CAPITAL STRUCTURE.
Introduction;
Funds or finance is the life blood of any business activities. No organization can run without finance or in other words we can call it as capital, of the company. It may be either long term or short term capital.
Capital required for day to day to day operation is normally met through short term source and capital required for capital budgeting purposes will be met through long term sources.
The financial strength as well as profitability of the organization is influenced by its capital structure. Financial structure is represented by the liability side of the Balance Sheet comprising own capital and debt capital. So financial structure includes both short term as well as long term funds. So requirement of funds of an organization is dependent on its investment decisions.
Meaning of capital Structure:
Capital structure is that part of financial structure which represents long term sources. The term capital structure is generally defined to include only long term debt and total stock holder investment. The term capital structure refers to the mix of long term sources of funds, such as equity share costal, reserves and surplus, debentures, long term debt from out side sources and preference share capital. The quote begin, capital structure may consist of a single clause of stock, or it may be complicated by several issues if bonds and proffered stock, the characteristics of which may vary considerably. In other words capital structure refers to the composition of capitalization that is to the proportion between debt and equity that make up capitalization.
Capital Structure = Long term debt + Preferred stock + Net worth.
OR
Capital Structure = Total Asset- Current Liabilities.
Thus, the capital structure of a firm consists of the shareholder funds and debt. The inherent financial stability of an enterprise or risk of insolvency to which it is exposed and primarily dependent on the source of its funds as well as type of assets it holds and relative magnitude of such asset categories.
Capital Structure Decisions:
Capital structure decisions are basic part of doing business yet often misunderstood. In terms of modern financial theory and EMH it should not matter what we issue as there is a zero NPV. Managers, however, spend much time worrying about what to issue and when.
Why?
Partially because some of the assumptions we use in developing EMH do not hold, partially because of transaction costs, partially for agency cost reasons, and partially because the Investment banking community is convinced that what firms issue does matter.
Know Advantages/disadvantages of issuing various types of securities.
Costs of issuing securities
APV = adjusted Net Present value
if no costs APV=NPV
if APV "go for broke since you will get nothing otherwise" (limited liability)
• A project can have a positive NPV for one group of claimants, while it is a negative NPV project in aggregate.
3. FINANCIAL SLACK:
• Financial Slack can be defined as the amount of funds a firm has available to invest without visiting the external financial markets after paying interest and before paying dividends + Depreciation.
• The following factors influence whether firms should have more equity (financial slack) or more Debt in their capital structures.
– Firms Track Record of Picking Good Investments.
– The likelihood of good investments and opportunities arising (growth industry?)
Likelihood of + NPV Investments?
1. Firms Track Record: PROBLEM OF LEMONS
• Firms may be willing to take risks and negative NPV projects because they are investing “other peoples money”.
2. Is Financing Available When Good Investments Arise?
• Small growing firms may have problems raising financing when they have positive NPV projects.
• The problem arises in convincing investors that their
projects have merit out of a pool of potential investments.
3. Costs of Financial Slack
Too much free cash flow may result in uneconomic expansion
• Serious examples include the incentives of executives to build "empires". A possible example: ATT's takeover of NCR.
Conclusions:
Optimal Capital Structure involves “trading off” costs and benefits.
Advantages to Debt:
• Reduction of taxes through tax shield
• Reduces managerial discretion when firm has few positive investment opportunities.
Disadvantages of Debt:
• Bankruptcy costs may be significant and may affect operation of business.
Advantages of Equity:
• Increased managerial discretion when firm has more positive investment opportunities and outside investors have poor ability to choose good firms.
Asset and Capital Structure:
A Hypothetical Study:
Total assets increased by 19.2 billion compared with December 31, 2005, to 55.9 billion, mainly because of the acquisition of X Company Ltd. Explanations concerning the full consolidation of Schering are provided in Note [7.2] to the consolidated financial statements. The data relating to the X Company Ltd. purchase price allocation are preliminary.
