The Journal of Institute of Public Enterprise

The Journal of Institute of Public Enterprise Vol : 41 July – December, 2018 No : 3 & 4 Content Research Papers ★ Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India Niranjan Mandal & Arup Chattopadhyay...... 1

★ Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance Ram Pratap Sinha ...... 25

★ Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market R.P. Prakash & Prakash Basanna ...... 46

★ Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment Sunil Kumar Yadav ...... 63

★ Managing Women Talent in Indian Central Public Sector Enterprises Priyanka Mishra & Shulagna Sarkar...... 74

Perspectives ★ Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective J.P.Dash & Devinder Kumar...... 92

★ Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad Shreshtha Dabral & Samik Shome...... 116 The Journal of Institute of Public Enterprise

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The Editor, The Journal of Institute of Public Enterprise, Institute of Public Enterprise, Hyderabad – 500 007. The Journal of InstituteOperating of Public Leverage Enterprise, and Profitability July-December, : An Empirical Vol. 41, No. Study 3&4 of Select PublicISSN Sector : 0971-1864, Enterprises © in 2018.India Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India Niranjan Mandal* & Arup Chattopadhyay**

In this research article, an attempt has been made to explore the ideas embedded in the concept of operating leverage and profitability of firm. An endeavour has also been made to analyse the impact of operating leverage on profitability of the sampled PSEs under different industries during the period 1999-2000 to 2009-2010 by using the relevant financial data available in the published Annual Reports of the firms concerned. In such an analysis the relationship between operating leverage and profitability has been tried to establish with the application of different statistical tools and techniques. After the analysis of data from different angles some important findings have been extracted, which are the essence of this study for deriving the managerial implications in the way of policy formulation of the management of different firms, which are ultimately helpful to the economic well being of the country as a whole. The entire study has been divided into four sections besides the introductory part. Section-I deals with the theoretical framework of the variables concerned and Section-II covers the Literature Review, Objectives and Methodology. The analyses and findings are presented in Section-III and Section-IV explores the conclusion of the study. Keywords : Operating Leverage, Profitabily, Bottom Line, Sales Elasticity, Return on Capital Employed, Sampled PSEs Regression Analysis, Correlation Analysis.

Introduction leads to rapid economic growth and development. A large number of PSEs It is now widely recognized that in the in India have been incurring losses due developing countries the trap of low per to their inefficient utilization of exist- capita income can be removed by a bold ing productive capacity as well as the intervention of the government in problems behind modernization of public sector enterprises (PSEs). The PSEs * Dr.Niranjan Mandal, Principal, Burdwan are regarded as powerful instruments Raj College, Aftav House, Frazer Avenue, for attaining the goal of socio-economic Rajbati, Purba Bardhaman, West Bengal, development of a country. In a mixed Pin-713104. economy, like India, the efficient and ** Dr.Arup Chattopadhyay, Professor, Department of Economics, The University of Burdwan, effective implementation of socio- Rajbati, Purba Bardhaman, West Bengal, economic model of industrial policy Pin-713104. 1 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise their transformation module to cope decision). So, it can be said that up with the changes that has already operating leverage is independent of the been taken place in the technological capital structure of a firm. subsystem of the society. The judicious Meaning and Definition of Operating blending of fixed cost and variable cost in the cost structure of a firm through Leverage suitable substitution of capital for The business enterprises having huge labour (which have already been exces- quantum of investment in technology sively deployed) raising its fixed cost and (i.e. in fixed assets) are associated with simultaneously reducing the variable the large amount of fixed operating cost per unit ensures greater amount of costs, such as salaries, rent, depreciation, profit with higher quantum of business insurance, etc. in their cost structure risk in terms of enhancing degree of which leads to high operating leve-rage operating leverage at its disposal. for them. If the business firm sub- Obviously, operating leverage has a stitutes capital for labour thereby raising great impact on profitability of a firm. its fixed cost, it will simultaneously Section-1 reduce the variable cost per unit. The large amount of fixed cost coupled with Operating Leverage and Profita- the small proportion of variable cost bility : The Theoretical Framework to sales revenue ratio will have a great The concept of operating leverage is not impact on Earnings Before Interests and a new one. It was originally developed Taxes (EBIT) even there is a slight for the purpose of taking capital bud- change in sales revenue. It is argued that geting decision. The mutually exclusive “if a high percentage of firm’s total cost projects involving alternative methods is fixed, the firm is said to have a high of production may have different values degree of operating leverage (Brigham, of operating leverage which result in 1971 : 426). Obviously, the firms having different Break-Even-Points (BEPs) lower amount of fixed operating cost with different degrees of risk. Opera- at their disposal are observing lower ting leverage is highly dependent on the operating leverage. Therefore, if the use of technology of the firms under ratio of fixed cost to total cost is very an industry. Obviously, it is closely high and does not decline when demand associated with how the fund has been falls, this will accelerate the firm’s busi- invested (i.e. the investment decision ness risk. This factor is technically of the firm) but not related with how known as operating leverage. To this the fund has been raised (i.e. financing direction, it may be argued that the

2 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India firms will have some control over their percentage change in operating income operating leverage in the way of taking (EBIT) due to a given percentage change their capital budgeting decision. in units sold. It reveals how a given change in volume affects EBIT. Thus, Operating leverage may clearly be defi- it can be expressed as follows : ned as the firm’s state of being able to use fixed operating expenses to enlarge DOL = the effect of changes in sales revenue Percentage change in EBIT (i.e.π ) = on its EBIT. Other factors remaining Percentage change in units sold (i.e., q) unaltered, a high operating leverage sig- .....(1) nifies that a relatively slight change in ∆EBIT sales revenue brings about a big change ×100 ∆×EBIT q in EBIT and the Return on Equity (ROE). ⇒=DOL EBIT = ∆q ×∆ ×100 EBIT q Schuttz and Shultz (1972) in their text- q book argued that, “since a fixed expense ∆−×qp() v q qp()− v is being compared to an amount which ⇒=DOL = [(qp−− v ) f ] ×∆ q qp()−− v f is a function of a fluctuating base (sales), Profit-and-loss-results will not bear a .....(1a) proportionate relationship to that base. Where, DOL = Degree of Operating These results, in fact, will be subject to Leverage magnification, the degree of which depends on the relative size of fixed EBIT = Earnings Before Interest & costs vis-à-vis the potential range of sales Taxes volume. This entire subject is referred to as operating leverage.”. The higher f = Fixed operating cost during the the proportion of fixed cost to total period cost, the higher will be the operating p = Selling price per unit which is fixed leverage of the firm (Archer and in the short-run period D’Ambrosio, 1972 : 421). One of the most dramatic examples of operating v = Variable cost per unit which is con- leverage is in the airline industry, where stant over the short-run period a large portion of total costs are fixed (Van Horne, 1972 : 680). It is an index which measures the effect of changes in sales revenue on EBIT It can alternatively be defined by the Buccino and McKinley (1997), in their term Degree of Operating Leverage research article, defined DOL as “the (DOL), which has been referred to the impact of a change in revenue on profit

3 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise or cash flow. It arises, whenever a firm ∆−qp() v can increase its revenues without a ×100 ∑n qp()−− v f proportionate increase in operating ∆q i=1 ×100 expenses. Cost allocated to increasing q revenue, such as marketing and busi- ⇒ DOL = i n ness development expenditures, are quickly consumed by high fixed expenses.” n qp()− v Rushmore (1997) in his article has ∑ = qp()−− v f pointed out that positive operating ⇒=DOL i 1 i .....(2) leverage occurs at the point at which n revenue exceeds the total amount of fixed costs. This equation (2) is practically used to determine average DOL of an enter- Higher operating leverage, caused by a prise over a period of time. We take greater proportion of fixed cost in the the absolute value of the percentage firm’s cost structure, makes the EBIT change in two series because these two series more volatile in relation to sales series can move in opposite directions. series. This basic relationship between EBIT and sales leads us to measure Here, the direction of change is not at operating leverage as the percentage all important but the relative size of change in EBIT relative to percentage change is relevant. change in sales during a specified Operating Leverage Elasticity of domain of time as shown below : Profits (OLEP) Degree of Operating Leverage (DOL) = From equation (1) we get, n %∆EBIT % change in EBIT (=π ) ∑ %∆q DOL = = i=1 i % change in Unit (q) n where n = number of years, ∆π ×100 (i=1, 2, 3,……n) ⇒=DOL π ∆q ×100 ∆EBIT q n ×100 ∑ EBIT ∆q i=1 ×100 ∆π q q ⇒=×DOL ⇒ DOL = i ∆q π n

4 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

∂π q ∆−×qp() v q qp()− v ⇒=×DOL .....(3) DOL = = ∂q π [(qp−− v ) f ] ×∆ q qp()−− v f

Contribution() C ⎡ ∆ππ∂ ⎤ DOL = ⎢ → for a very small change in q⎥ Contribution() C − f .....(4) ⎣ ∆qq∂ ⎦ Financial Implications : where, The financial implications of equation π = Earnings Before Interest & Taxes 1(a) are as follows : (EBIT) i) If a firm has no fixed cost, i.e., f = 0, q = Output sold in units (and hence breaks even at zero), though it is not practically possible, its ∆π = ∂ π = Change in EBIT (π) qp()− v DOL ==1, which means ∆Q = ∂ q = Change in units sold (q) qp()−− v f DOL = Degree of Operating Leverage. that there is no operating leverage of the firm and in that case, percentage Since DOL is nothing but a ratio of two increase in sales (i.e. q) yields the same percentage changes, it can be regarded percentage increase in operating income as the Operating Leverage Elasticity of (i.e. EBIT) and also the firm’s operating Profits (OLEP). When the sales revenue margin equals to its contribution margin. curve and the cost curve are linear, this Symbolically, if the fixed cost (f) = 0, elasticity measure will vary depending then : on the specific portion of the break-even chart under consideration. For instance, qp()()−= v qp −− v f when DOL is always very close to the qp()−− v f qp () − v Break-Even-Point (BEP), a very small ⇒= change in sales volume can produce a pq pq very large percentage enhancement of profits, simply because the base line qp()−− v f pv − ⇒= .....(5) profit is closed to zero (0) near the BEP. pq p Impact of Fixed Cost on DOL ⇒ Operating Margin (r%) = Contri- bution Margin (c%), DOL depends upon the quantum of fixed operating cost of an enterprise. It DOL is highest near the BEP. In fact can mathematically be shown as under : near BEP, π[(=−−qp v ) f ] tends to 0 From equation 1(a), we get and hence, 5 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise

qp()− v qp()− v [Dividing numerator and denominator DOL = = qp()−− v f 0 p by pv− ] = ∝ (infinity), i.e., very large. pq ii) If fixed cost (f) of the firm is greater ⇒=DOL f than zero (0), i.e. f >0, then pq − pv− qp()− v DOL =>1 and hence DOL p qp()−− v f exists and in that case, percentage Sales ⇒=DOL increase in EBIT (π) is greater than that Sales− BEP sales of sales. This means that if sale increases by 1 per cent, EBIT (= π) will increase 1 ⇒=DOL by more than 1 per cent; and Sales− BEP Sale iii) If Fixed cost (f )<0, which is not Sales at all possible, there is no question of 1 estimating DOL. ⇒=DOL (/)M S .....(6) Thus, it may be concluded that DOL heavily depends on the fixed operating where M/S indicates Margin of Safety. cost (f ) of the firm. Thus, it may be concluded that there Relation between DOL and Margin is an inverse relationship between of Safety (M/S) DOL and M/S ratio. Moreover, at the lower level activity M/S is low, hence It can also be shown simply by a little DOL is high and in that case a business manipulation of equation 1(a) that firm has not got enough risk bearing there is an inverse (i.e., reciprocal) relationship between DOL and capacity as measured by the volatility Margin of safety (M/S) of a firm. This of sales. A low M/S is the result of high is as shown below : operating fixed costs, other factors remaining constant. qp()− v DOL = qp()−− v f [from equation 1(a)] The Bottom Line The “bottom line” for a business pq ⇒=DOL fp firm is defined as the rate of return on pq − ()pv− owners’ equity.

6 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

Symbolically, It is realized that in assessing the justifi- cation of their investment in stocks of EBIT r = .....(7) a firm, its owners should use the current E market value of the stock as because the qp()− v− f market value is what the stockholder ⇒=r .....(7a) E would have got to invest elsewhere if where EBIT = Earnings Before Interest they dispose of their stocks. & Taxes The business firms have to change their E = Owners’ Equity level of output sold in order to enhance the rate of return enjoyed by their stock- r = Rate of Return on Owners’ Equity. holders. This can be done either by It is realized that the most appropriate increasing the sales in units or by method of ascertaining operating leverage reducing the units of production which is to determine the quantum of EBIT cannot be sold out in the market with- at various levels of output sold (q). out allowing certain percentage of dis- The change in the value of r due to the count in selling price. Here, it is assumed increase in the level of output (q) is that any change in the level of output defined by – will have no impact on selling price, which is true in the real world for a −− −− qpvftt+1()qpv () f ∆=rr()+ − r = − small enterprise. tt1 t E E Now the value of r, after there is a ()()qqpvff−−−+ ⇒∆r = tt+1 change in the level of output, may be r E derived as follows : −− ⇒∆ =()()qqpvtt+1 rt .....(8) rq±−()() qpv − E r = tt+1 t t+1 E where rt = Rate of return at period t, −−+ − − ⇒=qpvttt() f ( q+1 q )() pv rt+1 = Rate of return at period (t+1), rt+1 .....(9) E qt = Output at period t (Assuring qt+1 > qt) q = Output at period (t+1), and t+1 Let us consider i = interest expenses of E = Current market value of equity/ the firm on its debt fund in the capital stock structure; then

⎡ −−⎤ {qpvt ()−−f } −i ()()qqpvtt+1 rt = .....(10) ⎢∵∆=r ⎥ E ⎣ t E ⎦ and ∆ −− −− ⇒ rt = ()()qqpvtt++11= ()()qqpvtt r qpv()−− f qpv()−− f t t × E t {qpvt+1()−−f } −i E rt+1 = .....(11) E ⎛ qq− ⎞ ⎜ tt+1 ⎟ Therefore, ∆r ⎝ q ⎠ ⎛ qq− ⎞ q ()pv− ⇒ t = t = ⎜ tt+1 ⎟ × t −− ⎜ ⎟ r qpt () v f ⎝ q ⎠ qp()−− v f −− −− −− − t t t [{qpvfitt+1 ( ) } ] [{ qpvfi ( ) } ] − ∆=rr()+ − r = qpt () v tt1 t E ∆∆rq −− tt ⇒∆ = − =()()qqpvtt+1 ⇒=×DOLt rrtt()+1 r t .....(12) rq E tt ∆rr/ (/)∆×rr 100 which means that the change in owners’ ⇒=DOL tt= tt t ∆ ∆× rate of return resulting from a change qqtt/ (/)qqtt100 in the level of output sold is independent ∆rqtt ⇒=×DOLt of the interest expense incurred by the rqtt∆ firm on its debt capital in the capital structure. ∆rqtt ⇒=×DOLt ∆qrtt DOL and Sales Elasticity of

Operating Profit – A Proof of the drtt q ⇒=×DOLt .....(14) Relationship dqtt r

DOL is closely related to the rate of ⎡ ∆r dr ⎤ ⎢where t → t for a very small change in q ⎥ ∆ t increase in the return on owners’ ⎣ qt dqt ⎦ equity before interest and taxes (i.e. the operating profit margin) r. It can be Thus, we can say that DOL is nothing but the sales elasticity of operating proved that DOL in any period t is profit in any period t of a firm. nothing but the sales elasticity of operating profit. Meaning and Definition of Profitability The rate of increase in r The profitability of a business enterprise rr− ∆r ()()qqpv−− = tt++1 = 1 = tt1 .....(13) for a specified period of time can be rttr rEt visualized as the final outcome of its

8 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India investing and operating activities. It is which indicates relative ability to earn a relation measure of financial efficiency income on assets employed. It reveals of business. A good profitability always how efficiently the management of an brings a socially desirable performance enterprise can generate profits by using of those business enterprises who have the resources available at its disposal. sufficient capital to invest irrespective Though it is an important yardstick for of their ownership status – either private measuring efficiency, the profitability or public sector. It plays an important is not synonymous to the term efficiency. role in guiding and directing the business Actually it is the index of efficiency that enterprises of a mixed economy. may be regarded as management guide Growth and survival stability of an in the way of achieving better perfor- enterprise greatly depend on its profita- mance. The change in operational effi- bility. This profitability in its adequate ciency is merely one of the important shape can meet the real and potential factors on which profitability of an human wants in a new and more enterprise largely depends. Moreover, efficient ways. It may be defined as the there are many other factors, besides ability to earn profits (i.e., excess of efficiency, which affect the profitability income over expenditure) by an enter- of a firm. prise either on its static resources, i.e., Profit and profitability, in real sense, invested capital or on its volume of sales though in some cases used interchange- revenue. Thus, it expresses the relation- ably, are two different concepts—the ship between either ‘profits and capital’ former is the absolute term and the later or between ‘profits and sales’. Actually is the relative one. However, they are it acts as a yardstick to measure the closely related, mutually interdependent operating efficiency of the firm. The and interacting to each other, having greater the profitability the more will distinct role in business. Profit refers be the operating efficiency and vice-versa. to the amount of income earned by the On the basis of earning power and ope- enterprise during the specified domain rational strength profitability may be of time, while profitability refers to the defined as the “ability of a given finan- ability of a business firm to earn profits cial instrument/item to earn a return on sales/investment that can be regarded from its use (Howard & Upton, 1953). as a test of efficiency and a measure of It may be defined as “the net surplus of control. Two business firms, in terms a large number of policies and deci- of profits may be identical but on the sions” (Weston & Brigham, 1976). It basis of their profitability those may be also refers to “the relationship of different based on differences in their income to some balance sheet measures sales/investment. 9 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise

Being an absolute figure profit is not is using its fund. The ROCE can be in a position to give an exact idea of calculated by using different concepts the adequacy of income of a firm. It of profit and capital employed. However, also fails to identify the changes in for the the purpose of our study, the efficiency of the firm during a specified following formula is utilized : time period. Due to the variation in size Return on Capital Employed = of investment, volume of sales, etc. much difficulty arises in the way of EBIT interpreting absolute figure of profit for = ×100 Capital Employed the purpose of both horizontal and vertical analysis. The problem of such Operating Profit Ratio (OPR) : analysis and interpretation is solved by taking the ratio of either profit to It expresses the relationship between investment or profit to sales or both. net profit and sales, i.e., This profitability is measured on the Operating Profit Ratio (OPR) = basis of some financial ratios. For the purpose of this study following are the Net Profit three widely used ratios for measuring = ×100 Sales profitability. This is an indicator to the firm as to i) Return on Capital Employed the amount of sales that is left after Ratio (ROCE) meeting production expenses, charges This ratio expresses the relationship and all other costs associated with it at between operating profit before interest a reasonable level of risk and uncer- and taxes (EBIT) and the amount of tainty. The high OPR ensures good permanent funds invested in the enter- return to the owners and enables a com- prise. It is considered as the rigorous pany to maintain its survival stability test of profitability and gives a clear in adverse economic conditions. A com- picture of the efficiency of the firm’s pany with a low net profit margin may internal management. It enables the earn a high rate of return on its invest- management to show whether the ment if it has a high inventory turn- funds entrusted to the enterprise have over. This ratio is very significant to the been properly utilized or not. It also firm for the purpose of controlling cost indicates how well an enterprise has and promoting sales and, thereby, guides used long term funds invested by the the effectiveness or otherwise of the owners and creditors. The higher the firm. This ratio essentially expresses the ratio, the more efficient the enterprise cost price effectiveness of the operation.

10 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

Return on Total Asset Ratio leverage explain a large portion of the (ROTAR) variation in beta (β ). This ratio measures the company’s Pandey (1985) carried a study on 743 earnings before interest and taxes companies classified into 18 industrial (EBIT) against its total net assets. The groups for the period 1973-74 to ratio is considered an indicator of how 1980-81 and examined the relationship effectively a company is using its assets between leverage on the one hand and to generate earnings before the payment size, industry, profitability and growth of contractual obligations. on the other. From the survey of the ROTAR, one of the categories of Return company managers’ attitude towards on Investment (ROI), is computed as high degree of leverage, he observed follows : that one of the most motivating factors for employing outside debt was to increase Return on Total Asset Ratio (ROTAR) = return for shareholders. But the study failed to indicate a definite structural relation- EBIT = ×100 ship between the degree of leverage and Net Assets profitability. According to Pandey, It is also called profit to asset ratio and although over the periods, both the profi- is calculated to derive the productivity tability and the degree of leverage had of TAs. There are many variations of ROA improved significantly, yet majority of depending upon the definition of net the profitability groups was concentrated profits and assets and according to the within narrow bands of leverage. need, intent and purpose of calculation. Mseddi and Abid (2004) investigated SECTION-II the linkage between company value and risk. They used panel data to calculate Review of Related Literature DOL and DFL of 403 non-financial Mandelker and Rhee (1984) in their USA firms for the years 1995 to 1999. research study demonstrated how the They found a significant positive impact degree of operating leverage and financial on company value of both operating leverage contribute to systematic risk and financial leverage. They also proved of common stocks by analyzing the that the excess return is a positive and inter relationship amongst them. Though increasing function of DOL. DFL and the study on 255 manufacturing firms systematic risk for sample firms that during 1975-76, they concluded that show a positive correlation of sales the degree of operating as well as financial changes with market portfolio returns. 11 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise

Watson and Head (2010), in their on profitability of the firms under research article have argued that the consideration. degree of operating leverage provides an explanation to the extent to which an Achchuthan and Jasinthan (2012) enterprise relies on fixed operating costs have conducted a study in which they in its quest for maximizing its operating have investigated the influence of finan- profit. In this study it is clarified that cial and operating leverage on financial an enhancement of profits as a result performance with special reference to of controlling the fixed operating cost Lanka Orix leasing company Plc in of the enterprise is such that the total Sri Lanka. In this study, an attempt has revenue covers a higher margin than the been made to examine the impact of fixed cost of the product. Conversely, operating leverage on financial perfor- it is observed that the continuous increase mance of the firm under study during in operating leverage signifies an equal the year 2001-2010, taking financial percentage increase in fixed operating performance as dependent variable and costs of the firm that has the propensity financial and operating leverages as to decrease the margin of operating independent variables. Collected data profit of the enterprise in the long run. have been analysed with the help of different financial and statistical tools Chandrakumarmangalam and and techniques. From the study it is Gobindasamy (2010) conducted a found that operating leverage has a research study, taking financial records significant impact on financial perfor- of seven selected cement companies of mance of LOLC Plc in Srilanka. It is India over a period of eleven years also revealed that there is no significant (1997-2007), in which they tried to relation between financial leverage and analyse and examine statistically the performance of the company. impact of leverage on profitability of the firms. The study aims to describe Tayyaba K (2013) have conducted a how the earning capacity of firms is research study in which she has tried to influenced by fixed operating cost and understand the effect of the degree of fixed financial charges. The study also financial as well as operating leverage explains the relationship between Debt- on profitability of oil and gas sector. Equity ratio and Earnings Per Share. The study shows the relationship between The results of the study indicate that leverage and EPS of this sector. It analyses there is a significant relationship between how earning capacity is affected by leverage and profitability and growth and operating cost and fixed financial this leverage has a considerable impact charges. It also shows the relationship 12 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India between D/E ratio and EPS. In this over a period of 11 years (i.e. from study, financial data are collected from 1999-2000 to 2009-2010). Specific the Annual Reports of 25 sampled com- objectives of the study are as follows : panies during the period 2007 to 2012. These data have been analysed with the i) To give an insight into the concept help of financial and statistical tools and of operating leverage and profitability techniques. Different hypotheses have of a firm. been tested at 1 per cent level. From ii) To evaluate the intensity of relation- the study it is found that there is a positive ship between the degree of opera- relationship between DFL and EPS and ting leverage and profitability a negative relationship between DOL and measured in terms of different EPS. It is also found that the leveraged profitability ratios. companies are relatively more riskier with reference to ROE and ROI. iii) To assess the degree of association and the impact of operating leverage John Gartchie Gatsi, Samuel Gameli on profitability of the firms under Gadzo and Richard Kofi Akoto study by using the Pearsonian product (2013) have conducted a research study moment correlation coefficients and in which they have investigated how also regression analysis. profitability of insurance firms in Ghana, is influenced by working capital iv) To test the significance of the corre- management and leverage using relevant lation coefficient and the regression financial data of eighteen firms collected parameters at both 5 per cent and from database of the National Insu- 10 per cent level, using two tailed rance Commission and Ghana Statis- tests. tical Service on Insurance sector. One of the important findings in this study Methodology of the Study was that the degree of financial leverage The present study adopts the analytical and liquidity are inversely related to as well as descriptive research design. profitability while operating leverage is The study is based on secondary sources directly related to profitability. of information. The data of twenty sampled firms under four industries has Objectives of the Study been collected from the annual reports The main objective of the study is to and balance sheets published by the measure the relationship between ope- respective companies and also from the rating leverage and profitability of websites of the companies. The firms select public sector enterprises in India were included in the sample by using

13 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise the stratified random sampling method, ββ′ + ′ + Model 1 : OPRi = 01DOLii u when each stratum is considered as a separate industry. The variables used in ββ′′ + ′′ +∈ Model 2 : ROCEi = 01DOLii this analysis are Degree of Operating Leverage (DOL), Earning Before Interest ββ′′′ + ′′′ + ν Model 3 : ROTARi = 01DOLii and Taxes (EBIT), Return on Capital Employed (ROCE), Operating Profit Here variables are as defined earlier and Ratio (OPR), Return on Total Assets , ∈ and ν are white noise disturbance Ratio (ROTAR). The study has been i i conducted during 1999-2000 to 2009- terms having zero mean and constant 2010. Various statistical tools, such as, variance each. Mean, Standard Deviation, Coefficient Section – III of Variation, Correlation, Regression etc. have been used for the analyses of Data Analysis and Results data. The SPSS software has been used The computed values of degree of ope- to analyse the data, also to determine rating leverage (DOL) of each sample statistical significance of the relationship, company under four different sectors if any, among the variables under study over the study period are presented in and also to test different hypotheses Table-1 to Table-4. In general, DOL developed here. For better understanding figures are found to be highest for the of the effect of operating leverage select companies under steel sector and on the profitability, the following those figures are lowest for the select hypotheses have been developed : companies under power sector, which are evident from the mean values of i) Null Hypothesis (H0) : there is no DOL figures over the years for each of significance relationship between the particular companies. Further, from DOL and profitability (in its all these four Tables we see that there remains three measures) of the firms under wide variation in DOL for most of the study. companies over the years under steel ii) Alternative Hypothesis (H1) : there industry and that variation is lowest for is a significant relationship between the companies over the years under DOL and any of the three measures petroleum sector (as observed from the of profitability of the firms under computed values of coefficient of study. The following three regression variation). From Table-1 to Table-4, it models have been estimated to test is further observed that across different these hypotheses : selected companies, dispersion in

14 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

DOL varies over the year. For instance, but high values of C.V. during the study coefficient of variation in DOL is found period. Again from Table-1 to Table-4 very large in the last three years of our we see that there remains wide variation study period, compared to earlier years in values of DOL over sample companies for the companies of petroleum sector. within the same industry. For instance, The reverse situation is observed for the taking all the years under study together companies under coal industry and steel the mean value of DOL is found to be industry where initially values of C.V. much lower for 3 companies (CPCL, were lower than those in the later years. IOCL and ONGC) in petroleum sector, But for the companies under power 1 company (NCL) in coal sector, 2 sector we see more or less unchanged companies (NHPCL and NHDCL) in

Table-1 : DOL of Selected Companies under Petroleum Sector for the Period between 1999-2000 and 2009-2010 DOL of Industry BPCL CPCL HPCL IOCL ONGC Year Mean S.D. C.V. (%) 1999-2000 2.875 1.888 2.276 2.276 2.080 2.28 0.37 16.23 2000-2001 3.256 2.457 2.744 2.347 1.470 2.45 0.65 26.53 2001-2002 2.338 2.791 2.829 1.770 1.300 2.21 0.66 29.86 2002-2003 2.073 1.345 1.954 1.247 1.140 1.155 0.43 27.74 2003-2004 1.827 1.412 1.803 1.217 1.380 1.53 0.27 17.65 2004-2005 4.141 1.392 3.656 2.186 1.371 2.55 1.29 50.59 2005-2006 3.246 2.758 3.583 2.461 1.25 2.66 0.90 33.83 2006-2007 3.093 2.651 3.762 2.119 1.37 2.60 0.91 35.00 2007-2008 3.770 1.625 5.321 2.054 1.38 2.83 1.68 59.36 2008-2009 4.176 1.677 5.796 2.004 1.39 3.01 1.91 63.45 2009-2010 4.518 1.753 6.268 2.118 1.39 3.21 2.10 65.42 Mean 3.21 1.98 3.63 1.98 1.41 2.44 — — S.D. 0.89 0.57 1.55 0.41 0.23 — 1.19 — C.V. (%) 27.72 28.79 42.69 20.70 16.31 — — 48.77 Source : Author’s own calculations based on the data from published Annual Reports of selected companies under four sectors and also from the websites of the companies.

Table-2 : DOL of Selected Companies under Coal Sector for the Period between 1999-2000 and 2009-2010 DOL of Industry CCL ECL NCL WCL SECL Year Mean S.D. C.V. (%) 1999-2000 6.10 4.32 1.56 4.19 4.82 4.20 1.66 39.52 2000-2001 4.90 3.92 1.55 5.93 5.86 4.43 1.81 40.86 2001-2002 5.25 2.89 1.17 7.10 3.77 4.04 2.26 55.94 2002-2003 5.74 4.89 1.54 5.98 4.50 4.53 1.77 39.07 2003-2004 6.70 7.13 1.57 4.06 3.01 4.49 2.38 53.01 2004-2005 6.40 7.00 1.56 4.47 3.11 4.51 2.26 50.11 2005-2006 2.55 8.75 1.47 2.31 4.59 3.93 2.93 74.55 2006-2007 3.01 4.31 1.45 3.51 2.59 2.97 1.06 35.69 2007-2008 3.57 4.24 0.97 5.15 3.17 3.42 1.56 45.61 2008-2009 3.61 4.23 1.08 5.12 3.23 3.45 1.51 43.77 2009-2010 3.66 4.25 1.06 5.24 3.32 3.51 1.55 44.16 Mean 4.68 5.08 1.36 4.82 3.82 3.95 — — S.D. 1.46 1.76 0.24 1.31 0.99 — 1.84 — C.V. (%) 31.19 34.65 17.65 27.18 25.92 — — 46.58 Source : Author’s own calculations based on the data from published Annual Reports of selected companies under four sectors and also from the websites of the companies. power sector and 3 companies (RINL, we have computed Pearson’s product SIIL and SAIL) in steel sector compared moment correlation coefficient between to their sample counterparts. Therefore, DOL and each of the measures of profi- it may be concluded that there is wide tability (namely, OPR, ROCE, ROTAR) variation in DOL for the companies for each select company using time across different sectors over time series data from 1999-2000 to 2009- in regard to both mean levels and 2010 and the results are presented in instabilities (measured by C.V.s). Table-5. From Table-5 we see that out of total sixty (60) computed correla- After year-wise computation of DOL tion coefficient thirty-five (35) coeffi- for the companies across sectors, next, cients are significantly different from

16 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

Table-3 : DOL of Selected Companies under Power Sector for the Period between 1999-2000 and 2009-2010 DOL of Industry NHPCL NTPC NEEPCL NPCIL NHDCL Year Mean S.D. C.V. (%) 1999-2000 0.26 2.49 1.28 5.23 — 2.32 2.15 92.67 2000-2001 0.22 2.69 0.45 1.47 — 1.21 1.13 93.38 2001-2002 0.28 2.88 1.02 1.12 — 1.33 1.10 82.71 2002-2003 0.25 2.95 6.04 1.34 — 2.65 2.52 95.09 2003-2004 0.29 1.03 1.21 0.91 0.34 0.76 0.42 55.26 2004-2005 0.30 1.91 0.86 0.58 0.57 0.79 0.69 87.34 2005-2006 0.45 2.45 1.11 0.76 0.41 1.04 0.84 80.77 2006-2007 0.32 2.11 1.58 1.19 0.16 1.07 0.83 77.57 2007-2008 0.27 2.04 1.70 1.02 0.17 1.04 0.83 79.80 2008-2009 0.32 2.02 1.72 1.06 0.16 1.06 0.82 77.35 2009-2010 0.38 2.00 1.77 1.12 0.17 1.09 0.81 74.31 Mean 0.28 2.23 1.70 1.44 0.28 1.19 — — S.D. 0.11 0.54 1.50 1.28 0.16 — 1.1969 — C.V. (%) 39.28 24.22 88.23 88.89 57.14 — — 100.59 Source : Author’s own calculations based on the data from published Annual Reports of selected companies under four sectors and also from the websites of the companies.

