It is the ratio of capital (net worth) as a percentage of total assets. The study covers the period from 1995-96 to 1999-00. Data are collected from the individual balance sheets for the respective year. Capital adequacy is one of several factors to be considered in assessing the strength of a company.

The other factors considered are asset quality, profitability, management competence and diversification of business. Freely available capital of a company provides a cushion to meet losses.

When a company's capital/asset ratio is low, its ability to attract deposits and inter-corporate funds is limited. Capital inadequacy also hampers the image of a company among foreign investors. The capital/asset ratio is crucial in assessing the credit rating of companies in the international money market. A deficiency in the capital/asset ratio lowers the company's credit rating. The size of a loan, the degree of country exposure, the lines of credit enjoyed from foreign banks and execution of guarantees in support of international contracts too are related to the size of the capital base.

The study reveals that the ratio of capital to total assets marginally declined from 44.66 per cent in 1995-96 to 44.29 per cent in 1999-00, which was indicative of the fact that the credit rating of the corporate sector has diminished from the mid nineties.

A significant decline in the ratio can be seen in the case of Suashish Diamonds (80.93 per cent in 1995-96 to 55.87 per cent in 1999-00), Indo Gulf Corporation (74.71 per cent to 48.52 per cent), Larsen & Toubro (50.27 per cent to 38.17 per cent), Nirma (61.98 per cent to 36.27 per cent), Usha Beltron (52.27 per cent to 35.06 per cent), India Cement (47.5 per cent to 29.25 per cent), Gujarat Alkalies (46.98 per cent to 26.82 per cent), Greaves (49.31 per cent to 26.14 per cent), Whirlpool (79.45 per cent to 18.78 per cent) and Orient Paper (43.5 per cent to 11.73 per cent).

The capital/asset ratio of Orient Paper during 1999-00 declined significantly from that in 1995-96. During 1999-00, Orient Paper's last position in terms of capital-asset ratio can be explained by the poor performance of the company during that year. Total investment of the company declined by 23.4 per cent to Rs 19.30 crore in 1999-00 as against Rs 25.20 crore in 1998-99. The company made a loss of Rs 53.52 crore during 1999-00.

The resultant unremunerative sales realisation of cement and the immediate costs involved in bringing about long term benefits at Brajrajnagar were mainly responsible for the depressed financial performance of the company during 1999-00.

On the other hand the paper mill at Amlai had to face a forced shut down for 31 working days during May/June 1999 due to non-availability of water. Water shortage during summer has been affecting the company's performance from time to time in the past also. In the fan division also the profitability of the company was adversely affected due to lower price realisation. On the other hand a significant increase in the ratio was witnessed in the case of Hindalco (79.02 per cent in 1995-96 to 86.7 per cent in 1999-00), NIIT (54.38 per cent to 82.58 per cent), Punjab Tractors (52.62 per cent to 79.26 per cent), Global TeleSystems (25.61 per cent to 68.36 per cent), Marico Industries (33.11 per cent to 67.02 per cent), Bata (19.14 per cent to 66.7 per cent), Kodak India (22.46 per cent to 66.11 per cent), Wipro (26.31 per cent to 58.37 per cent), Kirloskar Oil (26.35 per cent to 46.96 per cent), Nestle India (25.71 per cent to 40.57 per cent), MRF (22.49 per cent to 37. 35 per cent) and Nicco Corpn (18.58 per centto 30.35 per cent).

The capital/asset ratio of Hindalco increased during 1999-00 from that in 1995-96 and the company stood first during 1999-00 from the fifth position during 1995-96.

Hindalco's firspt position in terms of capital-asset ratio can be explained by the performance of the company during that year. Total investment of the company rose by 6.6 per cent to Rs 1,132.85 crore in 1999-00 as against Rs 1,062.77 crore in 1998-99. The company's Aluminium Alloy Wheel Plant at Silvassa was commissioned in September 1999. Alloy Wheels being a hi-tech product, with the stabilisation of the Plant, production is slated to increase progressively. The company is of the view that growth is essential for sustainable prosperity. Following the shelving of the Aditya Aluminium project, the company evaluated plans for a brownfield expansion at Renukoot.

Accordingly, directors of the company have approved the proposal for brownfield expansion, which will increase Aluminium Smelting capacity by 100,000 MTPA. In keeping with the company's strategy of ensuring control on key inputs, the proposal also includes expansion of Alumina Refining Capacity by 210,000 MTPA and a matching increase in Power Generation capacity. Work on this project has just begun. It is scheduled for completion in phases by end 2002-03.

Similarly, in the case of Nicco Corporation, the ratio increased significantly during 1999-00. The company's steel division is commencing a modernisation cum expansion project to give it flexibility in input usage by accommodating higher size billets and enhancing product mix. The process of mordernisation of facilities at Shyamnagar continues with the Electron Beam Irradiation project.

A significant decline in rank was observed in the case of Dr Reddy's Lab (1st in 95-96 to 20th in 99-00), Suashish Diamonds (3rd to 34th), Indo Gulf Corpn (8th to 52nd), Nirma (12th to 92nd) and Whirlpool (4th to 122nd). The overall analysis presented in this study revealed that the credit rating of the Indian companies has marginally decreased during 1999-00 from the level of 1995-96 but increased from the level 1998-99.