The debt-equity ratio gives an indication of safety of the stakes held by the creditors of long-term loans. The operating freedom of every company is conditioned by the relative stake that the creditors have in the business in contrast with that of the owners.

A company with a lower-than average ratio of debt to equity (net worth), which indicates a strong ownership interest or position, enjoys relative freedom from creditors demanding repayment of funds or attempting to impose their will on the company's management decisions.

Conversely, if debt-equity ratios are higher than the industry norm, the management must be more apprehensive and may be compelled by creditors to adopt courses of action that rob the company of valuable initiative and innovation.

An attempt is made here to see the trend of debt-equity ratio of 320 major private sector companies during 1999-00 and 1998-99. The debt-equity ratio of 320 major private sector companies decreased from 1.01 during 1998-99 to 0.92 during 1999-00. Among the 320 companies, 166 saw a fall in the debt-equity ratio, while 147 witnessed a rise in the two years under consideration. The remaining seven companies ratios were same for both years.

The Indian corporates are becoming lean and mean. In their efforts to shape themselves up to become globally competitive,Indian corporates are toning up efficiency. This is brought out, among other things, by the significant decline in the debt-equity ratio last fiscal.

As we have seen slightly more than fifty per cent companies in the sample showed a decline in the ratio, indicating a clear trend towards a lower debt-equity ratio. What is the reason for the downward trend? Companies battling with the recession have realised that they can no longer afford to take on unsustainable levels of debt. In 1999-00, fifty three major companies had ratios of two or more with Digvijay Cement leading the list with 21.07. Among others were Modi Industries (17.90), Parasrampuria Synthetics (11.73), Orient Paper (7.30), Bellary Steel (6.87), Hindoostan Spg (6.54), Hikal Chem (4.97), DCM Ltd (4.84), Ferro Alloys (4.80), Andhra Cement (4.64), Balaji Indus Corpn (4.61) and Sakthi Sugar (4.53).

The companies which registered debt-equity ratios two or more in 1998-99, were Modi Industries (16.95), Parasrampuria Synthetics (10.03), Hikal Chem (6.85), Hindoostan Spg (5.50), Balaji Industrial Corpn (4.97), DCM Ltd (4.58), Andhra Cement (4.44) and Ferro Alloys (4.29). Companies which had a very low debt-equity ratio in 1999-00 were Alfa Laval (0.03), Atlas Copco (0.01), Burroughs Wellcome (0.02), Cabot India (0.03), Castrol India (0.02), Cipla (0.0.03), Digital Equipment (0.01), Punjab Tractors (0.03) and Wyeth Lederle (0.02).

The companies which recorded the lowest debt-equity ratio in 1998-99 were Burroughs Wellcome (0.03), Castrol India (0.01), Punjab Tractors (0.03), Thermax (0.05), Walchandnagar (0.07) and Wyeth Lederle (0.02).

A significant fall in debt-equity ratio was observed in the case of Birla Corp (2.49 in 1998-99 to 1.67 in 1999-00), Cadila Healthcare (1.62 to 0.45), DLF Cement (3.05 to 1.34), Elder Pharma (2.00 to 0.87), Global Tele-Systems (1.14 to 0.32), Henkal SPIC (1.42 to 0.17), Jain Irrigation (3.51 to 2.60), LML (2.01 to 1.22), Nagarjuna Const (2.57 to 0.80), Samtel Color (2.57 to 1.14), Swaraj Mazda (2.29 to 1.80) and TRF (1.02 to 0.49).

Corporates which saw a sharp increase in the debt-equity ratio from 1998-99 to 1999-00 were APM Industries (0.90 in 1998-99 to 1.14 in 1999-00), Bajaj Electricals (1.22 to 1.81), Bellary Steel (4.90 to 6.87), DGP Windsor (1.34 to 2.07), Godrej Soaps (0.70 to 1.15), Hindustan Motors (2.39 to 3.49), Jindal Vijay Steel (2.84 to 3.41), Jyoti Structures (1.59 to 2.21), Madras Aluminium (0.45 to 1.38), Priyadarshini Cement (0.45 to 3.25) and Shree Dig Cement (2.98 to 21.07).

The above analysis shows Shree Digvijay Cement witnessed a significant increase in debt-equity ratio during 1999-00. The net worth of Shree Digvijay Cement declined by -54.9 per cent to Rs 8.43 crore during 1999-00 from Rs 18.69 crore the previous year. On the other hand, the company's debt increased by 218.5 per cent during 1999-00. In case of Priyadarshini Cement, the net worth figure declined by -14.4 per cent during 1999-00 and debt amount increased by 516.4 per cent during the same period.

