing from banks (1989–2002): 25.7; 29.5; 30.6; 25.3; 29.6; 25.7; 29.6; 34.6; 33.9; 33.2; 32.5; 35.9; 33.1; 36.8.
  - Of which short-term borrowing (percent of bank borrowing): 51.1; 75.1; 82.0; 81.6; 86.3; 85.5; 80.3; 79.8; 78.2; 72.2; 69.1; 74.2; 74.6; 72.5.
- Borrowing from other financial institutions: 17.9; 18.4; 20.5; 23.8; 25.3; 25.5; 25.0; 24.4; 23.8; 24.4; 24.7; 23.7; 22.5; 19.9.
- Commercial paper and debentures: 12.3; 12.8; 13.0; 13.4; 14.7; 18.7; 16.0; 14.4; 14.8; 16.1; 17.7; 17.2; 18.9; 21.4.
- Borrowing from government: 16.9; 14.1; 12.9; 11.8; 8.6; 8.8; 8.3; 7.0; 6.4; 5.9; 6.6; 6.0; 6.9; 4.9.
- Borrowing from corporate sector: 1.9; 2.6; 3.9; 2.9; 3.8; 4.3; 4.0; 3.9; 3.8; 3.2; 3.5; 3.1; 3.7; 3.0.
- Memorandum items:
  - Total borrowings of the corporate sector (in Rs. billion) (1989–2002): 506.1; 654.2; 803.1; 960.7; 1,160.4; 1,342.4; 1,584.3; 1,935.4; 2,392.3; 2,816.4; 3,040.9; 3,207.4; 3,275.5; 2,761.5.
  - Total borrowings (in percent of GDP) (1989–2002): 10.8; 11.9; 12.7; 13.3; 14.0; 13.8; 13.8; 14.6; 16.2; 16.7; 16.2; 15.5; 14.6; 11.5.
- Sources: CMIE (Prowess database); and author's estimates.

### Appendix I — Data sources, sample composition, and breakdowns
- Data source: firm-level Prowess database compiled by the Centre for Monitoring the Indian Economy (CMIE). Dataset begins in 1989; disaggregated data for only two years of the pre-reform period.
- Coverage: information primarily from income statements and balance sheets of listed companies, which account for more than 70 percent of the economic activity in the organized industrial sector of India.
- Sample size and dynamics:
  - A total of 4,175 different companies are included for at least one year in the Prowess database.
  - Firms are categorized by National Industrial Classification Code and by ownership: stand-alone private Indian companies; private Indian companies associated with a business group; government-owned enterprises; and foreign companies.
  - Stand-alone companies: more than half of the total number of companies, but account for 12 percent of total assets, sales, and net worth of all companies.
  - More than 40 percent of the companies were incorporated in the past 18 years; older companies control a large share of total assets and sales.
- Notes on sample variability:
  - The size of the dataset varies by year. In some cases, companies exit and reenter the database; overall exit rates are very low.
  - In 2001 and 2002, the number of companies is considerably lower because of partial reporting by companies’ accounts for those years at the time of compilation.
  - Reserve Bank of India and ICICI Bank each tracked a small set of companies for the period 1980–1990; these data are not publicly available at a disaggregated level.
  - Definition of exit: a company is classified as having exited the sample if it does not appear in any subsequent years after the first year it does not appear in the dataset.
- Sample statistics, number of companies in sample (1989–2002) and percent exited:
  - 1989: 1,073; 0.00
  - 1990: 1,219; 0.00
  - 1991: 1,546; 0.00
  - 1992: 1,757; 0.00
  - 1993: 2,116; 0.00
  - 1994: 2,679; 0.00
  - 1995: 3,184; 0.15
  - 1996: 3,319; 0.41
  - 1997: 3,316; 1.60
  - 1998: 3,322; 2.77
  - 1999: 3,450; 4.49
  - 2000: 3,633; 3.04
  - 2001 1/: 3,167; ...
  - 2002 1/: 2,093; ...
  - Sources: CMIE (Prowess database); and author's estimates.
  - 1/ Provisional data, based on available sample from CMIE as of mid-2003.