Table-4 : DOL of Selected Companies under Steel Sector for the Period between 1999-2000 and 2009-2010 DOL of Industry MEL MDNL RINL SIIL SAIL Year Mean S.D. C.V. (%) 1999-2000 24.09 44.09 17.55 3.13 13.73 20.52 15.21 74.12 2000-2001 20.70 36.23 18.09 3.33 10.14 17.70 12.41 70.11 2001-2002 26.77 24.16 17.95 6.51 10.93 17.26 8.58 49.71 2002-2003 25.98 20.79 6.19 5.81 11.81 14.12 8.98 63.59

(Contd....)

2003-2004 15.15 15.25 2.98 2.23 5.85 8.29 6.45 77.80 2004-2005 2.88 10.27 2.61 9.93 3.22 5.78 3.95 68.34 2005-2006 6.65 7.36 3.43 8.18 4.32 5.99 2.03 33.89 2006-2007 9.31 4.36 3.04 9.01 3.06 5.76 3.15 4.69 2007-2008 6.08 3.69 2.45 5.67 2.93 4.16 1.63 39.18 2008-2009 5.45 3.17 1.50 6.58 2.98 3.94 2.04 51.78 2009-2010 4.31 2.95 0.98 6.62 2.41 3.47 2.14 61.67 Mean 13.40 15.67 6.98 6.09 6.49 9.73 — — S.D. 9.37 14.20 7.11 2.44 4.28 — 9.154 — C.V. (%) 69.92 90.62 101.86 40.06 65.95 — — 94.08 Source : Author’s own calculations based on the data from published Annual Reports of selected companies under four sectors and also from the websites of the companies. zero at either 5 per cent or 10 per cent correlation is found to be highest when level of significance. Significant corre- it is measured between DOL and OPR lation coefficient between DOL and (15 in number) but for other two measures any measure of profitability is found of profitability we get the same quantities to be highest in number for companies of significant correlation coefficient. under steel and power sectors (10 each) and lowest in number for companies Apart from the computation of correla- under coal industry (7 in number). tion coefficient we have also made Further, except in one case (NEEPCL regression analysis in which we have in power sector) all these statistically enquired whether profitability depends significant correlation coefficient are on DOL of the companies. Taking found to be positive implying thereby three different measures of profitability that there is statistically positive relation separately as explained variable and DOL between measure of profitability and as explanatory variable we have run the DOL in a good number of cases. Fur- regression equations and the estimated ther, our statistical analysis unhesitantly regression results along with R2 and exclude the situation of negative rela- F-values are presented in Table-6. From tion between DOL and any of the three Table-6 we see that out of sixty (60) measures of profitability. Again the sample cases exactly in thirty (30) cases number of statistically significant any of the measures of profitability

18 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

Table-5 : Correlation Analysis between DOL and measures of Profitability of Selected Companies under Indian Public Sector between 1999-2000 and 2009-10 Pearson’s Correlation Coefficient between Selected Sector / Companies DOL & OPR DOL & ROCE DOL & ROTER

MEL 0.467 0.478 0.487

MDNL 0.524** 0.174 0.126

Steel Sector RINL 0.578* 0.604* 0.435**

SIIL 0.781* 0.678* 0.659*

SAIL 0.573* 0.587* 0.546*

NHPCL 0.601* 0.454** 0.339

NTPCL 0.654** 0.657** 0.678**

Power Sector NEEPCL -0.324* -0.389 -0.398

NPCIL 0.582* 0.419 0.412

NHDCL 0.659* 0.674* 0.645*

CCL 0.699* 0.771* 0.713*

ECL 0.431 0.338 0.345

Coal Sector NCL 0.347 0.421 0.391

WCL 0.783* 0.697* 0.714*

SECL 0.517** 0.345 0.346

BPCL 0.524** 0.426 0.445**

CPCL 0.416 0.417 0.410

Petroleum Sector HPCL 0.561** 0.558** 0.557**

IOCL 0.532** 0.597* 0.592*

ONGCL 0.468 0.478 0.459

Source : Computed and compiled from the data published in Annual Reports of selected companies & their websites. Note : *Statistically significant at 5 per cent level and **Statistically significant at 10 per cent level.

Table-6 : Regression Analysis on Selected Companies of the Indian Public Sector (Regression Equation of Profitability on DOL ′′ ′′ ′′ i.e. OPR i = β+β01.DOL + ui , ROCEi = β+β+∈01i .DOL & ′′′ ′′′ ROTAR i = β+β01.DOL +νi ) Selected Measures of Intercept Regression R2 F-value ˆ ˆ Companies Profitability Term ( β0 ) Coefficients( β1 ) OPR 0.123 0.052 0.234 4.321 MEL ROCE 0.031 0.067 0.342 3.765 ROTAR 0.003 0.010 0.540 2.134 OPR 0.091 0.004** 0.282 4.334** MDNL ROCE 0.185 0.002 0.030 0.275 ROTAR 0.145 0.009 0.020 0.142 OPR 0.008 0.020** 0.341 5.981** RINL ROCE 0.125 0.020* 0.376 5.112* ROTAR 0.116 0.013* 0.387 5.065* OPR 0.092 0.013* 0.361 4.998* SIIL ROCE 0.011 0.009* 0.208 3.071* ROTAR 0.058 0.004 0.182 1.105 OPR 0.045 0.002* 0.487 5.595* SAIL ROCE 0.043 0.034* 0.789 6.340* ROTAR 0.091 0.063* 0.505 7.114* OPR 0.082 0.011* 0.361 4.398* NHPCL ROCE 0.099 0.009 0.208 2.071 ROTAR 0.058 0.004 0.112 1.105 OPR 0.101 0.006* 0.297 2.978* NTPCL ROCE 0.189 0.002* 0.232 3.324* ROTAR 0.171 0.009* 0.199 2.014* (Contd....)

20 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

OPR 0.078 -0.002 0.106 1.036 NEEPCL ROCE 0.149 -0.002 0.158 1.676 ROTAR 0.124 -0.002 0.156 1.649 OPR 0.141 0.005** 0.341 4.479** NPCIL ROCE 0.156 0.006 0.186 1.908 ROTAR 0.147 0.006 0.172 1.907 OPR 0.069 0.013** 2.287 3.533** NHDCL ROCE 0.212 0.019* 0.386 3.908* ROTAR 0.192 0.007* 0.347 5.787* OPR 0.045 0.002* 0.487 7.595* CCL ROCE 0.023 0.034* 0.589 8.340* ROTAR 0.081 0.003* 0.504 8.114* OPR 0.081 0.002 0.191 2.038 ECL ROCE 0.163 0.001 0.112 1.131 ROTAR 0.152 0.008 0.120 1.214 OPR 0.082 0.007 0.120 1.206 NEL ROCE 0.176 0.002 0.187 1.992 ROTAR 0.171 0.002 0.152 1.619 OPR 0.007 0.011* 0.608 12.455* WCL ROCE 0.069 0.008* 0.487 7.358* ROTAR 0.049 0.007* 0.512 8.456* OPR 0.047 0.009** 0.265 3.324** SECL ROCE 0.084 0.002 0.117 1.183 ROTAR 0.081 0.003 0.121 1.219 OPR 0.101 0.006 0.297 2.978 BPCL ROCE 0.189 0.002 0.232 3.324 ROTAR 0.171 0.009 0.199 2.014 (Contd....)

OPR 0.229 0.003 0.182 1.879 CPCL ROCE 0.152 0.011 0.172 1.851 ROTAR 0.131 0.008 0.165 1.740 OPR -0.001 0.002** 0.415 4.115** HPCL ROCE 0.024 0.022** 0.309 3.994** ROTAR 0.015 0.003** 0.318 4.187** OPR 0.069 0.003** 2.287 3.533** IOCL ROCE 0.212 0.009* 0.356 4.908* ROTAR 0.192 0.007* 0.347 4.787* OPR 0.091 0.012 0.291 4.038 ONGC ROCE 0.183 0.011 0.212 1.431 ROTAR 0.152 0.008 0.120 1.214 Source : Computed and compiled from the data published in Annual Reports of selected companies and their websites. Note : *Statistically significant at 5 per cent level and **Statistically significant at 10 per cent level. positively depends on DOL and in no slope coefficients are in numbers 6, 7, case we get negatively significant rela- 8 and 9 respectively. Further, it is to be tionship between any measure of profi- noted here that we get exactly 50 per tability and DOL. Further we do not cent cases where profitability does not get any industry or sector specific pattern significantly depends on DOL, contra- of dependence of profitability on DOL dicting established theories in financial of the sample companies. For each literature. An interesting observation industry/sector we have estimated 15 that we get from our empirical study regression equations (taking each of is that profitability is, in general, 3 measures of profitability as explained independent of DOL when the level variable and DOL as explanatory vari- of DOL is relatively low (e.g. for the able for each of 5 sample companies in sample companies in petroleum sector) an industry). For the sample compa- and we get significantly positive nies under steel industry, power sector, relation between them (i.e., more coal industry and petroleum industry risk leading to more return) when we get statistically significant slope DOL value is comparatively high parameter in 9, 8, 7 and 6 cases respec- (e.g. for the sample companies under tively; consequently, their insignificant steel industry).

22 Operating Leverage and Profitability : An Empirical Study of Select Public Sector Enterprises in India

Section-IV solely depend on DOL. The detailed investigation of these factors using Concluding Remarks more sample companies/industries for From the estimated values of DOL a longer study period and sub-periods across sample companies over the years opens up the new vista of future research. under study for all the selected industry we do not get any specific pattern, rather References there remains wide variation across both Archor, S.H. & D’Ambrosio, A.A. (1972) Busi- rows and columns implying that ness Finance. Theory and Management, sample companies are heterogeneous in Second Edition, MacMillan Company, New York. regard to their business risk. Again that risk for each company does not remain Brigham, E.F. (1971) Financial Management same over the study period. Theory and Practice, 3rd Edition, Halt Saunder International Edition, P. 426 There is well known hypotheses in financial literature that there is positive Buccino, G.P. & McKinley, K.S. (1997) The Importance of Operating Leverage in a relationship between risk and return. Turnaround, Secured Lender, Sept/Oct., That means more risk generates usually pp. 64-68. more return. DOL is widely used as a measure of business risk. Consequently Chandrakumarmangalam, S. & Govindasamy, P. (2010) ‘Leverage’ : An Analysis and its if DOL increases the profitability of the Impact on Profitability with Reference to company should also increase. In this Selected Cement Companies in India, empirical study, it has been observed European Journal of Economics, Finance and that this positive relation between DOL Administration Science, Issue 27, pp.53-66. and profitability (both from the measures Ferri, M.G. & Hones, W.H. (1979) Determi- of correlation coefficients and estima- nation of Financial structure : A New ted regression equations) in sizable cases, Methodological Approach, The Journal of especially when degree of business risk Finance, No. 3 (June), pp. 631-644. is found to be high. At the same time Gahlon, J.M. & Gentry, J.A. (1982) On the we have found no relation between Relationship between Systematic Risk and these two factors in a number of cases, the Degree of Operating Leverage, Financial (where degree of business risk is low), Management, Vol.11, No.2, pp.15-23. which signifies that there remains some other factors here (like price risk, credit Gatsi, J.G. et al (2013) Degree of Financial and Operating Leverage and Profitability of risk, market risk etc.) that significantly Insurance Firms in Ghana, International may affect the operating profit of the Business and Management, Vol.7, No.2, companies where profitability does not pp.57-65.

Howard, B.B. & Upton M. (1953) Introduc- Pandey, I.M. (1985) The Financial Leverage in tion to Business Finance, McGraw Hill Book India : A Study, Indian Management Company, New York. P. 147. No. 3, March, pp.21-34.

Jasinthan T. & Achchuthan, S. (2012). “Impact Rushmore S. (1997); “The Ups and Downs of of Financial, operating Leverage on the Operating Leverages”, Lodging Hospitality, financial performance : Special Reference Jan. p.9. to Lanka Orix Leasing Company Plc in Sri Lanka”, International Journal of Engineering Tayyaba, K. (2013) “Leverage” An Analysis and Science Paradigms and Research, Vol.01, its Impact on Profitability with Reference Issue 01, ISSN (online) : 2319-6564. to Selected Oil and Gas Companies; International Journal of Business and Khan, M.Y. & Jain, P.R. (2007) Financial Mana- Management Invention, Vol.2, No.7, gement : Text, Problems and Cases (5th ed.) Tata McGraw-Hill, New Delhi, p.6-20. pp.50-59.

Lortie, C. (1989) Using Operating Leverage to Van Horne, J.C. (1971) Financial Management Increase Small Business Profits, CMA and Policy, Second Edition, Englewood Magazine, November, pp. 32-34. Cliffs, N.J. Prentice Hall Inc, p. 680.

Mandelker, G.N. & Rhee, S.G. (1984) The Varsha, V. (2010) Impact of Leverage on Profi- Impact of the Degree of Operating and tability of Pantaloon Retail India Ltd., Financial Leverage on Systematic Risk of Advances in Management, Vol.3, No.8, Common Stock, The Journal of Financial pp.52-59. and Quantitative Analysis, Vol. 19, No.1, pp. 45-57. Watson, D. & Head, A. (2010) Corporate Finance Principles and Practice (5th ed), Mseddi, S. & Abid, F. (2004) The Impact of Essex, Pearson Education Ltd. Operating and Financial Leverage and Intrinsic Business Risk on Firm Value, Weston, J.F. & Brigham, E.F. (1977) Essential of International Conference AFFI-2007 at Managerial Finance, Hinsdale, III : Dryden Cergy-Ponthoise. Press, pp. 47-49.

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24 The JournalOwnership of Institute and of EfficiencyPublic Enterprise, of Indian July-December, General Insurance Vol. Companies41, No. 3&4 : A Bilateral ComparisonISSN Model : 0971-1864, of Performance © 2018. Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance Ram Pratap Sinha*

The present study makes efficiency evaluation of the Indian private and public sector general insurance companies by considering them as two distinct groups. By departing from the extant efficiency literature on Indian general insurance industry, we have compared the two groups of insurance companies in terms of a bilateral comparison of performance in which the efficiency performance of one group is evaluated in terms of the reference set constructed from the data of the other group and vice versa. On the basis of the available efficiency scores are then used to compare the distribution of efficiency in terms of rank-sum test. The results clearly indicate that during the period of observation (2011-12 to 2015-16), the private sector group has outcompeted the public sector group. Finally, the econometric relationship between efficiency and insurer solvency is estimated using censored regression and the result is found to be statistically significant. Keywords : General Insurance, Non-radial DEA, Bilateral Comparison, Ownership, Efficiency.

Introduction In the Indian context, the general insurance industry came in to existence The general insurance industry provides protection to individuals and busi- during the British rule in the mid- nesses from many forms of unforeseen nineteenth century. Till the nationa- events like fire, theft, health related lisation of the industry in 1973, it was ailments, legal liabilities, natural dominated by the private sector. After calamity etc. Thus the industry offers nationalisation, the industry remained insurance contracts which aim to within the ambit of the public sector protect property-liability, health etc. for nearly three decades. However, the but do not come under the purview deregulation of the insurance sector of life insurance. Needless to mention, in 1999 led to the re-entry of private in a modern society, the general sector * Dr.Ram Pratap Sinha, Associate Professor of plays an important role in promoting Economics, Government College of Enginee- economic agents from unanticipated ring and Leather Technology, L.B.Block, losses. Sector-III, Salt Lake, Kolkata - 700 106.

25 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise sector players in the general industry. In the early seventies, the market was During the past 18 years, the industry dominated by the private sector players. experienced considerable changes in Following nationalisation of general market structure, conduct and perfor- business, the market remained public mance. Against this backdrop, the sector monopoly for the quarter of a present study seeks to make a compara- century. Then the marketagain has tive evaluation of efficiency perfor- become competitive. This was made mance of private and public general possible due to the deregulation of insurance companies operating in India entry and the establishment of the and also explore the impact of solvency Insurance Regulatory and Develop- on such performance in terms of a ment Authority in 1999. At this time three stage approach. In the first stage, (1999), general insurance penetration technical efficiency of the observed (as measured by premiums as a per- general insurance companies is com- centage of GDP) was only 0.54 and puted using a non-parametric frame- general insurance density (as measured work with cross-benchmarking. In the by premiums per capita in USD) was second stage, rank-sum statistics 2.4. Gross direct premium income of method is used to check the two groups the general insurance sector during of general insurers have similar distri- 2000-01 was 9,807 crores. bution of efficiency scores or not. In the final stage,the linkage between At the time of policy reversal (relating efficiency and solvency is explored in to the role of private sector players) in terms of censored regression. The paper the Indian insurance sector, there were proceeds in the following manner. only four public sector general insurance Section-1 provides an overview of the companies in the market. Between general insurance sector. Section-2 2000-01 and 2015-16, 23 private sector describes the related research work. general insurance companies entered Section-3 outlines the methodology the market. During the period, the involved in the two stage analysis. general sector had an impressive Section-4 describes the results and growth in terms of both scale and Section-5 concludes. scope. Table-1 provides an overview Indian General Insurance Sector of the growth in Indian general insurance industry for the period Trends in Industry Growth 2011-12 to 2015-16. In the Table, During the last five decades, the general 2012 stands for 2011-12, 2013 for market in India has come a full circle. 2012-13 and so on.

26 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance

Table-1 : The Indian General Insurance Industry Particulars 2012 2013 2014 2015 2016 Gross Direct Premium 52875.77 62972.81 72990.36 80106.58 90338.31 ( crores) Number of New Policies 857.44 1070.24 1024.52 1257.61 1525.33 Issued (in Lakhs) Paid Up Capital (( crores) 5411 6575 6826 7622 8316 Number of Offices 7050 8099 9,872 10407 10283 Incurred Claims Ratio 88.90 82.79 81.74 85.06 90.91 Asset Under Management 99268 122991 139809 160714 174818 ( crores) Insurance Penetration 0.78 0.8 0.7 0.72 0.77 Insurance Density 10.5 11 11 11.5 13.2 Source : IRDA Annual Reports 2011-12 to 2015-16.

Regulation of the Industry regulatory body for the insurance market which would frame prudential Indian insurance industry was nationalised in order to protect the regulations for the insurance market consumers from unethical practices participants and would monitor their adopted by some of the then existing conduct of business. This led to the private sector insurers. However, after establishment of Insurance Regulatory the nationalisation of the industry it was and Development Authority (IRDA). gradually seen that the public sector After assuming charge of the insurance players were being rather insensitive to sector as the market regulator, the customer needs and also lagged in IRDA took several measures conducive respect of adoption of new technical to the broadening and strengthening skills. The Committee on Reforms in of the market. In the context of the the Insurance Sector, therefore, recom- general sector these included Third mended private sector entry for infusing Party Administration Regulations competition and providing greater (2001), Insurance Broker and Corporate choice to the consumers. Regulations (2002), detariffication At the same time, the Committee of prices (2007) and the Scheme of recommended the establishment of a Amalgamation and Transfer of General 27 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise

Insurance Business (2011). The Authority management functions. Empirical evi- also issued several regulations relating dence corresponding to the Finnish to the registration of insurers, conduct general insurance market implied that of business, maintenance of solvency the creation of a branch network is margins, code of conduct for the important for gaining market power intermediaries etc. or informational advantages. The study confirmed the presence of diseco- An important regulation concerning nomies of scale at the firm level, econo- the financial health of insurers is the mies of scale at the branch level and regulation of solvency. In 2000, the economies of scope on production. IRDA issued assets, liabilities, and solvency margin of insurers regula- Fukuyama and Weber (2001) exami- tions. The regulations stipulated that ned efficiency and productivity growth every insurer will have to determine of Japanese general insurance compa- the required and available solvency nies for the period 1983-1994. The margins and the solvency ratio (the paper estimated Farrell, Russell and ratio of available and required solvency Zieschang measures of output oriented margins). The regulations were tight- technical efficiency and constructed ened further in 2016 and the control Malmquist index of productivity level of solvency was specified as a growth based on these measures. The minimum solvency ratio of 150 per cent. Malmquist index was decomposed in Related Research Work and to indices of efficiency and technologi- Research Gap cal change. The results from the study showed that between 1983-90 produc- The Extant Efficiency Literature tivity improved significantly and it was Relating the General Sector mainly contributed by technological Compared to the life insurance industry, change. In the next three years the col- there are relatively fewer studies devoted lapsed bubble economy resulted in the to the efficiency and productivity stagnation of technological change. performance of the general sector. However, by 1993-94, there was again an upturn in technological change. Toivanen (1997) examined the economies of scale and scope in the Finnish Brockett, Cooper, Golden, Rousseau general insurance industry for the and Wang (2004) examined the effi- period 1989-91. He decomposed ciency of insurance companies using the production process of the general data envelopment analysis in terms of companies into cost and portfolio a financial intermediation approach

28 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance with three output indicators : solvency, Canadian context. In the first stage, claims paying ability and return on two different models (production and investment. The impact of solvency on investment) were used for the compu- efficiency is then examined. The tation of efficiency. Estimation was efficiency scores with and without made under both input and output solvency are further examined to study orientations. In the next stage, the input the performance of different forms of used was a dummy (having value 1) insurance organisation. was the outputs included the production and inverted investment efficiency Choi and Weiss (2005) examined the scores. This approach thus integrated linkage between firm performance, the production as well as investment market structure and efficiency in performance for efficiency evaluation. property-liability insurers during The evidence showed that the Canadian 1992-1998 in terms of a stochastic Life & Health insurance industry frontier analysis. The study estimated operated more or less in an efficient cost and revenue efficiency of the manner during the in-sample period. in-sample insurance companies. The objective of the study was to examine Kao and Hwang (2006) made use of a the validity of SCP (structure-conduct- two-stage DEA model to evaluate the performance) hypothesis, RMP (rela- performance of 24 Taiwanese general tive market power) hypothesis, and ES insurance companies using data for the (efficient structure) hypothesis. The years 2001 and 2002. The study de- results obtained by Choi and Weiss composed activities of insurance firms provides support for the efficient struc- into two sub-processes. The outcome ture hypothesis which states that more of the study reveal some unusual find- efficient firms can charge lower prices ings compared to the black box model. than competitors, which permits them Particularly, none of the insurers to occupy larger market shares and included in the study were found to extract economic rents, resulting in have full efficiency in both the stages. increased concentration in the industry. Thus regulators should be more con- Barros et.al. (2010) evaluated the per- cerned about efficiency compared to formance of 71 Greek insurance com- relative market power. panies (including life and general) with the application of two stage boot Yang (2006) used two stage DEA in strapped DEA estimation. Efficiency order to estimate the performance of evaluation was made under constant life and health insurance industry in returns to scale for the period of

European insurance market deregula- the presence of economies of scale. The tion (1994-2003). The first stage results study estimated efficiency and the confirmed the existence of significant Malmquist index of change in total divergence in efficiency scores. The factor productivity by using data second stage regression outcome envelopment analysis. The outcome of pointed towards competition as a major the study revealed that the majority of determinant of efficiency. However, the insurers below median size in the the degree of competition itself was industry have increasing returns to insufficient for improving market scale, and the majority of the insurers efficiency. above median size have decreasing returns to scale implying the presence The European Commission initiated of an inverse relationship between single market program changed the returns to scale and insurer size. competition scenario in the insurance industry as it removed restrictions on Alhassan and Biekpe (2015) estimated cross-border activities. The impact of efficiency, productivity and returns to this programon the technical/cost/ scale economies for the general insu- revenue efficiency and change in total rance market in South Africa using factor productivity of the German data for 2007 to 2012. They employed insurance companies was estimated by DEA to estimate efficiency, returns to Mahlberg and Url (2010) relative to scale and Malmquist index of change the timeperiod 1991-2006. The in- in total factor productivity. In the sec- sample observations for the study ond stage, they used truncated boots includes an unbalanced panel of 202 trapped regression and logistic regres- insurance companies. Mahlberg and sion techniques in order to identify the Url (2010) estimated technical, revenue determinants of efficiency and the and cost efficiency under NIRS (non- probability of operating under global increasing returns to scale). Further, technology (constant returns to scale) they computed Malmquist index of respectively. The outcomes of the study productivity change. The outcomes revealed thatgeneral insurers operate of the study reveal a mixed picture of with about 50 per cent inefficiencies. convergence of performance. Further, approximately 20 per cent of In an important study concerning insurers operate at an optimal scale. the U.S. property-liability insurance They also found productivity improve- companies, Cummins and Xie (2013) ments attributable to technological evaluated efficiency, productivity and changes. The results of the regression

30 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance analysis exhibited a non-linear effect that the public and private sector gene- of size on efficiency and constant ral insurance companies have different returns to scale. Overall, the study indi- ownership and operational characte- cated that factors such as diversified ristics, inter alia, such differences mani- product line, reinsurance of exposure fest themselves in various forms inclu- and leverage had a impact on efficiency ding variations in the fulfilment of uni- and presence of global technology. versal service obligations, customer profile or branch presence etc. This is In the Indian context, Sinha (2007, perhaps the first study which considers 2009) examined the efficiency and the public and private sector general productivity performance of Indian insurers as separate groups/systems. In general insurance industry. In another the present study, the efficiency of one study, Mandal and Ghosh Dastidar group is evaluated by taking the other (2014) estimated the operating perfor- group as the reference set and vice versa. mance of 12 general insurance com- Next, rank sum test is deployed to draw panies for the period 2006-2007 to inference about the relative performance 2009-2010 using Data Envelopment of each group. Finally, the linkage of Analysis (DEA). The study also estima- the efficiency performance is explored ted the impact of global recession on in terms of censored regression. the general sector. Sinha (2017a) used a dynamic DEA model to estimate the Measurement of Performance : dynamic efficiency performance of The Methodological Issues Indian general insurance companies. In the parlance of economics, effi- In another study Sinha (2017b) made ciency implies how well a firm isable efficiency evaluation of Indian general to transform inputs in to outputs. In insurance companies for 2013-14 other words, efficiency may be defined using the double bootstrap method. as the use of fewest inputs to produce The Research Gap the largest possible output. Thus efficiency of a firm is closely connected While there are several studies corres- to the technology of the firm. This is ponding to the Indian general sector because for the estimation of efficiency, which tried to evaluate the efficiency observed productive activity needs to performance of the general insurance be compared against the maximum companies, all of them have focussed quantity producible which given by the on the insurance companies as individual underlying technology. In this context, entities. It is a common knowledge Shephard (1953,1970) introduced the

31 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise concepts of input and output distance Charnes, Cooper and Rhodes (1978) functions. A firm is technically efficient provided an extension of Farrell’s from the input perspective if a con- Single input single output technical traction of input leads to a decline in efficiency measure to the multiple out- outputand it is efficient from the output-multiple input case and their con- put perspective if more output is not tribution resulted in the genesis of producible with the present level of Data Envelopment Analysis (DEA). input. The input distance function Charnes, Cooper and Rhodes (1978) gives the maximum amount by which proposed a fractional mathematical the producer’s input vector can be programming model. Under the radially contracted. The output dis- assumption of constant returns to tance function, on the other hand, scale, the objective of the CCR model gives the minimum amount by which has been to maximise the productivity the producer’s output vector can be ratio for each of the observed decision deflated and yet remain feasible for a making unit. Productivity in this con- given input vector. text is defined as the ratio of weighted total of outputs and weighted total of Farrell (1957) identified that the over- inputs which can be maximised (or the all efficiency of a firm is the product inverse can be minimised) by appro- of technical and price (allocative) effi- priately selecting the weights. This ciency. From the input oriented stand- ratio (which lies between 0 and 1) point a firm’s technical efficiency is the serves as a measure of efficiency. ratio of best practice input usage to actual input usage,output held constant. The Radial Banker-Charnes- Similarly, from the output oriented Cooper Model standpoint, technical efficiency is the The Banker-Charnes-Cooper (1984) ratio of actual output to best practice, model permitted DEA based estima- input held constant Farrell’s definitions tion of efficiency of decision-making of efficiency had close connections units under the assumption that tech- with the concepts of distance function nology is local. Let us now consider a since the reciprocal of the input productive firm which produces a sca- distance function can be considered as lar output Y from a bundle of k inputs i i the radial measure of input oriented X=(x1, x2, …, xk). Let (x , y ) denote technical efficiency whereas the radial the observed input-output bundle of measure of output oriented technical firm i (i=1, 2, …, n). The technology efficiency coincides with the output used by the firm is defined by the distance function. production possibility set.