On the other hand, debt-equity ratio of Zee Telefilms declined significantly due to the increase in net worth. The net worth of the company increased by 1759.0 per cent to Rs 3563.38 crore during 1999-00 from the level of Rs 191.68 crore during 1998-99. But the debt of the company also increased by 172.9 per cent during the same period.

The net worth of the company increased during 1999-00 partly due to the privately placed 80 lakh equity shares of Re 1 each at a premium of Rs 999 per share with a large foreign institutional investor. The company also acquired entire equity shares of Zee Multimedia Worldwide Ltd (ZMWL) in consideration of allotment of 1,94,18,880 equity shares of Rs 10 of the company during the study period.

The company has acquired 50% equity in Asia Today, Siti Cable and Patco during the year. This helped the company to reduce the debt-equity ratio during the year 1999-00. Significant increase in debt during 1999-00 are witnessed in the case of ABB (139.0 per cent), DSQ Software (230.0 per cent), Hindustan Inks (111.9 per cent), Indian Hotels (183.2 per cent), Madras Aluminium (323.9 per cent), Modi Xerox (514.4 per cent), Nirma (112.3 per cent), Parekh Platinum (175.8 per cent), Priyadarshini Cement (516.4 per cent), Shree Dig Cement (218.5 per cent), Shrenuj & Co (202.7 per cent), Thermax (132.0 per cent) and Zee Telefilms (172.9 per cent).

An opposite trend can be seen in the case of Atlas Copco (-91.0 per cent), Digital Equipment (-94.2 per cent), Himatsingka Seide (-97.4 per cent) and Wipro (-79.4 per cent).

In terms of debt, the top 10 companies during 1999-00 are Reliance Industries (Rs 11,520 crore), Tata Steel (Rs 4907.23 crore), Jindal Vijay Steel (Rs 4098.46 crore), Larsen&Toubro (Rs 3973.74 crore), Telco (Rs 3004.26 crore), Grasim Industries (Rs 2274.99 crore), Spic (Rs 2117.54 crore), Oswal Chem (Rs 1988.32 crore), Essar Shipping (Rs 1669.48 crore) and Nagarjuna Fert (Rs 1580.95 crore).

Out of 320 companies, 135 showed a declining trend in their debt amount during 1999-00 from the level of 1998-99. Similarly, in the case of net worth, significant increase was noticed in the case of Cadila Healthcare (486.0 per cent), Elder Pharma (162.1 per cent), Glenmark Pharma (200.0 per cent), Henkel SPIC (212.9 per cent), Modi Xerox (637.0 per cent), Shyam Telecom (399.8 per cent), SSI (191.6 per cent) and Zee Telefilms (1759.0 per cent). A noticeable decline was observed in the case of Shree Cement (-87.7 per cent) and Shree Dig Cement (-54.9 per cent).

In the sector wise analysis,the debt-equity ratio was more than 1 during 1999-00 in the case of other chemical products (1.03), cotton textiles (1.09), cement (1.45), tyres&tubes (1.20), fertilisers (1.14), man made fibres (1.32), sugar&breweries (1.66), shipping (1.23), paper&products (1.46), iron&steel (1.63) and diversified(1.11).

A significant increase in the debt-equity ratio during 1999-00 was noticed in the case of cement (1.15 in 1998-99 to 1.45 in 1999-00), sugar&breweries (1.39 to 1.66) and shipping (1.01 to 1.23). An opposite trend can be seen in the case of food products (0.62 in 1998-99 to 0.36 in 1999-00), tobacco (0.65 to 0.31), computers (software&hardware) (0.58 to 0.27), man made fibres (1.55 to 1.32), auto&autoancilleries (0.71 to 0.57) and paints (0.62 to 0.42). The highest and lowest debt-equity ratio was observed during 1999-00 in the case of sugar&breweries (1.66) and aluminium (0.24) respectively.

In the case of debt, significant increase was noticed in the case of hotels (33.0 per cent) followed by sugar&breweries (21.4 per cent) and shipping (19.8 per cent). A downward trend was noticed in the case of tobacco (-40.5 per cent), food products (-35.9 per cent), computers (hardware&software) (-23.0 per cent) and paints (-21.3 per cent).

But in the case net worth, highest increase was observed in the case of computers (hardware&software) (69.4 per cent), followed by misc (67.3 per cent), tea&coffee (34.9 per cent) and pharmaceuticals (32.4 per cent).

Highest decline in net worth was observed in the case of cement (-15.8 per cent) and paper&products (-2.6 per cent).