### Breakdown of companies by industry (average during 1989–2002, in constant 1993 prices)
- Total companies represented in the period: 4,175; Total assets: 4,485.0 (In Rs. billion); Sales: 4,060.2; Net worth: 1,258.2.
- Largest industry counts and shares (number of companies; percent of total; assets in Rs. billion; percent of total):
  - Chemicals: 765; 18.3; 759.0; 16.9; Sales 609.8 (15.0); Net worth 220.2 (17.5).
  - Basic metals: 371; 8.9; 813.0; 18.1; Sales 462.6 (11.4); Net worth 231.2 (18.4).
  - Coke, refined petroleum products, etc.: 37; 0.9; 487.3; 10.9; Sales 850.1 (20.9); Net worth 147.1 (11.7).
  - Food products and beverages: 480; 11.5; 199.2; 4.4; Sales 226.5 (5.6); Net worth 57.3 (4.6).
  - Textiles: 453; 10.9; 268.4; 6.0; Sales 201.2 (5.0); Net worth 34.8 (2.8).
  - Diversified: 61; 1.5; 430.1; 9.6; Sales 342.7 (8.4); Net worth 152.4 (12.1).
  - Missing industrial classification: 108; 2.6; 49.7; 1.1; Sales 42.5 (1.0); Net worth 14.6 (1.2).
- Smaller industry entries are included for many manufacturing subsectors with counts, assets, sales, and net worth as presented in the source table.
- Sources: CMIE (Prowess database); and author's estimates.
- 1/ In constant 1993 prices.
- 2/ Represents the total number of companies for which data are reported in the Prowess database during the period 1989–2002.

### Breakdown of companies by type of ownership and year of incorporation (average over 1989–2002 in constant 1993 rupees)
- By ownership (number of companies; percent of total; Sales in Rs. billion; percent of total; Asset in Rs. billion; percent of total; Net Worth in Rs. billion; percent of total):
  - Private Indian stand-alone companies: 2,365; 56.6; Sales 523.1 (11.7); Assets 509.5 (12.5); Net Worth 160.5 (12.8).
  - Private Indian companies associated with a business group: 1,426; 34.2; Sales 2,417.3 (53.9); Assets 1,890.8 (46.6); Net Worth 757.1 (60.2).
  - Government-owned companies: 142; 3.4; Sales 1,216.5 (27.1); Assets 1,236.5 (30.5); Net Worth 219.7 (17.5).
  - Foreign companies: 242; 5.8; Sales 328.1 (7.3); Assets 423.5 (10.4); Net Worth 120.9 (9.6).
  - Total: 4,175; Sales 4,485.0; Assets 4,060.2; Net Worth 1,258.2.
- By year of incorporation (number of companies; percent of total; Sales in Rs. billion; percent of total; Assets in Rs. billion; percent of total; Net Worth in Rs. billion; percent of total):
  - Before 1950: 448; 10.7; Sales 840.3 (18.7); Assets 808.2 (19.9); Net Worth 241.0 (19.2).
  - Between 1951 and 1971: 581; 13.9; Sales 1,442.2 (32.2); Assets 1,665.8 (41.0); Net Worth 407.6 (32.4).
  - Between 1972 and 1985: 1,259; 30.2; Sales 1,298.1 (28.9); Assets 932.9 (23.0); Net Worth 343.7 (27.3).
  - Between 1986 and 1991: 963; 23.1; Sales 412.4 (9.2); Assets 304.7 (7.5); Net Worth 115.6 (9.2).
  - After 1992: 906; 21.7; Sales 489.3 (10.9); Assets 344.9 (8.5); Net Worth 149.8 (11.9).
  - Total: 4,175; Sales 4,485.0; Assets 4,060.2; Net Worth 1,258.2.
- Sources: CMIE (Prowess database); and author's estimates.

*Italic: Source content unit — _wp0464 - 3. All companies (PDF chapter/section) — extracted from the provided material.*

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