32 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance

Ts = {(x, y) | x can produce y } handling of input and output slacks, Tone (2001) introduced the Slacks An input-output combination (x0, y0) 0 0 Based Measure model. In the non- is feasible if and only if (x , y ) ∈ Ts oriented version of the Slacks Based We assume that the decision-making Measure model, the efficiency of unit is an input minimiser (given DMU with activity indicated by (x,y) the level of output(s)). The firm’s is estimated by the following fractional optimization exercise can, therefore, be linear program : written as : ⎛⎞− Minθ 1si ⎜⎟1− ∑ m xi Minρ=⎜⎟ 0 0 non− oriented ⎜⎟+ Subject to : θ x > Σxy, y < yλ, Σy = 1, 1 s j ⎜⎟1+ ⎜⎟∑ y j λ > 0 ⎝⎠n

If we write the production function as : – + -1 s.t.xi = Xλ + si , yj = Yλ – sj λ > 0, Y = f(X) then it implies that X = f (Y). – + si > 0, sj > 0 Let X* represent the minimum input corresponding to a given level of output Here s– and s+ represent the input and (say Yf). In the presence of technical output slacks respectively. The slacks- in efficiency, x0 (=observed output) < x* based measure of efficiency has an where x* represents optimal input. additive character i.e., it removes Technical efficiency of the firm is there- input and output slacks through fore : optimal input usage/observed addition and subtraction from their x* respective inequalities. input usage = =θ. Under the assum- x0 ption of convexity, X* can be obtained Comparison of Decision-Making from the convex combination of two Units (DMUs) Belonging to Different best practice observed points in the Systems Banker-Charnes-Cooper envelopment DEA models are based on the assump- model, technical efficiency lies between tion of convexity of production possi- 0 and 1 because of the inclusion of the bility set. Convexity implies that if two observed decision making unit in the activities (x1,y1) and (x2,y2) belong to reference set. the production possibility set then each point lying on the segment combining The Slacks Based Measure Model the two activities also lies within the In view of the difficulty encountered production possibility set. However, by the radial DEA approach in the when the decision-making units belong 33 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise to two different systems , this assump- x λ Then Technical Efficiency θ=∑ jjj tion becomesinvalid. For example, the xa activities (x1,y1) and (x2,y2) may be accomplished by using different Similar procedure may be adopted for any observed DMU included in methodology/technology. Consequently, system B. Note that since the data set no activity formed out of weighted for the DMU under evaluation is not average of the two is feasible. included for the evaluation purpose, For the purpose of comparing DMUs the technical efficiency score can be belonging to two different systems (say greater than 1. A and B), the inputs may be divided In the slacks based measure model, the in to Xa ( ∈A) and Xb (∈B) and the out- technical efficiency score for any puts in to Ya ( ∈A) and Yb(∈B). As indi- observed DMU ‘a’ (which is a member cated earlier, convexity holds within of system A) is computed from the the same system but not across systems. following optimization program : In order to understand the differences in performance across the system, the ⎛ − ⎞ 1 s ⎜ 1− ∑ i ⎟ decision-making units corresponding ⎜ m xia ⎟ Minρ =−1 to the two systems are now evaluated a non− oriented ⎜ + ⎟ ⎜ + 1 s j ⎟ ⎜ 1 ∑ ⎟ using a bilateral comparison frame- ⎝ n y ja ⎠ work. The distinguishing feature of – + this framework is that when decision s.t.xi = XBλ + si , yj = YBλ – sj λ > 0, – + making units included in a particular si > 0, sj > 0 system (say system A) are evaluated, the benchmark reference set for A Similar procedure may be adopted excludes system A decision-making for any observed DMU included in units. Thus in the radial model, the system B. technical efficiency score for any obser- Statistical Significance of Efficiency ved DMU ‘a’ (which is a member Scores of system A) is computed from the following optimization program : When we compare the efficiency of two different categories, it is often Minθ useful to test the efficiency difference between two groups statistically. ∑∑jB∈∈xx,y jλ≤θ j a jB j λ≥ j y However, one cannot make use of λ≥0jB ∀∈ j ( ) parametric tests for this purpose

34 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance because the theoretical distribution of for m,n>10. By normalizing S, we have : efficiency scores in DEA is unknown. Under the circumstances, one needs to p()pq1+ + S − make use of non-parametric tests for Z = 2 which the distribution of efficiency pqp()++ q 1 scores are statistically independent. 12 Brockett and Golany (1996) introdu- Z has an approximately standard normal ced the Rank-Sum Test for comparing distribution. Using Z, we can test the the distribution of efficiency scores of normal hypothesis that the two groups the in-sample DMUs belonging to the have same distribution against the two different categories : A and B. The alternative hypothesis at a significance test is based on the ranking of data. level α. The null hypothesis is rejected

Compared to the parametric tests sug- if Z < –Zα/2 or Z > Zα/2. Here Zα/2 gested by Banker (1993), the Rank- correspond to the upper α/2 percentile Sum Test has several advantages. of the standard normal distribution. Firstly, unlike the methods suggested by Banker, no parametric assumptions In our case, the number of observa- regarding the distribution of ineffi- tions included in group 2 is 4 (<10). ciency is required. Secondly, non-para- Thus we have the degree of freedom metric rank procedures can be used for problem. In order to avoid the problem, any sample size. In the next paragraph, the decision-making units corresponding the methodology is described briefly. to both the groups are projected on the respective frontiers for getting a Let the data pertaining to two groups combined efficient frontier. of observation be represented by A = {a1, a2, ...... , ap} and B={b1, b2, ...... , bq}. Impact of Contextual Variables on Now we form a new series C by mer- Efficiency Scores ging A and B in which the data are Efficiency evaluation of decision-making arranged in descending order. C is now units is done only basis of certain ranked from 1 to R(=p+q). If there is suitable output and input indicators. a tie, the mid rank is used for the tied However, the input-output conversion observation. Next, the A’s rank data are process is also influenced by other con- summed. Let the resultant figure be S. textual variables. Thus most of the The statistic S, follows an approxima- DEA models make use of a multistage tely normal distribution with mean model in which in the first stage p(p+q+1)/2 and variance pq(p=q+1)/12 efficiency scores are obtained from a

35 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise non-parametric estimation and in the Censored regression models are esti- next stage the relationship of efficiency mated by the Maximum Likelihood score with contextual variables is esti- method. Given the assumption that mated econometrically. H the disturbance term ε is having normal distribution with mean 0 and variance However, since the DEA efficiency 2 scores are bounded, ordinary least σ , we can write the log-likelihood square method can be applied only function as : after transforming the data. In the ⎡ ⎛ Yx− ′β ⎞ ⎛ xY′β − ⎞ Log L= ∑⎢ I logϕ⎜ a ⎟ + I log ϕ⎜ b ⎟ present study, we have, however, used ⎣ a ⎝ σ ⎠ b ⎝ σ ⎠ censored regression. Censoring occurs ⎧ ⎛ − ′β ⎞ ⎫⎤ when the data relating to the depen- +−−()µ yx − σ 1Iab I⎨log⎜ ⎟ log ⎬⎥ dent variable is either limited/lost ⎩ ⎝ σ ⎠ ⎭⎦ while the data on the independent variables may be available. In a cen- Here ϕ (.) and µ (.) denote the cumula- sored regression model,the dependent tive distribution and probability density variable is either left or right censored, function respectively of the standard or both type of censoring is present. normal distribution. Ia & Ib are the The lower or upper limit of the depen- indicator functions with dent variable can be any number. The censored regression model can be Ia =1 if Y = Ya and Ia = 0 if Y > Ya and represented as : Ib =1 if Y = Yb and Ib = 0 if Y > Yb. Data, Results and Discussion Yi* = Xiβ + εi

2 Description of Variables where εi ~ N(0, σ ) For the estimation of efficiency perfor- Y = Ya if Y*<0, Y = Y* if Ya < Y* < Yb mance of general insurance companies, and Ya = Yb if Y* > 0 it is essential to identify the input and Y* is a latent (unobserved) variable and output variables whichis a challenging is the observed variable. The probability job for the financial services industry density function of is the same as of in general and for the insurance sector the latent variable Y*. X is a vector of in particular.This is because there are regressors. Ya and Yb represent the lower long standing disagreements as to and upper bounds of the dependent which are the ideal indicators ofinputs, variable. β is a vector of unknown outputs and prices for the financial parameters and ε represents the services industry. Some variables (like disturbance term. net premium or deposit) are used as

36 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance inputs in some research studies whereas variable. The model has been checked they are considered as outputs in other for isotonicity. studies. Collection of Data, Orientation and There are two major approaches of Returns to Scale choosing the outputs of insurance The data relating to the input, output companies : the value added approach and contextual variable are collected and the flow approach. The value from the IRDA Annual Reports and added approach selects output on the Handbook of Insurance Statistics for basis of the amount of financial ser- the relevant years. Estimation has been vices provided by the insurers. The made under the assumption of variable flow approach includes three outputs returns to scale. For the radial approach (return on asset, liquid assets to liabili- (which uses the Banker-Charnes-Cooper ties and solvency scores) which are framework), input orientation has indicators of financial safety. been used. However, the non-oriented In the present study, we have used the slacks based measure model has been value added approach for the selection used for the non-radial estimation. of outputs and inputs. There are seve- Descriptive Statistics of Efficiency ral reasons for this. First, for many of Scores the relatively new entrants, return on asset is negative creating obvious diffi- We are interested to know how the culties in performance benchmarking. private and public sector insurers have Second, with limited data disclosure, performed during the period under it is difficult to get liquid assets to observation. The present sub-section liabilities ratio figures. The inputs are has three tables which provide the operating expenses and net premium mean efficiency scores under the radial income and the outputs are asset and non-radial approaches. Table-3 under management and benefits paid provides the scores for the entire set of (refer Table-2). Solvency ratio (which observations. Table-4 and Table-5 is taken as output in the flow approach) highlight the picture relating to the two is included as the environmental ownership categories. Table-4 indicates

Table-2 : Inputs, Outputs and Contextual Variable Inputs Outputs Contextual Variable Operating Expenses, Asset Under Management, Solvency Ratio Net Premium Income Benefits Paid

37 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise that across the observed years, mean scores reported by SBI General efficiency of the in-sample general Insurance company during 2011-12 and insurance companies has diminished 2012-13. Accordingly, revised mean while the same has improved for the radial and non-radial efficiency scores public sector companies. However, the are also included by removing the scores private sector trend is largely influenced of the company. The inter-temporal by the abnormally high efficiency changes are now less dramatic.

Table-3 : Descriptive Statistics of Efficiency Scores-All Observed Insurers Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 Mean efficiency 12.8605 5.2865 4.2742 4.5014 2.47348 (radial measure) Mean efficiency 8.5156 4.6405 3.9334 3.9884 2.0480 (slacks based measure) Source : Calculated. Table-4 : Descriptive Statistics of Efficiency Scores-Private Sector Insurers Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 Mean Efficiency 16.8140 6.7153 5.3657 5.6686 2.9655 (radial measure) Revised Mean 4.2928 4.0365 3.9301 4.3782 2.3674 radial efficiency Mean Efficiency 10.7804 5.5767 4.6323 4.6765 2.3603 (slacks based measure) Revised Mean 4.0352 3.8990 3.6675 3.8651 1.9764 non-radial efficiency Source : Calculated. Table-5 : Descriptive Statistics of Efficiency Scores-Public Sector Insurers Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 Mean Efficiency 1 1 1 1 0.9985 (radial measure) Mean Efficiency 1.7212 1.8316 1.8367 1.9239 1.1108 (slacks based measure) Source : Calculated.

38 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance

Insurer-wise Scores Testing of Hypothesis and 7 provide the efficiency scores for In order to compare the performance the sixteen observed general insurers of private and public sector general relative to the five year period (2011-12 insurers, it is essential to compare the to 2015-16). As per the results, Shri distribution of efficiency scores. For Ram General Insurance Company this, we take the help of rank sum test. performed most consistently throughout The general insurers are classified in the period. to two groups : Group-1 comprising of

Table-6 : Insurer-wise Efficiency Scores (Radial Bilateral Comparison) Insurer 2011-12 2012-13 2013-14 2014-15 2015-16 Bajaj Allianz 2.0148 2.2442 2.1230 2.4891 0.7280 BhartiAxa 8.6660 6.0777 5.4479 5.5475 3.6477 Cholamandalam 5.6298 5.2387 4.5484 5.5139 2.5946 Future Generali 9.3857 7.2887 6.6974 6.7609 4.2667 HDFC Ergo 5.3507 4.5071 3.9734 3.7671 2.7077 ICICI Lombard 1.5517 1.6904 1.3930 1.6950 1.3407 IFFCO Tokio 3.8416 3.8864 3.5365 3.7973 1.5529 Reliance 4.2069 4.4548 3.8611 4.3670 2.2034 Royal Sundaram 4.4280 4.8751 4.9665 5.5094 3.0388 SBI General 141.3771 24.0356 9.4358 6.3500 4.0694 Shri Ram General 10.8035 12.4029 14.8460 18.1199 7.3931 Tata AIG 4.5126 3.8819 3.5589 4.1060 2.0435 National 1.0000 1.0000 1.0000 1.0000 1.0190 New India 1.0000 1.0000 1.0000 1.0000 1.0000 Oriental 1.0000 1.0000 1.0000 1.0000 0.9749 United 1.0000 1.0000 1.0000 1.0000 1.0000

Source : Calculated.

Table-7 : Insurer-Wise Efficiency Scores (Non-Radial Bilateral Comparison) Insurer 2011-12 2012-13 2013-14 2014-15 2015-16 Bajaj Allianz 1.9960 2.0584 1.9137 2.0051 0.6869 BhartiAxa 6.6714 5.4941 4.9474 5.2518 2.3238 Cholamandalam 5.2300 4.9485 4.3545 4.6569 2.2862 Future Generali 7.5625 7.0830 6.4774 6.3510 3.6181 HDFC Ergo 5.0118 4.4268 3.8649 3.7638 2.0536 ICICI Lombard 1.4652 1.5307 1.3804 1.5138 1.1192 IFFCO Tokio 3.7566 3.6224 3.2925 3.0439 1.5335 Reliance 3.8700 4.2253 3.6414 3.7902 1.9634 Royal Sundaram 4.1314 4.7594 4.7454 5.0658 2.6974 SBI General 75.7225 15.7622 7.9215 5.8368 3.1219 Shri Ram General 9.9084 9.1717 9.5105 11.2290 5.1226 Tata AIG 4.0397 3.8382 3.5378 3.6104 1.7974 National 1.5848 2.0785 1.7738 1.8029 1.0073 New India 2.2079 1.9876 2.4278 2.6738 1.3916 Oriental 1.3396 1.3320 1.3270 1.3020 0.8793 United 1.7526 1.9284 1.8181 1.9168 1.1651 Source : Calculated. private sector insurers and Group-2 this outcome is not affected even if we comprising of public sector insurers. exclude Shri Ram General Insurance The outcomes of the test (for the in- Company from the set of observations. sample years) are presented in Tables-8 Relationship of Bilateral Comparison through 12). In the aforementioned Tables, efficiency scores of the insurers Model Efficiency with Solvency for both the radial and slacks based For exploring the relationship between measure models have been compared. efficiency and solvency ratio, we take the In all the cases, the test statistics suggest help of censored regression. In the that Group-1 out performs Group-2. present analytical framework, efficiency It may be added in this context that scores can be greater than 1, we make

40 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance

Table-8 : Rank Sum Statistics and Testing of Hypothesis (2011-12) Measure of Rank Sum Level of Insurer Type Test Statistics Efficiency Statistics Significance (%)

Radial Private Sector 78 -2.9104 0.3609 measure Public Sector 58

Slacks based Private Sector 82 -2.4254 1.5293 measure Public Sector 54 Source : Calculated.

Table-9 : Rank Sum Statistics and Testing of Hypothesis (2012-13) Measure of Insurer Rank Sum Test Level of Measure of Efficiency Type Statistics Statistics Significance (%) Efficiency Private Sector 78 Group-1 Radial -2.9104 outperforms 0.3609 measure Public Sector 58 Group-2 Private Sector 82 Group-1 Slacks based -2.4254 outperforms 1.5293 measure Public Sector 54 Group-2 Source : Calculated.

Table-10 : Rank Sum Statistics and Testing of Hypothesis (2013-14) Measure of Insurer Rank Sum Test Level of Decision Efficiency Type Statistics Statistics Significance (%) Private Sector 78 Group-1 Radial -2.9104 outperforms 0.3609 measure Public Sector 58 Group-2 Private Sector 82 Group-1 Slacks based -2.4254 outperforms 1.5293 measure Public Sector 54 Group-2 Source : Calculated.

Table-11 : Rank Sum Statistics and Testing of Hypothesis (2014-15) Measure of Insurer Rank Sum Test Level of Decision Efficiency Type Statistics Statistics Significance (%) Private Sector 78 Group-1 Radial -2.9104 outperforms 0.3609 measure Public Sector 58 Group-2 Private Sector 82 Group-1 Slacks based -2.4254 outperforms 1.5293 measure Public Sector 54 Group-2 Source : Calculated.

Table-12 : Rank Sum Statistics and Testing of Hypothesis (2015-16) Measure of Insurer Rank Sum Test Level of Decision Efficiency Type Statistics Statistics Significance (%) Private Sector 82 Group-1 Radial -2.4254 outperforms 1.5293 measure Public Sector 53 Group-2 Private Sector 84 Group-1 Slacks based -2.1828 outperforms 3 measure Public Sector 52 Group-2 Source : Calculated. use of left censored Tobit regression. based measure model, however, The model includes an ownership coefficient of the time series dummy dummy (1 for private insurers and is not statistically significant. 2 for public sector insurers) and a time series dummy (1 for 2011-12, 2 for Conclusion 2012-13 and so on). Since we have two While the insurance market composi- sets of efficiency scores ( from the radial tion has changed in India remarkably and non-radial models), we have two and has altered the extant business sets of estimates included in Tables-13 practices of the public sector insurers and 14 respectively. In the radial model, in more than one ways, the manage- coefficients of all of the explanatory rial styles continue to differ for the two variables ( solvency ratio, time series groups of insurance companies.The dummy and ownership dummy) extant efficiency literature relating to are significant. In the non-radial slacks the general insurance industry compared

42 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance

Table-13 : Efficiency Solvency Relationship (Radial BCC Model) Particulars Coefficient Std. Error (SE) Coefficient/SE p-value Constant -6.32446 3.01764 -2.0958 0.03610 Solvency 13.8737 1.51443 9.1610 <0.00001 Time Series Dummy -1.25406 0.44011 -2.8494 0.00438 Ownership Dummy -7.72007 1.68387 -4.5847 <0.00001 Source : Calculated. Table-14: Efficiency Solvency Relationship (Non-Radial SBM Model) Particulars Coefficient Std. Error Coefficient/SE p-value Constant 4.47673 0.989137 4.5259 <0.00001 Solvency 0.862471 0.335709 2.5691 0.01020 Time Series Dummy 0.120064 0.171568 0.6998 0.48405 Ownership Dummy -2.46844 0.422268 -5.8457 <0.00001 Source : Calculated. the performance of the insurance estimated in terms of censored regression companies without considering their framework with solvency ratio being group affiliation. Thus, the entire input taken as the indicator of financial and output data set is used for con- health. The regression results indicate structing the reference set of efficiency that efficiency is significantly influenced evaluation. The present study has by solvency and the results are taken a different path of efficiency consistent with Sinha (2017a, 2017b). estimation by considering the private and public sector general insurers as One interesting outcome of the present two separate systems. For estimation study is that the private sector general of efficiency, the performance of one insurers as a group have consistently group of insurer is evaluated by taking outperformed the public sector general the data pertaining to the other group companies. While the central govern- as the reference set and vice versa. The ment has already initiated merger of distribution of efficiency is then com- three out of the four public sector pared in terms of non-parametric test. insurers, however, it is also essential to Further, the linkage between operating investigate in detail the reasons behind performance and financial health is their relatively weaker performance.

References Cummins, J.D. & Xie, X. (2013) ‘Efficiency, Productivity and Scale Economies in Alhassan, A.L. & Biekpe, N. (2015) ‘Effi- the U.S. Property-Liability Insurance ciency, Productivity and Returns to Scale Industry, Journal of Productivity Analysis, Economies in the General Insurance Mar- Vol.39, No.2, pp.141-164. ket in South Africa, The Geneva Papers on Risk and Insurance : Issues and Practice, Fukuyama, H. & Weber,W.L.(2001) Efficiency Vol.40, No.3, 493-515. and Productivity Change of General Insurance Companies in Japan, Pacific Banker, R., Charnes, A. & Cooper, W.W. Economic Review, Vol.6, No.1, pp.129-146. (1984) ‘Some Models for Estimating Tech- Kao, C. & Hwang, S. N. (2008) ‘Efficiency nical and Scale Efficiency’, Management Decomposition in Two-Stage Data Enve- Science, Vol.30, No.9, pp.1078-1092. lopment Analysis : An Application to Barros, C.P., Nektarios, M. & Assaf, A. (2010) General Insurance Companies in Taiwan’, ‘Efficiency in the Greek Insurance European Journal of Operational Research, Industry’, European Journal of Operational Vol.185, No.1, pp.418-429. Research, Vol.205, No.2, pp.431-436. Mahlberg, B. & Url, T., (2010) ‘Single Mar- Brockett, P..L. & Boaz, G. (1996) Using Rank ket Effects on Productivity in the German Insurance Industry,’ Journal of Banking & Statistics for Determining Programmatic Finance, Vol. 34, No.7, pp.1540-1548. Efficiency Differences in Data Envelopment Analysis, Management Science, Vol.42, Mandal, S. & Dastidar, S.G. (2014) ‘A DEA- No.3, 466-472. Investigation of Efficiency of the Indian General Insurance during Recession’, Brockett, P.L., Cooper, W.W., Golden, L.L., Journal of Advances in Management Rousseau, J.J. & Wang, Y. (2004) Research, Vol.11, No.1, pp.115-136. Evaluating Solvency versus Efficiency Performance and Different Forms of Sinha, R.P. (2017a) ‘Dynamic Performance Organization and Marketing in US Benchmarking of Indian General Insurance Property-Liability Insurance Companies, Companies’, Journal of Quantitative European Journal of Operational Research, Economics, Vol.15, No.3, 543-564. Vol.154, No.2, 154 (2), 492-514. Sinha, R.P.(2017b) ‘Efficiency-Solvency Charnes, A., Cooper, W.W. & Rhodes, E. Linkage of Indian General Insurance (1978) ‘Measuring Efficiency of Decision- Companies : A Robust Non-Parametric Making Unit’, European Journal of Approach’, Eurasian Economic Review, Operational Research, Vol.2, No.6, 429-444. Vol.7, No.3, 353-370.

Choi, B. & Weiss, M.A. ( 2005) ‘An Empiri- Sinha, R.P. (2009)‘Technical Efficiency of cal Investigation of Market Structure, Indian General Insurance Companies : Efficiency and Performance in Property- A Non-Radical Approach’, The Icfai Liability Insurance’, Journal of Risk and Journal of Risk and Insurance, Vol.6, No.1, Insurance, Vol.72, No.4, pp.635-673. pp.16-29.

44 Ownership and Efficiency of Indian General Insurance Companies : A Bilateral Comparison Model of Performance

Sinha, R.P. (2007) ‘Productivity and Efficiency Toivanen, O., (1997) ‘Economies of Scale and Scope in The Finnish General Insurance of Indian General Insurance Industry’, Industry,’ Journal of Banking & Finance, The Icfai Journal of Risk and Insurance, Vol.21, No.6, pp.759-779. Vol.4, No.2, pp.33-43. Tone, K. (2001) ‘A Slacks-based Measure of Efficiency in Data Envelopment Analysis’, Sueyoshi, T., Hasebe,T., Ito, F., Sakai, J. & European Journal of Operational Research, Ozawa, W. (1998) ‘DEA-Bilateral Perfor- Vol.130, No.3, pp.498-509. mance Comparison : An Application to Yang, Z. (2006) ‘A Two-Stage DEA Model to Japan Agricultural Co-operatives (Nokyo),’ Evaluate the Overall Performance of Canadian Life and Health Insurance Omega, Elsevier, Vol. 26, No.2, vol. 26(2), Companies’, Mathematical and Computer pp.233-248, April. Modelling, Vol.43, No.7-8, pp.910-919.

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45 The Journal of Institute ofThe Public Journal Enterprise, of Institute July-December, of Public Enterprise, Vol. 41, No. July-December, 3&4 Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise ISSN : 0971-1864, © 2018. Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market R.P. Prakash* & Prakash Basanna**

Capital markets of neighboring transition countries have been attracting significant attention of the wide investment public in the past ten years. These markets were characterized by high return, and in consequence, high volatility of securities' return as compared to developed capital markets. However, there is no consensus as to which pricing model should be used to estimate the volatility of stocks’ returns in these markets. The current study is descriptive research and quantitative approach which is based on secondary data. The researchers have chosen 50 sample stocks from CNX500 of NSE. The returns of individual stocks are collected for the period from 2013-17 after adjusting for corporate actions and splits and mergers. The stock prices collected for the sample are converted into discrete monthly returns and used as a dependent variable. The results show that the stocks with higher risk have higher return. The parameter with beta coefficient is positive and Y1 is less than Rm-Rf. Hence, the first hypothesis (i.e. constant (Yo) is equal to risk free rate) is accepted. This paper does not exclude the possibility of other sources of risk that affect the dynamics of return. In overall the variation in stocks returns cannot be explained by market return alone to the extent of 40.1 per cent due to other factors influencing on the stock return. Keywords : CAPM, Risk and Return, Systematic Risk, Beta, Defensive and Aggressive Stocks.

Introduction The Capital Asset Pricing Model (CAPM) given by Lintner and Sharpe is the foun- Capital markets of neighboring transition dation of the capital market theory and countries have been attracting signifi- a continuation of the single-period cant attention of the wide investment return variance model developed by public in the past ten years. These markets Markowitz in1952 and Tobin in 1958, were characterized by high return, and in consequence, high volatility of secu- * R.P. Prakash, Assistant Professor, Department rities’ return as compared to developed of MBA, Bangalore Institute of Technology, capital markets. However, there is no Bangalore. consensus as to which pricing model ** Dr. Prakash Basanna, Associate Professor, Department of Professional Studies, Christ should be used to estimate the volatility (Deemed) University, Hosur Main Road, of stocks’ returns in these markets. Bengaluru-560029. 46 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market utilizing the Expected Utility Theory increase of beta, we will have the from Von Neumann and Morgenstern same increase of return. in 1944. The single factor model CAPM assumes that the return of every indivi- • The capital market rewards only dual security is linked to a single factor. systematic risk which means that In this model, the number of estimated unsystematic risk should not variables is much lower than that of increase the return. Markowitz model, which is its basic Review of Related Literature advantage. Tests of the CAPM are based on three According to the CAPM, the relevant implications of the relation between risk measure of individual risky assets expected return and market beta implied is its contribution to the variance of a by the model. First, expected returns well-diversified portfolio, measured by on all assets are linearly related to their beta coefficient. Considering that betas, and no other variable has mar- investors are risk-averse, it is intuitive that ginal explanatory power. Second, the a stock with a higher risk (higher beta) beta premium is positive, meaning that should yield a higher return than a stock the expected return on the market port- with a lower beta. The CAPM model folio exceeds the expected return on suggests that an asset with a zero beta, assets whose returns are uncorrelated in equilibrium, will yield an expected with the market return. Third, in the return equal to that of a risk-free rate, Sharpe – Lintner version of the model, and that the expected return of all risky assets uncorrelated with the market have assets must be higher than the risk-free expected returns equal to the risk free rate for a risk premium, that is in direct interest rate, and the beta premium is proportion with the beta. In the rational the expected market return minus the and competitive market investors risk free rate. Most tests of these predic- diversify the entire unsystematic risk, tions use either cross-section or time- thus pricing assets according to the series regressions. Both approaches date systematic risk. Testing the standard to early tests of the model. requires the verification of the following three hypotheses : To improve the precision of estimated betas, researchers such as Blume (1970), A higher risk (higher beta) should • Friend and Blume (1970), and Black, be related to higher return. Jensen, and Scholes (1972) work with • The return is linearly correlated with portfolios, rather than individual securities. the beta; therefore, for every unit Since expected returns and market

47 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise betas combine in the same way in port- slope are determined by the month-to- folios, if the CAPM explains security month variation in the regression coeffi- returns it also explains portfolio returns. cients, which fully captures the effects Estimates of beta for diversified port- of residual correlation on variation in folios are more precise than estimates the regression coefficients, but sidesteps for individual securities. Thus, using the problem of actually estimating the portfolios in cross-section regressions of correlations. The effects of residual average returns on betas reduces the correlation are, in effect, captured via critical errors in variables problem. repeated sampling of the regression Grouping, however, shrinks the range coefficients. of betas and reduces statistical power. To mitigate this problem, researchers Jensen (1968) was the first to note that sort securities on beta when forming the Sharpe –Lintner version of the portfolios; the first portfolio contains relation between expected return and securities with the lowest betas, and so on, market beta also implies a time-series up to the last portfolio with the highest regression test. The Sharpe–Lintner beta assets. This sorting procedure is CAPM says that the average value of now standard in empirical tests. an asset’s excess return (the asset’s return minus the risk free interest rate, Fama and Macbeth (1973) propose a (Rit - Rft) is completely explained by its method for addressing the inference average realized CAPM risk premium problem caused by correlation of the (its beta times the average value of residuals in cross-section regressions. (Rmt - Rft). This implies that “Jensen’s Instead of estimating a single cross-sec- alpha,” the intercept term in the time- tion regression of average monthly series regression. The early tests firmly returns on betas, they estimate month- reject the Sharpe –Lintner version. The by-month cross-section regressions of early tests firmly reject the Sharpe– monthly returns on betas. The times Lintner version of the CAPM. There series means of the monthly slopes and is a positive relation between beta and intercepts, along with the standard average return, but it is too “flat”. Recall errors of the means, are then used to test that, in cross-section regressions, the whether the average premium for beta Sharpe–Lintner model predicts that the is positive and whether the average intercept is the risk free rate and the return on assets uncorrelated with the coefficient on beta is the expected mar- market is equal to the average risk free ket return in excess of the risk free rate, interest rate. In this approach, the standard E (RM) - Rf. The regressions consis- errors of the average intercept and tently find that the intercept is greater

48 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market than the average risk free rate (typically likely to expose any problems of the proxied as the return on a one-month CAPM prediction that, because the Treasury bill), and the coefficient on market portfolio is efficient, market beta is less than the average excess betas suffice to explain expected asset market return (proxied as the average returns. For example, in Fama and return on a portfolio of U.S. common MacBeth (1973) the additional varia- stocks minus the Treasury bill rate). bles are squared market betas (to test This is true in the early tests, such as the prediction that the relation between Douglas (1968), Black, Jensen and expected return and beta is linear), and Scholes (1972), Miller and Scholes residual variances from regressions of (1972), Blume and Friend (1973), and returns on the market return (to test Fama and MacBeth (1973), as well as the prediction that market beta is the in more recent cross-section regression only measure of risk needed to explain tests, like Fama and French (1992). The expected returns). These variables do evidence that the relation between beta not add to the explanation of average and average return is too flat is con- returns provided by beta. Thus, the results firmed in time series tests, such as Friend of Fama and MacBeth (1973) are con- and Blume (1970), Black, Jensen, and sistent with the hypothesis that their Scholes (1972), and Stambaugh (1982). market proxy – an equal-weight portfolio The intercepts in time series regressions of NYSE stocks – is on the minimum of excess asset returns on the excess variance frontier. market return are positive for assets with low betas and negative for assets Fama and French (1992) also confirm with high betas. the evidence (Reinganum, 1981, Stambaugh, 1982, Lakonishok & In the framework of Fama and Shapiro, 1986) that the relation bet- MacBeth (1973), one simply adds pre- ween average return and beta for com- determined explanatory variables to the mon stocks is even flatter after the month-by-month cross-section regres- sample periods used in the early empi- sions of returns on beta. If all diffe- rical work on the CAPM. The estimate rences in expected return are explained of the beta premium is, however, clouded by beta, the average slopes on the addi- by statistical uncertainty (a large standard tional variables should not be reliably error). Kothari, Shanken, and Sloan different from zero. Clearly, the trick (1995) try to resuscitate the Sharpe – in the cross-section regression approach Lintner CAPM by arguing that the is to choose specific additional variables weak relation between average return

49 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise and beta is just a chance result. But regression, afterward the validity of the strong evidence that other variables the CAPM model is tested by the capture variation in expected return second-stage regression. Thereby we missed by beta makes this argument have two different procedures; direct irrelevant. If betas do not suffice to and indirect tests. explain expected returns, the market portfolio is not efficient, and the CAPM In the first-stage time series regression is dead in its tracks. Evidence on the size of the systematic risk, beta is estimated of the market premium can neither save by the linear regression method. the model nor further doom it. We estimate the following model specification : Under the strong assumptions, the single factor CAPM implies a linear Ri = αi + βiRm,t + εi,t relation between expected return and I = 1...n; t = 1…T .....(2) expected risk : Where Rit = is return on security, Rmt is E (Ri)= Rf + (E (Rm) – Rf )bi .....(1) return on market , αi is estimated value

Where E (Ri) is expected return on of the regression line intercept, constant, βi is estimated betas coefficient repre- individual stocks, Rf is the risk-free rate, E (Rm) is the expected return sents the expected change in stock on the market portfolio and bi is beta return with the change in market return, coefficient of individual stock. εi,t is regression residual and T are the periods in days, weeks, months or years. In empirical tests, ex-ante variables in the market model are substituted with In order to estimate beta coefficients ex-post variables, which are called the of the standard single- factor CAPM ex-post version of the CAPM; expected model, we use equation (2), in which returns are replaced with historical the independent variable is the return returns, and beta coefficient is estimated on the previously estimated proxy index from the regression analysis. of 50 stocks from the capital market The most empirical tests of the CAPM of India which we use as the market validity employ the traditional two- portfolio proxy, and the dependent stage regression procedure. In the first variable are discrete returns on stocks step, the beta coefficient from CAPM 1 to 50. The period of return calculation model is estimated for every company is one month, and the time series from the sample by the first-stage contain 60 observations.

50 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market

Equation (2) clearly shows that the esti- • To examine the mean and standard mate is made employing full returns, deviation of each stock, and i.e. with no correction in this step of estimating the model for the risk free • To examine the systematic risk as rate of return. Therefore, the estimated measured by beta coefficient. alpha coefficients from the equation (2) are not the measure of undervaluation/ Hypotheses overvaluation; it is an intercept of the The hypothesis that market betas com- regression line on the y axis, therefore a pletely explain expected returns can also constant. On the other hand, the esti- be tested using time-series regressions. mated beta coefficients are CAPM betas; In the time-series regression described therefore, it measures the systematic above (the excess return on asset i risk, since the beta represents the regres- regressed on the excess market return), sion line slope that remains the same the intercept is the difference between whether the estimate is performed with the asset’s average excess return and the an excess return over the risk-free rate or with full returns. excess return predicted by the Sharpe – Lintner model, that is, beta times the Using specific notation, we estimate average excess market return. If the model (2) with discrete return model holds, there is no way to group assets into portfolios whose intercepts Di,t = Ci + biTPt + εi,t are reliably different from zero. For Where Di is the discrete return on stock example, the intercepts for a portfolio i where i=1...50, t is the observation of stocks with high ratios of earnings period expressed in months, where to price and a portfolio of stocks with t=1... Up to 60 , TP is the discrete return low earning-price ratios should both be on the proxy index used as the market zero. Thus to test the hypothesis that portfolio proxy, Ci a Constant, bi the market betas suffice to explain expected beta coefficient, and + εi,t the residual. returns, one estimates the time-series Objectives of the Study regression for a set of assets (or portfolios), and then jointly tests the vector • To assess the statistical goodness of of regression intercepts against zero. the model fit, The trick in this approach is to choose • To examine the prediction of stocks the left-hand-side assets (or form port- as benchmark for evaluating various folios) in a way likely to expose any investments, shortcoming of the CAPM prediction

that market betas suffice to explain Ha 1 : Constant (Yo) is equal to risk expected asset returns In early applica- free rate. tions, researchers use a variety of tests Ha 2 : Beta value (Y1) is less than risk to determine whether the intercepts in premium of market return. a set of time-series egressions are all zero. The tests have the same asymptotic Limitations of The Study properties, but there is controversy • The paper considers only five years about which has the best small sample period. property. Gibbons, Ross and Shanken The sample size is restricted to 50 (1989) settle the debate by providing • schemes only. However, the paper an F-test on the intercepts that has has ensured that the samples chosen exact small sample properties. They also for the study are fairly representative show that the test has a simple eco- of the stocks from every perspective. nomic interpretation. In effect, the test constructs a candidate for the tangency Research Methodology portfolio T in Figure-1 by optimally The current study is descriptive research combining the market proxy and the and quantitative approach which is left-hand-side assets of the time series based on secondary data. The researchers regressions. The estimator then tests have chosen 50 sample stocks from whether the efficient set provided by CNX500 of NSE. The sample stocks the combination of this tangency port- chosen for the study is a balanced folio and the risk free asset is reliably representative of the population in the superior to the one obtained by observed period based on the fact that combining the risk free asset with the the average share of sample transactions in the population, turnover and market proxy alone. In other words, the market capitalization of the each stock Gibbons, Ross, and Shanken statistic are taken into consideration. The tests whether the market proxy is returns of individual stocks are collected the tangency portfolio in the set of for the period from 2013-17 after portfolios that can be constructed by adjusting for corporate actions and splits combining the market portfolio with and mergers. The stock prices collected the specific assets used as dependent for the sample are converted into variables in the time series regressions. discrete monthly returns and used as a In order to test the CAPM hypothesis, dependent variable in the estimated the following hypothesis is set. model-2.