Bayer Group Summary Balance Sheets
Dec. 31, 2005
Dec. 31, 2006
Change
million
million
%
Noncurrent assets
20,130
35,897
+78.3
Current assets
16,592
17,069
+2.9
Assets held for sale and discontinued operations
0
2,925
-
Total current assets
16,592
19,994
+20.5
Total assets
36,722
55,891
+52.2
Stockholders’ equity
11,157
12,851
+15.2
Noncurrent liabilities
16,495
27,525
+66.9
Current liabilities
9,070
14,667
+61.7
Liabilities directly related to assets held for saleand discontinued operations
0
848
-
Total current liabilities
9,070
15,515
+71.1
Liabilities
25,565
43,040
+68.4
Total stockholders’ equity and liabilities
36,722
55,891
+52.2
Noncurrent assets rose by 15.8 billion to 35.9 billion. They include 11.6 billion in acquired and amortized intangible assets of X Company Ltd., consisting mainly of production related rights and know-how. Noncurrent assets also included goodwill of 5.7 billion as of December 31, 2006 resulting from the X Company Ltd. acquisition. Current assets of continuing operations rose by 0.5 billion from the previous year, to 17.1 billion, largely because of the trade accounts receivable, inventories, and cash and cash equivalents added by the X Company Ltd. acquisition. Current assets were diminished by the presentation of Diagnostics, A and B as discontinued operations. These businesses are no longer reflected in the individual balance sheet items as in the prior year, but instead are recognized under “Assets held for sale and discontinued operations” and the corresponding liability item. Stockholders’ equity expanded by 1.7 billion to 12.9 billion. The dividend payment (including reimbursements of capital gains tax) diminished stockholders’ equity by 0.5 billion, and negative currency effects led to a reduction of 0.7 billion, while Group net income contributed 1.7 billion and the issuance of new shares added 1.2 billion. This capital increase brought the capital stock of Bayer AG to 2.0 billion. The equity ratio (equity coverage of total assets) for 2006 thus stood at 23.0 percent on December 31, 2006 (2005: 30.4 percent). Taking into account our portfolio changes, we expect the equity ratio to be back at around 30 percent at year end 2007. Liabilities grew by 17.5 billion compared with December 31, 2005, to 43.0 billion. Current and noncurrent financial liabilities rose by 10.8 billion, mainly due to the financing of the X Company Ltd. acquisition. Despite the inclusion of Schering’s pension commitments, provisions for pensions were down by 0.6 billion to 6.5 billion in light of actuarial changes recognized directly in stockholders’ equity.
Balance Sheet and Financial Ratios
2005
2006
Cost of sales ratio (%)
Cost of goods sold
54.3
52.8
Net sales
R&D expense ratio (%)
Research and development expenses
7.0
7.9
Net sales
Inventory turnover
Cost of goods sold
2.4
2.5
Inventories
Receivables turnover
Net sales
4.7
5.0
Trade accounts receivable
EBIT margin before special items (%)
EBIT before special items
12.3
12.0
Net sales
EBITDA margin before special items (%)
EBITDA before special items
18.6
19.3
Net sales
Asset intensity (%)
Property, plant and equipment + intangible assets
43.6
62.1
Total assets (continuing operations)1
D&A/capex ratio (%)
Depreciation and amortization
126.5
100.1
Capital expenditures
Liability structure2 (%)
Current liabilities
35.5
36.0
Liabilities
Gearing (%)
Net debt + pension provisions
1.1
1.9
Stockholders’ equity
Equity ratio2 (%)
Stockholders’ equity
30.4
23.0
Total assets
Return on stockholders’ equity2 (%)
Income after taxes
14.4
14.1
Average stockholders’ equity
Return on assets (%)
Income before taxes and interest expense
8.8
7.7
Average total assets for the year based on segment table
2005 figures restated 1 Total assets (continuing operations) = non current and current assets minus the balance sheet item “assets held for sale and discontinued operations” 2 Ratio refers to the total of continuing and discontinued operations
Laguna Clothing P Ltd
(LCPL)
Capital Structure Analysis:
Laguna Clothing P Ltd was set up in 1980 under Companies Act, 1956 for manufacturing and supplying of garment products.
