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1
4.6 Indian Copyright Act, 1957
as amended in 1999 42-43
4.7 Consumer Protection Act, 1986 43
4.8 Specific Relief Act, 1963 43
4.9 Security Environment 44-50
4.10 Tax Provision in Indian IT Sector 50-51
CHAPTER: 6 CONCLUSIONS
6.1 Summary of the work 69
6.2 Suggestions 70-72
6.3 Limitation of Study 72
6.4 Scope for Further Research 72-73
Bibliography 74-75
2
Chapter-1 INTRODUCTION
1.1 Backdrop
India has occupied the leadership position in Information Technology (IT,
hereafter) and Information Technology Enables Services (ITES, hereafter) sector in
all over the world in the recent years. Strong demand for past few years has placed
India amongst the fastest growing IT markets in Asia-Pacific region. The annual
revenue of IT & Information Technology Enabled Services including domestic and
export segment in 2007 is expected to exceed USD $ 47.8 billion which shows an
increase of nearly 28% in current fiscal and ensures the growth of 21% over 2005-06.
But China, Russia, Taiwan, Vietnam are also upcoming IT superpower who can give
a cutthroat competition to India. Indian IT sector is one of the most flourishing
industries but there is a fear of collapsing of Indian IT sector with the recession in US
market. So this type of study is mandatory to carry on at this point of time to reveal
the actual financial scenario of this industry and to check whether it will continue its
growth position or able to hold the leadership position to next decade. As no study
can efficiently start without literature review, we attempt to do so in the next section.
3
that made great differences in revenues. But still the consistent growth rate can be
observed from this study.
Rafiq Dossani (2005) discussed in his study the evolution of India’s software
industry and the effect of rigid and hostile government policies concerned this sector
internal as well as international market. He also shows that technologically
sophisticated industry can develop even when many conditions typically present
elsewhere are missing. He also examined the conditions in which transnational entry
was made.
Balaji Parthasarathy (2004) discussed in his study about the details of different
phases of IT industry starting prior to 1984. He presented the revenues earned by this
industry from international as well as from domestic market, percentage of export
revenues and share of Software Technology Park’s in such revenues from pre
liberalized period. He also examined the government policies and its effect with
briefly discussing the contribution towards GDP by this sector.
4
process and converting them into extremely cost effective moneymaking machine.
(http://www.cxotoday.com/-Article by Aarti Shah 4th January 2008)
It discussed about the problems of linear growth with its overcome measures in
Indian Software industry. Opening up the Indian market to the foreign players and the
economic reforms of 1990 acted as a catalyst for Indian Software industry Continues
increase in export in export as well as domestic revenues accompanied with growing
number of employees indicates a total spectacular growth. It also specifies two
different models of revenue recognition. (www.expresscomputeronline.com - article
by Neeraj Verma 16th July 2007)
The impact of IT is not restricted to its passive contribution to GDP alone. IT
acts as a transformational agent in Indian economic development helps to promote
infrastructure like power, road, electricity etc. Growth of domestic market shows a
CAGR of 23% over 05-06. The infrastructures cost tends to going down with this
prosperous growth. But several problems like absence of active demand, scarcity in
proper infrastructure also exists. It also recognizes that a vibrant and innovative
domestic IT market is sine qua non for sustaining the countries IT industry’s
competitive advantage. (www.nasscom.in published on 27th September 2007)
IT, a fastest growing industry in India makes a significant contribution to GDP in
way of exportation of IT services and ITES product and becomes a preferred global
sourcing base in this sector. But some problems are there in relation to risk
management, human capital attraction and retention and cost management. A key
demand driver for Indian IT services and ITES industry has been the changing global
business landscape, which has exerted performance pressure on MNC enterprises.
(www.ibef.com, published on 21st February 2006)
The value proposition of offshore development being well established,
corporate in west are increasingly outsourcing to India and it promises a bright future
for Indian Software industry as a whole. In spite of having all favorable factors the
Indian IT sector acquires only 3% of global market. As per Budget parameters of
2004 like SEZ, Service Tax, Surcharge etc creates a great impact on this growing
industry. ( www.rediff.com ,8th July,2004)
5
Former Prime Minister created a National Task Force on IT to formulate the
policies in relation to National Information Technology with the aim to abolish
impediments and to help India emerging IT super power. During 1999-2000 with the
increasing software export revenue the overall economic development increased
about 53%. The software industry is not only growing exponentially it is moving up
the value chain. (Asia Times, 7th December 2000)
India is emerging as a highly technical manpower at a cheap rate in
comparison to China who is giving a cutthroat competition to Indian IT sector. A
good quality of exported software develops the thrust among Americans at a large
which helps in increasing the export revenues (Forbes Magazine, 1997).
6
4. Showing its contribution to export revenue and GDP (Chapter-3).
5. Analyzing the significance of IT in economic policies. (Chapter-3).
6. Discussing the organizational and regulatory structure of Indian IT Sector.
(Chapter-4).
7. Looking into financial performance of IT companies to evaluate the position
of IT industries in Indian economy followed by conclusions (Chapter-5).
1.4.1 Sources
1.4.2 Methodology
7
the research by explanatory (used for doing casual investigation) and collective case
studies (group of case studies required).
To conduct the study the following methodologies are adopted here. They are
as follows:
1. Ratio analysis is adopted to analyze the financial performance of the sample
companies and to compare the inter-firm and industrial performance.
Profitability and liquidity ratios are examined to evaluate the performance of
the concerned companies. It also facilitates the comparison between the past
and present result and indicates the future dimensions of the performance.
2. Multiple regression analysis is conducted to quantify the linear relationship
between liquidity and profitability ratios of the company and also to
discover the variable/variables which mostly influence the overall
profitability return on capital employed (ROCE, hereafter) of the company.
The analysis is carried on by taking ROCE as dependent and liquidity ratios
(current ratio, quick ratio and absolute liquid ratio and debt equity ratio) as
independent variables. The variables (ratios) are retained in the regression
model on the basis of high t value (|t|>2) and low p-value (p<0.05). In the
present study Durbin-Watson test (DW, here after) is conducted to examine
the autocorrelation among residuals. If DW test statistic lies between 1.5 and
2.5 then it indicates that the residuals are independent. Another severe
problem is multicollinearity in the regression model. Tolerance value is the
amount of a variable unexplained by the other independent variables; small
tolerance values denote high collinearity. A common cut-off threshold is a
tolerance value of .10 which corresponds to a VIF (Variance Inflation
Factor) value of 10 (Hair, et.al, 2009).
3. Pictorial presentation like tables, column chart, bar chart and line charts are
used to facilitate the analysis and interpretation of the data. Line chart is
used in the study to understand the trend over the time. Colum chart and bar
charts are used to facilitate the interpretation of the data in a simplest and
easier way.
8
1.5 Chapterization
Chapter: 6 Conclusions
9
Chapter-2 HISTORY, GROWTH AND EVOLUTION OF IT SECTOR IN INDIA
The first electronic computer was introduced in 1955. The concept of IT industry
was virtually unknown during the 1950-60s and this picture continues up to 1970s. At
that point of time IBM was only the Multi National Company who was working in
India as one of the largest hardware service provider along with some development of
basic software packages with the help of COBOL, FORTRAN etc. However, it is a
very shocking fact that prior to 1984 there was no IT industry in India. In 1968 Tata
Consultancy Services (TCS) the first Indian software company established with their
registered head office in Mumbai. Formally at the beginning years of its existence it
had only some local contracts but the picture was like almost changed after getting
one export order from Iran to develop ‘Inventory Management System’ in the mid of
1970 and afterwards the picture began to change. In 1975, 26th December CMC
(Computer Maintenance Corporation) was established. The registered office of CMC
situated in Hyderabad. CMC became a Public limited company in August 19, 1977
primarily the 100% shares of this company were held by the Government.
But then it started to face a certain type of challenges came into its way. First
and fore most challenge was shortfall of skilled and trained manpower to develop
new technologies, Secondly lack of availability of required hardware, Thirdly rigid
and hostile government policies stating that the MNCs has to reduce their share in
Indian subsidiaries less than 50%. At that time IBM, the only foreign company was
working in India not agreed with this regulation, subsequently decided to leave India.