52 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market

Sample of Stocks Selected for Assessing Systematic Risk Sl. No. Name of the Company Sl. No. Name of the Company 1 ABB India Ltd. 26 Lupin Ltd. 2 Adani Power Ltd. 27 Mahindra & Mahindra Ltd. 3 Ashok Leyland Ltd. 28 Mother son Sumi Systems Ltd. 4 Asian Paints Ltd. 29 Muthoot Finance Ltd. 5 Bajaj Finance Ltd. 30 Petro net LNG Ltd. 6 Bharat Forge Ltd. 31 Pfizer Ltd. 7 Cipla Ltd. 32 Power Grid Corporation of India Ltd. 8 Coal India Ltd. 33 Prestige Estates Projects Ltd. 9 Delta Corp Ltd. 34 Raymond Ltd. 10 Dish TV India Ltd. 35 Reliance Communications Ltd 11 DLF Ltd. 36 Shree Renuka Sugars Ltd. 12 GAIL (India) Ltd. 37 Sun Pharmaceutical Industries Ltd. 13 GVK Power & Infrastructure Ltd. 38 Sun TV Network Ltd. 14 Hindustan Motors Ltd. 39 Suzlon Energy Ltd 15 Hotel Leela Venture Ltd. 40 Syndicate Bank 16 ICICI Bank Ltd. 41 Tata Consultancy Services Ltd. 17 IDBI Bank 42 Tata Motors Ltd. 18 Infosys Ltd. 43 Tata Steel Ltd. 19 ITC Ltd. 44 The India Cements Ltd. 20 Jain Irrigation Systems Ltd. 45 Thomas Scott (India) Ltd. 21 Jaypee Infratech Ltd. 46 Titan Company Ltd. 22 Jet Airways (India) Ltd 47 TVS Motor Company Ltd. 23 JK Tyre & Industries Ltd. 48 Vedanta Ltd. 24 JSW Energy Ltd. 49 Vijaya Bank 25 Larsen & Toubro Ltd. 50 Voltas Ltd.

Table-1 : Table Showing the Results of Mean, Standard Deviation and Normality Tests for the Sample Selected for Study Standard Kolmogorov- Shapiro- Sl.No. Company Name Mean Deviation Smirnov wilk 1 ABB India Ltd. 0.92 0.32 0.183 0.001 2 Adani Power Ltd. 1.62 3.37 0.200 0.342 3 Ashok Leyland Ltd. 2.17 2.23 0.001 0.000 4 Asian Paints Ltd. 0.83 0.25 0.001 0.000 5 Bajaj Finance Ltd. 3.34 0.24 0.000 0.000 6 Bharat Forge Ltd. 2.15 0.60 0.000 0.000 7 Cipla Ltd. 0.36 0.00 0.200 0.007 8 Coal India Ltd. 0.29 0.11 0.200 0.002 9 Delta Corp Ltd. 13.54 7.25 0.000 0.000 10 Dish TV India Ltd. 0.58 0.17 0.200 0.480 11 DLF Ltd. 1.08 0.31 0.007 0.019 12 GAIL (India) Ltd. 0.66 0.85 0.039 0.000 13 GVK Power & Infrastructure Ltd. 1.81 0.93 0.190 0.002 14 Hindustan Motors Ltd. 1.30 1.30 0.016 0.004 15 Hotel Leela Venture Ltd. 0.53 0.96 0.020 0.001 16 ICICI Bank Ltd. 0.96 0.18 0.200 0.085 17 IDBI Bank 1.18 1.09 0.018 0.000 18 Infosys Ltd. 0.38 0.46 0.037 0.001 19 ITC Ltd. 0.21 0.92 0.200 0.144 20 Jain Irrigation Systems Ltd. 0.92 0.10 0.200 0.828 21 Jaypee Infratech Ltd. 2.45 3.83 0.000 0.000 22 Jet Airways (India) Ltd 1.46 0.34 0.007 0.015 23 JK Tyre & Industries Ltd. 3.17 4.92 0.000 0.000 24 JSW Energy Ltd. 0.80 2.01 0.200 0.500

(Contd...)

54 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market

25 Larsen & Toubro Ltd. 0.60 0.18 0.200 0.500 26 Lupin Ltd. 0.45 0.17 0.200 0.001 27 Mahindra & Mahindra Ltd. 0.41 0.26 0.100 0.000 28 Mother Son Sumi Systems Ltd. 2.10 0.08 0.666 0.000 29 Muthoot Finance Ltd. 1.22 1.56 0.200 0.010 30 Petronet LNG Ltd. 1.10 0.906 0.001 0.000 31 Pfizer Ltd. 0.79 3.07 0.000 0.000 32 Power Grid Corporation of India Ltd. 0.49 0.08 0.009 0.000 33 Prestige Estates Projects Ltd. 0.78 1.57 0.059 0.005 34 Raymond Ltd. 1.15 0.89 0.001 0.000 35 Reliance Communications Ltd. 1.4 8.7 0 .000 0.000 36 Shree Renuka Sugars Ltd. 1.44 1.52 0.001 0.000 37 Sun Pharmaceutical Industries Ltd. 0.50 0.21 0.200 0.002 38 Sun TV Network Ltd. 0.99 1.10 0.200 0.006 39 Suzlon Energy Ltd. 1.95 4.13 0.000 0.000 40 Syndicate Bank 1.20 2.58 0.048 0.001 41 Tata Consultancy Services Ltd. 0.53 0.30 0.001 0.000 42 Tata Motors Ltd. 0.60 1.56 0.200 0.290 43 Tata Steel Ltd. 0.85 0.10 0.200 0.141 44 The India Cements Ltd. 1.21 0.79 0.200 0.028 45 Thomas Scott (India) Ltd. 1.72 0.75 0.000 0.000 46 Titan Company Ltd. 1.23 0.81 0.010 0.000 47 TVS Motor Company Ltd. 4.05 0.71 0.002 0.000 48 Vedanta Ltd. 1.18 1.40 0.200 0.020 49 Vijaya Bank 0.53 1.20 0.063 0.031 50 Voltas Ltd. 2.47 0.41 0.007 0.000 Source : The values are obtained using SPSS output-14.0.

Explanatory Power of Mean and the conventional level of statistical Standard Deviation significance of 5 per cent. We have ensured a series of monthly Results and Discussion returns for sample stocks, with a mini- Durbin-Watson Test mum of 50 and a maximum of 60 observations. By analyzing the descrip- The empiric research of time series tive statistics it is found that 100 per assumes that the time series is stationary. cent stocks have a positive mean, and The Durbin-Watson test which tests for standard deviation, as a measure of serial correlations between errors is used distribution dispersion from its mean, in the current study. It tests whether is generally high which indicates the adjacent residuals are correlated or not. existence of outliers, extreme returns in The test statistic can vary between 0 and the distribution. 4 with a value of meaning that the residuals are uncorrelated. A value greater Kolmogorov–Simonov and Shar- than 2 indicates a negative correlation piro-Wilktest of Normality Test between adjacent residuals, whereas a Prior to estimating the model, we have value below 2 indicates a positive corre- examined whether the returns on stocks lation. The value less than 1 or greater in the capital market of India have a than 3 definitely cause for concern. normal distribution. In order to test the However, value closer to 2 may not be distribution of stock returns and the problematic depending on the sample proxy index, we have used the and model. The analysis resulted into Kolmogorov–Simonov and Sharpiro- time series of stock prices being closer Wilktest of normality. The zero hypo- to 2 for all stocks except a few stocks thesis of this test is that the random whose values are more than 2. The variable has a normal distribution. If assumptions made for the model cer- significance level is less than 0.05 we tainly have been met and the returns can say that the data is normally dis- on stocks are stationary in time series. tributed and if it is more than 0.05 and CAPM -Model then the data are normally distributed. Overall result indicates that the data is According to CAPM, beta coefficient normally distributed as the significance should statistically differ from zero, level is less than 0.05 for most of the should be positive and should vary stocks except a few stocks have the across stocks. Though beta coefficients significance level more than 0.05 but of all the stocks are not positive; they it cannot be rejected in those cases with are statistically significant at 5 per cent

56 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market Sig .623 .072 .322 .860 .847 .907 .993 .919 .904 .987 .531 .774 .540 .479 .875 (Contd...) Beta .079 .059.147 .002 .755 .028 .008 .232 (Beta) -1.756 -0.814-0.538 -0.062 -0.042 -0.205-0.178 -0.315 -0.044 .306 Constant 15.825 (P-value) Constant F-Statistic 1.6061.574 0.0381.486 3.356 .8281.600 0.997 2.6771.256 0.032 .637 2.8741.384.168 0.014 .9101.713.221 0.099 3.2651.844 0.000 .545 1.9652.234.138 0.010 .359.334 0.244 .257 .749 .831 1.9402.149 0.0151.784 0.000 .6442.017 0.398 1.0772.207 0.083 .671 .9271.716.597 0.379 2.045 0.507 .511 1.711.444 .236.441 .867 1.966 0.025 1.024.397 Durbin- 2 R 0.001 0.055 0.017 0.001 0.000 0.002 0.000 0.000 0.004 0.000 0.000 0.007 0.001 0.007 0.009 0.000 watson Table-2 : Showing Regression Results of Stocks against NSE CNX-500 of Stocks Results Regression : Showing Table-2 Company Name 1 ABB India Ltd. 2 Ltd. Power Adani 3 Ashok Leyland Ltd. 4 Ltd. Asian Paints 5 Bajaj Finance Ltd. 6 Bharat Forge Ltd. 7 Cipla Ltd. 8 Coal India Ltd. 9 Delta Corp Ltd. 10 TV Dish India Ltd. 11 DLF Limited 12 GAIL (India) Ltd. 13 Ltd. & Infrastructure GVK Power 14 Hindustan Motors Ltd. 15 Ltd. Venture Leela Hotel 16 ICICI Bank Ltd. Sl. No.Sl.

57 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise .616 .681 0.245 0.879 0.814 0.963 0.426 0.555 0.059 0.932 0.260 0.951 0.084 0.225 0.895 0.887 (Contd...) 0.926 0.0640.021 0.2190.740 0.021 1.187 -0.083 -0.263-0.112 -0.223 -0.026 -0.487-0.044 -0.042 0.526 0.645 0.507 0.719 0.378 .528 .655 0.506 0.657 3.090 1.632 0.577 1.094 0.288 0.855 0.380 0.300 1.889 1.428 0.2542.062 1.5261.667 1.470 1.288.500 0.0041.947 1.377 0.959 .023 1.2511.624 0.600 1.450 1.575 0.714 1.5062.077 0.018 1.4351.830 0.0201.355 0.405 0.056 0.5101.800 0.002 0.3311.273 0.690 0.642 2.0762.268 0.778 0.352 1.736 1.526 0.288 3.718 0.821.007 -0.165 0.607 0.921 0.469 0.665 0.54 1.967 0.171 0.019 0.004 0.025 0.000 0.023 0.000 0.0510.025 1.905 0.000 0.000 0.000 0.011 0.006 0.060 0.000 33 Prestige Estates Projects Ltd. 17 IDBI Bank 18 Infosys Ltd. 19 ITC Ltd. 20 Jain Irrigation Systems Ltd. 21 Jaypee Infratech Ltd. 22 Jet Airways (India) Ltd. 23 Ltd. & Industries Tyre JK 24 JSW Energy Ltd. 25 Ltd. Toubro Larsen & 26 Lupin Ltd. 27 M & M 28 Mother son Sumi Systems Ltd. 29 Muthoot Finance Ltd. 30 net LNG Ltd. Petro 31 Pfizer Ltd. 32 Ltd. Corporation of India Grid Power 0.001

58 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market .848 0.611 0.129 0.950 0.644 0.382 0.534 0.865 0.523 0.231 0.807 0.272 0.718 0.687 0.763 0.496 0.215 0.998 0.025 0.196 0.291 0.623 0.182 -0.100 -0.368-0.052 -0.266 -0.073-0.378 -0.191 -0.174-0.338 0.445 1.489 1.462 0.400 0.858 1.559 .037 2.600 .249 1.5411.391 0.2611.599 5.574 0.8801.985 0.392-1.337 1.899 0.629 .029 1.924 0.7301.564 0.414 0.572 0.451 2.114 2.373 1.3361.748 0.666 0.022 0.6601.809 0.456 0.0601.655 0.814 1.230 0.6281.697 0.007 1.0981.691 0.625 0.132 0.8221.696 0.458 0.164 1.4621.379 0.636 0.2151.723 0.521 0.092 0.9831.863 0.470 4.276 0.591 0.777 1.6260.89 0.159 0.448 0.911 0.007 0.004 0.088 0.007 0.001 0.007 0.039 0.0250.001 1.691 0.021 0.000 0.002 0.003 0.004 0.002 0.008 0.013 50 Ltd. Voltas 34 Raymond Ltd. 35 Reliance Communications Ltd. 36 Shree Renuka Sugars Ltd. 37 Sun Pharmaceutical Industries Ltd. 38 TV Sun Network Ltd. 39 Suzlon Energy Ltd 40 Syndicate Bank 41 Consultancy Services Ltd. Tata 42 Ltd. Motors Tata 43 Ltd. Steel Tata 44 The India Cements Ltd. 45 Thomas Scott (India) Ltd. 46 Company Ltd. Titan 47 TVS Motor Company Ltd. 48 Ltd. Vedanta 49 Vijaya Bank Source : The values are obtained using SPSS output-14.0. are The values : Source

59 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise with variability of beta. The variability the null hypothesis. We fail to reject the of beta ranges from 0.28 to 1.18. null hypothesis and it leads to conclusion There are negative betas, which is rare that we are accepting the null hypothesis. in other markets also. Out of fifty, 22 Accepting the null hypothesis signifies stocks (i.e. 44 per cent) have a beta of less that beta is less than Rm –Rf. than one. These stocks have systematic risk as the market itself. It indicates that As is evident from the Table that con- the systematic risk is priced. Indeed; the stant is positive for all stocks barring beta risk premium is positive in the two stocks. It indicates that there is market. It indicates that there is stock stock return from the market return return from the market return depending while the market trend is upward Con- upon the beta values and these stocks stant is significant at 5 per cent signifi- are considered to be defensive as their cance level in all stocks (Table-2) There- beta value is less than one. Out of fifty, fore, we cannot reject the null hypothe- 26 stocks (i.e. 52 per cent) have nega- sis and if it fails to reject the null hypo- tive beta values. There are only two thesis that we accept it. Accepting the stocks whose beta value is considered null hypothesis produces evidence that more than one. These two stocks are the constant is equal to risk free rate. considered to be aggressive. According to which constant is different from the risk free rate of return yo ≠ rf As an illustration, we present the esti- because the constant signifies that the mated regression line for one of the excess stock returns on the excess market stocks, e.g. stock 17 (Table-2). The return are positive for assets with low estimated beta coefficient for stock 40 and negative betas during the observed is 0.926 which means that the increase period and constant is negative for in the return on the market portfolio assets with high betas. For example, of 1% results in an increase in return the stock namely 1 whose beta is high on stock 40 for 0.926 per cent, on ave- and its constant are negative. rage. The same applies for the decrease in return: a decrease in the returns on The average coefficient of determina- the market portfolio of 1 per cent leads tion in all 50 regressions is 59.9 per to a decrease in the return on stock 40 cent. This account for 59.9 per cent of for the 0.926 per cent. the variation in stocks returns. In our case, this measure has its economic Since the significance of beta at 5 per interpretation, showing the relative cent significance level is greater than significance of systematic risk for each alpha value i.e. 0.05 we cannot reject stock.

60 Assessing Systematic Risk Using Time Series Regression : An Evidence from Indian Capital Market

The variance of the sample stocks is their investment objectives. The sys- found to be on an average 59.9 per cent tematic risk helps the investors to guess due to systematic risks and 40.1 per about the stocks which are untapped cent due to unsystematic risks. This in the market as well. means that 40.1 per cent variation in Scope for Further Research return cannot be explained by the market return alone. Therefore there Since the constant in the model remains must be other variables that have an positive and significant multi factor influence also. models are the natural extension of further study. The systematic risk mea- It is inferred from the analysis that the sured by sock beta is statistically sig- relationship between risk and return of nificant and that can be used in a wide the stocks is linear as the Y0 is greater range of applications of the CAPM than risk free rate and Y1 is less than model. There is also scope for the use beta premium. Hence, the result of the of betas in the Indian capital market to current study is in line with the CAPM estimate the required rate of return on hypothesis. securities, to estimate the discount rate used to discount cash flow in Research Implications capital budgeting and measuring the This paper mainly helps the investors performance of portfolio management. to choose the stocks which are under- Conclusion priced and overpriced either to invest in or to offload the holdings. It may The results show that the stocks with also help the company and financial higher risk have higher return. The para- institutions to evaluate the investment meter with beta coefficient is positive alternatives in capital budgeting and and Y1 is less than Rm-Rf. Hence, the cost of capital. Further it would help first hypothesis (i.e. constant (Yo) is the fund managers in evaluating the equal to risk free rate) is accepted. This performance of the schemes. The use paper does not exclude the possibility of beta in assessing the systematic risk of other sources of risk that affect the helps the investing community to take dynamics of return. In overall the varia- wise decisions about what are the macro tion in stocks returns cannot be explai- and micro economic factors affecting ned by market return alone to the stocks to move up and go down in the extent of 40.1 per cent due to other market so that they are able to achieve factors influencing on the stock return.

References

Ball, R. (1978) Anomalies in Relationships Blume, M. (1970) Portfolio Theory : A Step between Securities Yields and Yield- towards its Practical Application, Journal of Surrogates, Journal of Financial Economics, Business, 43(2), 152-174. 6(2), 103-126. Fama, E.F. (1996) Multifactor Portfolio Effi- Banz, R.W. (1981) The Relationship between ciency and Multifactor Asset Pricing, Return and Market Value of Common Journal of Financial and Quantitative Stocks, Journal of Financial Economics, 9(1), 3-18. Analysis, Vol.31, No.4.

Basan & Sanjay (1977) Investment Performance Fama, E.F. & Kenneth R.F. (1992) The Cross- of Common Stocks in Relation to Their Section of Expected Stock Returns, Journal Price Earnings Ratios : A Test of the of Finance, Vol.47, No.2, 427-465. Efficient Market Hypothesis, Journal of Finance, 12(3), 29-56. Fama, E.F. & Kenneth R.F. (1993) Common Risk Factors in the Returns on Stocks and Bhandari, L.C. (1988) Debt Equity Ratio and Bonds, Journal of Financial Economics, Expected Common Stock Returns : Vol.47, No.2, 3-56. Empirical Evidence, Journal of Finance, 43(2) 507-28. Lintner, J. (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Black & Fischer (1972) Capital Market Equi- librium with Restricted Borrowing, Stock Portfolios and Capital Budgets, The Journal of Business, 45(3) 444-454. Review of Economics and Statistics, Vol.47, No.1, 13-37. Blume, M. & Irwin, F. (1973) A New Look at the Capital Asset Pricing Model, Journal of Markowitz, H. (1952) Portfolio Selection, The Finance, 28(1), 19-33. Journal of Finance, Vol.47, No.1, 77-91.

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62 Asset Management EfficiencyThe Journal in Maharatna of Institute Central of Public Public Enterprise, Sector Oil July-December, Companies in Vol. India 41, during No. 3&4 the Post-liberalization EraISSN : An Empirical: 0971-1864, Assessment © 2018. Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment Sunil Kumar Yadav*

The Central Public Sector Enterprises (CPSEs) have been a strategic lever for India’s economic development in post-independence periods. Since liberalization, CPSEs have been exposed to competition from domestic and multinational corporations and has to reorient business strategies and benchmark their performance with the best practices prevailing in the global environment. A large number of studies have been carried out on the analysis of financial performance of Indian public sector enterprises in which along with other aspects of financial performance the efficiency of asset management has been considered. However, in the post- liberalization period the issue connected with efficiency of assets management of the companies belonging to the Maharatna oil sector has not been addressed with due importance. Moreover, the outcomes derived from the studies so far made on the current topic are contradictory in nature and therefore, the studies have not been able to provide any definite conclusion. Further no significant study has so far been conducted to deal with the same matter relating to the Maharatna oil companies in India in the recent times although these enterprises have been making remarkable contribution towards developing the Indian economy. The present paper attempts to make an analysis of Maharatna oil companies in respect of the efficiency of their assets management during the period 2004-05 to 2016-17. Keywords : Maharatna, Lever, Liberalization.

Introduction skilful utilization of its funds. Generally in manufacturing concern, inventory, A company usually utilises its fund in receivables and cash are the most vital two ways : (a) by making investment components of working capital. So the in fixed assets and (b) by making invest- efficient management of long-term as ment in working capital. So the value well as short-term assets is recognised generating capability of the company as an integral component of the overall largely depends on the efficiency with which fixed assets and working capital * Sunil Kumar Yadav, Assistant Professor, Department of Commerce, Egra Sarada Shashi are managed. In other words, we can say Bhusan College, Egra, East Medinipur, the success of a company stems from the West Bengal. 63 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise corporate strategy to create shareholder’s them by granting operational and value. In fact, efficiency in asset financial autonomy in order to equip management facilitates the owners’ them to react proactively to market wealth curve soaring upwards. forces. After assessment based on selected criteria, CPSEs have been awarded The Central Public Sector Enterprises the status of ‘Maharatna’, ‘Navaratna’, (CPSEs) have been a strategic lever for ‘Miniratna-Category I’ and ‘Miniratna- Indian economic development in both Category II’ by the Department of the pre-independence and post-independence periods. In fact, the growth Public Enterprises, Government of story of India has strong roots in the India, thereby granting enhanced powers. th form of contributions made by the On 24 December 2009 certain CPSEs over the years. The CPSEs have CPSEs had been conferred Maharatna emerged as the medium through which status by Government of India. The cherished goal of balanced economic principal objective of the Maharatna growth, wealth creation for all sections scheme is to empower mega CPSEs to of people of the country, inclusive expand their operation and emerge as growth and sustainable environmental global giants. A CPSE must satisfy the practices are being facilitated. Over the following criteria in order to enjoy years, the CPSEs have grown not only Maharatna status : (a) The enterprise in number but also in the array of activi- should have already have Navaratna ties such as manufacturing, engineering, status. (b) It should be listed in Indian steel, heavy machinery, textiles, phar- stock exchange with minimum share maceuticals, petrochemicals, power etc. holding as prescribed by SEBI. (c) Average The opening of the economy has annual turnover should be 20,000 changed the market dynamics with crore or more in the last 3 years. (d) The private sector playing greater role in average annual net worth of the company shaping the industrial landscape. As a should be 10,000 crore or more in last consequence, the CPSEs have been 3 years. (e) The average annual net profit exposed to competition from domestic after tax should exceed 2,500 crore and multinational corporations. Some during the last 3 years. (f) The company CPSEs have been able to reorient their should have notable global presence or business strategies and benchmark their international operations. Presently, performance with the best practices there are eight Maharatna CPSEs. They while others have failed to do so. The are Bharat Heavy Electricals Ltd. (BHEL), central government has identified the Bharat Petroleum Corporation Ltd. profit-making CPSEs and empowered (BPCL), Coal India Ltd. (CIL),

64 Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment

Gas Authority of India Ltd. (GAIL), The remainder of this paper is structured Indian Oil Corporation Ltd. (IOCL), as follows : Section-2 narrates the National Thermal Power Corporation objectives of the study. Section-3 is con- Ltd. (NTPC), Oil and Natural Gas cerned with the methodology adopted Corporation of India Ltd. (ONGC), in this study. In this Section-4, a brief and Steel Authority of India Limited profile of the Maharatna oil companies (SAIL). is presented. Section-5 discusses the empirical results. Section-6 provides Several studies have been carried out on concluding remarks. the analysis of financial performance of Indian Public Sector Enterprises in Objectives of the Study which along with other aspects of The objectives of the study are : financial performance the efficiency of assets management has been consi- • To analyse the trend in efficiency dered. However, in the post-liberaliza- of assets management of the tion period the issue connected with Maharatna oil companies. the efficiency of assets management of • To ascertain the status of the Maha- the companies belonging to Maharatna ratna oil companies in respect of the oil sector has not been addressed with efficiency of their asset management. due importance. Moreover, the outcomes derived from studies so far made • To assess the relationship between on the topic are contradictory in nature the efficiency of asset management and therefore, the studies have not been and value generating capability of the able to provide any definite conclusion. companies under study. Further, no significant study has so far Methodology been conducted to deal with the same matter relating to the Maharatna oil The study is based on the companies companies in India in the recent times belongs to the Maharatna oil sector. although these enterprises have been The data of these companies for the making remarkable contribution towards period 2004-05 to 2016-17 used in the developing the Indian economy. In this study were collected from secondary backdrop, the present paper attempts sources i.e. Capitaline Corporate Data- to make an empirical analysis of the base of Capital Market Publishers (I) Maharatna oil companies in respect of Ltd., Mumbai. The fixed assets turn- the efficiency of their asset management over ratio (FATR), inventory turnover during the period 2004-05 to 2016-17. ratio (ITR), debtors turnover ratio

(DTR) and cash turnover ratio (CTR) products. It operates through two are the most common measures of segments i.e. downstream petroleum efficiency of fixed assets management, and exploration and production of efficiency of inventory management, hydrocarbons (E&P). It is engaged in efficiency of debtors management and production of liquid and gaseous fuels, efficiency of cash management respec- illuminating oils, lubricating oils, tively (Fairfield & Yohn,2001). While greases or other products from crude measuring the efficiency of Maharatna petroleum and bituminous minerals. It oil companies in term of asset mana- is one among the rarest company which gement, these ratios were used to draw bears the ancient Sanskrit name for the inference from the study. Specifi- India (Bharat). BPCL is the modern oil cally, ‘value added to capital employed refining and distribution company. It ratio’ (VACE) was used in analysing the has 10,000 gas stations, a national net- value generating capability of the work of kerosene dealers and more than enterprises. While analyzing the data used 3355 LPG distributors. The company in the course of the study, statistical operates about 50 bottling plants and tools like arithmetical mean (AM) serves more than 41.2 million LPG standard deviation, (SD) etc., statistical customers across India. Considering its techniques such as Pearson’s simple outstanding performance and tremen- correlation analysis, Spearman’s rank dous contribution to the national correlation analysis, Kendall’s correla- economy, the Government of India has tion analysis and Ordinary Least Square granted ‘Maharatna’ status to BPCL on (OLS) methodology and statistical test September 12, 2017. like ‘t’ test were applied at appropriate Indian Oil Corporation Ltd (IOCL) : places. India’s largest company by sales with a Maharatna Oil Companies – A turnover of 4,45,372 crore coupled Brief Profile with a profit of 19,106 core for the year 2016-17, IOCL produces petrol, Bharat Petroleum Corporation Ltd. diesel, LPG, auto LPG, aviation fuel, (BPCL) established in the year 1952 is lubricants and petrochemicals, such as one of the leading company in the naptha, bitumen and kerosene etc. It is petroleum sector in India. BPCL is the leading Indian corporate in the engaged in offering motor spirit (MS), fortune’s ‘Global 500’ listing raked at high speed diesel, liquefied petroleum the 168 in the year 2017 and it is ranked gas (LPG), refining crude oil and mar- 1st in Fortune India 500 list for the year keting of various kinds of petroleum 2016. On November 16, 2010 the

66 Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment company was formally conferred the while it was the least (0.60) which was Maharatna status by the Government kept by ONGC. In respect of consistency of India. coefficient of FATR, IOCL (7.53) captured the top most position and BPCL ONGC : It is India’s largest oil and gas (6.50), ONGC (6.50) jointly hold the exploration and production company. next positions. The linear trend equations It produces around 77 per cent of India’s as fitted to FATR series in Table-2 dis- crude oil and around 62 per cent of its close that an increasing trend in FATR natural gas. The company was estab- th was observed in BPCL which was lished on 14 August, 1956 by the found to statistically significant during Government of India, which currently the study period while IOCL shows holds 69 per cent equity stake. It decline trend in same which was statis- was conferred with ‘Maharatna’ status tically insignificant and ONGC revea- by the Government of India in led a upward trend which was statisti- November 2010. cally not significant during the period Empirical Results and Discussion under study. An attempt was made in Table-1 and The maximum mean ITR (15.81) was Table-2 to analyze the efficiency of asset found in ONGC and the minimum management of the selected Maharatna mean ITR (9.34) was achieved by oil companies using FATR, ITR, IOCL. While taking consistency coef- DTR, and CTR. In these Tables, for ficient of ITR as a basis of evaluation, measuring the average values of FATR, IOCL (8.48) was considered as the most ITR, DTR and CTR of the selected consistent whereas ONGC (5.56) was companies, AM and for ascertaining the placed in the last berth. The trend lines consistency coefficients (CC) of these fitted to ITR series reveal that in BPCL ratios, the ratio of AM to SD were an increasing trend which was statisti- used. For identifying the nature of cally significant was observed during trend in selected ratios of each of the the study period while IOCL and companies during the study period, ONGC shows a declining trend which linear trend equations were fitted and was found to be statistically significant. in order to test whether the slopes The highest average DTR (70.09) was of the trend lines were statistically achieved by BPCL while it was lowest significant or not, t test was used. (13.51) in ONGC. Based on the con- Table-1 shows that the highest mean sistency coefficient of DTR, BPCL FATR (6.29) was maintained by BPCL (5.07) captured top most position

67 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise whereas ONGC (3.88) found place in based on the sum of scores of each the last berth. The linear trend equa- company’s separate individual ranking tions fitted to DTR series indicate that under AM and the ratio of AM to SD in IOCL, and BPCL an upward trend of the said efficiency ratios, was made in DTR was observed but the trend was on the principle that the lower the com- found statistically significant in IOCL posite score, the higher the efficiency only while ONGC shows a declining and vice versa (Sur, 2012). Table-1 dis- trend which was statistically found not closes that based on the combined found to significant. score, BPCL and IOCL jointly captured the top-most position in respect The maximum mean CTR (676.40) of assets management efficiency and was maintained by IOCL and the mini- followed by ONGC. mum mean CTR (6.46) was found in ONGC. On the basis of the consistency In Table-3, with a view to identify the coefficient of CTR, ONGC (0.96) factors making significant contribution proved to be most consistent performer towards the value generating capability whereas BPCL occupied the last rank. of the companies under study, an attempt The trend line fitted to CTR series was made to ascertain the closeness of depict that all companies shows an association between the assets manage- increasing trend which was found to be ment efficiency and value generating statistically significant was observed capability of the companies through during the period under study. correlation coefficients between the selected indicators (FATR, ITR, DTR, In Table-1 for the purpose of ascertaining and CTR) and value generating capa- the assets management efficiency bility measure (VACE) taking into con- status of the companies under study sideration their magnitudes (i.e. by more precisely, a composite rank test, Pearson’s simple correlation coefficient), considering both the average of and ranking of their magnitudes (i.e. by consistency in the FATR, ITR, DTR, Spearman’s rank correlation coefficient) and CTR for the study period was also and nature of their associated changes carried out. In this test, a process of (i.e. by Kendall’s correlation coeffi- ranking was used for arriving at a more cient). All these correlation coefficient comprehensive measure of efficiency in were tested by t test. This Table shows which AM values and other values of that out of 9 correlation coefficients AM to SD ratio of FATR, ITR, DTR between FATR and VACE, 5 coeffi- and CTR were combined in a composite cients were positive of which 3 were score. The ultimate efficiency ranking, found to be statistically significant

