Corporate Finance Practices in India: A Survey

Vikalpa, Vol. 27, No. 4, pp. 29-56, October - December 2002

Posted: 13 Nov 2004

See all articles by Manoj Anand

Manoj Anand

Management Development Institute


The present study surveys 81 CFOs of bt-500 companies of India and her most valuable PSUs to find out the corporate finance practices with respect to capital budgeting decisions, cost of capital, capital structure, and dividend policy decisions.

Large firms and growth firms follow the EVA maximization objective more than the small firms and low growth firms. The objective to reduce side costs in the form of conflicts amongst the various stakeholders of the firm is not very popular in India. The firms use discounted cash flow methodology for capital budgeting decisions today more than in the previous times. They use multiple criteria in their project choice decisions. The firms still use payback period.

The firm size significantly affects the practice of corporate finance. Large firms rely heavily on PV techniques and CAPM, while small firms are likely to use payback criterion. The IRR is more popular than NPV. The small firms use the Gordon's dividend discount model to estimate the cost of equity The industry average beta is the most popular measure of systematic risk. The BSE Sensex is widely used as a proxy for market portfolio.

A substantial number of firms use company risk rather than project-specific risk in appraising new projects. The sensitivity analysis and scenario analyses are more widely used techniques for project risk analysis. Large firms use scenario analysis, where as small firms' resort to sensitivity analysis more. The public sector firms carry out national economic profitability analysis of their projects more than the private sector firms do. The domestic resource cost per US$ earned/saved is widely used for this purpose followed by the effective rate of protection.

Retained earnings are the most preferred source of finance followed by debt and then equity. Very few firms use hybrid securities as a source of finance. The pecking order theory holds in India. Debt is preferred more by the low growth firms than the high growth firms. Most of the firms have target dividend payout ratio and dividend changes follow shift in the long-term sustainable earnings. The findings on dividend policy are in agreement with Lintner's study on dividend policy. Most of the respondents agree that dividend policy provides signaling mechanism of the future prospects of the firm and thus affects its market value. Thus, there are clear indications that firms practice to a great extent what is taught in the professional institutes and business schools.

Keywords: Corporate Finance Practices, Capital Budgeting, Cost of Capital, Capital Structure, Dividend Policy, India

JEL Classification: G31, G32, G35

Suggested Citation

Anand, Manoj, Corporate Finance Practices in India: A Survey. Vikalpa, Vol. 27, No. 4, pp. 29-56, October - December 2002, Available at SSRN:

Manoj Anand (Contact Author)

Management Development Institute ( email )

Gurugram, Haryana 122001

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