As a result shortage of foreign exchanges arises. But consequently it seems to be a
great chance towards Indian software companies to occupy the Indian market with
foreign exposure. The actual fact is that first IT companies are concentrated in
Mumbai Nariman point; later on it shifted to Santacruez. Though the first IT industry
started over there in 1970 but the real turning point turned around when an US
company Texus Instrument (TI) came to India in 1986 and established its designing
10
centers in Bangalore. After that many large and small companies clustering in and
around the city.
Primarily Indian economy was agricultural based. In one word it can be said
that agriculture was the backbone of economy. But now a day the total picture is
likely to be changed. Agricultural sector contributes only 21% towards Indian
economy whereas from industrial sector it is getting 28%. Above all IT sector plays a
vital role for such contribution. It is like a sunrise to Indian economy. India’s
economic condition was not very impressive after post independence period.
Industrial sector as a whole was totally neglected. Therefore there was no question
for separate IT industry. Above all the India was the worst sufferer due to scarcity of
foreign currency; inadequate international business, harsh and hostile policy as
framed by Indian government, closed economy etc. This picture was continued up to
the mid of 1990s but began to change afterwards. Meanwhile Government
understood the necessity of open economy started to liberalized its policy towards the
outside of the country and adopt the policy of globalization with a view to increase its
global trade. That became possible only for the former Finance Minister Dr.
Manmohan Singh and Prime Minister Rajiv Gandhi. But it was very unfortunate that
nobody has concentrate over IT sector and it was being neglected till 1990.
11
NASSCOM has projected an overall software service market that will grow by 25-
28% to USD $ 36-38 billion in the financial year 2006-07 and the export is likely to
grow 27-30% in the same fiscal. It is also indicated through highlight that Indian IT
industry has grown its revenue 10 fold in the past decade from US $100 million in
1985-86 to USD $ 47.8 billion by 2007-08.
From the last decade India has became one of the most important offshore
destinations amongst the Asia-Pacific region. During 4 to 5 years it increases up to 3
fold and captured the leadership position in the world market. Indian IT sector
acquires 3% of the total global market and it is expected to increase its volume in the
next few years. IT and ITES has recorded $ 39.6 billion revenue in the year of 2006-
07 which register a growth of 30.7% beating the projected growth of 27% as per
NASSCOM estimation.
TABLE -1
GROWTH OF INDIAN IT INDUSTRY
Year Revenue(US $) % of Growth Rate
1980-81 12 million -
1984-85 100 million -
1994-95 168.3 million -
1996-97 3011 million -
1997-98 4.8 billion -
2000-01 5.9 billion 31.3
2001-02 5.8 billion 16.4
2002-03 7.02 billion 21.1
2003-04 23.6 billion 18.2
12
2009-10 60billion 44 (Expected)
(Expected)
13
becomes only possible due development of proper infrastructure and flexible
government policies. Government understood the importance of the infrastructure for
this industrial set-up and create conductive environment for its development and
expansion. The domestic market segment continues the same growth rate during last
5 years. This is not an easy task to maintain a same growth rate during last 5
continuous years. Moreover, the domestic market is small in size and primarily
influenced by Multinational Companies. According to NASSCOM domestic market
has register a growth of 18% in 2001-02 but fails in 2002-03 to 13% as slowdown in
spending of manufacturing and banking concern by 17%. But in the year of 2004 IT
service market recorded a growth of USD $ 2.3 billion at a CAGR of 19%. The
domestic market is expected to grow by 22.4% in the current fiscal and will become
fastest growing market amongst Asia-Pacific region. Domestic segment grew by 23%
to register revenue of USD 8.2 billion in financial year 2006-07 up from USD 6.7
billion in 2005-06. As per annual survey domestic IT industry has recorded a growth
rate of 32% to cross the US $10 billion mark in 2007-08. Therefore it can be said that
Indian domestic IT market is no longer a dream or myth.
But if we see the other side then it will be revealed that IT development
confined in some metro cities and urbanized areas. Rural areas are not taken into
account properly. That is why it makes a huge discrimination among the people of
urbanized and rural areas in respect of per capita income, status, standard of living
etc. Indian IT industry is predominantly export oriented but the export graph did not
grow uniformly between 1980 and 2000. Major part of Indian IT products and
services export to U.S.A and U.K. As a result, instability of economical and political
conditions of these two countries affect adversely to Indian economy at large
proportion. If any discrepancy happens with these countries it will directly affect the
Indian economy immediately.
IT, being a knowledge based industry requires an enormous number of
technologically equipped, English speaking man pools with specialized knowledge.
Therefore this sector itself can create a huge number of employment opportunities
with a growth rate exceeding 50% in export 40% in total IT industry over last five
14
years. After economic reform in 1991 leading to increase in GDP, per capita income,
purchasing power of the consumers and standard of living of people specially
belonging to middle class.
TABLE-2
REVENUES OF IT AND ITES SECTOR OF INDIA (IN USD $ BILLIONS)
15
Figure-2 TOTAL REVENUES EARNED BY IT AND ITES SECTOR
The above Table (Table-2) shows that the revenues of IT services, ITes BPO
and software products &engineering services increase gradually during the study
period. IT-Services earns a revenue of USD $ 17.8 billion in 2006-07 compared to
USD $ 5.8 billion in 2001-02 from export. The domestic revenues from IT services
also increasing steadily and shows a sharp increase of USD $ 2.1 billion in 2001-02
to USD $ 5.5 billion in 2006-07. The compound annual growth rate (CAGR,
hereafter) of IT-Services is 19.76 for the study period. The export revenues from
ITes-BPO shows increasing trend during the study period. Revenues from export in
2001-02 was USD $ 1.5 billion and increased to USD $ 8.4 billion in 2006-07.
Domestic revenues from this segment is also impressive and shows an increase from
USD $ 0.1 billion to USD $ 1.1 billion in 2006-07. The CAGR of ITes-BPO revenue
is 34.57 percent. The other segment of Indian IT sector is software product and
16
engineering services demonstrated an increasing trend in case of revenues earned
from domestic as well as from export. The export revenue of this segment in 2001-02
was USD $ 0.3 billion in 2001-02, USD $ 2.5 billion in 2003-04 and USD $ 4.9
billion in 2006-07. Domestic revenue is USD $ 1.6 billion in 2007-07 compared to
USD $ 0.4 billion in 2001-02. The CAGR of the revenue earned by this segment is
44.98 percent for the study period. The Figure-2 shows the pictorial presentation of
the revenues earned from the above mentioned segment of Indian IT industry.
17
CHAPTER -3 POSITION OF IT INDUSTRY IN INDIAN ECONOMY
USD $
Years/Items 01-02 02-03 03-04 04-05 05-06 06-07 CAGR (%)
[Source: www.nasscom.in]
18
Figure-3
EXPORT REVENUES FROM DIFFERENT SEGMENT OF IT INDUSTRY IN USD $
The above table-3 and figure-3 explains the export revenues earned by IT
sector during the study period. In 2001-02 Indian IT earns export revenues of USD $
7.6 billion and it increases to USD $ 31.1 billion in 2007-07. The export revenues
from IT services follows increasing trend for the period since 2001-02 to 2006-07. It
grows gradually. The revenues from export of IT services was USD $ 5.8 billion in
2001-02 and reached to USD $ 10.0 billion in 2004-05 and attains USD $ 17.8 billion
in 2006-07. The CAGR of export revenues from IT-Services is 20.5 percent for the
study period. The export revenues from ITES-BPO also shows growing trend for this
period of six years. In 2002-03 this segment earns USD $ 2.5 billion which reach to
USD $ 8.4 billion in 2006-07 with CAGR of 33.3 percent. Software and engineering
services demonstrates a rising trend of export revenues for the particular study period.
It earns revenues of USD $ 0.3 billion in 2001-02, USD $ 3.1 billion in 2004-05 and
USD $ 4.9 billion in 2006-07. The CAGR of export revenues from this segment is
59.3 percent.