68 Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment Efficiency of Final Rank of Rank CC Rank Ultimate Aggregate of Rank Average based Ranks Assets erage Rank CC Ultimate Ultmate DTR CTR FATR Rank CC Rank Av Mahartna Oil Companies in India 69 8.5 6 1 2 2 1 3 3 1.5 1.5 Rank Average 10 9.5 3 3 6 3 Sum of Sum of Average CC average CC on Management based on based on bsed on the Rank the Rank Rank Rank 5.56 3 13.51 3 3.88 3 6.46 3 0.96 1 0.60 3 6.50 2.5 Table-1 : Average and Consistency Aspects of Efficiency of Managing Assets of of Managing and Consistency Aspects of Efficiency : Average Table-1 erage Rank CC 9.34 3 8.48 1 41.72 2 4.42 2 676.40 2 0.67 2 4.34 2 7.53 1 ITR BPCL 13.72IOCL 2 8.37 2 70.09 1 5.07 1 507.00 2 0.54 3 6.29 1 6.50 2.5 ONGC 15.81 1 Company Av Source : Compiled and computed from ‘Capitaline Corporate Database’ of Capital Market Publishers (I) Ltd. Mumbai. Publishers of Capital Market Database’ : Compiled and computed from ‘Capitaline Corporate Source

Table-2 : Trend Analysis of Assets Management Efficiency of the Maharatna CPSEs Oil Companies in India Assets Efficiency FATR ITR DTR CTR Measure Company Slop of Slop of Slop of Slop of Trend Line Trend Line Trend Line Trend Line BPCL 0.178 0.236 0.226 109.69 (5.181)*** (3.025)*** (.264) (2.182)** IOCL (-)0.005 ( -)0.117 1.895 119.021 (.148) (1.948)* (7.331)*** (2.238)** ONGC 0.006 -0.485 ( -).149 0.706 (1.196) (4.242)*** (.701) (1.910)* Source : Compiled and computed from ‘Capitaline Corporate Database’ of Capital Market Publishers (I) Ltd., Mumbai. Figures in the parentheses indicate t values Significance at 1 per cent level. *** Significance at 5 per cent level. ** Significance at10 per cent level* whereas 4 coefficients were negative statistically significant but no signifi- which were not found to be statistically cant negative correlation between them significant. It is theoretically argued that were found. Generally speaking, the there is a positive relationship between higher the efficiency of inventory mana- efficiency of fixed assets management gement, the higher is the value gene- and value generating capability, though rating capability. The correlation analysis it may not hold good in the real world assessing the relationship between situation. The analysis of correlation ITR and VACE shows that in ONGC between FATR and VACE reveals that the outcome conforms to the generally in IOCL the outcome support the accepted argument. theoretical argument. Table-3 also discloses that 6 correlation Out of 9 correlation coefficients bet- coefficients between DTR and VACE. ween ITR and VACE, 3 coefficients Out of which 9 were positive and of which were positive which were found to be 3 positive correlation coefficients were

70 Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment

Table-3 : Analysis of Relationship between the Efficiency of Asset Management and Value Generating Capability of Maharatna Oil Companies of India

Correlation Correlation Correlation Correlation Correlation between between ITR between DTR between CTR Company FATR and VACE and VACE and VACE and VACE

PKS P KS PKS PKS

BPCL -.460 -.317 -.435 -.329 -.163 -.279 .090 .048 .088 -.025 .299 -.433

IOCL .074* .097* .160* -.054 -.038 -.136 .700** .517** .676** .368* .153* .239*

ONGC -.244 .029 .016 .211** .287** .493** -.132 -.096 -.080 -.031 -.019 -.027

Source : Compiled and computed from ‘Capitaline Corporate Database’ of Capital Market Publishers (I) Ltd., Mumbai. ‘P’ denotes Pearson’s simple correlation coefficient. ‘S’ denotes Spearman’s rank correlation coefficient. ‘K’ denotes Kendall’s correlation coefficient. ** Significant at 1 per cent level. * Significant at 5 per cent level. found to be statistically significant between efficiency of cash management whereas no negative correlation coeffi- and value generating capability is cient between them was found to be theoretically desirable. The analysis of statistically significant. It is a theoretical correlation between CTR and VACE argument that higher the efficiency as reflects in Table-3 points out that of debtors management, the higher is only in IOCL the outcome reaches the the value generating capability. The desired result. results obtained from analysis of correlation between DTR and VACE Conclusion exhibit that in IOCL the outcome i) BPCL has captured the top-most posi- supports the theoretical argument. tion based on average score of FATR Of the 9 correlation coefficients bet- so it proved itself as the best performer ween CTR and VACE, 5 coefficients while IOCL was placed first based were negative and 4 coefficients were on consistency score of FATR so it positive. Three positive correlation proved itself as the most consistent coefficients were found to be statistically performer in respect of managing significant. The positive relationship fixed assets during the study period.

Based on the same scale, ONGC vi) The analysis of composite scores showed the poorest performance in based on the combination of average the same period. A notable increasing and consistency aspects of the trend in the efficiency of managing selected parameters reveals that fixed assets was observed in 33 per BPCL and IOCL jointly bagged the cent cases during the study period. best award in respect of assets management efficiency and they were ii) Although based on average ITR, followed by ONGC during the IOCL was placed in the last posi- period under study. tion, it however, proved itself as the most consistent performer in respect vii)Only in IOCL a strong evidence of of managing inventory during the positive relationship between the study period. A considerable down- efficiency of fixed assets manage- ward trend in the efficiency of ment and value generating capability, inventory management was found to which supports the theoretical in 67 per cent of Maharatna oil argument, was noticed during the companies whereas in the remain- study period. It signifies that in 33 ing 33 per cent showed an upward per cent of Maharatna oil compa- trend during the period under study. nies the role played by fixed asset management in improving value iii)BPCL has captured the top-most posi- generating capability was noticeable tion in respect both the average and during the study period. consistency scores of DTR. Thus BPCL proved itself as the best per- viii) In ONGC strong evidence of former in respect of managing debtors evidence of positive association during the study period. Based on between ITR and VACE was same scale, ONGC showed the established. It reflects that in 33 per poorest performance in the same cent of Maharatna Oil Company’s period. A notable upward trend in inventory management made managing debtors was observed in significant contribution towards 33 per cent cases while the remain- enhancing their value generating ing failed to establish any notable capability during the study period. trend in it during the study period. ix) A notable positive relationship bet- iv) A significant increasing trend in ween efficiency of debtors manage- efficiency of cash management ment and value generating capability was established in cent percent cases was found in 33 per cent cases but during the period under study. no significant negative relationship

72 Asset Management Efficiency in Maharatna Central Public Sector Oil Companies in India during the Post-liberalization Era : An Empirical Assessment

between them was observed in any Datt, R. & Sundharam, K.P.M. (2002) Indian case. So, strong evidence of favoura- Economy, Mittal Publications, New Delhi, pp.99-127. ble impact of debtors management on value generating capability in Fairfield, P.M. & Yohn, T.L. (2001) Using Asset a substantial portion of sample Turnover and Profit Margin to Forecast Changes in Profitability, Review of Accounting companies was noticed during the Studies, Vol.6, No.4, pp.371-385. study period. Ganesh, S.(2001) Privatization in India, Mittal x) Only in IOCL a noticeable positive Publications, New Delhi, pp.99-127 relationship between efficiency of Khan, A.Q. (1990) Efficiency Profile of Public cash management and value genera- Enterprises in India, Vohra Publishers, ting capability was observed. It Allahabad, pp.30-43. indi-cates that only in 33 per cent Mallik, A.K. & Sur, D. (2004) Financial Perfor- of the Maharatna Oil companies, mance of Indian Enterprises in the Post- cash management had made notable Liberalisation Era : A Case Study of contribution towards enhancing National Thermal Power Corporation Ltd., Research Bulletin, No.XXV, pp.59-69. their wealth generating capability during the period under study. Sinha, G. (1983) Value Added Income, Book World, Kolkata, pp.129-136. References Sur, D. (2012) Financial Statement Analysis : A Ahmad, A. (1998) Public Enterprises and Eco- Comprehensive Approach, Excel Books, nomic Development, Anmol Publications New Delhi, pp.53-59. Pvt. Ltd, New Delhi, pp.35-48. Sur, D. & Yadav, S.K. (2014) Trends in Asset Bernstein, L.A. & Maksy, M.M. (1994) Cases Management Efficiency in Maharatna in Financial Statement Reporting and Central Public Sector Enterprises : A Cross- Analysis, Richard D. Irwin, Inc Burr Ridge, Sectional Analysis, The Journal of Institute of Illinosis, pp.40-44. Public Enterprise, 37.

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73 The Journal of Institute Theof Public Journal Enterprise, of Institute July-December, of Public Enterprise, Vol. 41, July-December, No. 3&4 Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise ISSN : 0971-1864, © 2018. Managing Women Talent in Indian Central Public Sector Enterprises Priyanka Mishra* & Shulagna Sarkar**

There is a strong link between diversity and productivity in an organization. By hiring a diverse team of qualified men and women, benefits of creativity and uniqueness can be reaped. Women employees’ experiences can be used to increase the productivity and motivation levels. As long as women remain under-represented in leadership positions, gender inequality will continue. In order to boost India’s economic growth, it is important to achieve diversity in managerial ranks by managing women talent. The present study outlines the Indian scenario of women talent in leadership position. Beginning with the government policies and our industries’ new projects for the betterment of their situation, the study captures the views of different scholars regarding recruiting more women, developing supportive career models, providing child care options, organizational support for work life balance as well as the challenges faced by the organizations in managing the women talent. The study also discusses engagement of women leadership from international perspective. The study further highlights the cases of encouraging women in Central Public Sector Enterprises. Efforts of Maharatna CPSEs towards implementing women leadership driven activities have been documented in the form of cases.

Keywords : Talent Management, Women, CPSEs, Gender Bias, Women Leadership.

Introduction As managerial ranks continue to become more diverse, more pathways The Asia-Pacific region continues to will open for India’s women, and this lose between 42 and 47 billion dollars in turn will promote India’s economic a year in GDP due to the lack of parti- growth. (Catalyst, 2013). cipation of talented women in the workforce. The looming talent shortage Economic growth depends on the and the Indian government’s goal to participation of a full labor force train 500 million skilled workers over (including both men and women) the next ten years, implies that those and India’s lack of gender balance in companies wishing to remain competi- * Ms.Priyanka Mishra, Assistant Professor, tive will need to tap into India’s popu- Princeton P.G. College of Management, lation of highly educated Indian Hyderabad. women. As long as women remain ** Dr.Shulagna Sarkar, Assistant Professor, under-represented in leadership positions, Institute of Public Enterprise, OU Campus, gender inequality will continue. Hyderabad.

74 Managing Women Talent in Indian Central Public Sector Enterprises economic participation remains still developmental differences between one of the worst in the world. The them and due to societal factors. International Labour Organization (Powell & Maneiro 1992). At the start (ILO) ranks India 120th out of 131 of managerial careers, career motiva- countries examined for women’s labor tion’ and need for challenging jobs force participation rate, and the World tend to be similar for men and women Economic Forum rates India 123rd out but their work experience with refe- of 134 countries. The 2010 workforce rence to receiving feedback, opportu- participation rate was 26.1 per cent for nities to interact and learn from bosses women in rural India, and only 13.8 was much lesser. Also issues around per cent for women in urban areas. If child rearing and dual careers have a women were given more opportunities far higher impact on women’s careers in the workforce, India’s GDP could than they ever on men.Other conclu- jump another 4 per cent (Catalyst 2013). sions based on work of O’Neil et al (2008) and other already existing Investing in women is investing in the literature around women and careers future of India. While India is poised are as following : to be a superpower, its gender inequality is stalling India’s economy and keeping • Women careers impacted by larger it from reaching its full potential. life contexts. Changes in the workplace and society Families and careers are central to take time, and India has been taking • women’s lives. positive steps towards gender equality (Hewlett & Rashid 2010). • Women’s career paths reflect wide range and variety of patterns. The objectives of the paper are : Human and social capital are critical To study the Indian scenario of women • • factors for women’s careers. talent in leadership position. Companies should be building a culture • To discuss case studies on the that attracts, retains and promotes talen- initiatives of Indian public sector ted women. Firms need to recognize encouraging women talent. what the barriers to progression are, Need for advancing Women into and devise practices to support women through critical periods of transition. Leadership These that do will create a compelling Literature suggests that the career of brand, and one which women as well women and men are different due to as men will want to work for. Women 75 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise will also be more inspired to reach inequity in pay in corporate India. It senior levels. There is an argument for was also found most women cope with catching and recognizing talent earlier gender bias by accepting slower rate of on. There is no denying that the big- advancement, challenging organiza- gest attrition of professional women in tional policies or decisions on an indi- business is when theystart families, and vidual basis, work harder to get what are faced with the choice of whether men have, and simply believing that they should give up their career, put it gender-bias does not affect them. Male on hold, or carry on and try to balance stereotyping, exclusion of women from their work and family life (potentially informal communication network, to the detriment of all if they are not commitment to family responsibilities, properly and correctly supported). lack of business experience, and not Businesses need to be monitoring the being in the pipeline long enough points at which women “fall out” of are some of the barriers to women’s the company, as a result of the extreme advancement. To assist women choices they have had to make. advance on corporate ladder, both men and women agree that HRM practices Some clients are recognizing that they need to be changed. Women need to even have an issue with retention before get greater exposure to top management; parenthood, where women choose to they should be encouraged to engage leave and find either less “extreme” in job rotation within the company, roles or more “parent-friendly” cultures and should participate in career deve- in which to continue their careers. lopment programs. Companies also Initiatives that would make a diffe- need to provide better child-care faci- rences are recruiting more women, lities, survey women more often, build driving career models supportive to mentoring programs for women and women, difference are recruiting more actively recruit women at senior level women, driving career models sup- positions (Gupta et al, 1998). portive to women, providing childcare options, and organizational support for Desai and Ghosh (2011) show how work life balance (Parke, 2012). being economically productive enhances Advancement of Women in a woman’s self-esteem explaining why women around the world willingly Indian Firms work, even at the cost of dual pressure Survey based research of male and and additional stress. However, this female managers in India conducted stress often results in detrimental by Gupta and Koshal 1998, found effects on satisfaction with life and

76 Managing Women Talent in Indian Central Public Sector Enterprises work and adjustment in general. The work environment than a big organi- top most needs for all working women zation. It also finds that the percentage today are social and organizational and mobility of female employees in support. These include women friendly an organization depends on the loca- work policies - like flexible and work tion of the firm and not on the turn- from home, cooperative home envi- over or the total number of skilled ronment and assistance for housework, employees in the organization. Of the stress relief programmes like yoga, three IT hubs covered in the study, overall change of attitude towards Delhi-NCR and Bengaluru seem to do housework. (Desai et al, 2011). better than Kolkata, as companies there seem to have better gender- The future organizations should create inclusive policies to ensure better a conducive environment where the upward mobility among female workforce have members of diverse employees (Dutta Gupta et al, 2015). backgrounds and the members of these workforces should accommodate the Interviews of Indian women leaders views of others and applaud genuinely. from service, manufacturing and Clearly, it is important for organiza- financial services in India revealed their tions to commit to diversity, to review positive experience in progression targets and networks, and to find through the organization, despite a innovative ways of tackling bias. Even traditional culture that might have sug- more critical to success is training and gested otherwise. They have been suc- development, both in building the cessful owing to the interplay of orga- skills of assessors and encouraging nization and familial support, coupled managers to reflect on their own with a strong personal drive to succeed behavior. Without this missing link, (Nath D 2000). it will be difficult for organizations to effectively translate their policies, Gupta and Saran 2013 conducted a procedures and targets into actions study to compartmentalize the impact (Agrawal, 2012). of economic liberalization in India, with reference to the forcer, shaping Research by Gupta and Haldar (2015) the opportunities and pathways for based on data from IT companies women leadership. The findings of this across India found determinants of study based on the interviews of ninety female absorption in IT sector. The women trendsetters across various results reveal that a small company may leadership positions in corporate India provide its women employees a better affirm the significance of individual

77 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise factors like ‘Zippie Orientation’, ‘Swaraj behavior to change. There is, no doubt, Orientation’, ‘Large Raho Orientation, that the government is taking several organizational level factors like ‘Walk steps but women as a whole are not with the Movers’, ‘Home away from being benefited and if all women get home’, the World’ and also talked empowerment irrespective of any region, about family level influences. (Gupta religion, caste, class or age then they & Saran 2013). will be empowered in real sense, be it political, economic or social empower- Since career centrality is a multidimen- ment. Information and communica- sional concept (consisting of three tion have been playing an increasingly dimensions : purpose based centrality, important role in economic and opportunity based centrality, and social development of nations so our career satisfaction). Each dimension is studied for its impact on career persis- corporations should give more and tence. Together, these observations more efforts to the society (Jatana & suggest that Indian IT women persist Crowther, 2007). in their careers when they experience Though economics of women talent career satisfaction and a purpose based is an established fact, numbers at the centrality. and not because of oppor- top are not changing. In India, women tunity based centrality dimension make up 42 per cent of new graduates, (Srinivasan et al 2013). but only 24 per cent of entry-level While women are making progress and professionals. Of these, about 19 per fighting for their rights and the govern- cent reach senior-level management ment is making many policies, our roles. Women hold only 7.7 per cent industries are assisting with new projects of board seats and just 2.7 per cent of for the betterment of their situation. board chairs (Financial Express, 2017). Despite the intense effort of many agencies and organizations, and Women leaders are missing across sec- numerous inspiring success stories, the tors. To gain momentum and drive picture is still disheartening. There is change, women need to “lean-in” and still a lot of work to be done against they are doing so – at least more than violence, harassment and inequality in before. But the work-life environment our society. It can be possible by giving for women has not changed suffi- proper direction to women and through ciently for them to overcome the education, awareness raising, and patterns hurdles to join, stay and rise to of socialization and causing general leadership roles.

78 Managing Women Talent in Indian Central Public Sector Enterprises

Table-1 : Extract of Literature- Review of Key Papers Author, Year Areas of Study Values and Organizational Initiatives (family friendly policies, timeoff work, career development programme, training and challenging work), Individual McKeen and Demographic and Situational characteristics (age, marriage, children, Burke, 1994 income, household work, Job involvement, Career strategies, Supervisor support, Work overload, Satisfaction. Ruderman Fair promotion process et al, 1995 Environment free of gender bias and discrimination, Early identification of high-potential women talent, Leadership development programmes Mattis, 1995 including lateral moves, Line experience, Flexibility in arranging work and support for balancing work/life responsibilities, Senior management. Sponsorship and support for gender diversity goals. Appelbaum Women’s attitude and self-confidence, Women’s work experiences, Woman’s et al 2003 transformational style, Corporate environment. Ambition, masculinity and adaptability. Senior management commitment for energized diversity effort,Tackling discriminatory attitudes in managers, Driving attitudinal changes in manager behavior and cultural norms, Metz, 2004 Individual level coaching, Formal networks and mentoring programs to help level the playing field, Talent reviews, Succession planning that incorporate diversity and advance high potential women, High visibility assignments, Work life balance and flexibility initiatives. Support to balance career and children (Spouse, child-minder, state child care), Crowley and Social capital, Opportunistic mindset, Opportunities and choices available Weir, 2007 to women. Value system (hard work, passion/integrity/luck, serendipity, good fortune/ continuous learning/tenacity/risk taking), Family Support (supportive Ezzedeen and parents, in laws/friends/mother-father, spouse), Professional/Social support Ritchey, 2009 (peers/education, experience/mentors/supervisor, organization), Life course strategies (outsourcing, navigating partner support, career shifts, family before career, parenting, career before family, Slowing down of advancement Elizabeth F. Authenticity, Desire for challenge, Work life balance Cabrera, 2009

(Contd...)

Organization support for balancing family responsibilities, Inclusion in informal networks, women role models, Senior leadership accountable Evans, 2010 for women advancement, Awareness of stereotyping and biases, Visible/ challenging assignments, General management or line experience, Organizational culture, Gender diversity agenda Leadership competency frameworks, Talent management, Succession Vander Broeck, planning processes, Leadership development, processes, Women to leverage 2010 differences, Firms to be gender bilingual Using your drive to make the most of early life and career experiences, McDermott Developing personal strategies to attain balance, Undertaking the dual-strands and Flood, of emotion-management, Knowing that you cannot do it along, Maintaining 2011 the substance of your leadership. Literature reveals that hiring, retention and practices of the company will be a and growth of women—all are a big waste of time and effort for HR. So challenge. Let us take hiring. When 42 the leadership commitment has to go per cent of new graduates are women, beyond setting visible targets and policy why are only 24 per cent of entry-level changes to having a clear purpose to jobs held by them? Either women are build a culture that is as inclusive for being pressurized to opt out of the women as it is for men. workforce or they are simply not being hired. Why is that so and what are the “Diversity and inclusion should not companies doing about it? In order to only be a phrase on a piece of paper, it capitalize on the women talent, we is a mindset and should be lived acti- need two things being, leadership vely every day,” said Claudia Marshall, commitment to gender parity and an Ikea distribution area manager, Northern inclusive culture along with gender Europe. equitable hiring practices. In 2014, Microsoft India launched Women in Tech, an initiative to train Engaging Women Leadership : and mentor one million girls in a year, An International Perspective enable the next generation girls to find Many leaders,while professing equal suitable careers in IT and accelerate opportunity for all, still exhibit clear their growth. UNDP with support biases and preferences for having men from Ikea Foundation launched Disha— in critical roles, with the belief that women an initiative to make a million educated cannot handle the same pressure. In but underprivileged college girls emp- these instances, all diversity policies loyable. Companies can partner with

80 Managing Women Talent in Indian Central Public Sector Enterprises such programmes and gain access to a are the two factors that contribute to large pool of women talent. In 2015, the enhancement of complications or Ikea Switzerland became the first com- problems for employed women, and pany in the world to reach the highest between the two, the non-job factors level of gender equality certification or family-related factors weigh more from EDGE (Economic Dividends for importantly for women (Joshi, 1990). Gender Equality) and Ikea globally has 48 per cent female managers. Ikea’s Gender differences exist in terms of gender-related philosophy is all perva- work and family boundaries in almost sive in their business. It extends beyond every society and this has resulted in their organizational wall to their vendors, gender differences in the experiences suppliers and customers. There is no of work-family interface (Rothbard, substitute for visible top management 2001). Even in developed countries in commitment to gender equity. the West, especially in North America, But there are specific actions that sources of stress for women include role are complementary to the leadership overload from paid work and family commitment. work, role conflict, pressures associated with child care and other family care, Many studies have shown that the and aspects of spouse relationships, employees nowadays seem to value the including dissatisfaction with spouses’ quality of life more than the amount contribution to family work (Lewis & of salary they get (Vloeberghs, 2002). Cooper, 1987; 1988). Research over a They also suggest that people want to period of time and across cultures have more control over their work and continues to document the persistent accord more meaning to it. They want inequality in the allocation of house- a better work-life balance. As a result, hold work within dual career families, says Chalofsky (2003), the best emp- even among couples with ‘modern’ loyers are not great because of their ideologies and a commitment to gender perks and benefits, but because of their equality at home and at work (Brannen organizational culture and policies that & Moss 1991; Hochschild 1989; promote meaningful work, and a nurturing Sandqvist 1992). as well as supportive workplace. The Indian Context Pleck’s (1977) research suggests that family-to-work spill-over is stronger The growing number of educated women for women and the work-to-family in India— who are now participating spill-over is stronger for men. Family in the urban, organized, industrial environment and work environment sector in technical, professional, and 81 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise managerial positions—has been Maharatna PSEs has been studied accompanied by a steady growth in dual using secondary data. Efforts of organi- career families (Komarraju, 1997). zations towards implementing women Research on career women in India leadership driven activities has been shows that work and family dilemmas documented in the form of cases. are often different from those reported Women Employment in CPSEs : The by women in the West (Sekaran 1992). ratio stands in stark contrast to the As compared to their counterparts in national average for women’s partici- other parts of the world, Indian pation in the labour force 28 per cent, employees face a lot of difficulties in as per the latest report from the World managing their work and life. Research Economic Forum. Despite decades of conducted by Rout, Lewis and Kagan platitudes and rhetoric on the subject (1999) finds that women in India of women empowerment and gender experience considerable pressure, in equality from successive governments the morning before going out to work at the centre, data released by the and after work, to do all that is neces- Department of Public Enterprises (DPE) sary for the family. Komarraju (1997) in March shows that the percentage of notes that the relative absence of an women employees in Central Public infrastructure that provides a reliable Sector Enterprises (CPSE) in the coun- supply of electricity, water, and time- try stood at an abysmal 9.36 per cent saving, modern-day kitchen and other in 2015-16 (Indian Express, 2017). appliances, renders the performance of According to the Public Enterprises domestic responsibilities a burden, Survey 2015-16, a DPE initiative particularly for women in dual career document the CPSE performance, families. In addition, inflexible work- that number has stayed stagnant ing hours and the absence of childcare between 9 and 10 per cent mark for facilities constitute impediments rather the last four years. than sources of support for employed mothers (Bharat, 2001). Though in The ratio stands in stark contrast to urban India, things have started the national average for women’s parti- improving, yet they are not adequate. cipation in the labour force—28 per cent, as per the latest report from the Methodology World Economic Forum. While human An effort has been made to discuss the resource experts point out that this might cases of encouraging women in CPSEs. be a few percentage points lower if the The employment pattern of women in unorganised sector is excluded, they

82 Managing Women Talent in Indian Central Public Sector Enterprises say CPSE performance in this regard by the management of respective is still “unimpressive”. And, CPSEs are CPSEs. Like in other sectors, women cognizant of the situation. “I acknowledge are employed in CPSEs also and their that it is below average,” admitted percentage of employment is about U D Choubey, Director-General of the 10.20 per cent as on 31.3.2017. The Standing Committee of Public Enter- number of women employees in prises (SCOPE), the apex body repre- operating CPSEs in different groups/ senting PSEs. “But it has been impro- level such as managerial/executive ving gradually over the years and we level, supervisory level and workmen/ (PSEs) are trying to do better.” How- clerical level during the last three years ever, the percentage over the last three is shown in the Table (below). years has fallen, albeit marginally— from 9.81 per cent in 2013-14 to 9.45 It is evident from the above Table that per cent in 2014-15 to 9.36 per cent women employment in CPSEs during in 2015-16. The latest numbers show the last three years has been hovering that CPSEs employed only 1,15,318 around 10 per cent roughly. CPSEs has women last financial year—a fall of the provision to provide maternity 12.83 per cent in three years. In benefits to eligible women employees contrast, total employee count fell just as per Maternity Benefit Act (1961). 8.6 per cent during the same period. Also, the CPSEs have formed Internal Committees in respect of implemen- “There are many reasons for this. Many tation of the Sexual Harassment of of these PSE employees were first Women at Workplace. (Prevention, recruited in the 70s and 80s. Women Prohibition and Redressal Act), 2013. participation was generally low then. Oil & Natural Gas Corporation Those added later were only replace- Ltd ments, in naturally lower numbers” pointed out Aditya Mishra, chief Women employees constituted over executive of CIEL HR Services. 6.6 per cent of ONGC’s workforce. “Another factor is that many CPSEs During the year, programmes on are in the technical and heavy engi- women empowerment and develop- neering sector, where there is a heavy ment, including programmes on gen- skew towards men.” der sensitization were organized. ONGC actively supported and The personnel and recruitment policies nominated its women employees for in respect of appointments against programmes organized by reputed below Board level posts are formulated agencies. Disclosure under the sexual

Table-2 : Employees in Central Public Sector Enterprises

Female Employees as Total Employees Total Female Employees Type of % of Total Cadre 2014-15 2015-16 2016-17 2014-15 2015-16 2016-17 2014-15 2015-16 2016-17

Managerial/ 2,64,497 2,62,665 2,64,648 26,661 27,010 28,631 10.08 10.28 10.82 Executives

Supervisors 1,30,208 1,17,487 1,04,404 9,506 8,297 10,308 7.30 7.06 9.87

Workers 8,96,469 8,03,681 7,60,209 85,907 80,011 76,299 9.58 9.96 10.04

Total 1,29,1174 1,18,3833 1,12,9261 1,22,074 1,15,318 1,15,238 9.45 9.74 10.20

Source : Compiled by Authors –Government of India (2014-15, 2015-16 & 2016-17) PE Survey Reports, New Delhi, Department of Public Enterprises.

Table-3 : Number of Employees with Maharatna CPSEs during 2016-17 Total Number Number of Name of the CPSE Percentage of Employees Women Employees Oil and Natural Gas Corporation Ltd. 33,600 2208 6.57 Indian Oil Corporation Ltd. 33,135 2,735 8.25 GAIL (India) Ltd. 4,355 257 5.9 NTPC Ltd. 20,593 1330 7.74 Coal India Ltd and its Subsidiaries 310016 – – Bharat Heavy Electricals Ltd. 39,821 2,251 5.65 Steel Authority of India Ltd. 82,964 4,782 5.76 Bharat Petroleum Corporation Ltd. 12,484 1139 9.12 harassment of women at workplace Internal Complaints Committee (ICC) policy (prevention, prohibition & has been set up to redress complaints redressal) Act, 2013. The company has received regarding sexual harassment. in place an Anti-Sexual Harassment All employees (permanent, contractual, Policy in line with the requirements temporary, trainees) are covered under of the sexual harassment of women this policy. The following is a summary at the workplace (Prevention, Prohi- of sexual harassment complaints bition & Redressal) Act, 2013. received and disposed of during

84 Managing Women Talent in Indian Central Public Sector Enterprises

FY’17: No. of complaints received : 02, development have won recognition of No. of complaints disposed of : 02. WIPS as the best enterprise for women The total manpower strength as on development for initiatives undertaken 31.03.2017 was 33,660. during the year 2016. Indian Oil Corporation Ltd. IOCL is committed to prevention of (IOCL) sexual harassment of women at workplace and takes prompt action in case The employee strength of the IOCL of reporting of such incidents. In this was 33,135 as on 31.03.2017, consist- regard, internal complaints commit- ing of 16,545 executives and 16,590 tees have been constituted at various non-executives. This includes 2,735 offices of the corporation to deal with women employees comprising 8.25 sexual harassment complaints, if any, per cent of the total work force. IOCL and to conduct enquiries. There were is committed to diversity and inclu- four complaints of sexual harassment, siveness and has, therefore, adopted which were pending as on 1st April, various practices to achieve women’s 2016. During the year, seven com- development and gender equality in plaints were received and five com- the organisation. Women employees plaints were disposed of. As on 31st have equal opportunities, equal rights March, 2017, six complaints are pend- and equal responsibilities. Congenial ing, out of which four are pending for work culture of IOCL continues to more than 90 days. Regular workshops inspire women employees to shoulder are held for employees, especially higher responsibilities in various verticals women, to enhance awareness about of the corporation. Under the Forum their rights and facilities at the work- of Women in Public Sector, WIPS cell place as well as the rights available to have been formed across IOCL, which them under the Act. During the year, focus on all-round development of 32 workshops/awareness programmes women in the corporation and render were conducted. necessary support required by women employees. As part of its commitment IOCL provides equal opportunity as to the development of women, IOCL an employer, where no discrimination has been organising various training is made on the basis of gender, color, programmes on topics such as leader- caste or creed. There are various forums, ship skills, health & safety, work life where women employees are encouraged balance, gender sensitivity, etc. to represent the organization. To The corporation’s efforts in women promote gender sensitivity and to

85 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise improve transactional relationship, 2013. The Internal Complaints Com- workshops and training programs are mittee (ICC) has been set up to redress conducted regularly through domain complaints received regarding sexual specialists across its establishments. harass-ment. During the year 2016-17, 3 (three) sexual harassment complaints IOCL extends various types of special were received and the same were leaves to its women employees viz. disposed of. maternity leave, husband joining leave, child care leave and child adoption GAIL women cell has been established leave, etc. An online portal by the to look after the developmental needs name “Maitri” has been developed for of women employees. The cell focuses the women employees of the refineries on reaching out to the women division, who can take part in various workforce, initiate discussions and discussions, as well as raise concerns. adequately address their concerns All the women employees of IOCL are including discrimination and sexual harassment at workplace. GAIL remains part of the women centric forum WIPS committed to equal rights for all gender (Women in Public Sector). Various and the same is reflected in their training programs are organized on compensation policy for employees. topics ranging from self-defence, Minimum wage requirements in awareness on sexual and work-place accordance with the applicable norms in harassment to stress management each state where of GAIL’s operations and organizational behaviour from are also ensured. time to time. NTPC Ltd. GAIL (India) Ltd. Total number of employees : 20,593 Total employees 4,355 and women and women employees are 1,330 employees are 257. (7.74 per cent) Sexual Harassment of Women at NTPC has in place a policy on Pre- Workplace : GAIL has in place a policy vention, Prohibition and Redressal of on Prevention, Prohibition and Sexual Harassment of Women at Redressal of Sexual Harassment of Workplace in line with the require- Women at workplace in line with the ments of the Sexual Harassment of requirements of the Sexual Harassment Women at the Workplace (Prevention, of Women at the Workplace (Preven- Prohibition & Redressal) Act, 2013. tion, Prohibition & Redressal) Act, Internal Complaints Committee (ICC)

86 Managing Women Talent in Indian Central Public Sector Enterprises has been set up to redress complaints gainful redeployment, training and received regarding sexual harassment. uplifting their morale by recognizing All employees (permanent, contractual, outstanding achievement, recognizing temporary, trainees) are covered under and honouring the exceptional talent. this policy. These ICCs have been constituted at all projects/stations also. Sexual Harassment of Women at the Every three years, the constitution of Workplace : The company has Anti- these committees is changed and new Sexual Harassment Policy in line with members are nominated the requirements of the Sexual Harass- ment of Women at the place workplace Coal India Ltd. (Prevention, Prohibition & Redressal) In Coal India Ltd. there is a forum for Act, 2013. Internal Complaints Com- women in public sector cell at committee (ICC) are working at every sub- pany headquarter-Kolkata and subsi- sidiary and the office of Coal India Ltd. diary companies. Each WIPS cell is to redress complaints regarding sexual headed by a coordinator who plans and harassment. All women employees executes various activities of the forum (permanent, contractual, temporary, with the help of a duly appointed trainees) are covered under the said executive committee. The company policy. No sexual harassment complaint extends active support to the various was received during the year 2016-17. activities of WIPS comprising of welfare activities. training & development acti- Total employees of Coal India Ltd. and vities, seminars, cultural programme, its subsidiaries was 3,10,016 as on industrial awareness visits, health 31.3.2017. awareness programme, etc. for the Prevention of Sexual Harassment at WIPS members, women workers, their Workplace : Sexual harassment of any families and society at large. form of misconduct under the conduct Coal India Ltd and its subsidiary com- discipline and appeal rules applicable panies are extending full-fledged sup- to executive cadre employees as well port and patronage to the national as in the standing orders applicable to conference of forum of WIPS held the non-executive cadre employees. every year in the month of February. Internal Complaints Committee (ICC) In recent years, the WIPS cell have done is functioning at all levels in the com- commendable work in reaching out to pany under the sexual harassment the grass root level women employees, of women at work place (Prevention, empowering them by suggesting Prohibition and Redressal Act, 2013.