Table-I – Capital Structure
(Rs. in crore) As on 31.03.2007)
A) Authorised Capital
4.00
B)Paid up Capital
a)State Govt.
Nil
b)Central Govt.
Nil
c)Others-Holding Company (KSFC)
2.99
d)Total (a+b+c)
2.99
C) Share Application Money
Nil
D) Total Capital (B+C)
2.99
Table-II - Borrowings
(Rs. in crore ) As on 31.03.2007)
Type of loan
State Govt.
Financial Institutions.
Others
Total
1.Secured Loans.
0.33
54.65
Nil
54.98
2.Unsecured Loans.
Nil
Nil
3.02
3.02
3.Total borrowing.
0.33
54.65
3.02
58.00
Table-III – Value of Assets
(Rs. in crore) As on 31.03.2007)
Asset
Book Value
Estimated Realizable Value
Land (Lease hold)
0.08
*
Building
0.59
*
Machinery
0.41
*
Others
0.88
Total
1.96
*
(*Not furnished by the Organization)
Performance & Business Analysis
In post liberalisation era, LCPL failed to meet both the technological competition of multi-national companies in garment industry and the lower end marketing activities of unorganized sector in this field. Consequently, the company started losing its market share and accumulated losses of Rs. 23.76 crore as on 31.3.1997 eroded its net- worth completely. This way, it got itself declared as a sick industry u/s 3(1)(o) of SICA from BIFR. LCPL was on the verge of closure of its ongoing activities due to shortage of working funds. Its earnings continuously decreased and were not adequate even to meet the non-manufacturing fixed expenses. The activity-wise break-up of sales during the year 2006-2007 is given in Table IV:
Table – IV - Break-up of Sales (Operating Income)
Particulars
2006-07(%)
Sale of Garments
25.20
Sale of Miscellaneous Cloths
6.40
Other Job Works
32.20
Sale of Suiting
5.60
Sale of Ready made Coats
17.70
Other Income
13
Financial Analysis
Table V – Financial Parameters of LCPL
(Rs. in crore)
S.No.
Indicators
02-03
03-04
04-05
05-06
06-07
1
Operating Income
10.69
5.49
8.48
8.39
5.58
2
Operating Profit / Loss
(5.55)
1.68
0.62
0.39
(0.74)
3
Profit after Tax / Loss
(17.26)
(2.28)
(5.99)
(12.06)
(12.17)
4
Gross Margin (%)
-
-
-
-
-
5
Accumulated Loss
(23.76)
(35.66)
(41.65)
(53.71)
(65.88)
6
Net Worth
(21.53)
(33.43)
(39.44)
(50.65)
(62.84)
7
Paid–up Capital
2.13
2.13
2.13
2.99
2.99
8
Capital Employed
8.01
1.40
0.97
(2.60)
(4.83)
9
Working Capital
0.42
(5.23)
(4.88)
(5.18)
(6.79)
10
Debt Equity Ratio
13
16
18
16
19
11.
Current Ratio
1.02
0.7
0.7
0.7
0.6
12.
Return on Share holder's Equity (ROSE) (%)
-
-
-
-
-
13.
Return on Capital Employed (ROCE) (%)
-
-
-
-
-
In 2002-03, LCPL was in operating losses but earned operating profit in the next 3 years due to sale of ready made coats in a time bound stipulation. Now, ready made coats work has tapered off, thereby making the Company run into operational loses in 2006-07. Its accumulated losses were Rs.65.88 crore as on 31.03.2007. Its net worth had become negative to the extent of Rs.62.88 crore as on 31.03.2007.
Critical Analysis
Corporate Focus
This company was established during the initial stages of development of affaral industries in the country, when private individuals were reluctant to enter into such Hi-tech area due to high degree of uncertainty and risk.
.