19
It is a known fact that a major part of export revenues come from US and UK
market and the rest of the world stands for a small portion. Actually India at the first
stage of its IT export focused on US and UK market which may become the probable
cause of economic recession while these two markets get unstable. For that reason
Indian has diversified its vision and started to focus on the rest of the world.
According to an annual report of NASSCOM India seems to be third largest country
among the Asia-Pacific region with a large amount of export revenues.
TABLE-4
PERCENTAGE OF EXPORT BY INDIAN IT SECTOR
[Source: www.nasscom.in]
Figure-4
PERCENTAGE OF EXPORT TO THE WORLD BY INDIAN IT SECTOR
20
The Indian IT and ITES industry (including the domestic font) showing an
overall growth of 30.7% against a projected growth rate of 27%. Now it becomes
cleared that India is quickly but quietly acquiring the top position particularly in the
area of software designing and web based services. This growth rate also helps to
grow Indian economy and emerging to be one of the developed countries in the next
decade. India became the leading offshore destination and account for 65% of global
industry in offshore IT and 46% in BPO industry from the last decade. The
addressable market for the offshore IT is around US $150-180 billion. During 4 to 5
years India is holding the first position around the world. This only accelerates the
Indian economy with a high spark. It can be said that Indian economy becomes more
globally integrated. Indian IT and ITES including export and domestic is expected to
exceed USD$47.8 billion annual revenue in the current fiscal 2007, an increase of
28% in the same. Software and service exports remain mainstay of the sector
contributing USD $ 31.3 billion and beating a forecast to register a 32.6% growth and
it is expected to increase USD$ 60 billion by 2008-09 forming a part of 30% of total
export.
21
3.2 Share in Gross Domestic Product (GDP)
It is quite expected that with this tremendous development in the revenue,
Indian IT industry alone can contribute 1% per year to GDP growth for next 5
years. At present IT sector contributes a high percentage towards GDP. A
remarkable progress has been found in Indian economy as its GDP increases day
by day and growing revenues from this sector is one of the reasons behind it. The
table is comprehensible to show the increasing trend in contribution to GDP. The
following table (Table-5) and figure (Figure-5) shows the contribution towards
GDP and its graphical representation. IT industry contributed only 0.38% in 91-
92 and got increased to 1.2% in 1999-2000 and keeps on raising gradually its
share to GDP. In 2004-05 it contributed 4.5% and in 2005-06 it was 4.8% and
presenting a figure of 5.4% in 2006-07and expected to register a contribution up
to 7% in 2007-08. So it can be said that the IT industry is holding a prime
position in Indian economy. This type of development only becomes possible due
to advancement of export procedure as well as in domestic segment also. Now a
day India’s real GDP will grow by 9.2% in this year to last September. Central
Statistical Organization released a data that Indian GDP grew at 9.4% for the year
up from 9% in the previous year only because of foreign currency as earned by IT
sector in India. Currently India spent 3.7% of GDP on IT and Industry’s
contribution for 5.2% of National GDP. On Feb07, 2007 India’s Central
Statistical Organization has chosen to release of an 18 year high in Indian GDP
escalation. This revolutionary boom becomes possible by earning enormous
revenue in foreign currency from IT and ITES sector which just thrust the growth
percentage to GDP.
22
TABLE-5 CONTRIBUTION TOWARDS GROSS DOMESTIC PRODUCT
Year Contribution
Towards GDP
(in %)
1991-92 0.38
1999-2000 1.20
2004-05 4.50
2005-06 4.80
2006-07 5.40
2007-08 7.0 (E)
Note: E=Expected
[Source: www.nasscom.in]
23
3.3 Significance in Economic Policy
The market of India is most exciting and emerging market among the world.
Indian economy has been described as ‘huge, complex and growing’. In 1994 World
Bank carried on a calculation based on purchasing power parity (PPP) where India
was rated as World’s fifth largest economy and predicted to be 4th largest economy in
the world by 2020 behind China, US, Japan. But at the present point of time when a
survey has conducted it is revealed that India acquires the position of 3rd largest
economy in the World. Since 1980 successive reforms have progressing and moved
the Indian Economy to the market based economy. Indian Government designed a
new software policy to serve as a catalyst for the Indian software industry in 1986.
This was followed in 1988 with the world market policy and the establishment of
Software Technology Park (STP) scheme. Government of India (GOI) also permitted
foreign equity up to 100% and duty free import on all inputs and products to attract
the Foreign Direct Investment (FDI). State Government reduced its intervention and
control over economic activities gradually and consequently private entrepreneurship
increased its share in the economy. Liberalization touched on most aspects of
economic policy including industrial, fiscal, financial market regulation, trade and
foreign investment.
Indian IT sector is purely export oriented. Measured by the age of many
industries the IT software industry in India is still in fantasy. Yet its growth and
development has caught the attention of the. As a result India is being identified as
the major powerhouse for incremental development of computer software. The reason
for such attention is not only for the actual size of the industry but its rapid growth
rate during 1990 and its projected growth rate in the first decade of 2000. After 1990
Indian Govt. started to pay the attention to such industry and it also affected the
Economic Policy formulation.
But the terror attack on 9th September 2001 on US had given a shock to Indian
Economy. A disaster period was started with such shock. Industrial slowdown period
24
started just immediately after such attack. A major part of software exported to US so
that the attack was not only damage the US economy but also affected the Indian
Economy too. In that period software export came down by 30% of total exported
figure. The market was full of slashed price, low interest loan, and free offers but
there were no consumers to go for those choices. Basically then the Indian Economy
was passing through a phase of economic recession. Indian booming IT sector was a
major part of it. Several IT conferences across the US as well as in India were
cancelled or postponed after that attack. The total growth rate of export value came
and software recruitment affected by 30 to 50%. The demand for the software
professionals declined and job market situation was not at a good position.
But afterwards that situation was almost changed. The Indian IT/ITES sector
have demonstrated their superiority, sustained cost advantages and fundamentally
powered value proposition in the international market. Actually it has transformed the
whole world into a global village with a global economy, which is increasingly
dependent on the creative management and distribution of information. Government
also understands the requirement of liberalized economic policy instead of rigid and
hostile one.
Indian IT companies increase global service delivery capabilities through a
combination of green field initiatives, cross border mergers and acquisitions,
partnerships and alliances with local players. It also enables end-to-end delivery of
new series. Quality certification as per international standard is very much required
for the purpose of export. Many of the Indian IT companies acquired quality
certification and it is expected that in near future India will have the status of having
highest number of ISO 9000 companies in the world.82 Indian companies certified at
SEI CMM Level 5 which is higher than any other country in the world possess. India
has the comparative cost advantages with large number of scientific man pool that
help Indian IT industry to boom. IN 2007-08 volume of export has increased to 710%
over 2000-01.
To see such spectacular growth GOI concentrated more in this industry and its
effect started to be seen in economic policy framed by the Government. GOI creates
25
SEZ (Special Economic Zone) to remove the barriers and also liberalized the policies
to enhance the private cooperation in such sector, which becomes extremely effective
and has proven itself that the growth has been phenomenal. As Indian IT industry is
purely export oriented that is why it can have a sufficient amount of foreign currency
to the economy. But it is very unfortunate that no spectacular growth has been found
in hardware, as it is found in software sector. In 2005-06 some policy initiatives had
undertaken by the Government for IT sector:
1) Customs Duty on the entire 217 tariff lives covered under The IT agreement
(ITA-1) of WTO has been abolished.
2) All good require in the manufacture of ITA-1 items have also been exempted
from custom duty subject to actual user conditions.
3) For the improvement of information security with growing application of IT,
an information security management system has been set up. Microsoft has been
signed a security cooperation agreement to enhance computer security in relation to
information and training of technical personnel.
4) An expert committee has been set up to review the IT Act. In 2006-07 GOI has
taken the following steps to modify the economic policy in relation to IT industry.
