Impact of Preference Share Capital on Equity Networth: An Empirical Case from the Indian Corporate Sector

Abstract

The present empirical study is confined to J.K. Industries Ltd. from the tyres & tubes industry of the Indian corporate sector which covers a time period of ten years (effective nine years) extending from the year 1983 to 1991-92. The company is lying in top ten companies of tyres & tubes industry of the Indian corporate sector on the basis of sales for the year 1991-92 for the purpose of this study. The study reveals that leverage ratio₂ and preference share capital to equity networth ratio₂ of the company have declining trend during the period under study, whereas, aggregate leverage ratio₂ and preference share capital to equity networth ratio₂ of the company are worked out 45.38 percent and 1.21 percent, respectively, during the period under study. It is observed that cost of preference share capital (Kp_at) is varying from 11 percent to 14.28 percent during the period under study, whereas, aggregate cost of preference share capital (Kp_at) of the company is worked out 12.08 percent during the period under study. It is also found that rate of return on total networth on after tax basis (RON_at) is declining over the period under study and witnesses a deep decline in the years 1984-85 and 1986-87 when it is -0.22 percent and -6.99 percent respectively, whereas, rate of return on equity networth (ROEN_at) is also having declining trend over the period under study. Aggregate rate of return on total networth on after tax basis (RON_at) and aggregate rate of return on equity networth (ROEN_at) have been worked out 7.08 percent and 6.97 percent, respectively, during the period under study. It is also found that spread and net gain are negative for five out of nine years under study. In nut shell, it is concluded that the company is enjoying favourable leverage with regard to use of preference share capital during four out of nine years under study. Consequently, rate of return on equity networth (ROEN_at) is higher than cost of preference share capital (Kp_at) as well as rate of return on total networth (RON_at) in the above said four years over the period under study. However, on aggregate basis, the company is experiencing unfavourable leverage with regard to use of preference share capital over the period under study. It means that use of preference share capital in the capital structure of the company has positive impact on the profitability of the company during four out of nine years under study which consequently contributing to the equity networth of the company which is ultimately benefitting to the equity share holders of the company, whereas, on aggregate basis, it has negative impact on the profitability of the company during the study period. It is also found that the amount of preference share capital in the equity networth is very small during the period under study.