Strength / Core Competency / Opportunities
LCPL has not developed any core competency in manufacturing of garments and other peripherals. Such activities require high degree of professional skill and technology up-gradation on biannual basis. Moreover, its core competency in training garment personnel, development of new manufacturing techniques, contacts with new foreign customers and more recrutive orders are thriving well in the private sector having freedom and flexibility in decision making
Restructuring / Revival
The Operating Agency has got a rehabilitation scheme sanctioned under BIFR by which payment of Rs.6.04 crore by way of OTS will take care of the entire dues of banks, financial institutions and other agencies. For implementation of the scheme, LCPL requires additional funds of nearly Rs.9 crore). KSFC had agreed to advance a bridge loan of Rs.5 crore to pay off OTS of the banks to be recovered out of proceeds of sale of 6 acre plot at Bangalore and commercial property at Delhi. However, it has come to the notice of the Disinvestment Commission from Government that while offer price for basement in Delhi was much below the reserve price, the offer for two Delhi flats was Rs.92 lac as against DDA claim of Rs.79 lac leaving a negligible surplus of Rs.17 lac. For Bangalore property, HOUSEFED agreed to purchase the same if its land use was allowed to be changed.
The profitable disposal of the land was hampered by the fact that permission to alter the land use was not forthcoming or the agencies such as PUDA who had earlier agreed to purchase the property were financially constrained. Since, both these properties could not be sold, the compliance of the BIFR has not been possible. The Empowered Committee of the Karnataka Government has objected to bridge loan of Rs.5 crore which the KSFC was proposing to give. Further, relief/concessions as stipulated in the sanctioned scheme were also disallowed by the Empowered Committee. Under the circumstances, it is obvious that LCPL may not be in a position to get the sanctioned scheme implemented. The company thus faces winding up.
Recommendations
The Commission, therefore, recommends that:
1. LCPL should take immediate action in this regard.
2. KSFC, its holding Company, should take appropriate action in view of recommendation No.1.
It clearly shows how crucial the capital structure decision in case of any business organization.
**********
Introduction;
Funds or finance is the life blood of any business activities. No organization can run without finance or in other words we can call it as capital, of the company. It may be either long term or short term capital.
Capital required for day to day to day operation is normally met through short term source and capital required for capital budgeting purposes will be met through long term sources.
The financial strength as well as profitability of the organization is influenced by its capital structure. Financial structure is represented by the liability side of the Balance Sheet comprising own capital and debt capital. So financial structure includes both short term as well as long term funds. So requirement of funds of an organization is dependent on its investment decisions.
Meaning of capital Structure:
Capital structure is that part of financial structure which represents long term sources. The term capital structure is generally defined to include only long term debt and total stock holder investment. The term capital structure refers to the mix of long term sources of funds, such as equity share costal, reserves and surplus, debentures, long term debt from out side sources and preference share capital. The quote begin, capital structure may consist of a single clause of stock, or it may be complicated by several issues if bonds and proffered stock, the characteristics of which may vary considerably. In other words capital structure refers to the composition of capitalization that is to the proportion between debt and equity that make up capitalization.
Capital Structure = Long term debt + Preferred stock + Net worth.
OR
Capital Structure = Total Asset- Current Liabilities.
Thus, the capital structure of a firm consists of the shareholder funds and debt. The inherent financial stability of an enterprise or risk of insolvency to which it is exposed and primarily dependent on the source of its funds as well as type of assets it holds and relative magnitude of such asset categories.
Capital Structure Decisions:
Capital structure decisions are basic part of doing business yet often misunderstood. In terms of modern financial theory and EMH it should not matter what we issue as there is a zero NPV. Managers, however, spend much time worrying about what to issue and when.
Why?
Partially because some of the assumptions we use in developing EMH do not hold, partially because of transaction costs, partially for agency cost reasons, and partially because the Investment banking community is convinced that what firms issue does matter.
Know Advantages/disadvantages of issuing various types of securities.