5) The IT Amendment bill has been introduced in the Parliament on 15th
December 2006. This proposes to put in place the technological applications, security
practices and procedures relating to such applications. Further, in IT laws as
recommendations by UNCITRAL Model Law on electronic signature.
6) A proposal has placed for electronics and IT/Hardware manufacturing policy is
also under consideration which aims to
a. Rationalize the tariff structure on capital goods and inputs;
b. Unify manufacturing for domestic and international market;
c. Transfer the state of the art technology (TOT);
d. Facilities the registration of international patents;
e. Enhance research and development.
7) Indian Government takes the initiatives to reach IT to the common people by
making the software tools easily available to them at the reasonable price. Not only
26
those software fonts are available in different languages i.e. Hindi, Tamil, Telegu,
Bengali and it is expected that all Indian languages can be covered within one year.
8) Indian Government also takes into account the rural areas within the
perspective of software technology. Government has formulated a proposal to
establish 10000 Common Service Centers (CSC) in rural areas, which will perform as
the front end for most of the government services but also a means to connect the
citizens of rural India to the World Wide Web. The scheme will be implemented
through Public Private Partnership (PPP). An outlay of C5742 crorers has been
approved in which Central Government share is C856 crores and the State
Government has the share of C793 crores and the balance will be invested by the
private sector.
a. This sector records an overall growth and having a destination of fastest
growing industry in Asia-Pacific region. Government pays a lot of significance to
formulate economic policy. IT sector day by day increases its export revenues and
consequently contribution towards GDP also gets increased. Annual Growth in GDP
per capita has accelerated from just 1.25% in three decades after independence to
7.5% currently. Potential output growth is currently estimated to 8.5% annually and
expected that the total GDP growth in 2011 may up to 10% if such reforms continue.
It is also expected that Indian IT industry also held the major share in GDP. Indian
IT industry is a knowledge based industry which helps Indian Economy to reach a
new horizon and further change in the scenario on Indian IT industry fueling India’s
economic growth. It can be said that Indian IT sector is one of the major sources of
earning significant amount of foreign exchange and hold adequate foreign exchange
reserve for the country.
27
Chapter-4 ORGANIZATIONAL AND REGULATORY STRUCTURE OF INDIAN IT
INDUSTRY
4.1 Introduction
Indian IT industry lies on a very sensitive and economical position and through
this sector India is earning an enormous foreign exchange by means of export. It is a
well-known fact that Indian IT sector’s income basically depends on exploration of
services and software products. But before 2000 it was a very disappointing fact that
there was no specific law relating to this industry.
The United Nations General Assembly by resolution A/BES/51/162 dated
30/1/97 has adopted a model law on Electronic Commerce. This is referred to as
United Nations Commission on International Trade Law (UNCITRAL) model law in
E-Commerce.
The Ministry of Commerce Government of India created the first draft of its
legislation following the UNO termed E-Commerce Act 1998.But when a new and
separate a ministry of IT was formed they just took over the former draft and began
to redraft the same legislation, which was recognized as IT Bill 1999 and placed it in
the Parliament on December, 1999 which was passed in May 2000. After getting the
assent of President on 9th June, 2000 the Act was finally notified with effect from 17th
October, 2000 vide notification no: GSR788 (E).
A major amendment was made to the Act, which came to effect from
th
6 February, 2003 consequent to the passage of a related legislation called Negotiable
Instruments Amendment Act, 2002. Some other Acts relevant in this context are
Contact Act, Penal Code Act and Copyright Act etc.
28
4.2 Information Technology Act, 2000
IT Act, 2000 consisted of 94 sections segregated into 13 Chapters and 4
schedules from the part of it. IT Act 2000 discussed about the following issues –
1. Legal recognition of Electronic Document
2. Legal recognition of Digital Signature
3. Offences and Contraventions.
Where any law provides that information or any other matter shall be
authenticated by affixing the signature or any document shall be signed or bear the
signature of any person then, not with standing any thing contained in such law, such
requirement shall deemed to have been satisfied if such information or matter is
authenticated by means of digital signatures affixed in such a manner as may be
prescribed by the Central Government. -“Signed” with its grammatical variations and
29
cognate expressions, shall with reference to a person, mean affixing of his hand
written signature or any mark on any document or expression “signature” shall be
construed accordingly. The Information Technology (Certifying Authorities) Rules,
2000 detail various aspects and issues concerning to Certification Authorities for
digital signatures. These rules specify the manner in which information has to be
authenticated by means of digital signatures, the creation and verification of digital
signatures, licensing of certification authorities and the terms of the proposed licenses
to issue digital signatures. The said rules also stipulate security guidelines for
certification authorities and maintenance of mandatory databases by the said
certification authorities and the generation, issue, term and revocation of digital
signature certificates. The said rules further mandate the audit of the operations of the
Certification Authority and classify various kinds of information. The said Rules also
have in Schedule II the Information Technology Security Guidelines which mandate
various guidelines for the implementation and management of Information
Technology security. The said Security Guidelines are a virtual Bible for all
Certification Authorities for the security aspects of their operations.
The government has also specified the procedures relating to Cyber
Regulations Appellate Tribunal in the notified Cyber Regulations Appellate Tribunal
(Procedure) Rules, 2000. These rules specify how an application to the Cyber
Regulations Appellate Tribunal has to be preferred along with relevant documents
and application fee. It further stipulates how proceedings have to be conducted by the
Tribunal. It has also elaborated on the powers of the Registrar of the Cyber
Regulations Appellate Tribunal.
The government, by another notification of 17th October 2000, has also
constituted the Cyber Regulation Advisory Committee. The committee shall advise
the Central Government either generally as regards any rules or for any other purpose
connected with the IT Act, 2000. The said committee shall also advise the Controller
for Certifying Authorities in framing the regulations under this Act. It comprises,
amongst others, the Minister of IT, various Secretaries of different Ministries,
representatives from different trade bodies and technical bodies, director of the
30
Central Bureau of Investigation, police chiefs from the states and the Controller of
Certifying Authorities.
The overall net effect of all these notifications is that the IT Act, 2000 has come
into operation. The information in the electronic format has been granted legal
validity and sanction; digital signatures have been defined and made legal. It is now
possible to retain information in an electronic format. Electronic contract has been
recognized to be legal and binding. Some types of cyber crimes have been defined
and made punishable offences like hacking, damage to computer source code,
publishing of information, which is obscene in the electronic form, breach of
confidentiality and privacy and publishing digital signature certificate false in certain
particulars and for fraudulent purpose. The appointment of the Controller for
Certifying Authorities has kicked off the process of licensing of Certifying
Authorities in India. It is expected that in a couple of months, Certifying Authorities,
duly licensed by the Controller, would begin operations of issuing digital signature
certificates in India. It has taken India nine Internet years to pass and notify the
implementation of its first cyber law namely the Information Technology Act, 2000.
The implementation of the IT Act is likely to throw up a gamut of complicated and
complex legal issues as numerous areas have still not been covered under either the
IT Act, 2000 or the various IT Rules. India has to face the challenges of cyberspace
and its regulation in a very bold, prompt and decisive manner if it wants to become an
IT superpower in the years to come.
31
maintained by law for the time being in force, shall be punishable with imprisonment
up to three years, or with fine which may extend up to two lakh rupees, or with both.
Explanation: For the purposes of this section, "computer source code" means the
listing of programmes, computer commands, design and layout and programme
analysis of computer resource in any form.
1. Whoever with the intent to cause or knowing that he is likely to cause wrongful
loss or damage to the public or any person destroys or deletes or alters any
information residing in a computer resource or diminishes its value or utility or
affects it injuriously by any means, commits hack:
2. Whoever commits hacking shall be punished with imprisonment up to three
years, or with fine that may extend up to two lakh rupees, or with both.
32
D: Power of Controller to give directions
(1) The Controller may, by order, direct a Certifying Authority or any employee of
such Authority to take such measures or cease carrying on such activities as specified
in the order if those are necessary to ensure compliance with the provisions of this
Act, rules or any regulations made there under.