Bharat Heavy Electrical Ltd conferencing. At the unit level, 41 workshops/awareness programmes An Act to provide protection against were conducted on gender sensitiza- sexual harassment of women at work- tion, self-defense and awareness place and for the prevention and about the Act. In addition, women redressal of complaints of sexual harass- employees are nominated for programs ment and for matters connected there- conducted by outside agencies on with or incidental thereto called “The sexual harassment. Sexual Harassment of Women at Workplace (Prevention, Prohibition The total number of regular employees and Redressal) Act, 2013”, has come as on 31-03-2017 : 39,821 and number into force from 9th December 2013 of permanent women employees as on with notification of rules by Government 31-03-2017 : 2,251 of India, Ministry of Women and Child Development called “The Steel Authority of India Limited Sexual Harassment of Women at Disclosure under the Sexual Harassment Workplace (Prevention, Prohibition of Women at Workplace (Prevention, and Redressal) Rules, 2013”. Prohibition and Redressal) Act, 2013 : The provisions of the Act and the rules The company has in place a system of thereon are being strictly complied Complaints Committees (under SAIL with. In accordance with the Act, Conduct, Discipline and Appeal Internal Complaints Committee (CDA Rules, 1977) in line with the (ICC) has been constituted in all units requirements of the sexual harassment of BHEL and their constitution and of women at the workplace (Preven- contact details have been hosted on tion, Prohibition and Redressal) Act, unit’s website. Posters highlighting the 2013. These committees have been set key provisions of the Act, duties of up to redress complaints received the employer, complaints redressal regarding sexual harassment. All emp- mechanism, action for malicious com- loyees of the company are covered plaints and various misconceptions under these Rules. The following is a about sexual harassment have been summary of sexual harassment displayed at conspicuous places in all complaints received and disposed of units in Hindi, English and regional during the year 2016-17 : Number of languages. Five workshops were con- complaints received : 5, Number of ducted by corporate office for ICC complaints disposed of : 6, (including members across units through video 1 pending of previous year).

88 Managing Women Talent in Indian Central Public Sector Enterprises

Table-4 : Annual Report on Safeguard of Women at Workplace 1 Number of complaints received during the year 2016-17. 04 2 Number of complaints disposed of during the year 2016-17. 04 3 Number of cases pending for more than ninety days. 00 4 Number of workshops or awareness programme against sexual harassment 46 carried out. 5 Nature of action taken by the employer on therecommendations of ICC 6 2 Women, one Act apprentice and one regular employee, jointly submitted a complaint against a male employee. After detailed inquiry and ascertaining Case the misconduct, penalty was imposed by reducing the pay of the respondent closed by one stage for one year with cumulative effect w.e.f. 01/04/2017. 7 An Act apprentice made a complaint against a male employee for using filthy and obscene words on phone with someone else when she was sitting nearby. On enquiry, the complaint was found to be true though the motive was not Case with the intention of hurting her. He realized his mistake and assured better closed behaviour. The Committee disposed of the case with a letter of warning. The respondent superannuated in March 2017. 8 Complaint was made by a female security guard against a supervisor for Case using double meaning words. The respondent was transferred to another closed workplace and the case closed. 9 The complaint received by ICC was of official nature and not amounting to sexual harassment. On examining the matter, it was found that it is not a case Case of sexual harassment, rather an official conflict. Counseling was provided and closed it was reiterated that if in future, employee faces harassment, she may give complaint in writing and action will be taken by ICC accordingly. Source : BHEL (2016-17) Annual Report, New Delhi, BHEL, Government of India.

As on 1.4.2017 total number of emp- Conclusion loyees in SAIL : 82,964 (Executives- No country can make progress if it 12840; Non-Executives - 70,124) and locks out a half of its population. As on 1.4.2017, permanent women Increasing contribution of women in the workplace would call for increasing employees in SAIL : 4,782 (Executives- contribution of men at home. 975; Non-executives - 3,807) Sheryl Sandberg said “A world where

89 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise half our homes are run by men, and Catalyst (2013) Why Diversity Matters, Cata- half our institutions are run by women, lyst Information Center, 2013 Catalyst would be a far better world!”. Equitable http://www.catalyst.org/system/files/ why_diversity_matters_catalyst_0.pdf hiring is fundamental to bringing men and women to the same footing. Only Cabrera, E.F. (2009). “Protean Organizations : then shall a discussion about retention Reshaping Work and Careers to Retain Female Talent”, Career Development and growth of women at the workplace International, Vol.14, Issue: 2, pp.186-201. matter. Crowley-Henry, M., & Weir, D. (2007) “The Biggest competitive advantage that International Protean Career : Four Women’s CPSEs have by their side is the talent Narratives”, Journal of Organizational pool which exists currently with them; Change Management, Vol.20, Issue:2, pp.245-258. any pilferage would cost CPSEs dearly. During their operations, effective and Desai, M., Majumdar, B., Chakraborthy, T. efficient talent management which & Ghosh, K. (2011) “The Second Shift : encompasses organizational goals, Working Women in India”, Gender in Management : An International Journal, resources aspirations, training and Vol.26, Issue: 6, pp.432-450. deployability and technology enabling women at work are the key to drive Ezzedeen, S.R. & Ritchey, K.G. (2009) sustenance and results. “Career Advancement and Family Balance Strategies of Executive Women”, Gender References in Management : An International Journal, Vol.24, Issue: 6, pp.388-411. Agrawal, V. (2012)”Managing the Diversified Team : Challenges and Strategies for Evans, D. (2010)”Aspiring to Leadership … Improving Performance”, Team Performance A Woman’s World? : An Example of Management : An International Journal, Developments in France”, Cross Cultural Vol.18, Issue: 7/8, pp.384-400. Management : An International Journal, Vol.17, Issue: 4, pp.347-367. Appelbaum, S.H., Audet, L. & Miller, J.C. (2003) “Gender and Leadership? Leader- Financial Express (2017) India Needs More ship and Gender? : A Journey Through Women in Leadership Roles : Here is a the Landscape of Theories”, Leadership & Look at Shocking Reality,Available at : Organization Development Journal, Vol.24, https://www.financialexpress.com/opin- Issue:1, pp.43-51. ion/india-needs-more-women-in-leadership-roles-here-is-a-look-at-shocking-real- BHEL (2016-17) Annual Report, New Delhi, ity/807195/. BHEL, Government of India. Hewlett, S.A. & Rashid, R. (2010) “The Battle Coal India Ltd (2016-17) Annual Report, for Female Talent in Emerging Markets”, Kolkatta, Coal India Ltd, Government of Harvard Business Review, Vol.88, No.5, India. pp. 101-105. 90 Managing Women Talent in Indian Central Public Sector Enterprises

Hopkins, M.M., O’Neil, D., Passareli, A.M. & McDermott, A., Kidney, R. & Flood, P. (2011) Bilimoria, D. (2008) “Women’s Leadership “Understanding Leader Development : Development Strategic Practices for Women Learning from Leaders”, Leadership & and Organizations”, Consulting Psychology Organization Development Journal, Journal Practice and Research (4) : 348-365. Vol.32, Issue: 4, pp.358-378. Nath, D. (2000) “Gently Shattering the Glass Metz, J. (2004) “Do Personality Traits Indi- Ceiling : Experiences of Indian Women rectly Affect Women’s Advancement?”, Managers”, Women in Management Journal of Managerial Psychology, Vol.19, Review, Vol.15, Issue: 1, pp.44-52. Issue: 7, pp.695-707. Gupta, S.D., Raychaudhuri, A. & Haldar, S.K. (2015) Information Technology Sector in NTPC Ltd (2016-17) Annual Report, New India and Gender Inclusivity, Gender in Delhi, NTPC Ltd, Government of India. Management : An International Journal, Vol.30, Issue: 2, 94-108. ONGC (2016-17) Annual Report, New Delhi, ONGC, Government of India. India Oil Corporation Ltd (2016-17) Annual Report, New Delhi, India Oil Government of India (2016-17) PE Survey Corporation Ltd, Government of India. Reports, NewDelhi, Department of Public Enterprises. Jatana, R. & Crowther, D. (2007) “Corporate Social Responsibility and the Empowerment Preko (2012) “Attitude of Male Employees of Women : An Indian Perspective”, Social toward Female Managers in selected Responsibility Journal, Vol.3, Issue : 4, pp.40-48. organizations in Ghana”, Journal of Arts, Jackson, S.E. & Ruderman, M. (1995) Science & Commerce, Vol.III, Issue : 3(3). “Diversity in Work Teams: Research Paradigms for a Changing Workplace”. SAIL (2016-17) Steel Authority of India Annual Report, New Delhi, Government Indian Express (2018). Women Employment of India. in Central Public Sector Enterprises : An Abysmal 9.36 per cent : Department of Srinivasan, M., Mukherjee, D. & Gaur, A.S. Public Enterprise, September, 25th. (2011) Buyer Supplier Partnership Quality and Supply Chain Performance : Modera- McKeen, C.A. & Burke, J.B. (1994) “An ting a Role of Risks, and Environmental Exploratory Study of Gender Proportions on the Experiences of Managerial and Uncertainty, European Management ProfessionalWomen”, The International Journal, Vol.29, 260-271. Journal of Organizational Analysis, Vol. 2, Vanderbroeck, P. (2010) “The Traps that Issue: 3, pp.280-294. Keep Women from Reaching the Top and Mattis, M.C. (1995) “Corporate Initiatives for How to Avoid Them”, Journal of Advancing Women”, Women in Management Management Development, Vol.29, Issue: 9, Review, Vol.10, Issue: 7, pp.5 14. pp.764-770.

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91 The Journal of Institute Theof Public Journal Enterprise, of Institute July-December, of Public Enterprise, Vol. 41, July-December, No. 3&4 Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise ISSN : 0971-1864, © 2018. Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective J.P.Dash* & Devinder Kumar**

Leadership in public sector is critical to good public governance for transforming India to high growth and inclusive economy. The question remains, are the public sector leaders good enough? How can we ensure, the leader is selected rightly and inducted properly? The risk of making type I error makes the CEO selection a challenging task. This paper analyses current practice of selection and induction in the Central Public Sector Units and brings out various competency models for CEOs including generic Department of Personnel Training (DoPT) competency based dictionary and deliberates issues like right age of CEO, lateral entry vs internal promotion and past performance as a predictor performance. It outlines a model selection process and advocates for mentoring, bringing out some of the best practices in this field. Keywords : Public Sector, CEO, Selection and Induction, Risk.

Introduction her into the high-profile job is crucial to the success of any organisation, more With a view to make India to occupy particularly for the public sector. the space it deserves in the league of developed countries, both the govern- Leadership in the public sector is ment and business are developing several especially important; it not only influ- high-impact strategies and policies. ences the job performance and satis- No strategy or policy can achieve the faction of employees, but also how transformation of the Indian economy government and public agencies per- without the right people, the right form. Leadership in the public sector technical know-how, and the right is critical to good public governance, mindset and behaviour, and most addressing market failures and promo- importantly, right leadership. Leaders, ting equity, setting model standards for lie at the heart of economic growth, the corporate in creating social impact. formulation of strategy and implemen- * Dr.J.P.Dash, IOFS, Addl GM, Ordnance tation thereof (Spencer, Rajah, Mohan Factory, Khamaria, Jabalpur-482005. and Lahiri, 2008). Selecting the best ** Devinder Kumar, Jt.General Manager, candidate for Chief Executive Officer Ordnance Factory, Yeddumailaram, Medak, (CEO) post and indoctrinating him/ Telangana-502205.

92 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective

The question remains, are the public some of the universal principles appli- sector leaders good enough? INSEAD cable, irrespective of whether in public carried out a study of the best perform- or private sector, other recommendations ing CEOs from 374 CEOs represen- are specific to the public sector consi- ting just over 200 companies in India. dering its unique context. This paper, The study found no significant diffe- drawing from secondary research, rence in the performance of CEOs of would attempt hands-on guidelines for domestic private enterprises or Indian the boards to aid them in selection and subsidiaries of foreign multi-national induction of the CEOs from a cross- companies. On the other hand, CEOs section of research amidst various of leading State-Owned Enterprises trade-offs in decision-making such as (SOE) were systematically ranked the right age of CEO at entry, lateral worse. Other things being equal, lead- entry vs internal promotion and selecting ing an SOE led to a drop of thirty five a relevant competency model, in the places in the ranking. The report says, Indian public sector context. the Indian state needs to provide a milieu at the top so that competent Public Sector Organisation and people can thrive and drive shareholder Need for Leadership Studies value (Insead, 2012). The need for Public management differs from corpo- public sector leadership is more impor- rate management in several important tant than ever for the aspiration of the ways (Bower, 1977). Public sector nation and challenges arising from a managers frequently must accept goals volatile, complex, dynamic highly that are set by organizations other than competitive business environment. their own, operate structures designed by groups other than their own, work The various elements in the talent with people whose careers are in many management process i.e. how a CEO respects outside management’s control is selected (Entry) and how a CEO is and accomplish their goals in less time enabled to perform (Immersion) need than is allowed for corporate managers. to be deliberated at depth. This paper delves into the process highlighting the In a state-led mixed economy, where risk involved in each of the steps, public sector took the centre stage in bringing out solutions andideas. The many sectors, Indian Public Sector paper also limits its scope to selection and Undertakings (PSUs) have shaped induction of CEOs of Central Public the economic, social, and political Sector Enterprises (CPSEs) excluding developments, with specific focus on banking sector. While the paper borrows regional development. With the

93 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise constraints of private capital, the public While findings on public sector from sector was seen crucial for establishing research studies in Western countries self-reliance, regional balance, may be applicable to India to a limi- equal employment opportunities and ted extent, the uniqueness of Indian infrastructure development (Jain, political, social, economic, and cultural Gupta, & Yadav, 2014). However, the context demands research studies Indian PSUs have been criticized for of Indian public sector undertakings lack of efficiency, corruption, and poor in their own right. Researchers quality of services (Khatri, 2016). Gupta et al., 2017; Khatri, 2011, Especially in a developing country like 2016; Orazi et al., 2013; Roberts, India, where their social and economic 2017; and Siugzdiniene, 2006 have importance and impact factor is high noted that leadership styles depend and society needs inclusion and more on contextual factors of social growth, they need more attention than and cultural and environment of the that has been given in research till date (Gupta & Khatri, 2018). public sector organization. It calls for country-wise studies on private and Public sector leadership research has public sector leadership. experienced neither the volume nor the integration of the mainstream Expectations from the Public (Wart, 2003). Compared to the bulk Sector and the CEOs of research on leadership in private companies, studies on leadership in Government and business leaders public sector have been somewhat across the world are facing the chal- limited (Gupta, 2016; Gupta et al., lenge of rising geopolitical uncertainty 2018). Hansen and Villadsen (2010) and a more connected, yet in many conclude that compared to other ways more divergent, world. In this disciplines, “leadership theory has changing environment, public sector generally received little attention in leaders can do more to help business public management research”. Orazi, and society by : Turrini, and Valotti (2013) suggest public sector leadership to be a distinc- • Committing to a renewed focus on tive and autonomous domain emerg- delivering fiscal sustainability, with ing in public administration/public a spotlight on re-defining purpose management studies despite little and with a zero-based approach to attention to the same in business strategically managing both costs administration studies. and assets.

94 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective

• Delivering digitally-led public body by more than just financial profit; and which is both agile and resilient to many agree that they should be doing change. more to measure and communicate their impact on wider stakeholders. • Building the foundations for a long- The starting point for CEOs is to term, sustainable (good) growth redefine success fundamentally such with a focus on the key levers of that creating societal value is part and skills, infrastructure and tax. parcel of a profitable enterprise (PwC, • Collaborating to reduce the 2016). Thus, inclusion, equity and geopolitical uncertainty that societal value in triple bottom line hinders the confidence to invest, performance are even more important drive good growth and create good for the public sector leaders in the jobs (PwC, 2016). emerging context. As the world tries to cope with rising A significant difference for public sector tensions, together business and govern- CEOs is, who they see as having the ment can deliver what citizens really biggest impact on their organisation’s want by putting good growth and strategy. In contrast to the private sector, good jobs at the heart of the mission where the customer is king, govern- and the mandate of public bodies. In ment and regulators have a ‘high’ or ‘very today’s globalised world, the challenge high’ impact for 87 per cent of public remains for public sector organisations sector CEOs. Public sector CEOs are of to ‘do more for less’ and strategically the view that government and regula- manage their costs in the face of budgetary tors have a ‘high’ impact for 41 per cent pressure and ever increasing demands of them and a ‘very high’ impact for on public services. In addition, there 45 per cent. Nevertheless, for 53 per is a need to build digital capability of cent of public sector CEOs surveyed public sector organisations as well as view that customers and clients still the agility and resilience to cope with have a very high impact (PwC, 2016). future (PwC, 2016). CEO is the orchestra conductor in a The 19th Annual Global CEO Survey company environment. CEOs make by PwC looked at the ways in which sure all the instruments are playing in CEOs are redefining business success. synchronism to make the proper The survey found, around three quarters sound, and that the orchestra has the (76 per cent) of CEOs agree that in right instruments being played. With future business success will be defined a capable leadership of CEO, orchestra

95 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise creates sound of harmony or else it In the public sector, CEO can mean causes cacophony resulting in destruc- the CMD where the Chairman and tion of value of the company. Leader- Managing Director role are merged ship in any organization is important, into one, or it can be Chairman or but developing good leaders in the Managing Director. This paper also public sector is especially crucial. examines selection and induction for Executive Director or Functional C-suite roles are challenging and often Director or anybody playing a role in high-profile. The CEO is responsible management of the board by other for the success or failure of the com- designation, but playing similar role. pany. Operations, marketing, strategy, financing, creation of company culture, In the Harvard Business Review article human resources, hiring, firing, titled, “What Sets Successful CEOs compliance with safety regulations, Apart”, it is brought out that high-per- sales, public relation, etc.—it all falls forming CEOs don’t distinguish them- on the CEO’s shoulders. The principal selves by regularly making great deci- component of a CEO’s job description sions. They stand out for being more covers; setting strategy and direction, decisive, making decisions earlier, modelling and setting the company’s faster, and with greater conviction and culture, values, and behaviour, building consistency, whereas high IQ execu- and leading the senior executive team tives struggle with decisiveness – make and allocating capital to the company’s slow decisions that frustrate teams and priorities. lead to attrition of talent. They do not The OECD defines also the role of wait for perfect information to make public leaders as “to solve the problems the perfect decision. This study points and challenges faced in a specific out that wrong decisions are often better environment. When we say we want than no decisions, as teams need more leadership in the public sector, direction and teams lose faith in leaders what we are really looking for is people who waffle or backtrack (Lytkina, Kim who will promote institutional adap- Kincaid and Wang, 2017). Four key tations in the public interest. Leader- behaviors for successful leaders are : ship in this sense is not value neutral. 1) Deciding with speed and conviction; It is a positive espousal of the need to 2) Engaging for impact; 3) Adapting promote certain fundamental values proactively; and 4) Delivering reliably that can be called public spiritedness” (Lytkina, Kim Kincaid & Wang, (OECD, 2001). 2017).

96 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective

Risks matter assumes serious consideration in view of the fact that CEOs appoin- The role of CEO as institution builder ted after 1985 are three times more is different from that of his previous likely to be fired than CEOs who were experience. One can be a good player, appointed before that year based on a but can fail to be a good captain. Simi- study conducted by Rakesh Khurana, larly, a good captain need not be a good Dean of Harvard College, and Nitin coach. Choose the right one and every- Nohria, Dean of Harvard Business thing else will be easier. Choose the School. Moreover, 40 per cent of all wrong one, it can be a catastrophe. executives who change jobs or get While recruiting, one can make either promoted fail in the first 18 months, a type I or II error. While a type I error a number that has remained steady for (or error of the first kind) will lead to the past 15 years (Hauswirth, 2016). incorrect rejection of a true null hypo- Thus, the Boards need to reassess their thesis, a type II error (or error of the CEO succession processes and ensure second kind) is the failure to reject a that they are supporting their strate- false null hypothesis. In terms of false gic goals. There is nothing more positives and false negatives, a positive important for board members than result corresponds to rejecting the null selecting the organization’s next leader. hypothesis, while a negative result The stakes of CEO selection require a corresponds to failing to reject the null process with commensurate rigor. hypothesis; “false” means the conclu- Some of the most common missteps sion drawn is incorrect. Thus a type I are elaborated below. First, the board error is a false positive, which means, may be too much dependent on pers- we assumed the selection to be great, pective of the current CEO. As such, however it turned out that the CEO right people may not be involved in the on the job does not meet our aspira- selection. Second, although the board tion. A type II error is a false negative, may be pretty good at understanding which means a CEO which is sidelined industry dynamics and financial and stra- by our selection criteria eventually tegic planning, but it may not be good would have been a great CEO. In the at accurately evaluating and assessing a case of PSUs, chances of type I error potential CEO. The board may fail to prevails over the type II error. examine in totality all aspects such as; The cost of failure of wrong selection successor’s integrity, fit with the organi- of CEO has significant financial, zational culture, ability to inspire and reputational and talent impact. This energize the enterprise, and capacity

97 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise to develop other leaders. Third, the and collaborating vs delegating in the long duration of the selection process search process. The following para- can change the job specification as graphs delve into examination of such market dynamics change. Moreover, if vital issues. The first issue of qualities of the specification is too rooted in the CEO is analysed from the general context, present and can include status quo India specific expectations from future assumptions, specification can be limi- business leaders, attributes/qualifica- ting. The specification for CEO job tions of board members specific to may not align with the organization’s public sector : and finally expectations cultural and future requirement. Fourth, from Indian public sector leaders. if there is lack of alignment in the board about differing perceptions of The Qualities of a CEO the strategy, it can derail the new CEO. CEOs and diamonds are a lot alike. Without unified board support, the Most are flawed in some way, all are successor can quickly fall into the trap hardened and formed under crushing of navigating conflicting mandates pressures and intense heat, and they rather than delivering on the organi- are judged by the degrees of quality sation’s strategic goals (Hauswirth, (Trammell, 2016). The following para- 2016). These remarks are independent graphs first bring out expectations whether the CEO is heading a public from CEO, then expectations from sector or a private sector, whether he Indian corporate leadership followed belongs to India or belongs to any by expectations from public sector other country. leadership, and Indian public sector leadership. Issues and Key Ideas for Change The qualities of CEO set them apart; In order to make the CEO selection per- which are credibility, competence and fect, we should know what exactly we caring attitude, as explained below are expecting from the CEO and what (Trammell, 2016). kind of competencies he/she should possess. There are a lot of variables that Credibility : Without credibility, people influence the selection of an outstand- would not put their trust on the CEO. ing CEO, like the right age for entry They may act out of compulsion of and past performance as a predictor for obeying some of the diktats, but future. There are a lot of issues and apparently they will be against such trade-offs in CEO selection such diktats. Thus, they would put less as, lateral entry vs internal promotes, energy into the strategic directions

98 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective outlined by the CEO. Ultimately, the competence but not caring about organisation becomes a loser. CEOs, people or the organization’s mission who lose credibility, can never regain will not take CEO very far. Caring is it. To maintain credibility, not only about showing that the CEO puts the they tell the truth 100 per cent of the organization above himself. The most time, but to every stakeholder the same common trust killer for CEOs is the version of truth every time. In bad belief that they do not have to follow times, if CEOs try to pretend, hoping the same rules or be held to the same that things will improve; all credibility standards of performance as the rest of with employees is lost. The first acid the employees. Caring means applying test that a potential CEO must pass is the same standard to one as applied to that of credibility. others and communicating otherswith empathy. He/she let others go first. Be Competence : The CEO’s to deliver must happy to give others the credit. During be seen as not only credible but compe- the time of crisis, he/she takes responsi- tent. The marks of competencies bility and does not start a blame game. should be visible. CEOs need to show In good times, he/she credits others, a deep understanding of the company’s and empowers others. Thus the third business model—how the product is acid test that a potential CEO must bought and sold—as well as how the pass is that of caring attitude. product is made or how the service is constructed and delivered. They need to Moran (2018) in an article on ‘How show a willingness to learn and adapt. To Figure Out If You’re CEO Material’ If the CEO is wrong, ill-informed or brings out the essential skills, based on make poor judgments, he/she will a research by Botello as follows : make the ship of enterprise sink. The Risk Tolerance : The ability to take CEO may be sitting in the captain’s calculated risks—and live with the chair, but every time he/she shouts an potential fallout—is important for rising order, people will ignore it, as people leaders. Not taking risks is the most know that he/she lacks understanding dangerous thing to do on the way to about the business. The second acid the top. test that a potential CEO must pass is that of competence, which will be Vision : Effective CEOs can see beyond discussed at length subsequently. the immediate needs and urgent matters and keep long-term goals in mind. As Caring : People must believe in both a CEO, he/she is no longer be in the the message and the messenger. Having weeds, but he/she is at the helm of the 99 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise ship looking out in the horizon, and body language makes CEO’s engage- looking around. That implies constantly ment with people different. Emotional staying abreast of what is happening intelligence is a key part of their impact in the industry, thinking about trends as a leader as well. Being able to “read” and developments, and analyzing what people and respond appropriately to they mean for the future of the orga- them, make a difference to how the nization. The more CEO broadens his/ CEO makes an impact. her exposure to various content and context, and the factors, trends, changes Although the attributes proposed by and circumstances that affect the two different models remain valid industry or the economy overall, the irrespective of the company, company’s more he/she can connect the dots and status in business cycle, company spe- see things others do not. cific factors like culture etc. needs to be built in finding a best fit between Reliability and Results Orientation the requirement and attributes. This CEO must invariably be reliable. They exercise is scientifically done through should do it, if they say. Most people competency mapping and assessment. overestimate how dependable they are in the eyes of others. Since reliability Regardless of the sector, leaders and is an essential component of trust, such a mangers hold a vital role in making misalignment can be a problem in ascen- organizations deliver results in chang- ding to a leadership role. A focus on ing times. In general, leaders carry criti- results is a component of reliability. cal responsibilities such as managing When they are given a task, they take organizational change, developing the on with energy and enthusiasm, finding organizational culture, strategizing, solutions to problems when they arise. and managing crises. Adaptability : CEOs must be able to India Specific Expectations from pivot and adjust to change. Highly Future Business Leaders adaptable leaders do not hide from rea- Conference Board (CB) 2014 identified lity. They face what’s happening and the personal attributes required of future use well-honed decision-making skills business leaders in India. The attri- to make the best choices in any given butes are; courage, collaboration, self- situation. awareness, comfort with ambiguity, Engaging for Impact : Effective CEOs humility, independent thinking, and craft a shared vision. Deliberate practices integrity. The competencies identified such as clear communication, positive are global mindset; cultural sensitivity;

100 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective and ability to lead change, to commu- be able to move seamlessly through the nicate and tell stories, to manage global public and private sectors as well as virtual teams, to be a talent optimizer, civil society. The ability to effectively to be a team and network builder network between these three overlap- and to listen and make the opinions ping spheres will be crucial (CB, 2014). of others (CB, 2014). Attributes/Qualifications of Board CB survey brings out the challenges Members Specific to Public Sector before the next generation of leaders. The era of digital abundance delivers The OECD State-Owned Enterprises an overwhelming volume of informa- (SOE) Guidelines recommends setting tion at dizzying speed. The next clear minimum qualification criteria generation of leaders must understand for board nominations; vetting mecha- that problems can be solved by expert nisms for ministerial board nomina- networks outside the traditional tions; establishing nomination commi- internal employee domain and that ttees or taking a tailored nomination others outside the inner corporate approach; and ensuring shareholders’ circle may have the best solutions. This right to elect board members (OECD, will require future Indian leaders to 2018). It is interesting to note prac- become truly collaborative, be expert tices of various countries for selection listeners, develop the ability to trust of board level appointments. nontraditional partners, and seek solutions in non-traditional forums In China, according to the regulations (CB, 2014). on state-owned assets of enterprises, directors are required to have profes- The next generation of leaders should sional knowledge and competency. nurture a global mindset. In a Having a ‘good character’ is also one borderless global economy, cultural of the required qualifications. competency and sensitivity matter more than ever. Globalization and In Korea, formal qualifications are regionalization are putting more pres- stipulated in the Public Institutions sure on business leaders in India, a Management Act. It states that candi- country rich in cultural/regional diver- dates with good knowledge, experi- sity, thrusting them into often unfa- ence, and competent ability necessary miliar cross-cultural leadership situa- for performing his/her duties can be tions. The next generation of leaders nominated as a director or auditor of are those tri-sectoral leaders, who will the SOE.