Costs of issuing securities
APV = adjusted Net Present value
if no costs APV=NPV
if APV
• A project can have a positive NPV for one group of claimants, while it is a negative NPV project in aggregate.
3. FINANCIAL SLACK:
• Financial Slack can be defined as the amount of funds a firm has available to invest without visiting the external financial markets after paying interest and before paying dividends + Depreciation.
• The following factors influence whether firms should have more equity (financial slack) or more Debt in their capital structures.
– Firms Track Record of Picking Good Investments.
– The likelihood of good investments and opportunities arising (growth industry?)
Likelihood of + NPV Investments?
1. Firms Track Record: PROBLEM OF LEMONS
• Firms may be willing to take risks and negative NPV projects because they are investing “other peoples money”.
2. Is Financing Available When Good Investments Arise?
• Small growing firms may have problems raising financing when they have positive NPV projects.
• The problem arises in convincing investors that their
projects have merit out of a pool of potential investments.
3. Costs of Financial Slack
Too much free cash flow may result in uneconomic expansion
• Serious examples include the incentives of executives to build "empires". A possible example: ATT's takeover of NCR.
Conclusions:
Optimal Capital Structure involves “trading off” costs and benefits.
Advantages to Debt:
• Reduction of taxes through tax shield
• Reduces managerial discretion when firm has few positive investment opportunities.
Disadvantages of Debt:
• Bankruptcy costs may be significant and may affect operation of business.
Advantages of Equity:
• Increased managerial discretion when firm has more positive investment opportunities and outside investors have poor ability to choose good firms.
Asset and Capital Structure:
A Hypothetical Study:
Total assets increased by 19.2 billion compared with December 31, 2005, to 55.9 billion, mainly because of the acquisition of X Company Ltd. Explanations concerning the full consolidation of Schering are provided in Note [7.2] to the consolidated financial statements. The data relating to the X Company Ltd. purchase price allocation are preliminary.
Bayer Group Summary Balance Sheets
Dec. 31, 2005
Dec. 31, 2006
Change
million
million
%
Noncurrent assets
20,130
35,897
+78.3
Current assets
16,592
17,069
+2.9
Assets held for sale and discontinued operations
0
2,925
-
Total current assets
16,592
19,994
+20.5
Total assets
36,722
55,891
+52.2
Stockholders’ equity
11,157
12,851
+15.2
Noncurrent liabilities
16,495
27,525
+66.9
Current liabilities
9,070
14,667
+61.7
Liabilities directly related to assets held for saleand discontinued operations
0
848
-
Total current liabilities
9,070
15,515
+71.1
Liabilities
25,565
43,040
+68.4
Total stockholders’ equity and liabilities
36,722
55,891
+52.2
Noncurrent assets rose by 15.8 billion to 35.9 billion. They include 11.6 billion in acquired and amortized intangible assets of X Company Ltd., consisting mainly of production related rights and know-how. Noncurrent assets also included goodwill of 5.7 billion as of December 31, 2006 resulting from the X Company Ltd. acquisition. Current assets of continuing operations rose by 0.5 billion from the previous year, to 17.1 billion, largely because of the trade accounts receivable, inventories, and cash and cash equivalents added by the X Company Ltd. acquisition. Current assets were diminished by the presentation of Diagnostics, A and B as discontinued operations. These businesses are no longer reflected in the individual balance sheet items as in the prior year, but instead are recognized under “Assets held for sale and discontinued operations” and the corresponding liability item. Stockholders’ equity expanded by 1.7 billion to 12.9 billion. The dividend payment (including reimbursements of capital gains tax) diminished stockholders’ equity by 0.5 billion, and negative currency effects led to a reduction of 0.7 billion, while Group net income contributed 1.7 billion and the issuance of new shares added 1.2 billion. This capital increase brought the capital stock of Bayer AG to 2.0 billion. The equity ratio (equity coverage of total assets) for 2006 thus stood at 23.0 percent on December 31, 2006 (2005: 30.4 percent). Taking into account our portfolio changes, we expect the equity ratio to be back at around 30 percent at year end 2007. Liabilities grew by 17.5 billion compared with December 31, 2005, to 43.0 billion. Current and noncurrent financial liabilities rose by 10.8 billion, mainly due to the financing of the X Company Ltd. acquisition. Despite the inclusion of Schering’s pension commitments, provisions for pensions were down by 0.6 billion to 6.5 billion in light of actuarial changes recognized directly in stockholders’ equity.