(2) Any person who fails to comply with any order under sub-section (1) shall be
guilty of an offence and shall be liable on conviction to imprisonment for a term not
exceeding three years or to a Fine not exceeding two lakh rupees or to both.
33
2. The appropriate Government may, by order in writing, authorize the persons
who are authorized to access protected systems notified under sub-section
(1).
3. Any person who secures access or attempts to secure access to a protected
system in contravention of the provisions of this section shall be punished
with imprisonment of either description for a term that may extend to ten
years and shall also be liable to fine.
If anybody makes any misrepresentation to, or suppresses any material fact from, the
Controller or the Certifying Authority for obtaining any license or Digital Signature
Certificate, as the case may be shall be punished with imprisonment for a term which
may extend to two years, or with fine which may extend to one lakh rupees, or with
both.
Save as otherwise provided in this Act or any other law for the time being in force,
any person who, in pursuance of any of the powers conferred under this Act, rules or
regulations made there under, has secured access to any electronic record, book,
register, correspondence, information, document or other material without the
consent of the person concerned discloses such electronic record, book. Register,
correspondence, information, document or other material to any other person shall be
punished with imprisonment for a term which may extend to two years, or with fine
which may extend to one lakh rupees, or with both.
34
(1) No person shall publish a Digital Signature Certificate or otherwise make it
available to any other person with the knowledge that-
(a) The Certifying Authority listed in the certificate has not issued it; or
(b) the subscriber listed in the certificate has not accepted it; or
(c) the certificate has been revoked or suspended, unless such publication is for the
purpose of verifying a digital signature created prior to such suspension or
revocation.
(2) Any person who contravenes the provisions of sub-section (1) shall be punished
with imprisonment for a term, which may extend to two years, or with fine which
may extend to one lakh rupees, or with both.
(1) Subject to the provisions of sub-section (2), the provisions of this Act shall apply
also to any offence or contravention committed outside India by any person
irrespective of his nationality.
(2) For the purposes of sub-section (1), this Act shall apply to an offence or
contravention committed outside India by any person if the act or conduct
constituting the offence or contravention involves a computer, computer system or
computer network located in India.
35
L: Confiscation
Any computer, computer system, floppies, compact disks, tape drives or any other
accessories related thereto, in respect of which any provision of this Act, rules, orders
or regulations made there under has been or is being contravened, shall be liable to
confiscation:
Provided that where it is established to the satisfaction of the court adjudicating the
confiscation that the person in whose possession, power or control of any such
computer, computer system, floppies, compact disks, tape drives or any other
accessories relating thereto is found is not responsible for the contravention of the
provisions of this Act, rules, orders or regulations made there under, the court may,
instead of making an order for confiscation of such computer, computer system,
floppies, compact disks, tape drives or any other accessories related thereto, make
such other order authorized by this Act against the person contravening of the
provisions of this Act, rules, orders or regulations made there under as it may think
fit.
No penalty imposed or confiscation made under this Act shall prevent the
imposition of any other punishment to which the person affected thereby is liable
under any other law for the time being in force.
36
4.3 THE INFORMATION TECHNOLOGY (AMENDMENT) BILL, 2006
The union cabinet has given approval to the amendment proposed in the
Information Technology Act, 2000 on Monday, October 16, 2006. This required
move comes from the part of Government to tighten the network security in the IT
industry regarding adequacy of data shield and privacy laws in the country,
particularly in the light of allegations by a UK-based TV channel about data theft
from Indian call centers. Further to amend the Information Technology Act, 2000. BE
it enacted by Parliament in the Fifty-seventh Year of the Republic of India as follows:
The Government of India has proposed major amendments to ITA2000, which
have been passed by Cabinet Committee of the Government of India, are ready for
being placed before the Indian Parliament for approval and sanctioned. Indian IT
sector seeks some strict rules and regulations, as it is a revolutionary development
where people can communicate and transact over the cyber space with the help of
Internet and World Wide Web. The cyber laws of India contains in the ITA2000. At
this point of time cyber crime becomes a major challenge to Indian Government and
it tries to overcome such shortfall by amending the existing laws.
Chapter-II
According to this law any subscriber may authenticate his/her document by affixing
digital signature. Any person using of a public key of the subscriber may verify an
electronic record.
Chapter-III
This chapter contains the details about E-Governance and provides the inter alia
amongst others that where any law provides that information or any other matter shall
be written, type written or printed form.
37
Chapter-IV
The Act stipulates the scheme for regulation of Certifying Authorities. The Act
envisage a controller of Certifying Authorities, who shall perform the function of
exercising supervisor over the activities of the Certifying Authorities and also lays
down the standards and conditions governing the Certifying Authorities. It also
specifies some forms and content of Digital Signature Certificate. The Act recognizes
the need for recognizing the foreign Certifying Authorities and it further details the
various provisions for the issue of license to issue Digital Signature Certificates.
Chapter-V
This chapter of the Act lays down the details of Digital Signature Certificates. It
also enshrines the duties of subscribers.
Chapter-VI
It lays down different penalties and adjudication for various kinds of offences. If
there is any damage to computer and computer system the affected person will
entitled be with damage by way of compensation not exceeding ` 100, 00,000. It also
deals with the appointment of any officer not below the rank of director of the
Government of India or an equivalent officer of State Government as an Adjudicating
officer.
Chapter-VII
It contains provisions in relation to the establishment of Cyber Regulation
Appellate Body who can entertain the appeals against the orders passed by
Adjudicating Officer, shall be preferred.
Chapter-VIII
It specifies several kinds of offences and also imposes the restrictions that such
offences must not be investigated by the Police Officer whose rank is below Deputy
38
Superintendent of Police. These offences include tempering with computer source
documents publishing of information, which is obscene in electric form and hacking.
The Act provides the rules and regulations for the constitution of Cyber
Regulation Advisory Committee who can able to provide advices to Government
regarding any rules and regulations and provisions or any other purposes connected
with the said Act. It also proposes the amendments of the following Acts.
1. The Indian Penal Code Act, 1860
2. The Indian Evidence Act, 1872
3. The Bankers’ book Evidence Act, 1891
4. The Reserve Bank of India Act, 1934
Section-43
If any person accesses or downloads the data without the permission of person
in charge of computer system shall liable for a punishment with a fine up to C10
million.
Section - 65
If any person purposefully or deliberately destroys or damage or alter the data
is liable to be punished with imprisonment up to 3 years or with fine, which may
extend to C10 lakhs or with both.
Section – 66
This section lays provision in relation to Hacking. If any person destroys,
damages or alters any information with the permission of concerned person residing
in a computer resources diminishes its values or utilities or affects it injuriously by
any means then the former person will be liable for punishment for imprisonment of
3 years or with a fine which may extend to C3 lakhs or with both.
39
Section – 72
It relates to disclosure of certain information. If any person has secured
the access to any electrical record book, register, correspondence, information,
documents or any other materials the disclosure of such credentials may be liable to
imprisonment extendable to 2 years or with fine or with both.
40
causes damages or copies data. The remedy provided by the Act is in the
form of monetary damages, not exceeding 1 core.
Damages
The party, which suffers due to the breach of a contract, by the other party is entitled
to receive compensation for any loss or damage caused to it. In other words,
compensation is not to be given for any remote and indirect loss or damage sustained
by reason of the breach. Where a sum has been named in the contract, to be paid in
the case of a breach, or if the contract specifies a penalty, the party complaining of
the breach is entitled (whether actual damage or loss is proved to have been caused)
to receive a reasonable compensation not exceeding the amount agreed upon or, the
stipulated penalty.
41
various aspects of data security and confidentiality. This will help company’s
safeguard themselves in the case of any fraud or misconduct. As mentioned above,
damages are the best remedy, but due to the lengthy timelines of the Indian judicial
system, companies should first try to obtain an injunction. It does not normally take
more than a month to obtain an injunction. Obtaining damages is quite a difficult
task, and at times takes several years.