In Malaysia, leadership experience, In Vietnam, specialty and manage- national and regional backgrounds are ment skill are a prerequisite qualifica- included in the criteria. At present, most tion for board member nomination of the SOE board members are retired and the board is responsible for professionals or public officials from the identifying its skills needs and Ministry of Finance or relevant line minis- communicating them to the relevant tries. Candidates are identified mainly decision-makers. through networking and word of mouth. Expectations from India Specific In Morocco, the board of directors of Public Sector Leaders SOEs are required to be selected based As per an IIM Ahmedabad study, on their professional competency and Indian PSUs Leaders are driven by expertise, particularly in the technical, public-service motivation, job security economic and financial fields relevant and work environment. They face to the profile of the organisation three key managerial challenges, according to the Moroccan Code of political interference and lack of auto- Good Governance Practices of the nomy, rigid rules, standard HR prac- Public Enterprises and Establishments. tices, and lack of employee motivation. In Thailand, the State Enterprise Policy The top leader qualities, as per the study Office is charged with developing a are; positive leader personality, com- profile of board skills called ‘Skill munication skills, change and relation- Matrix’ to identify its skills needs and oriented behaviors, HR skills, and potential members with appropriate decision-making (Gupta, Kulkarni & knowledge, competencies and exper- Khatri, 2018). tise, as indicated by the questionnaire responses by Thai authority. The quali- Age of CEO fication criteria to be considered for Age is a leadership wild card as head- the pool include age, educational hunters and corporate boards ponder qualifications, relevant work experience trade-offs such as energy vs. wisdom. and Thai nationality. Korn/Ferry’s research finds that such In Sweden, a high level of expertise is traits as perseverance, integrity and required in corporate governance, busi- trust have nothing to do with age. ness operations, financial issues or However, conflict management and other relevant areas. Furthermore, negotiating skills improve over time. integrity and the ability to see to the An experienced CEO might help a company’s best interests are required. company avoid repeating mistakes, but

102 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective the flexibility of youth might be for external candidates, age of super- important in an environment of quick annuation being 60 years. Thus, this adjustments (Korn Ferry, 2017). age criteria need to be revisited and brought down. The eternal debate as to what is the right age for becoming CEO continues. Lateral Entry vs Internal Promotion There are some CEOs running major In a McKinsey paper ‘What makes a companies in their 40s and 70s, and CEO exceptional’, the authors have those interviewed say that age has little presented their finding based on research to do with success and leadership. The from experiences of exceptional CEOs, median age for an S&P 500 CEO in those defined as the very top performers 2007 was 55, according to executive in their data set of roughly 600 chief search firm Spencer Stuart. If anything, executives at S&P 500 companies bet- companies are gravitating more toward ween 2004 and 2014. Exceptional the sweet-spot age of 55 (Korn Ferry, CEOs were defined as CEOs who deli- 2017). vered more than 500 per cent growth The ordeal of CEO is tested in the in total returns to shareholders over cradle of pressure. Experience, which tenure, normalized for performance of we correlate with age, is not about broader industry. CEOs, who are hired having more answers. It is about ask- externally tend to pull more strategic ing the right questions. Thus a younger levers than those who come from within guy can demonstrate better compe- and outperform their internal counter- tency despite being less in age. Charac- parts over tenure. Exceptional CEOs ter and courage are more important are twice as likely to have been hired than age. However, considering the from outside the company. (Birshan, context of the government, where risk Meakin, & Strovink, 2017). avoidance is generally observed grow- It is interesting to note that 55 per cent ing with age, it would be wiser to limit of the exceptional CEOs were internal the age of entry level to CEO to 55. hires in the mentioned study. Clearly, Public Enterprise Selection Board (PSEB) insiders can move aggressively and specifies two years of residual service achieve outstanding results. Doing so as on the date of vacancy pertaining often means cultivating an outsider’s to the date of superannuation for point of view to challenge the internal candidates and three years of company’s culture with greater objec- residual service as on the date of vacancy tivity and overcome the organizational related to the date of superannuation inertia that sometimes limits an insider’s 103 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise span of action. A CEO selection pro- operational parameters. However, the cess based entirely on internal talent is behavioural aspects of an employee considered as a band-aid solution for play a very vital role in the employee a larger wound. In this context, com- executing the assigned goals, which is ments of R.V. Shahi, Former-Secretary, normally relegated to the background. Power, Government of India is apt. He With competency model, there is a observed that the institutionalised well-rounded assessment of an indivi- arrangement for selection should hold dual by measuring and assessing the good only up to general managers. behaviour of employees. Beyond that, leadership positions should be open to everyone (Spencer, Competencies have been defined in Rajah, Mohan & Lahiri, 2008). many ways. However, a practical definition of competencies that is easy to Past Performance as a Predictor of understand has been defined by Boyatzis Future of Hay Group. It states that competencies are those underlying characteris- London School of Economics research tics of an employee – motive, trait, skill, has brought out that an individual’s aspects of one’s social image, social role past performance plays a minor role for or a body of knowledge, which can CEO positions in major non-financial result in effective and/or superior perfor- firms by the search agencies. The inter- mance in a job or role’ (DoPT, 2014). national search firms choose candidates on the basis of more observable In the National Training Policy (NTP) factors such as good references, their 2012, Government of India has career path – whether the person has brought out that competency will be held one or more managerial posts and the building block for all HR inter- has had fairly clear upward progression ventions. Further NTP 2012 brought – and the board’s anticipated approval out that “For moving to a competency- of them, what is called ‘fitting in’, rather based approach, it would be necessary than looking at past performance to classify the distinct types of posts (Sangani, 2015). Currently, PSEB makes and to indicate the competencies overwhelming emphasis on past required for performing work in such performance, which needs to be revisited. posts. Once the competencies are laid down, an individual’s development can Competency Mapping be more objectively linked to the The performance of an employee is competencies needed for the current generally assessed based on technical / or future jobs. Career progression and

104 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective placement need to be based on matching CEOs. It found the best Indian CEOs the individual’s competencies to those have competencies in four general required for a post. The training plan areas : Socially responsible business of each ministry/department/organi- excellence, energising the team, mana- sation needs to address the gap ging the environment, and inner between the existing and the required strength (Spencer et al 2008). The competencies and provide opportuni- three components of socially respon- ties to the employees to develop their sible business excellence are adaptive competencies.” thinking, entrepreneurial drive and A competency dictionary is a collection excellence in execution. The three of competencies for an organisation or components of energising the team are set of organisations from where com- driving change, team leadership and petencies for specific jobs or roles can empowerment with accountability. be identified. This competency dictio- The three components of managing nary could be applied to various environment are networking, organisa- human resource management functions tional awareness and stakeholder such as training, recruitment, perfor- influence; the two components of mance management, placement and inner strength are, executive maturity promotions. The implementation and transcending self. (Spencer et al, toolkit provides detailed guidelines on 2008). how departments/organisations can apply this Competency Dictionary for DoPT Competency Dictionary HRM functions. Toolkit : The Department of Personnel Various CPSEs, which have rolled out and Training (DoPT) of the Govern- their competency models are; Rourkela ment of India with the United Nations Steel Plant (RSP), National Aluminum Development Programme (UNDP) Company Ltd., (NALCO), Bharat initiated the project titled ‘Strengthe- Dynamics Limited, National Hydro- ning HRM of Civil Service’ in the year electric Power Corporation Ltd., 2011. This project created ‘Compe- National Thermal Power Corporation, tency Dictionary’ (Government of Power Grid Corporation of India India-UNDP 2013), comprising of 25 Ltd., and Tehri Hydro Development core competencies across the various Corporation Ltd. roles and positions of civil service emp- Hay group conducted a study to find loyees in four categories: ethos, ethics, competencies for successful Indian equity, and efficiency in Table-1.

Table-1 : Basket of Competencies and their Short Explanation Competency Definition ETHOS 1.1) People first Passion for serving people with special care for the marginalised and disadvantaged. Being approachable, welcoming, caring and rising above bias while interacting with people. Understands the needs of the people and constantly strives to improve the services. 1.2) Strategic thinking Ability to understand dynamic internal and external environment and its impact. Responds to the opportunities and challenges for the betterment of society. 1.3) Organisational Understanding of the organisation’s mandate, structure, policies, awareness processes, norms and its interface with other organisations. It also includes an understanding of the organisation’s informal structures, power dynamics and constraints. 1.4) Commitment to Aligns behaviours and interests with the needs and goals of the the organisation organisations. 1.5) Leading others Ability to engage, energise, and enable the team to excel. ETHICS 2.1) Integrity Consistently behaves in an open, fair and transparent manner, honours one’s commitments and works to uphold the Public service values. 2.2) Self-confidence Belief in own capability to accomplish a task and being able to express confidence in dealing with challenging circumstances without being arrogant or boastful. 2.3) Attention to Having an underlying drive to being thorough and meticulous and detail to comply with procedures, rules, guidelines, and standards. Digs deeper and strives to reduce uncertainties and errors. 2.4) Takes Takes ownership for outcomes (successes or failures) while addressing accountability performance issues fairly and promptly. EQUITY 3.1) Consultation and Ability to identify the stakeholders and influencers, seek their views consensus building and concerns through formal and informal channels. Build consensus through dialogue, persuasion, reconciliation of diverse views/interests and trusting relationships. 3.2) Decision-making Makes timely decisions that takes into account relevant facts, tasks, goals, constraints, risk and conflicting points of view. (Contd...) 106 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective

Competency Definition 3.3) Empathy Empathy is about being able to accurately hear out and understand the thoughts, feelings and concerns of others, even when these are not made explicit. 3.4) Delegation Delegates responsibility with the appropriate level of autonomy so that others are free to innovate and take the lead. EFFICIENCY 4.1) Result orientation High drive for achieving targets and competing against a standard of excellence. 4.2) Conceptual Understanding a situation or environment by putting the pieces thinking together and identifying patterns that may not be obviously related. Connecting the dots while resisting stereotyping. 4.3) Initiative and drive Contributing more than what is expected in the job. Refusing to give up when faced with challenges and finding or creating new opportunities. 4.4) Seeking An underlying curiosity to know more about things, people, or issue. information This includes “digging” for exact information and keeping up-to- date with relevant knowledge. 4.5) Planning and Ability to plan, organise and monitor work with effective utilisation coordination of resources such as time, money, and people. 4.6) Desire for Keeps up-to-date with relevant knowledge and technology, share latest knowledge developments with others, and advocates the application of acquired knowledge. 4.7) Innovative Open to change, approaches issues differently, offers alternate/out of thinking box solutions and strives for efficiency by working smartly. 4.8) Problem-solving Understanding a situation by breaking it into small parts, organising information systematically and setting priorities. 4.9) Developing Genuinely believes in others’ capabilities to develop and take personal others responsibility for their development. Creates a positive environment for learning and provides developmental opportunities for individual and team. 4.10) Self-awareness Identifies one’s own emotional triggers and controls one’s emotional and self-control responses. Maintains sense of professionalism and emotional restraint when provoked, faced with hostility or working under increased stress. It includes resilience and stamina despite prolonged adversities. 4.11) Communication Articulates information to others in language that is clear, concise, skills and easy to understand. It also includes the ability to listen and understand unspoken feelings and concerns of others. 4.12) Team-working Working together as a unit for common goal, building teams through mutual trust, respect and cooperation.

Selection Methodology As per DoPT implementation toolkit, officers who exhibit such competen- Conference Board brings out that cies, its associated behaviours while ‘Companies are in too much of a hurry performing their duties have a higher to make leaders out of managers. It is not easy to find inspirational leaders chance of producing better results. that can motivate people in all times, Once the gap in competencies is asses- both good and bad. What we have sed, officers can better understand most of the time are clinical managers possible reasons for their failure and who are good at following mandates in determining remedial steps. It says, and using technology and implemen- competency directory will come handy ting programs but not at leading for the appraising agencies, who can people. They are not inspirational. We pick and choose six to eight relevant have seen great managers who are bad competencies based on the context of leaders’ (CB, 2014). It is necessary to the organisation and job role played put appropriate mechanism to filter by the officers. Having decided the leaders from managers. competencies, it is important to lay down a robust selection process. PSEB is responsible for the selection and placement of personnel in the posts Selection Committees : OECD guide- of chairman, managing director or lines recommend board to identify the chairman-cum-managing director right mix of skills, experience and per- (Level-I), and functional director sonal characteristics. The boards could (Level-II) in CPSEs as well as in posts seek expertise from management at any other level as may be specified recruitment agencies (or head-hunters) by the government. PESB advises the and/or create a “Directors’ pool” based government on matters relating to on rigorous qualification criteria. appointments, confirmation or extension China, Korea, Malaysia, Thailand and of tenure and termination of services Sweden have such practices (OECD, of the personnel of the above men- 2018). tioned levels. Further, PESB advises the government on the desired structure Ram Charan in an article ‘Why boards at the board level, and, for senior mana- fail to choose the right CEO’ brings gement personnel. It also advises the out how IBM selected its CEO. He is government on a suitable performance of the opinion that there is no generic appraisal system for both the CPSEs capabilities of CEO which makes them fit and the managerial personnel in such for any unit, rather the unit’s requirement enterprises. to be matched with candidate’s

108 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective profile. To find a successor to CEO, high energy. Two more are especially John Akers in IBM appointed a commi- important: decisiveness, a bias toward ttee in 1993. The consensus of head- saying ‘yes’ or ‘no’ rather than ‘may be’ hunters, pundits, security analysts and and courage. media was that IBM’s new boss needed infotech experience. Some believed Bucket-2 : Skills-Specific abilities like IBM especially needed someone who the ones Murphy and Burke identified could win the PC war. The selection for IBM’s CEO. They will vary widely committee comprising of Murphy and from company to company and era Burke took a radically different view. to era. For example, for units facing They laid down a set of non-negotiable significant challenges of product criteria : Customer orientation; busi- obsolescence, skills may include ness acumen – the ability to diagnose change management, new product what ailed IBM and see how to fix it; positioning and marketing. and the ability to execute needed Bucket-3 : Relationships- In most change and take the company forward. companies, much is achieved through They did not use generic terms like a sustained network of external and “vision” or “strategy,” and they explicitly internal relationships. It does not happen did not require infotech experience. The fast. External relationships in particular board selected Lou Gerstner, CEO of RJR/Nabisco and previously president of are built over long periods and become American Express. He was not a techie, valuable two-way bridges of informa- but outstanding on each of the three tion. There is a need to examine candi- criteria. He famously made clear that date’s record of building enduring rela- IBM did not need a vision and then tionships at several levels and converting rescued the company from the verge them into strategic advantages. of breakup, leaving it eight years later Bucket-4 : Judgment- Almost all deci- as one of the world’s most admired and sions at the CEO level require trade-offs, valuable corporations. (Ram Charan, and many factors are qualitative and 2012). Ram Charan explains the con- subjective. It needs to be examined, cept of selection criteria of CEO into how effective is the candidate’s judg- five buckets. These criteria can help in ment on key questions. In addition, making specific, pointed conclusion. there is a need to look how sage have Bucket-1 : The ‘givens’ – intelligence, the candidate’s judgments been on character, past record of performance, people, strategic bets, and resource a methodology for excellent execution, allocation.

Bucket-5 : Perception and cognition- defined as “a variety of testing tech- There is a need to examine, if a candi- niques designed to allow candidates to date sees what waits around the bend demonstrate, under standardized con- before others do? Powers of perception ditions, the skills and abilities that are and the ability to connect diverse exter- most essential for success in a given job”. nal forces are worth a lot of points. The Bureau sought the assistance of There is a need to find evidence from Egon Zehnder, talent strategy and past experience, about the ability and leadership development firm, to conduct resilience in the face of shocks. such tests through an assessment centre (Bandyopadhyay, 2017). In light of the above, necessary objective test criteria may be built on the above Steps in Selection Process five buckets to find suitability of the potential recruit for CEO job. While doing empanelment for central posting at the ministry level, the gov- Shareholders’ Right to Elect Board ernment is already using 360-degree Members : The OECD SOE guide- appraisal system—that includes assess- lines call for the relevant decision-making bureaucrats on integrity and repu- ing and advisory bodies to have a prior tation, through a comprehensive back- consultation with non-government ground check, before their empanel- shareholders concerning all board ment. This concept can be applied for appointments. In listed state-owned CEO’s selection and their subsequent enterprises, the enterprises establish evaluation. While an executive gets external nomination committees into the senior leadership positions, attached to their annual general meet- he/she needs to be assessed for his/her ing of shareholders, which ultimately competency and training interventions has the right to appoint the board. In need to be undertaken for plugging the most cases non-state shareholders gaps over a period of one to three years should take part to the committee so that he/she can become a better (OECD, 2018). potential candidate for CEO. It is interesting to note that the Banks The key steps for the selection com- Board Bureau followed one of the most mittee in suggested interview process advanced process of selection for five are : executive directors of public sector banks for top posts using an assess- • The selection committee should ment centre through a global executive decide the list of questions, which search firm. An assessment centre is focus on the areas of concern.

110 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective

• The selection committee should individual’s executive intelligence and meet with the two shortlisted finalist ability to succeed in more complex and candidates. Each candidate should demanding contexts is more important receive at least thirty minutes to than past accomplishments. Past research present his or her experience and has shown predictive power of these plans for the organization, followed traits on executive performance – and by forty five to sixty minutes of Q&A. their link to the business performance. The search consultant should be Boards should strive to gain an under- present only as an observer. standing of candidates’ analytical capabilities, social intelligence and • The selection committee should self-awareness. provide an interview guide to the board outlining the critical compe- The selection must compile and share tencies from the position specifica- the following multifaceted information as well as the key organization with the entire board; the results tional culture attributes and ask from a capabilities-based interview, each member to rate the candidates reflecting past performance; the results in these areas. This will eliminate from a rigorous assessment of poten- subjectivity and focus on concrete tial and aptitude, predicting future skills and performance. performance; the results from prelimi- nary reference checks and 360-degree • The selection committee should conversations about the candidate’s finally agree on a single candidate. leadership style and its impact on the • The selection committee can take business, providing a current baseline; assistance from a search firm to get and cultural assessments, highlighting feedback from former superiors, the difference between the CEO peers and subordinates. References prospect and the current culture of the provided by the candidate should enterprise, as well as the individual not be weighed as heavily as others leader’s interpersonal style (Steuer, (Spencer at al, 2008). Abell & Wynn, 2015). Although some organizations evaluate Mentoring and Training candidates based on personality testing, No candidate is a perfect fit. The board there is no clear correlation between should identify where the winning personality and performance (Guion candidate falls short and determine and Gottier, 1965, Steuer, Abell and how to help him or her close the gap. Wynn, 2015). Skills that bring out The directors need to discuss up front 111 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise what risks they are taking by choosing ones, do not believe they need to that candidate. They should also try invest in themselves. They simply don’t to imagine how the candidate might believe in continuing education or evolve over time. An emerging best continuous learning once they reach a practice is to appoint a senior director/ certain level. But seriously, would you external mentor as a sounding board rely on a surgeon who studied 20 years and coach to help make the new CEO ago but has never refreshed his skills successful, with a highly structured or updated his practices (CB, 2014)?” plan for delivering that help in the CEO’s first year. To enhance SOE board professionalism and performance, the OECD SOE CEOs face unique challenge, being guidelines recommend that appointed lonely at the top. They must keep rais- directors receive a minimum level of ing their game—and having their training (i.e. induction training), so thinking usefully challenged—for the that SOE board members are well good of their organizations. They must informed of their responsibilities and routinely make decisions concerning liabilities. Induction sessions should matters they have never before tackled. take place within the first month of In such high-stakes situations, CEOs an appointment before the first board need wise mentoring. CEOs need meeting. It recommends that govern- someone who he can share his fears and ments encourage ongoing professional challenges with; someone whom he development through technical or has a great rapport with and who will specific training (OECD, 2018). listen to him when he needs the most; In this regard, Dun & Bradstreet identi- and someone he can trust completely, fied best practices of Aditya Birla Finance who has no agenda. In high perfor- Limited, which encourages and enables mance organizations, executives accel- employees to own their learning through erate their learning by engaging the an array of structured tools and processes services of high-profile veteran leaders (Dun & Bradstreet, 2017). from outside their companies through a mentor. Unlike bosses, mentors are • Leadership Talent Development not a burden to be shouldered, but a Program : About 25 per cent of support system that can be relied. the population being part of the Talent Pool. CB brings out “Learning agility is one aspect of leadership that is missing • Talent Council – The Leadership here. Our leaders, especially experienced Board/Governance Body for talent

112 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective

management decisions, provides posting and management of CEO to opportunities for inter and intra reduce the type I error, which are : business unit movements in the group. • Identifying specific requirement for each organisation for CEO job • Fast Tracker – Being high on per- specification. formance and potential, 67 per cent of the talent pool has experienced • Competency modeling and Job enhancements/Job enrichments assessment. within the organization. • Selecting of CEO through a structured • Succession Plans – 100 per cent behavioral interview process. Leadership Bench strength identified • Cap on age of CEO at entry to be for the CXO positions and critical put at 55. positions across the organization. • Taking assistance of search agencies Leaders play an important role in deve- in evaluating the CEOs through an loping a culture and mindset of agility assessment centre. among employees. They also promote performance measurement and incen- • Referral check from stakeholders. tive structures which reward a ‘whole • More emphasis on potential of of enterprise’, ‘whole of government’ CEO than mere past performance. and ‘whole of society’ view focused on outcomes and impact as opposed to • Induction training, mentoring structures, processes and outputs. And and orientation and professional because the public sector presents development. unique conditions and challenges, it The challenge is to identify each public is crucial to identify CEO potential sector specific competencies, conside- candidate, who possess right compe- ring their unique context, followed by tencies. Subsequent to the selection of development and nurturing of CEO a right CEO candidate, effective public competencies among present and service leadership is promoted by potential leaders. Leadership selection, setting high expectations and investing succession planning and talent mana- in continuous learning. gement processes need to be refined Some of the special interventions/prac- so that public sector CEO is chosen tices need to be taken for selection, and nurtured with perfection.

References Hauswirth, J.M. (2016) CEO Selection : The Costs of Getting it Wrong, retrieved from : Bandyopadhyay, T. (2017) How Public Sector https://www.spencerstuart.com/research- Bank CEOs are Selected, Mint, 10-April. and-insight/ceo-selection—the-costs-of- Birshan, M., Meakin, T. & Strovink, K. (2017) getting-it-wrong. What Makes a CEO ‘Exceptional’? INSEAD (2012) India’s top-performing CEOs, McKinsey Quarterly. retrieved from : https://knowledge.insead. Bower, J.L. (1977) Effective Public Manage- edu/node/762/pdf. ment, Harvard Business Review, March. Jain, P.K., Gupta, S., & Yadav, S.S. (2014) Conference Board (2014) The Future India Public Sector Enterprises in India : The Impact Business Leader, retrieved from : https:// of Disinvestment and Self-Obligation on www.conference-board.org/publications/ Financial Performance, New Delhi : publicationdetail.cfm?publicationid=2792. Springer. DoPT (2014) Competency Dictionary for the Khatri, N. (2011) A Taxonomy of Supervisor- Civil Services, retrieved from : http:// Subordinate Exchanges across Cultures, persmin.gov.in/otraining/Competency IIMB Management Review, Vol.23, No.2, %20Dictionary%20for%20the%20Civil pp.71-80. %20Services.pdf. Khatri, N. (2016) Crony Capitalism in India : Dun & Bradstreet ( 2017), HR Best Practices Establishing Robust Institutional 2017 : Transforming the Thinking, retrieved Frameworks, UK : Palgrave Macmillan. from : http://www.dnb.co.in/edm/files/ Korn Ferry (2017) Age and Tenure in the C- HR_Best_Practices_2017.pdf. Suite : Korn Ferry Institute Study Reveals Guion, R.M. & Gottier, R.F. (1965) ‘Validity Trends by Title and Industry, retrieved from : https://www.kornferry.com/press/ of Personality Measures in Personnel age-and-tenure-in-the-c-suite-korn-ferry- Selection’, Personnel Psychology, Vol.18, institute-study-reveals-trends-by-title- pp.135-164. and-industry. Gupta, V., Kulkarni, S. & Khatri, N. (2018) Botelho, E.L., Powell K.R., Kincaid, S. & Leadership and Management of Public Wang, D. (2017) What Sets Successful Sector Undertakings in an Emerging CEOs Apart, Harvard Business Review, Economy, retrieved from : https://web. May–June. iima.ac.in/assets/snippets/workingpaper pdf/17499772842018-01-04.pdf. Moran, G. (2018) How to Figure Out if you are CEO Material, retrieved from : https:// Hansen, J.P. & Villadsen, A.P. (2010) ‘Compa- www.fastcompany.com/40546006/how- ring Public and Private Managers Leader- to-figure-out-if-youre-ceo-material. ship Styles : Understanding the Role of Job Context’, International Public Management OECD (2001) Public Sector Leadership for the Journal, Vol.13, No.3, pp.247-274. 21st Century, Paris : OECD Publications.

114 Selecting and Inducting Public Sector CEO in India : A Risk Management Perspective

OECD (2018) Professionalising Boards of Siugzdiniene, J. (2006) Competency Directors of State-Owned Enterprises : Management in the Context of Public Stocktaking of National Practices, Paris : Management Reform, Public Policy and OECD Publications. Administration, Vol.1, No.18, pp.26-33.

Orazi, D.C., Turrini, A. & Valotti, G. (2013) Spencer, S.M., Rajah, T., Mohan, S. & Lahiri, Public Sector Leadership : New G. (2008) The Indian CEOs : Compe- Perspectives for Research and Practice, tencies for Success Keys to Outstanding International Review of Administrative Indian Corporate Leadership,Vision, The Sciences, Vol.79, No.3, pp.486-504. Journal of Business Perspective, Vol.12, PwC (2016) Government and the Global No.1. CEO : Redefining Success in a Changing World, retrieved from : https://www.pwc.co. Steuer, M., Abell, P. & Wynn, H. (2015) nz/pdfs/19th-annual-global-ceo-survey-2016- Head-Hunter Methods for CEO Selec- government-and-the-global-ceo.pdf. tion, Journal of General Management, Vol.41, No.1. Charan,R. (2012) Why Boards Fail to Choose the Right CEO, retrieved from : http:// Trammell, J. (2014) The Three Qualities fortune.com/2012/08/08/why-boards- a CEO Must Have to Succeed, Forbes, fail-to-choose-the-right-ceo. June, 10th. Roberts, A. (2017) Our Asian Challenge, Wart, V.M. (2003) Public-Sector Leadership Governance, July. Theory : An Assessment, Public Sangani, P. ( 2015) How CEO Appraisals Administration Review, Vol.63, No.2, Really Work, Economic Times, April, 17th. pp. 214-228.

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115 The Journal of Institute ofThe Public Journal Enterprise, of Institute July-December, of Public Enterprise, Vol. 41, No. July-December, 3&4 Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise ISSN : 0971-1864, © 2018. Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad

Shreshtha Dabral* & Samik Shome**

India has witnessed the birth, growth and collapse of many start-ups in the past few years. Some have stood against the odds, stride and emerged as home grown unicorns. The Government of India also through its various programs like Start up India, Make in India and Digital India have tried to promote private sector development through entrepreneurial ventures. In the backdrop, the central idea of this study revolves around identifying the hindrances start-ups face in Gujarat with special reference to the city of Ahmedabad. The paper addresses two specific objectives. First, it attempts to recognize the probable issues and challenges faced by start-ups in Ahmedabad; and, secondly, it examines the role State plays in providing assistance to promising entrepreneurs. The study identifies lack of government support, financial constraints, deficiency in appropriate human capital, unsatisfactory ecosystem, minimum interest from the financers and skimpy pricing policy are the major apprehension among the start-ups to mature in the city of Ahmedabad. The new ventures would require the State government to come with an a holistic step through integrating theoretical and policy frameworks. The paper contributes to literature in two distinct ways. First, it provides empirical evidence of the issues and challenges that the start-ups face at the grassroots level; and secondly, it documents how the State can play a role to solve the issue of stagnation in start-up growth.

Keywords : Start-ups, Entrepreneurship, Startup India, Pradhan Mantri Mudra Yojana, Multi-case Research, Asymmetric Information, Technology Enterprise.

Introduction Entrepreneurs are known for having strong desire to control their own Entrepreneurs are born and not made destiny (Deakins & Whittam, 2000; has been a debate that has raged for Salamzadeh, 2014). This passion is so decades with no conclusive proven intense that entrepreneurs will risk their evidence from either side. However, some of the most successful entrepreneurs * Dr.Shreshtha Dabral, Assistant Professor, like Mark Zuckerberg, Steve Jobs, Bill Institute of Management, Nirma University, Ahmedabad, India. Gates, Jeff Bezos, Larry Page, Serget * Dr.Samik Shome, Associate Professor,Institute Brin, and Jan Koum, among others, did of Management, Nirma University, Ahmedabad, not come from entrepreneurial families. India. 116 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad family, secured career and future for a Shri.Narendra Modi has been big on better way or an idea that would really changing the rhetoric around business change their life. However, there is no and profit. Government started provi- ‘one-size-fits-all’ blueprint to achieve ding support for entrepreneurial initia- entrepreneurial greatness. In fact, bud- tives. A series of high-level initiatives, ding entrepreneurs cannot apply “one- including Start up India, Make in India, size-fits-all” to different sectors of the Digital India, Pradhan Mantri Mudra economy. However, research has found Yojana (PMMY) and Mudra Bank, common personality traits among among others have been launched to entrepreneur. The most important of promote private sector development these are the determination to succeed, through entrepreneurial ventures. In a passion for what they are doing, the fact, in India, November 9th, every ability to learn from their mistakes and year is now celebrated as ‘National take failure on the chin, a long-term Entrepreneurship Day’. vision and a sixth sense that signals an Taking a look back towards the Indian on-coming opportunity. Hence, for business history and legacy, Gujarat every start-up, the crucial phenomenon (a State in Western India) stands out to is risk taking, capabilities to adopt and be the state of entrepreneurs and busi- foresightedness. nessmen. A land of growth, progress, Over the last decade, entrepreneurship development and success, Gujarat is and new venture formation have been called the ‘Karmabhumi’ or ‘land of considered as an important propulsion action’ for risk takers and aspiring of economic development in India. entrepreneurs. However, despite the They have not only received a lot of globally renowned success of businessmen attention from the scholars of several with Gujarati connect, the state still lags fields (like, economics of innovation, behind many states and metro cities entrepreneurship and strategic manage- within India in terms of successful start- ment) but have also included it as a ups. According to a report by Grant compulsory course in the curriculum Thornton (2016), National Capital of almost all leading business schools Region (NCR), Bangalore and Mumbai across India. Recognizing that the gov- contributed 87 per cent of total invest- ernment cannot generate sufficient ment value and 84 per cent of total employment for the country, and the investment volume in 2015. Hence, slowing down of private investment, cities like NCR, Bangalore and the Government of India under the able Mumbai and also Hyderabad and Pune leadership of Hon’ble Prime Minister have shown a better prospect than the

117 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise top cities of Gujarat (like, Ahmedabad, perspectives: finance, human resource, Gandhinagar, Vadodara, Surat and environment and support mechanism. Rajkot) when it comes to ease in estab- Three research questions are addressed. lishing a start-up organisation and sub- The first one examines the financial sequently growing into a formidable, issues during the inception and its per- full-fledged business. Hence, despite of sistence. The second question cultivates the tendency of being better risk- the challenges and bottlenecks faced by analysers and possessing high risk-taking the start-ups. The third one looks at abilities, the start-up scenario within how the state effectively supported Gujarat is very dismal and not on a these entrepreneurial ventures. constant state of rise. This paper contributes to literature in In the given background, the central two distinct ways. First, it provides idea of this study revolves around iden- empirical evidence of the issues and tifying the hindrances start-ups face in challenges that the start-ups face at the Gujarat with special reference to the grassroots level. These findings from city of Ahmedabad. The paper has two Ahmedabad may be consistent with the specific objectives to study. First, it Indian scenario. It further probes a attempts to recognize the probable issues common argument put forward to and challenges faced by start-ups in explain the ease doing business in India; Ahmedabad; and, secondly, it examines in particular, it documents an associa- the role that the state plays in providing tion between the level of obstacles and assistance to promising entrepreneurs. the likelihood of failures. These results Multi-method, multi-case research allow venture capitalists’ to have enough understanding of management prac- design were incorporated for collecting tices, through which they price their field research data. The proprietary investment and participation. The nature of the data and the details needed second contribution documents how to address the research questions the state plays a role to solve the issue demanded the design of tailored data of stagnation in start-up growth. In collection instruments. For each start- particular, this study also highlights the up in the sample, information is collec- recent initiatives the State has adopted ted through semi-structured interviews regarding this issue. with the founders. Four start-ups are considered for this study. The paper The organization of the article is as analysed how these start-ups build up follows. Literatures related to start-ups their business from four different and their issues are reviewed in Section-2.