Balance Sheet and Financial Ratios
2005
2006
Cost of sales ratio (%)
Cost of goods sold
54.3
52.8
Net sales
R&D expense ratio (%)
Research and development expenses
7.0
7.9
Net sales
Inventory turnover
Cost of goods sold
2.4
2.5
Inventories
Receivables turnover
Net sales
4.7
5.0
Trade accounts receivable
EBIT margin before special items (%)
EBIT before special items
12.3
12.0
Net sales
EBITDA margin before special items (%)
EBITDA before special items
18.6
19.3
Net sales
Asset intensity (%)
Property, plant and equipment + intangible assets
43.6
62.1
Total assets (continuing operations)1
D&A/capex ratio (%)
Depreciation and amortization
126.5
100.1
Capital expenditures
Liability structure2 (%)
Current liabilities
35.5
36.0
Liabilities
Gearing (%)
Net debt + pension provisions
1.1
1.9
Stockholders’ equity
Equity ratio2 (%)
Stockholders’ equity
30.4
23.0
Total assets
Return on stockholders’ equity2 (%)
Income after taxes
14.4
14.1
Average stockholders’ equity
Return on assets (%)
Income before taxes and interest expense
8.8
7.7
Average total assets for the year based on segment table
2005 figures restated 1 Total assets (continuing operations) = non current and current assets minus the balance sheet item “assets held for sale and discontinued operations” 2 Ratio refers to the total of continuing and discontinued operations
Laguna Clothing P Ltd
(LCPL)
Capital Structure Analysis:
Laguna Clothing P Ltd was set up in 1980 under Companies Act, 1956 for manufacturing and supplying of garment products.
Table-I – Capital Structure
(Rs. in crore) As on 31.03.2007)
A) Authorised Capital
4.00
B)Paid up Capital
a)State Govt.
Nil
b)Central Govt.
Nil
c)Others-Holding Company (KSFC)
2.99
d)Total (a+b+c)
2.99
C) Share Application Money
Nil
D) Total Capital (B+C)
2.99
Table-II - Borrowings
(Rs. in crore ) As on 31.03.2007)
Type of loan
State Govt.
Financial Institutions.
Others
Total
1.Secured Loans.
0.33
54.65
Nil
54.98
2.Unsecured Loans.
Nil
Nil
3.02
3.02
3.Total borrowing.
0.33
54.65
3.02
58.00
Table-III – Value of Assets
(Rs. in crore) As on 31.03.2007)
Asset
Book Value
Estimated Realizable Value
Land (Lease hold)
0.08
*
Building
0.59
*
Machinery
0.41
*
Others
0.88
Total
1.96
*
(*Not furnished by the Organization)
Performance & Business Analysis
In post liberalisation era, LCPL failed to meet both the technological competition of multi-national companies in garment industry and the lower end marketing activities of unorganized sector in this field. Consequently, the company started losing its market share and accumulated losses of Rs. 23.76 crore as on 31.3.1997 eroded its net- worth completely. This way, it got itself declared as a sick industry u/s 3(1)(o) of SICA from BIFR. LCPL was on the verge of closure of its ongoing activities due to shortage of working funds. Its earnings continuously decreased and were not adequate even to meet the non-manufacturing fixed expenses. The activity-wise break-up of sales during the year 2006-2007 is given in Table IV:
Table – IV - Break-up of Sales (Operating Income)
Particulars
2006-07(%)
Sale of Garments
25.20
Sale of Miscellaneous Cloths
6.40
Other Job Works
32.20
Sale of Suiting
5.60
Sale of Ready made Coats
17.70
Other Income
13
Financial Analysis
Table V – Financial Parameters of LCPL
(Rs. in crore)
S.No.