India has one of the most modern copyright protection laws in the world. A
major development in the area of copyright was the amendment to the Copyright Act
of 1957 in 1999, to make it fully compatible with the provisions of WTO’s Trade-
42
related Aspects of Intellectual Property Rights (TRIPS) Agreement. The Copyright
(Amendment) Act, 1999, came into force on January 15, 2000.
The 1994 amendment of the Copyright Act of 1957 brought sectors such as satellite
broadcasting, computer software and digital technology under Indian copyright
protection. The other important development during 1999 was the issuance of the
International Copyright Order, 1999, which extended the provisions of the Copyright
Act to nationals of all World Trade Organization (WTO) member countries. As per
the provisions of the Indian Copyright Act, 1957 and as amended in 1994-1995, any
person who knowingly makes use of an illegal copy of a computer program shall be
punishable. According to Section 63 B, copyright infringement attracts a minimum
imprisonment of seven days. The Act further provides for fines, which shall not be
less than fifty thousand rupees, but may go up to twenty lakh rupees, a jail term up to
three years, or both1. Under Indian law, computer programs have copyright
protection but no patent protection. A software program is an algorithm and patent
law does not protect algorithms per se. 'software' includes computer programs,
databases, computer files, preparatory design material, and associated printed
documentation such as users' manuals.
43
4.9 Security Environment
44
disruptions to business from clients’ auditors and its potent marketing tool in
the face of increasing competition.
7. Indian BPO companies for securing themselves from breaches must pay
insurance premium.
India is at least reached at a safe position comparable to other nations who are
serving this industry. At this instant IT security is a global challenge in an
increasingly networked economy. According to Kiran Karnik “Now a day there is
outsourcing of data as well and many people has access to your data which is
unavoidable and possibly can be misused by somebody.” He added “There is one
area of concern for the industry World Wide and NASSCOM doing host of activities
to ensure information security culture within the IT and ITES-BPO industry.” To
boost the net security following organizations are formed.
45
Cyber safety Week, an annual event of Mumbai since 2003. Hyderabad also
celebrates this event in 2006.
The Ministry of Information Technology collaborates with NASSCOM take
several initiatives to develop security and standards. Few of them enumerated as
below:
46
7. It serves as a central point, responding to computer security incidents and
providing a reliable and trusted 24-hours referral contact for emergencies.
47
Trusted Destination
NASSCOM’S 4E FRAME WORK FOR TRUSTED SOURCING
Engage Creation of Global and National Advisory
Board on security.
Meet all stakeholders in India and key market.
Educate Conduct the number of seminars to educate the
members, judiciary and lawmakers.
Prepare the report on SLAs security practices
and standards model contracts industrial
legislation like HIPAA, GLB and DPA.
Create intellectual capital for members and
other stakeholders.
Enact Examine areas to strengthen legal framework in
India.
Work with coalition regulators in key market to
identify relevant provisions.
Best security practices in member companies.
48
Indian Information Technology Enabled Services/BPO COMPANIES
49
INDIA US INFORMATION SECURITY SUMMIT 2004
50
MAT under Section 115JB of the Income tax Act. In other words, export
profits were exempt from the levy of MAT.
2. Fringe Benefit Tax (FBT) will be levied on employees’ stock option
(ESOP).
3. Dividend Distribution tax would be increased from 12.5% to 15%.
4. Increased allocation to C7.5 billion as against C3.9 billion in the previous
year for e-Governance.
5. A benefit of investment in Venture Capital Fund (VCF) has been extended
to IT sector, by giving a pass through status to the same.
6. The Chair Person of Infosys had favored the idea of MAT imposed on
Indian IT sector by Government but on the other side Azim Premji,
Chairman of WIPRO and CEO of Stayam and Chairman of NASSCOM
discard such imposition and favored the continuation of tax holiday beyond
2009 for another decade.
[Note: Section10A- This section exempts the income of any newly established
undertakings in a Free Trade Zone (FTZ). It provides a 5 years total tax holiday to
industrial undertakings, which manufacture or produce any articles or things and are
set in notified FTZ. The Finance Act, 1981, introduced this provision.
Section 10B- This Section is allowed a 5 years tax-holiday approve 100% Export
Oriented Undertakings (EOUs), which manufacture or produce any articles or things
introduced by The Finance Act, 1988].
51
Chapter-5 ANALYZE FINANCIAL PERFORMANCE OF IT INDUSTRY- A CASE STUDY
5.1 Introduction
A business concern, being a commercial and profit seeking organization
have the prime and primary objective to earn and maximize the profit. A commercial
organization always tries to continue its better performance to achieve the ultimate
goal of profit earning. It is quite true that analysis of financial statement helps them in
this respect. In real practice stakeholders like investors, government, financial
institutions, employees, consumers, suppliers and researchers are directly or
indirectly interested to know the actual financial position of the concern and for such
purpose analysis and interpretation of financial statements are required. To evaluate
the financial position of selected IT companies the following aspects have been
attempted to be analyzed.
1. Profitability Analysis
2. Liquidity Analysis
52
5.3 Profile of the Selected Company
Tata Consultancy Services (TCS) Limited has been in operation since 1968
as division of Tata Sons Ltd. TCS a part of Tata Group at present continues its
operation in IT consulting and Business Process Outsourcing (BPO) services. The
head quarter of TCS is situated at Mumbai. TCS is the pioneer in the offshore
delivery model for IT services. Its expertise area includes independent consulting
division and IT services, assets based solutions, IT infrastructure, engineering and
industry services, BPO segment. It has success fully embraced quality parameters of
IEEE, ISO 9001:2000, CMMI, SW-CMM, P-CMM and Six Sigma.
Wipro Limited, being a multi business and multi location corporate entity
started its operation as a groundnut-crushing unit in 1947. Latter on, it expands its
business range from customer products to specialized IT products and services having
two wings namely Wipro Technologies and Wipro Infotech. Wipro has got its head
quarter in Bangalore. It is the first PLMM Level-5 and SEI CMM Level-5 certified IT
services company globally. This company is the largest independent R and D services
provider in the world, ranked among three offshore BPO providers.
CMC Limited, being world’s leading information technology services and
Solutions Company and BPO organization and a subsidiary of Tata Consultancy
services Ltd started its journey on 26th December 1975. Head Quarter of CMC is
situated in Hyderabad. CMC provides a wide spectrum of unique information
technology solutions and services to a clientele of premier organization in the
Government and Private sector.
HCL Infosystem Limited was established in 1976 one of the IT premier
products and services company covers entire spectrum of Information Technology. It
is a single window shop for products and infrastructure solution in the area of
Information Technology.
Satyam Computer Services Limited based in Hyderabad India is a leading
global consulting and IT services company that offers a wide array of solutions. B.
Ramalinga Raju founded it in 1987. The meaning of the word ‘Satyam’ in Sanskrit is
“truth”. The company offers a variety of IT services spanning various industrial
53
sectors and listed in the New York Stock Exchange. Satyam is the SEI CMM Level-
5, ISO 9001:2000 (first in the world) and BS 7799-2 certified company providing
Information Technology and Information Technology Enabled Services. It believes in
finding solutions that work best for the customer. As a diverse end-to-end IT solution
provider Satyam offers a range of expertise aimed at helping customers re-engineer
and re-invent their business to compete successfully in an ever changing market place
with the final objective of giving clients the competitive edge in the market place. It
provides quality services to 300 global companies.
The word ‘profit ‘comes from a Latin word “to make progress”. Profit is
generally is making of gain in business activity for the benefit of owners of the
business. Profit can be defined in two ways. One is economic point of view and
another is accounting point of view. Pure economic profit is the increase in the wealth
that an investor possess by making investment, taking into consideration all the costs
associated with that investment including opportunity cost of capital. Profit from the
accounting point of view is the reward of entrepreneur of taking risk. It is the
difference between the revenues and costs. A purely commercial organization always
aims to maximize profit. Profitability Analysis helps to show the operating efficiency
of the business. Different stakeholders (management, investors, suppliers, employees
etc) want to know the financial efficiency of the business. Financial Institutions like
bank etc wish to know the profitability of the firm or business to access the credit
worthiness of such business. Owners always want to know the rate of return on
capital employed in the business. Suppliers have the interest in the analysis for his
credit payments. With this object we have attempted to calculate the following ratios
of the selected companies.