118 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad

The entrepreneurial scenario in Gujarat The lack of experience acts as a constraint is presented next in Section-3. Section-4 for the entrepreneurs plunging into the gives an idea how various issues and dynamic and ever evolving competitive challenges are faced by the start-ups in industry (Schade & Siegel, 2008). In Ahmedabad through four case discus- other words, the knowledge and expe- sions. Further analysis of these cases are rience required to survive in the indus- discussed in Section-5. Implications of try is found to be limited in case of the study for policy-making and research nascent entrepreneurs. Therefore, the are represented in Section-6, followed differentiating factor of innovative by certain concluding comments in ideas or assets is missing from the Section-7. start-ups (Bhide, 2000). However, there Review of Related Literature are few exceptions too with respect to this subject. Jack Ma and Bill Gates Creating a new endeavour would have been exceptions, and massively mostly encounter difficulty and failure successful with limited experience and (Reynolds & Miller, 1992; Van De Ven qualification. et al., 1984). Most of the start-ups are unable to sustain themselves and even This section aims to identify and if they sustain, surviving beyond one examine the most common difficulties to two years is very rare (Patel, 2015). and challenges encountered by start-ups Risk and uncertainty go hand in hand in the early stages of establishment, with a new venture. There have been irrespective of sector or industry. The many start-ups that have changed the review of literature is done based on mechanism and practices of the indus- four typical challenges faced by most try and the customer and emerged with of the start-ups: (a) Financial chal- success, however issues like securing lenges; (b) Human resource challenge; (c) Support mechanism; and, (d) Envi- finance, expertise knowledge, network- ronmental elements. These challenges ing in the venture circle have been com- are identified from the paper of mon to all the venture. The start-ups Salamzadeh and Kesim (2015). also faced problems like increasing labour cost, generating reputation in (a) Financial Challenges the dynamic market, issues of raising The initial step for any business is finance capital (Storey, 1985; Shepherd et al., and this has been one of the most 2000; Ebben & Johnson, 2006; prominent challenge for start-ups to Serarols, 2008; Salamzadeh, 2014). raise external finances (Bannock 1981).

Despite the stage that the start-up is at alliances, and establishing credibility financial issues are mostly encountered (Salamzadeh et al., 2015). Banks by venture for multiple reasons (Colombo face this administrative and financial & Piva, 2008; Tanha et al., 2011; burden which is not regularly witnessed Salamzadeh, 2015 a, b). For example, by large established firms. Penalising the whether it is bootstrapping which start-ups for having inadequate com- requires entrepreneurs to source their mercial or financial history – an under- funds through their family and relatives mining factor to its credibility as a busi- or at the seed stage where the discus- ness entity (Bruton & Rubanik, 2002; sion takes place with the angel investor Ebben & Johnson, 2006). proposing their expansion plans and valuation. Every stage has its challenge (b) Human Resource Challenges with reference to finance. In order to Usually a start-up is founded by one take advantage of venture capital, founder or few co-founder. But as the preparation of a plan and supporting venture starts growing they require the documents are carried out by the right people with specialized know- founder, this takes place in the creation ledge and experience to perform the stage (Azmat & Samaratunge, 2009). task. The founder would not be an expert While seeking external finance, the role in various functions and processes of of asymmetric information is very the venture and not having the right crucial for the new venture. This was professionals could act as a major hin- strongly suggested in the economics of drance towards growth and expansion information (Maasoumi, 2007). In and this human resource management theory, when conditions of vagueness issues could lead to the dissolution of combines with asymmetric information the venture (Salamzadeh, 2015 a, b). (where investors and borrowers have Bosma et al. (2002) has presented a different sets of information), for the detailed study of firms investing in the funders there are challenges of selection human and social capital for improving (choosing profitable ventures) and performance. Through their empirical moral dilemma (what will entrepre- study they suggested that a proper neurs do with this invested capital) investment in human and social capi- (Deakins & Whittam, 2000). Negative tal increases the entrepreneurs’ perfor- ‘knock-on’ effect in the start-up pro- mance. Again, according to Dwivedi cess which happens due to lack of funds and Singh (2017), nowadays, one of or inability to raise funds lead to problems the biggest challenge faced by the start- with attracting clients and building up companies is to attract best talent

120 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad and retain it. They also submit that bad creating goodwill, which in turn proves hires by start-ups cost more than just to be of immense help during the situa- money, they dent morale too. Bad hires tion of shortage of demand. Macro- do more damage by creating broken economic factors like interest rates, and unbroken teams (Ariyo et al. 2015). inflation and labour costs makes it Hence, before pumping out job de- difficult for the start-ups to survive and scriptions, human resource team has to sustain. Due to the bubble image of the make sure that it is hiring the right start-ups, resource providers hesitate people for the job by creating flexible supporting the start-ups (Vesper, 1990). recruiting frameworks. In India for the manufacturing and ser- (c) Environmental Elements vices sectors the spatial determinants of entrepreneurship was studied by Ghani, Issues like the existing trends, limita- Kerr and O‘Connell (2013). General tions in the markets and legal issues are traits of quality of physical infrastruc- very critical for any venture to bloom ture, workforce education, labour laws and ignoring these trends has led to failure and household banking access played in the case of many start-ups. A number important role. The first two mentioned of academic contributions focus on that had the most significant impact as the importance of contextual (environ- a predictor of entry. Whereas at the mental) factors and identify a number regional level, local education and phy- of possible problems faced by new ven- sical infrastructure provided evidence to tures. Having conducive and support- being strong predictors of entry. Dis- ing environmental facilities is essential couraging entrepreneurship was related for the success of a start-up, the absence to strict labour regulations and for of it could disrupt the mere existence entry in unorganized market better of the venture (Boeker, 1988). An organi- household banking environment was zation at every stage needs a supportive critical. The role of regional conditions environment, but it is argued that a in India for the spatial patterns of start-up would need one more than an entrepreneurship compared to incumbent established firm (Bhave, 1994; Bruton industry locations is much stronger as & Rubanik, 2002; Van Gelderen et. al., compared to the United States. 2005). D) Support Mechanism Studies conducted by Storey (1985) and Bhide (2000) in the UK and the Furthermore, few studies tried to combine USA analysed that in the short journey the impact of management control of start-ups they face difficulty in system and functioning of start-ups. 121 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise

Managerial challenge were faced by not a mere happening. These areas had firms expanding beyond informal the right mix of novel ideas, enterprising interaction boundaries Davila and George people, and a culture of risk taking (2005). During the transition period which amalgamated and resulted in crea- adaptation of management control sys- tions of transformational business ideas. tem requires the attention of top mana- It would be wrong to say that only an gement and provides the infrastructure idea could transform the economy of a to scale up the business model which is region. These regions have strong mag- very crucial. Positive relation was found nets ranging from like premier institu- between adoption of management tions to restaurants and bars, which pull control system and start-up firm the youth provide them a platform for growth (Ebben & Johnson, 2006; intellectual stimulation. This was Ritchie & Richardson, 2012). analysed by Venkataraman (2004). Similarly, the role of institutional Considering the Indian perspective, the factors like regulations, culture, norms factors discussed above are also appli- and infrastructure plays a significant role cable to most of the start-ups irrespective in supporting or inhibiting growth. of sector or industry. Additionally, Countries characterised by efficient the last few years for a substantial pro- markets and effective financial and labour portion of Indian start-ups have been regulations assist firms grow more and bumpy because of the deficiency in the faster (Fritsch, 1997; Djankov et. al., support from government, market and 2006). Due to the stringent, costly and blurred vision of the business aspect time consuming process of registering (Monsen et al. 2012). The entry of acce- a new company, the recognition of a lerators and incubators has played a business also become a big challenge for crucial role in shaping the path for start- the start-ups (Ardagna & Lusardi, ups. In order to match its counterpart 2010). The support of angel investors, in other countries there would be a long hatcheries, incubators, science and tech- way (Jain et al., 2015; Kumar 2015). nology parks, accelerators, small busi- Many promising entrepreneurs failed to ness development centres, venture capi- have a realistic business plan along with tals, etc., is very critical in the journey customer validation. The emergence of of a start-up and availability of such a the Goods and Services Tax (GST) has system leads to the failure of a start-up. also added to the complication of busi- Regions like Silicon Valley and Bangalore ness doing (NASSCOM, 2017). Entre- are booming while Albany struggles was preneurship needs simple and stable

122 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad rules, however, the attempts to increase states in India and strong public policy entrepreneurship have not been helped support. Gujarat has always been able by some of the recent policies of the to attract significantly high levels of State. Sharma (2013) made a study on investments, including Foreign Direct women entrepreneurs in India. Women Investment (FDI) among all the entrepreneurs face problems like social Indian states (Assocham, 2015). This barriers, legal aspects, lack of education, has been a factor for sustaining and family support etc was analysed. She accelerating the growth of the State in also elucidated various pull and push the past decades. factors affecting entrepreneurship. In order to foster more entrepreneur- To conclude, it is very unrealistic to ship and promoting innovation by pro- avoid the hiccups that start-ups face. viding an ecosystem that is conducive Although deliberate efforts to reduce for growth of start-ups, the Government the impact of obvious factors in the real of Gujarat has launched several initia- world could be practised, a start-up tives in line with the national start-up needs to be agile, flexible and innovative programs in last few years. The ‘Start-up in the entire process. Scheme’ was announced by the government along with the ‘Industrial Policy Entrepreneurial and the Start- 2015’. Figure-1 provides the flowchart up Ecosystem in Gujarat related to Gujarat Start-up Mission The State of Gujarat has been a home (GSUM) about the scheme. to many famous industrialists known Few research and academic intuitions for their risk appetite and growth. are identified as the Nodal Institutions Therefore the State is known as the land (NIs) by GSUM, industries department, of successful entrepreneurs and indus- who are responsible for dealing with the trialist who have had the ability and start-ups from step one to end. This maturity of commercial knowledge involves inviting proposals from start-ups, (KPMG, 2007). The State also offers assessing them, providing incubation an impressive infrastructure with skilled facility and mentoring facility to grow labour at a competitive cost, great road in the right direction. and port connectivity, reliable power supply through traditional and non-tra- In order to evaluate the growth of the ditional sources like wind energy, indus- ecosystem of Gujarat State, the govern- trial park, competitive commercial real ment has established the Gujarat Start- estate rates in comparison to other up Development Society (GSDS). Right

Figure-1: Start-up Ecosystem in Gujarat

Gujarat Industrial Government Policy 2015 – Equity/Loan Policies / Schemes / Scheme for →→through GVFL as a Gujarat Startup Venture Capitalist

assistance for → Mission Startup/Innovation

Nodal Institution Gujarat’s Funds/Equity Academic Startup Institutions Ecosystem → →

Nodal 20 Nodal Institutions → Institution 4.05 crore spent so far approved for Incubation for developing the Incubation facilities Centers Startup Ecosystem

Source : Gujarat State Start-up Initiatives, Government of Gujarat (2016). from assisting the start-ups to provi- discussion. As discussed earlier, face-to- ding incubators for procuring the funds face interviews were conducted with the to self-certifications and fulfilling com- founders of these four start-ups, namely, pliances are the activities carried by Don’t Scratch Your Head, Oven Bell, GSDC among many others. Food Memories and Z Axis Unmanned Machines Pvt. Ltd. A summary of these Issues and Challenges of Start-ups discussions are presented here through in Ahmedabad : Case Discussions a multi-case based approach. Although few notable start-ups like Space Case-1 : Don’t Scratch Your Technologies, College Bol, Pegasus, Head (DSYH) infibeam.com, Travelyaari, Shradhan- jali.com, Lendingka, Aura and Jolly DSYH is an e-commerce marketplace Food Fellow are the fall out of the that resolves logistics reconciliation. It initiatives taken by the Government of is a SaaS-based (Software as a service Gujarat, however there are several based) platform where sellers de-stress issues and challenges the start-ups are themselves from the pain of reconcili- continuously facing in spite of the ation. Generally sellers face a tough assurance from the state. In this section, time when it comes to reconciling two four such start-ups are considered for records – their own and those of the

124 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad market. It was founded in November DSYH strongly believes that human 2015 by three Gen-X entrepreneurs talent is instrumental in taking the ven- Suraj Vazirani, Sumit Karanji and ture forward. They have a very lean Harshad Vagdoda with a goal of human resource (HR) structure and globalizing their business through a very closely knit team members. The solution to get rid of the termites cofounding team itself takes care of the through reconciliation. HR and gives direct attention into training and development of their With a bootstrap funding and zero client colleagues. They offer attractive com- base, it was always a big challenge for pensation structures to their employees DSYH to establish a client base of more and in spite of being a start-up, com- than 500 in less than a year. They started pensation and rewards model is much product development with the core better than several established corporate offerings of their area of competency in and around Ahmedabad. DSYH i.e. reconciliation. DSYH followed the operate in an open working environ- ‘MUSHCO’ method which is essentially ment with direct access to senior lea- developing the product and features in dership. They have created an open cul- ranking of ‘Must Have’, ‘Should Have’ ture where everyone can give feedback and ‘Could Have’ strategy. This allowed to each other on ‘what is working’ and a good balance between scaling up and ‘what is not working’. Also, rewarding client servicing in terms of product the right candidate with promotions development with developing support instantly rather than waiting for mechanism for clients. Their market- completion of a year cycle is imbibed ing are predominantly done through in the culture of the company which remote team viewer demonstrations, helps to constantly engage employees bulk emailing and referral mechanism with the organizational goals. with the core sales strategy to create an inbound sales engine driven by word Since DSYH was the pioneer in the technology they built, in a short span of mouth, lead generation from affilia- of around two years, they are now tes like Amazon India, partnerships and monthly cash positive and self-suffi- direct agents. DSYH within two years cient. An angle funding of $250,000 has transformed itself from a ‘reconci- was raised from Venture Catalysts in liation-only’ company to an ‘e-commerce June 2016. business management software’ company providing opportunities in data Although the story looks very attrac- visibility, analytics and reconciliation. tive and promising, the progress of

DSYH has not been so smooth. Being Home Chefs. They tried to replicate a start-up from the city of Ahmedabad, the Home Chef concept which is popular DSYH had its own share of challenges. in Mumbai and Gurgaon. They found Based on the discussions with the it feasible and optimal as it does not cofounders, it was observed that the involve huge cost of kitchen, equipment, biggest challenge which they faced is other fixed cost, etc. Their portal com- related to HR. Finding good talents bined with their systems and processes from the city who were ready to join a bring both parties, the home chefs and start-up was initially the main challenge consumers, together in a seamless way. for them. Since the company was in its nascent stage, talented personnel neither Oven Bell started through boot from the premium institutes of the strapped finance with incubation at state of Gujarat nor from outside the Gujarat Technical University (GTU) in state were ready to take up the assign- Ahmedabad. Although this idea of ment although they were innovative and Home Chef was highly appreciated at challenging. Hence, recruitment of the forum of Gujarat Start Up Mis- right candidates for the technical areas sion and promised with some funding, was a daunting task. Similarly, acquain- but due to bureaucratic red tapes and ting people with the product and instability of government functioning, channelizing funding avenues was also it never materialized into reality. difficult at the initial stage. Although in several occasions, the Government Like any other start-up, Oven Bell also of Gujarat has been approached by faced several problems like finance, not DSYH for incubation, events and a ready market, etc., however, their mentorship, but no assistance has been major challenge was related to logistics provided to them till date. and delivery timings. Since this is not a typical restaurant like concept where Case-2 : Oven Bell there is a centralised kitchen with availa- Three friends Pratik, Sandeep and Ravi bility of ready food items, minimum started Oven Bell, a new concept of one and half hours is required to deliver Home Chef in Ahmedabad, in January any food as it was prepared only after 2016. Considering that a majority of the order was confirmed. There are very Indians are concerned about getting few logistic companies available in proper food, especially outside food, Ahmedabad who deliver food items this innovative concept offers ‘Home and none could provide guarantee of Cooked’ food to discerning, quality delivering orders efficiently and most conscious individuals from passionate importantly on time. Hence, Oven Bell

126 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad had to hire its own delivery boys Memories was conceived in August which in turn incurred an additional 2016. Food Memories is an online cost. Other significant challenges which platform where food from legendary this start-up faces are narrow spending and iconic vendors from every nook capacity of customer, availability of and corner of India is given an online cheaper tiffin options, lack of aware- presence to touch the globe. ness about home chef concept and the mindset of the customers. They also Since its inception, Food Memories has always believed in being more than just face many challenges in terms of a food delivery service with their inno- getting appropriately trained people vative and always-on-the-move atti- with respect to communication and tude. At present, this e-commerce technical aspect. brand brings in over 2,400 authentic Although Oven Bell made extensive use Indian delicacies from more than 200 of social media and word of mouth vendors across the country and delivers strategy, they found it extremely diffi- it to over 120 countries. They have cult to at least manage their break even. done their necessary legwork to ensure Hence to cut down the cost, Oven Bell that every food item they deliver comes from December 2016 considered shut- straight from the master’s kitchen and ting down its retail business. At present, is not a cheap, low quality attempt by they are in tie-up with three companies average vendor. in Ahmedabad and they take their orders The initial investment was 6 million for breakfast and lunch as it requires a rupees (60 lakhs in Indian currency) much simpler logistics. from three cofounders who themselves Case-3 : Food Memories are responsible for their verticals of marketing, logistics and finance. The Dr.Harmit Singh, a migrant from company currently has a team of seven Punjab, is a doctorate in finance by pro- members. The HR is non-existent fession and has substantial work expe- in the organization and the reporting rience in the academic field. However, channels are also fairly direct. this educationalist could not resist when he was bitten by the entrepreneurial Within a year Food Memories has bug. Being a foodie, it always used to generated first round of seed funds irritate him to depend on others for which helped them in further expan- procuring his favourite food in an sion of their vision. They aggressively uncertain time period. With this market themselves through social media craze for good traditional food, Food and regularly visit college campuses to 127 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise increase awareness among students who based manufacturer and service provider come to study from across the nation. in the field of Unmanned Aerial Vehicle They have also tried to incorporate new (UAV). It was founded in August 2015. strategies apart from delivering food products to retail customers. Now Food The idea was initiated by Pandya and Paneria from their own experience of Memories also provide customised fes- dealing with Chinese fibre drone which tival hampers during Diwali, Christmas have less pay load capacity and very less and other festivals to the corporates as flying time. In this backdrop, they well as individual customers. started exploring other options for Like other start-ups, Food Memories material that have higher durability and had also applied for various government longer flying duration. They discovered funding but were unsuccessful to receive carbon fibre as a suitable material and any. Also, according to the cofounders, initiated research on it. The initial Ahmedabad has some challenges asso- investment was 3 million rupees (30 lakhs ciated with it for a start-up to grow. The in Indian currency) with a bootstrapped investors lobby is at a passive stage in model. As they did not have enough this state, and hence, the entrepreneurs funds to have steel mould to manufac- are not able to regularly network with ture their first product, they took help them and find the appropriate leads for of a friend who dealt in marble and fund raising. Similarly, identifying the made their first product out of marble right talent with respect to technical and mould. This is how their journey managerial skills and lack of proper started. mentoring for the budding start-ups in Over the years, the company has the city of Ahmedabad acts as a big designed and developed four different hindrance and made the path uneasy products catering to specific needs of and volatile for this start-up. different areas such as defence, fire and Case-4 : Z Axis Unmanned disaster management, forest and agri- Machines Pvt. Ltd. culture, and to cater different service applications such as 3D mapping, Passion turned into a viable technology- LIDAR survey, solar power plant map- based enterprise is the story of Z Axis ping and soil testing, among others. In Unmanned Machines (in short Z Axis). fact, Z Axis is India’s first start-up cate- Flying different multi-rotors and air- ring to defence, security and allied sec- crafts, Jugal Pandya and Pankaj Paneria tors and the only start-up from Gujarat discovered their fascination for unmanned selected for ‘Make in India Week’ in aerial machines. Z Axis is a Gujarat Mumbai in the year 2016. The products 128 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad produced by them are 40 per cent only way to sell its products is through cheaper than the imported UAVs from tender. This works in favour and against Israel, France and the USA. the company simultaneously. As this was a new product and comparatively The customers for Z Axis in Ahmedabad new technology in the market, initially are : State Tourism Department, it was difficult to convince government Anti-Terrorist Squad (ATS), Ahmedabad officials about the utility and benefits Fire and Emergency Services, Indian of the products. Although, the Space Research Organisation (ISRO) favourable part was that they just had and Border Security Force (BSF) among to convince a few government depart- others for supply of the indigenously ments, the other departments would built drones. Entering into such a niche follow and repeat the procurement. market was not an easy task, right from They purposely did not apply for any the designing of the product to the government funding as they found the manufacturing everything had to be of amount to be significantly small and the highest quality. Their products are the process is too unwieldy. made of carbon-fibre, which makes them lightweight and durable. They can Discussions be equipped with different payloads Subsequent empirical cases in the pre- depending on customer requirements. vious section confirms that embarking In their journey of searching funds, on a new business is one of adventure Z Axis identified an angel investor, who and challenge and is accompanied with contributed in both forms as a mentor factors like high risk and uncertainty. and a shareholder. The survey done in the four start-ups for this paper provides an insight into Z axis works at a capacity of 40 drones some of the common challenges that per month with a facility set up in they are facing particularly in light of Ahmedabad. The company has a team the city of Ahmedabad. They are discussed of 10 members consisting of the technical, below in line with the parameters designing and marketing expertise. identified in review of literature. Since the team is a small and everyone has an expertise in their own domain, (a) Financial Challenges there is no in-house training required. All the four start-ups discussed in this The compensation packages are high as paper failed to receive any financial aid the work is one of a kind. from the Government of Gujarat. They Since the major market for Z Axis is found the process to be very lengthy, government and allied agencies, the unclear, highly bureaucratic and less 129 The Journal of Institute of Public Enterprise, July-December, Vol. 41, No. 3&4 © 2018, Institute of Public Enterprise transparent. The monetary amount (c) Environmental Elements associated is also very minimal. Also the All the start-ups eventually had to change trend of bootstrapping is seen in all the their core strategy to suit in well with the ventures studied in order to build faith environment. This happened gradually and credibility of the investor. Entre- after understanding the dynamics of the preneurs in all four cases were not having markets, customer preferences and feasi- any other options but to initiate the bility options. Therefore flexibility is venture through their own fund. ingrained in start-ups. (b) Human Resource Challenges (d) Support Mechanism Ventures based out of Ahmedabad face There is a lack of a dynamic ecosystem, a stiff challenge of recruitment. This is mentors, and common platforms for an unique problem for a city like budding entrepreneurs to collaborate Ahmedabad. Although the start-ups and brainstorm. There is scarcity in the provide an attractive compensation support of angel investors, mentors to package, decent candidates do not want guide, the right cultural mix, incubators, to explore the risk of joining these science and technology parks, accelerators, places due to instability, uncertainty and small business development centres, lack of start-ups who are at an expansion venture capitals, etc., which causes stage. The people who are willing to hindrance towards surviving and deve- join possess ordinary skills in the area lopment of a start-up. of communication, technology and management. Implications of the Study Similarly, an established human Economists like Schumpeter, Samuelsson and Vanderwerf have made a valuable resource department is absent in most contribution to the emergence at the of the ventures as they follow the prin- macro level, however the process and ciple of ownership. Every cofounder is understanding of entrepreneurial activi- responsible to train their team and every ties at the micro level is still vague. While employee has to take ownership of the discussing with the co-founders the task and allied activities, as there are process is ingrained with spontaneity limited number of employees and and uncertainty. The process of initia- resources. However, every founder does ting a new venture would be multi- not possess substantial knowledge of dimensional. corresponding field and hence it sometimes creates issues in retaining the right Few common characteristics of the talent within the organization. issues and challenges have emerged 130 Not So Easy for ‘Start-ups’ to Start in India : Government Policies and Start-up Scenario in Ahmedabad from the survey of four start-ups in Concluding Remarks Ahmedabad. Support and right ecosys- Initiating a new venture is not an expe- tem from the state is extremely criti- ditious activity. Uncertainty and spon- cal, however single best approach or taneity makes the process extremely solution for start-ups to survive and challenging and dynamic, therefore to grow is non-existent. Solely crafting pin down an exact theory is difficult dynamic and vibrant start-up policies (Evers, 2003). Generalization would be may not be very effective until and impossible for startups who are so unless they are implemented well. The diverse in the existence (Gartner, 1985). states may lack resources and may not The process for a new venture creation be able to support start-ups fully. are accompanied by various issues and Therefore, it is important to address challenges which are discussed in the core issues and simultaneously generate literature. This paper examined and solution mix. considered the issues and challenges the Since the founders, their ideas are so start-ups face in Ahmedabad. In the light of the survey conducted in four diverse, it is not viable to follow a generic start-ups in Ahmedabad, it was revealed model which could be applicable to by the cofounders that lack of govern- all the start-ups and States. Future ment support, financial constraints, research could contribute to specific deficiency in appropriate human models in accordance to the sector and capital, unsatisfactory ecosystem, mini- states of development. Research in this mum interest from the financers and direction could be beneficial for all, the skimpy pricing policy are the major policy makers, academicians and entre- concern in the city of Ahmedabad. Inte- preneurs. State-sponsored research pro- grated theoretical frameworks of new grams in this area would benefit start- venture creation and initiative from the ups from having an evaluation research state is very important can be review design as part of the project itself. This closely to have a holistic understanding. would allow for appropriate data to be Also, scholars can take these issues for generated, it will sustain momentum further research in order to develop a as the implementation steps progress, comprehensive theory of start-ups. and it will enable the lessons from success or failure to be carried forward However, to conclude in an encouraging for future schemes. Also, Information and positive note, a recent article in Live and Communications Technology (ICT) Mint (2017) express that traditional capabilities have to be leveraged to push business houses are increasingly invest- the program forward. ing in start-ups to tap into disruption

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S.No. Title of Programme Dates Programme Director (s) 1 Valuation of Public Sector Enterprises May 10-11, 2018 Dr A Pavan Kumar 2 Ethical Hacking, Cyber Security & May 23-25, 2018 Mr A Rakesh Phanindra Cyber Law 3 Board Orientation Program for Directors May 30-31, 2018 Prof R K Mishra & Ms J Kiranmai 4 Legal Aspects of People Management June 21-22, 2018 Dr Deepti Chandra 5 Finance & Risk Management for Non- June 25-30, 2018 Mr S Satish Kumar & Finance Executives [for the executives Dr K V Ramesh Kumar of NMDC Ltd] 6 Corporate Reforms and Changing June 28-29, 2018 Dr K Trivikram & Corporate Strategy Dr Shaheen 7 Operations and Supply Chain Analytics July 2-4, 2018 Mr S Satish Kumar & for Competitive Advantage Dr C V Sunil Kumar 8 Cyber Crime & Safety Measures July 5-6, 2018 Mr A S Kalyana Kumar 9 Managing Corporate Social July 19-20, 2018 Dr Shulagna Sarmar & Responsibility for High Impact Ms Pragnya Acharya 10 Ethical Hacking and Cyber Security Aug 22-24, 2018 Mr A Rakesh Phanindra 11 Enhancing Effectiveness at Workplace Sept 5-6, 2018 Dr A Sridhar Raj 12 Advanced Leadership Programme Sept 10-23, 2018 Prof R K Mishra & Mr S Satish Kumar 13 Business Decision Making Using Sept 18-20, 2018 Dr Shaheen & Software Tools (MS Excel, R & Tableau) Dr C V Sunil Kumar 14 Board Orientation Programme for Sept 24-25, 2018 Prof R K Mishra & Directors Ms J Kiranmai 15 Rudiments of Business Analytics for Sept 25-26, 2018 Dr K V Anantha Kumar Modern-day Decision Making – A Software Based Approach 16 Legal and Regulatory Issues in Power Sept 25-26, 2018 Dr Rajesh G Sector 17 Advanced Leadership Programme for Oct 3-4, 2018 Dr Narendranath Menon, Women Executives Dr P S Janaki Krishna & Dr P Geeta (Contd...) S.No. Title of Programme Dates Programme Director (s) 18 Cyber Attacks & Network Security Oct 11-12, 2018 Mr A S Kalyana Kumar 19 Enhancing Accountability and Oct 15-19, 2018 Dr P Geeta & Responsiveness in Scientific Dr A Sridhar Raj Organizations [DST Prog] 20 Strategic Marketing for PSUs Oct 24-25, 2018 Dr M MKaruna & Dr M L N Rao 21 International Conference on “Operations Oct 24-25, 2018 Mr S Satish Kumar, and Supply Chain Excellence” Mr S N Mantha & Dr C V Sunil Kumar 22 Financial Models for Sustainable Oct 29-30, 2018 Mr M Chandrashekar Excellence 23 Project Management for Competitive Nov 1-3, 2018 Mr S Satish Kumar & Advantage Mr S N Mantha 24 Goods And Services Tax (GST) Nov 2-3, 2018 Dr K V Ramesh 25 Management of Technology & Innovation Nov 5-9, 2018 Dr P S Janaki Krishna 26 Creativity & Problem Solving Nov 5-6, 2018 Dr Anand Akundy & Dr N G Satish 27 SIPPA Programme Nov 10-1 Dec, 2018 SIPPA Team & Dr Ch Lakshmi Kumari 28 International Conference on “Expanding Nov 15-16, 2018 Dr Shulagna Sarkar & HR Value : Unraveling the Future of Work” Dr Samarendra Mohanty 29 GST -Policies, Perspectives and Practices Nov 15-16, 2018 Dr K Trivikram, (An Industry-oriented Programme) Dr Usha Nori & Dr Sandeep Kumar 30 e-Procurement System for Vigilant and Nov 19-20, 2018 Mr A S Kalyana Kumar Transparency 31 Enhancing Sales Performance Nov 26-27, 2018 Dr V Srikanth & Mr P Mahesh 32 Understanding Foreign Currencies Nov 29-30, 2018 Dr Rajesh G & Risk and Global Finance Dr M Karthik 33 Ethical Hacking and Cyber Security Dec 3-5, 2018 Mr A RakeshPhanindra 34 Leadership and Change Management Dec 6-7, 2018 Mr V AnjiRaju 35 Contract Management Dec 10-11, 2018 Dr K V Ramesh 36 Effective Logistics & Supply Chain Dec 17-19, 2018 Mr S Satish Kumar & Management for Operational Excellence Mr C V Sunil Kumar (Contd...) S.No. Title of Programme Dates Programme Director (s) 37 6th National Conference on “Diversity Dec 20-21, 2018 Dr Narendranath Menon, in Management – Development of Dr Anupama Dubey & Women Executives” Dr Prarthana Kumar 38 Enterprise Risk Management Dec 27-29, 2018 Mr S Satish Kumar 39 Essentials of Corporate Finance Dec 27-28, 2018 Dr A Pawan Kumar & Dr Harishankar Vidyarti 40 International Conference on “New Dec 30-31, 2018 Dr Usha Nori & Trade Policies and Capital Flows in the Dr Sandeep Kumar Kujur Context of Emerging Economies Under Deglobalization” 41 Sustainable Lean Management Practices Jan 3-5, 2019 Mr S Satish Kumar & for Improved Business Performance Mr C V Sunil Kumar 42 Emotional Intelligence for Improved Jan 9-10, 2019 Dr A Sridhar Raj Performance 43 International Conference on Sustainable Jan 11-12, 2019 Dr P S Janaki Krishna & Development Goals Dr Ch Lakshmi Kumari 44 Digital Marketing Jan 17-18, 2019 Dr V Srikanth & Dr Prarthana Kumar 45 Strategic Management in PSUs for Jan 23-24, 2019 Dr MLN Rao, Success Mr S N Mantha & Dr Santosh Kumar Tiwari 46 Risk Management in Banking & Jan 28-29, 2019 Dr JyotiKumari & Other Lending Institutions Dr Shweta Mehrotra 47 6th International Conference on Feb 4-5, 2019 Dr Shulagna Sarkar “Corporate Social Responsibility” 48 Communication for Managerial Feb 6-8, 20-19 Dr Anand Akundy & Effectiveness Dr N G Satish 49 National Conference on “Data Science, Feb 7-8, 2019 Dr Shaheen Machine Learning, AI, IoT and Analytics” 50 2nd National Conference on Feb 18-19, 2019 Mr M J Ramakrishna & “Marketing in Digital India : Trends, Mr A RakeshPhanindra Opportunities & Challenges” 51 10th International Conference on Feb 21-22, 2019 Ms J Kiranmai, Corporate Governance : Governance Ms Swetha Mahrotra & & Integrity Accounting Research Institute, UTiM 52 National Conference on “Cyber Security” Mar 6-7, 2019 Mr A S Kalyana Kumar & Mr A Rakesh Phanindra The Journal of Institute of Public Enterprise Vol : 41 January – June, 2018 No : 1 & 2 Content

Research Papers

★ Role of Safety Culture and Safety Management on Organizational Sustainability : Evidence from Bangladesh Shahadat Hossain

★ Measuring Basic Welfare Index for Indian States : An Empirical Analysis Reena Kumari

★ Impact of Foreign Financial Inflows on Reserve Bank of India’s Credit Policy Manjinder Kaur & Sharanjit S. Dhillon

★ A Study on Exploring the Diversified Stakeholder’s Response in Adopting Change Management Practices to Implement Privatization Policy Virupaksha Goud G & Vinod Puranik

★ A Study on Operational Efficiency of Public Sector Banks in the Pre- and Post-Merger Periods M.Jegadeeshwaran & M.Basuvaraj

★ An Empirical Study on Employee Engagement and Attitudinal and Workgroup Commitment Anuradha Chavali & Nihar Ranjan Mishra