Indicators
02-03
03-04
04-05
05-06
06-07
1
Operating Income
10.69
5.49
8.48
8.39
5.58
2
Operating Profit / Loss
(5.55)
1.68
0.62
0.39
(0.74)
3
Profit after Tax / Loss
(17.26)
(2.28)
(5.99)
(12.06)
(12.17)
4
Gross Margin (%)
-
-
-
-
-
5
Accumulated Loss
(23.76)
(35.66)
(41.65)
(53.71)
(65.88)
6
Net Worth
(21.53)
(33.43)
(39.44)
(50.65)
(62.84)
7
Paid–up Capital
2.13
2.13
2.13
2.99
2.99
8
Capital Employed
8.01
1.40
0.97
(2.60)
(4.83)
9
Working Capital
0.42
(5.23)
(4.88)
(5.18)
(6.79)
10
Debt Equity Ratio
13
16
18
16
19
11.
Current Ratio
1.02
0.7
0.7
0.7
0.6
12.
Return on Share holder's Equity (ROSE) (%)
-
-
-
-
-
13.
Return on Capital Employed (ROCE) (%)
-
-
-
-
-
In 2002-03, LCPL was in operating losses but earned operating profit in the next 3 years due to sale of ready made coats in a time bound stipulation. Now, ready made coats work has tapered off, thereby making the Company run into operational loses in 2006-07. Its accumulated losses were Rs.65.88 crore as on 31.03.2007. Its net worth had become negative to the extent of Rs.62.88 crore as on 31.03.2007.
Critical Analysis
Corporate Focus
This company was established during the initial stages of development of affaral industries in the country, when private individuals were reluctant to enter into such Hi-tech area due to high degree of uncertainty and risk.
.
Strength / Core Competency / Opportunities
LCPL has not developed any core competency in manufacturing of garments and other peripherals. Such activities require high degree of professional skill and technology up-gradation on biannual basis. Moreover, its core competency in training garment personnel, development of new manufacturing techniques, contacts with new foreign customers and more recrutive orders are thriving well in the private sector having freedom and flexibility in decision making
Restructuring / Revival
The Operating Agency has got a rehabilitation scheme sanctioned under BIFR by which payment of Rs.6.04 crore by way of OTS will take care of the entire dues of banks, financial institutions and other agencies. For implementation of the scheme, LCPL requires additional funds of nearly Rs.9 crore). KSFC had agreed to advance a bridge loan of Rs.5 crore to pay off OTS of the banks to be recovered out of proceeds of sale of 6 acre plot at Bangalore and commercial property at Delhi. However, it has come to the notice of the Disinvestment Commission from Government that while offer price for basement in Delhi was much below the reserve price, the offer for two Delhi flats was Rs.92 lac as against DDA claim of Rs.79 lac leaving a negligible surplus of Rs.17 lac. For Bangalore property, HOUSEFED agreed to purchase the same if its land use was allowed to be changed.
The profitable disposal of the land was hampered by the fact that permission to alter the land use was not forthcoming or the agencies such as PUDA who had earlier agreed to purchase the property were financially constrained. Since, both these properties could not be sold, the compliance of the BIFR has not been possible. The Empowered Committee of the Karnataka Government has objected to bridge loan of Rs.5 crore which the KSFC was proposing to give. Further, relief/concessions as stipulated in the sanctioned scheme were also disallowed by the Empowered Committee. Under the circumstances, it is obvious that LCPL may not be in a position to get the sanctioned scheme implemented. The company thus faces winding up.
Recommendations
The Commission, therefore, recommends that:
1. LCPL should take immediate action in this regard.
2. KSFC, its holding Company, should take appropriate action in view of recommendation No.1.
It clearly shows how crucial the capital structure decision in case of any business organization.
**********