54
3. Return on Capital Employed (ROCE) =
Profit/Turnover * Turnover/ Capital Employed
Table-6
PROFITABILITY ANALYSIS OF IT INDUSTRY (IN PERCENT)
TCS Limited
NPM (%) 9.35 12.10 15.18 22.81 24.23 25.15 18.14
CTR (Times) 1.20 0.80 0.90 2.42 1.99 1.85 1.53
ROCE (%) 20.45 25.75 32.24 53.36 48.43 46.42 37.76
WIPRO Limited
NPM (%) 25.35 20.41 17.82 20.67 19.75 20.76 20.79
CTR (Times) 1.01 1.56 1.43 1.47 1.58 1.47 1.42
ROCE (%) 33.86 24.04 25.39 30.42 31.25 30.41 29.23
CMC Limited
NPM (%) 6.15 6.09 6.42 2.97 5.32 9.52 6.08
CTR (Times) 5.20 4.50 4.20 4.03 3.15 3.95 4.17
ROCE (%) 32.01 27.45 26.45 11.19 16.79 25.64 23.26
HCL Info system Limited
55
Average
NPM is the overall measure of the firm’s ability to turn each rupees sale
into profit. If the NPM is inadequate, the firm will fail to achieve satisfactory return
on shareholders’ funds, NPM will decline unless operating expenses decrease
significantly. From the Table-6 it is quite clear that every company has the sufficient
and steady NPM growth rate except CMC Ltd as it suffers from a very poor margin
of NPM during 2004-05 due to increase in several expenditures like operating
expenses, manpower expenses, interest cost etc. Declination of export revenues and
equipment business marginally was one of the main causes of such poor margin of
profit otherwise the companies maintain a good position in regard to NPM. HCL Info
system Ltd. Earns highest NPM in 2006-07 of 29.23 percent followed by Satyam
Computer Services Ltd. in 2005-06 of 26.75 percent, WIPRO Ltd. in 2001-02 of
25.25 percent, TCS Ltd in 2006-07 of 25.15 percent and CMC Ltd in 2006-07 of 9.52
percent. The companies under the study follow an increasing trend in case of NPM.
Apparently ROCE is quite strong for selected companies as this ratio is very
much vital, conceptually sound appealing. ROCE is the indicator of profitability of a
firm, thus, it can be said that higher the return, the more profitable is the position of
the firm and vice versa. In this case all the companies maintain a quite bright percent
(%) in ROCE, which proves that companies are in a stable financial position and
having utmost ability to be succeed, attract financing, repay creditors and reward
owners. But after analyzing it has come to notice that in 2004-05 TCS Ltd has ROCE
of 53.36 percent, Wipro Ltd 30.42 percent HCL Infosystem Ltd. 27.06 percent
Satyam Computer Services Ltd 23.25 percent there CMC Ltd. Only has 11.19
percent. It means in this year profitability condition was not good for this company as
return on capital employed is showing a poor figure in comparison to other
56
companies. But this company recovered this state immediately and showing an
improvement in ROCE of 16.79 percent and 25.64 percent in 2005-06 and 2006-07
respectively.
If the question comes to CTR TCS Limited has the very low CTR in 2002-03
and 2003-04 and HCL Infosystem Ltd having the low CTR during 2006-07, it means
that the company has not efficiently utilized the capital employed by it. The other
companies maintain the required range of CTR. The CTR of CMC Ltd is declining
year after year, where it has the CTR of 5.20 times in 2001-02 reach to 3.95 in 2006-
07 that means the company is continuously facing the problem of low efficiency to
utilize its capital employed. On the other hand Satyam Computer Services Limited
has a steady growth rate in regards to CTR and increasing trend where in 2001-02 it
has 0.89 there in 2006-07 it has the CTR of 1.07. The average of all profitability
ratios is high which indicates that strong profit earning capacity of the industry.
57
short-term debt. This analysis is very vital for short-term creditors, lenders including
banks and debenture holders, management.
Common liquid ratios include the current ratio, liquid ratio, absolute liquid
ratio, working capital to current assets ratio etc. A company’s ability to turn short-
term assets into cash to covers debts is of the utmost importance when creditors are
seeking payments. Bankruptcy analysts and mortgage originators frequently use the
liquidity ratios to determine whether a company will able to continue as a going
concern.
While liquidity ratios are most helpful for short-term creditors, suppliers/bankers,
they are also important to financial managers who must meet the obligations to
suppliers of credit and various Government agencies. A complete liquidity analysis
can help to uncover weaknesses in the financial position of the business. In brief, we
are taking the following into account –
58
QR 1.74 2.03 1.65 1.61 1.57 1.48 1.68
ALR 0.55 0.69 0.35 0.44 0.46 0.62 0.52
DER 0.08 0.05 0.07 0.07 0.06 0.07 0.67
CMC Limited
CR 1.30 1.60 1.98 1.86 1.64 1.44 1.60
QR 1.27 1.49 1.87 1.71 1.45 1.36 1.50
ALR 0.12 0.10 0.11 0.06 0.13 0.17 0.12
DER 1.04 1.07 0.66 0.79 0.79 0.63 0.83
HCL Infosystem Limited
CR 1.74 1.69 1.43 1.88 0.74 1.21 1.45
QR 1.33 1.20 0.98 1.43 0.74 1.21 1.15
ALR 0.29 0.19 0.12 0.34 0.09 0.29 0.22
DER 0.23 0.18 0.22 0.26 0.27 0.25 0.24
Satyam Computer Services Limited
Current Ratio indicates the relation between Current Assets and Current
liabilities. As these two are also components of Working capital, this ratio also
regarded as Working capital ratio. In General it can be stated that higher the ratio, the
larger is the amount of rupee of Current liabilities and accordingly greater is the
safety of funds of short term creditors. This ratio indicates the short-term solvency
59
i.e. short-term debt paying capacity of an enterprise. It is also known as solvency
ratio. The companies in our study are holding more or less sufficient ratios except
TCS Limited. In 2001-02 to 2003-04 this company is suffering from a very poor
liquidity position revealed from Current Ratio. But this company recovers it from
2004-05 having more than two times of Current Assets against Current liabilities. It
has 2.4, 2.5, 2.3 current ratio in 2004-05, 2005-06, 2006-07. But it is noticeable that
Satyam Computer Services Ltd keeps its high Current ratio since 2001-02.In 2005-06
HCL Infosystem Limited suffers from a very poor Current ratio of .74. It means that
in that year this company was not quite efficient to meet up its short-term liabilities
and it invested more in current assets and blocked it. As a result it had that poor
current ratio at that period. Similarly CMC Limited continues with sufficient current
ratio i.e. company is able to meet its short-term obligations.
Quick Ratio indicates immediate loan repaying ability. True and fair solvency
position cannot be inferred from Current Ratio itself for inventories may be
overvalued or full of obsolete items. With a view to eliminate this shortcoming this
item should be excluded. TCS Limited is suffering from a very poor solvency
position form 2001-02 as 0.02 in 2001-02 0.01 in 202-03 and 0.01 in 2003-04 quick
ratios. But it progressed in 2004-05 and the quick ratio was 2.4 in 2004-05, 2.5 in
2005-06 and 2.3 in 2006-07.In comparison to TCS Limited Wipro Limited was in a
better position during 2001-02 to 2003-04. Same condition belongs to CMC Limited,
HCL Infosystem Limited; Satyam Computer Services Ltd These companies are
passing through a very good financial solvency position from 2001-02 to 2006-07.
That means they are able to pay short-term liabilities at any time.
Absolute liquid ratio indicates the utmost liquidity condition against the
Current liabilities. The same condition is continued with TCS Limited suffering from
a low liquid position from 2001-02 to 2003-04. The company makes its performance
better from 2004-05 to 2006-07. The other companies like Wipro Limited, CMC
Limited, and HCL INFOSYSTEM LIMITED, Satyam Computer Services Ltd
belonging to the better position of absolute liquidity. That means they possess the
sufficient amount of cash in their hand to meet their short term liability.
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Debt Equity ratio is a very vital ratio because it indicates the degree of
dependency of the company on external funds. Higher the ration indicates more
dependency on external funds. DER of all the companies is in declining nature
except Wipro Limited. In case of Wipro Limited it is in fluctuating nature. In 2002-
03 it was 0.05 and increases to 0.07 in 2006-07. But the other companies maintain
the declining trend during our study period. It reveals that these companies have
been depending less on debt and more on equity. Therefore, short term as well as
long term liquidity of these companies can be considered as favorable.
a. Predictors: (Constant), QR
b. Dependent Variable: ROCE
Table- 9 ANOVA
Table- 10 COEFFICIENTS
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Model Standardized t Sig. Collinearity
Coefficients Statistics
Beta Tolerance VIF
1 (Constant) 2.643 .057
QR .905 4.243 .013 1.000 1.000
a. Dependent Variable: ROCE
1. Prior to 1980 there was no IT industry in India because of mainly hostile and
rigid Government policies, underdeveloped infrastructure and adverse situation
of the country. As a result no impressive growth has been found at that time.
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After post economic reform boom period started in this sector and it becomes
fastest growing industry among all other industries.
3. If we consider the average of DER there from the Table-7 then it quite clear
that Satyam Computer Services Ltd has averages DER of 0.03 times which
means that company is less dependent on external debt. Average DER of TCS
Ltd. is 1.07 indicated more dependency on external debt. On the other hand
CMC Limited, Wipro Limited, HCL Infosystem Limited is having 0.83 times;
0.67 times, 0.24 times average DER during this period.
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the declining trend of having 2.34 times and 2.10 respectively. QR is also
following the same trend i.e. in 2001-02 1.33 times, 2002-03 1.61 times, 2003-
04 1.86 times, 2004-05 2.43 times, 2005-06 2.34 times and 2006-07 2.10
times. But in case of DER it is following the declining trend that means
dependency on external debt is reducing year by year. In 2001-02 0.33 times,
2002-03 0.46 times, 2003-04 1.15 times, 2004-05 0.26 times, 2005-06 0.25
times, 2006-07 .22 times. But the fluctuation has been found in average of
ALR. Now if we consider the overall picture of IT industry the solvency
position is good for this sector and expected to be better in near future.
5. Wipro Limited and Satyam Computer Services Ltd have the highest average of
NPM of 20.79% and 20.05% during the study period. TCS Limited, HCL
Infosystem Limited and CMC Limited have 18.14%, 12.18% and 6.08% of
average NPM respectively during this period. If we analyze the profit earning
capacity of the selected companies then it will be cleared that Wipro Limited
and Satyam Computer Services Ltd has the more capacity than the other
companies to earn profit. If we take CTR then Satyam Computer Services Ltd
then this company has the lowest CTR of 1.02 times in comparison to other
companies. CMC Limited, HCL Infosystem Limited, TCS Limited, Wipro
Limited have the 4.17, 2.75, 1.53 and 1.42 CTR for the same period. Now if
we consider ROCE then TCS Limited contains the highest return of 38.07% on
capital employed during the study period and Satyam Computer Services Ltd
has the lowest ROCE of 20.82% for the same period. The other selected
companies Wipro Limited, CMC Limited, HCL Infosystem Limited contain
29.23%, 23.26% and 21.06% of ROCE for that period.
6. Regression analysis is used for prediction and it predicted that liquidity and
profitability are balanced. The effect of liquidity (Quick Ratio) on profitability
(ROCE) is positive which implies that the sector is not following conservative
liquid policy so excess current or quick assets are not retaining in the business
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for a long period of time. The current and quick assets are used for business
purpose which facilitates to raise the potential profits for the industry. Hence,
directly help to increase the overall profitability of the industry.
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Table –11 COMPARISONS OF PROFITABILITY RATIOS BETWEEN IT AND AI
INDUSTRY
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constant growth rate in ROCE. It means comparatively IT industry can have a
strong profitability position than AI.
2. The QR of Indian IT industry shows a rising trend during the study period. In
2001-02 it was 1.3 times compared to 2.3 times in 2005-06. On the other hand
QR of AI shows a fluctuating trend during the study period. The QR of AI
was 0.9 times in 2001-02 compared to 0.8 times in 2004-05. But in 2005-06
the QR decreases to 0.6 times in case of AI. The increasing trend of QR
indicates sound liquidity condition for the industry which helps to meet the
short term liability.
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3. Now, if we take DER, AI shows an impressive figure of declining trend that
reveals AI has been depending less on debt and more on equity. The same
trend has been followed by the IT industry also. In 2001-02 IT industry has
0.33 times where in 2001-02 AI has 0.9 times DER and 2005-06 AI shows
0.3 times and in this year IT industry has the DER of 0.25 times. The DER of
IT industry is following increasing trend upto 2003-04 but since 2004-05 it
shows decreasing trend. The DER of Indian AI also shows declining trend for
the study period. The decreasing trend of DER in Indian IT and automobile
industry indicates that the industries reduce the debt portion in their capital
structure which also helps to trim down the financial as well as operating risk
for the industry.
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Chapter- 6 CONCLUSIONS
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6.2 Suggestions
Though in the post reform period Indian IT industry has shown a very
extraordinary and extravagant growth but it has to face a keen and cut throat
competition in the globalize business environment. Some top Indian originated
companies like TCS Limited, CMC Limited, HCL Inosystem Limited, Satyam
Computer Services Limited Infoys Limited etc. constituted global market but several
U.S.A, U.K based companies operate in India and Indian personals work for these
countries instead of their own country. So Indian companies must pay their attention
in the following aspects –
1. More IT software developing units should be constructed instead of BPO
centers to accommodate Indian software engineers to prohibit brain drain
from India.
4. Now a day cyber crime is a great problem not only for India but also for the
whole world. So Government of India (GOI) must take some necessary
measures to prohibit increasing cyber crimes on net and tighten the cyber
security. GOI also prepare strict rules and regulations in regards to those
crimes and should make sure that all must abide that rules and regulations.
5. In the budget proposals GOI should not impose such high rate of tax as
imposed by way of MAT (Minimum Alternative Tax) by GOI in the year
2006-07 that can pull down the revenue percent as earned by the Indian IT
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sector and should continue the Special Economic Zone (SEZ) benefits for
this industry for another five years.
6. To boost up the domestic IT market GOI must take some urgent steps. So
not only The Indian Government but also the Indian IT companies should
look after this matter.
7. Each and every IT companies put their emphasis only on software segment
till now hardware sector is totally neglected so IT companies must make
sure that hardware sector should get proper importance.
8. Still now we are importing some hardware components from aboard whish
pull up the price of laptops and computers. So the Indian IT companies
should look after this matter and start to manufacture their own components.
10.As IT is purely human based industry, therefore it must takes some steps to
provide them required training with a view to equip them necessary
knowledge to form future personnel panel.
11.Indian IT industry only develops in certain urban areas only but till now
rural areas are still neglected. So they must focus on these areas and on these
people also.
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trend of cyber crimes. Therefore they must adopt some major steps to
prohibit such crimes on net.
14.Software developers must acquainted with the needs of the customers and
always try to satisfy their needs in the changing business environment.
According to the customer’s need, choice and preferences they should
develop the software.
The present study is basically deals with the financial performance of Indian IT
sector after post liberalized period. To discuss the financial position of IT sector in
India we have taken top five companies and analyze their annual reports to view the
actual scenario of financial growth and stability in this sector. In course of the study,
it has been felt that some future research may be carried on in relation to this IT
industry. A few such areas are mentioned below-
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1. Future performance and prospect of Indian IT industry may be another
important of research.
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BIBLIOGRAPHY
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• Pandey, I.M, Financial Management, Vikas Publication House Pvt. Ltd,
2004; New Delhi, India.
• http://www.rediffmoney.com/
• Sinha G, Accounting Theory and Management Accountancy, Book World,
Kolkata-700085, 1997
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