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Department of Business ManagementFaculty of Management and Research
Lucknow-226026
U.P. (India)
p-ISSN : 0974-8032
e- ISSN : 2278 6120
A Journal of Management(Indexed at J-Gate and EBSCO)
Vol. 8 No.2 December -2015IRJM
SERV II TN Y,U L ULA C
R KG N
E OT WNI
Dr. Zahid Raza KhanDept. of Business ManagementIntegral University
Dr Yasir Arafat ElahiDept. of Business ManagementIntegral University
Dr. Gaurav Bisaria Dept. of Business ManagementIntegral Univerisity
Prof. Mirza S. SaiyadainDean Faculty of BusinessBSAS UniversityChennai, Tamilnadu
Prof. Ashfaq Ahmad ZilliDeanFaculty of EngineeringIntegral University
Prof. Serajul BhuiyanFaculty of Marketing communication & Media, University of AuburnMontgomery, USA
Prof. Shahid SiddquiMarketing & International BusinessLong Insland UniversityC.W. Post Campus, USA
A Journal of Management
Editor-in-chiefProf. Aftab Alam
Dean, Faculty of Management and Research, Integral University
Chief PatronProf. S.W. AkhtarVice ChancellorIntegral University
PatronProf. S.M. IqbalChief Academic ConsultantIntegral University
Sub-EditorDr. Adeel MaqboolAssociate ProfessorHead, Dept. of Business ManagementIntegral University
Managing EditorDr. Rizwana AtiqAssistant ProfessorDept. of Business ManagementIntegral University
Prof. I. A. KhanRegistrarIntegral University
Prof. Azhar KazmiCollege of Industrial ManagementKing Fahad Univ. of Petroleum & MineralsDhahran, Saudi Arabia
Advisory Board
Dr. Asma FarooqDept. of Business ManagementIntegral University
Associate Editors
December 2015, All Right ReservedNo part of this publication may be reproduced or copied in any form by any means without prior written permission. The
Faculty of Management and Research, Integral University, Lucknow press holds the copyright to all article contributed to its publication. In case of reprinted articles, the Faculty of Management and Research. Integral University, Lucknow press holds the copyright for the selection, presentation, and publication.
Dr. Tauhidur RahmanAssociate ProfessorDept of Agriculture and Resource EconomicsArizona University, Tucson, USA
Prof. T. UsmaniPro Vice ChancellorIntegral University
Prof. Kaleem Mohd. KhanFaculty of Mgmt. Studies & ResearchAMU, Aligarh
Prof. Abid HaleemFaculty of Engg & TechnologyJMI , New Delhi
Dr. Jabir AliAssociate ProfessorCentre for Food and AgribusinessManagement, IIM, Lucknow
Prof. D.C. ThaparAcademic ConsultantIntegral University
C O N T E N T S
Camille Paldi Kuwait finance house: A case-study in the issues andconcerns in the financial reporting of Islamic banks
Sanjeev Kumar Saxena Measuring organizational service orientation:Validating Serv*or scale in Indian context
Archana Aravindan Urban infrastructure investment & its relateddevelopmental status in Kerala - A study with specialreference to Kerala sustainable urban developmentproject
Shazia Parwez Liquidity and stock returns: A study of theValeed Ahmed Ansari Indian market
Navdeep Kumar Leveraging emotional intelligence for the enhancementof the organizational effectiveness – Paradigms and Paragons
Anu Kohli An empirical study of variations in critical successRam Singh factors of quality management practices
in Indian manufacturing industry
K.K. Garg Leadership in TQM context : A case studyPranav Mishra
Author(s) Research Papers Page No.
1-8
25-35
36-47
48-63
1-16
17-35
36-51
52-71
72-80
81-92
93-101
Editorial Note
Global economic growth, estimated at 3.1 percent in 2015, is currently projected at 3.4 percent in 2016 and 3.6 percent in 2017. The pickup in global activity is projected to be much more gradual than in October 2015 as per the World Economic Outlook (WEO), especially in emerging markets and developing economies. Similarly, while assessing India's economy from October to December period 2015, it has been found on track and so far it is a witness to being one of the fastest-growing economies in Asia. The core facts of the resilient domestic demand and a limited reliance on the external sectors, are expected to fuel a pickup in growth in the fiscal year 2015. However, the data for the final quarter are mixed. The reason behind this debacle is industrial production deterioration in January, although the manufacturing PMI was found stable in February. The Ministerial credibility in this regard has unveiled some credence to the tune of the budget for the upcoming fiscal year 2016. The overall budget continues in tune with the government's fiscal consolidation path , and introduces a number of measures to spur the rural economy and improve the business environment. At the advent of governmental treatise and understanding, what makes the government responsive to the needs of the citizens is a key issue of today's political economy. It is poignant in low-income countries, wherein the absence of market opportunities, vulnerable populations are being relied upon the state action for their survival. A key issue then is what institutions of economic, social and political change can be built to enhance the effectiveness of the state in social protection and preparing people to be vigilant over social change. It requires not just a grasp of the roots of both state and government, but also an understanding of its embeddedness in society, to restore specifically its relation with the economy.The overall gamut of such complexities can be reckoned positively if some authentic sources could be put forth under the ambit of research foray, which has become an order of the day.The Integral Review Vol 8 No. II issue in your hand reveals a combined essence of researches, with diverse ideas from different scholars. The first paper highlights the current unorganized state of financial reporting in Islamic bank and reveals a true picture of the negative effects of using conventional accounting standards in Islamic banks rather than Islamic accounting standards and shows how this leads to non-transparency and the provision of inaccurate and misleading information to the general public and investors. The second paper contemplates the unique scaling technique “Validating SERV *OR Scale in Indian context” and has proved how it fits in for measuring any organizational service and verified positively for its internal consistency. The third paper, a unique study on “Urban infrastructure investment & its related developmental status in Kerala” herein incorporated, is worth studying for its strategic plan. The fourth paper is devoted
Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Dr. Aftab Alam
Editor-in-chief
Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
to “Liquidity and stock returns: A study of Indian market.” It examines the effect of liquidity on returns in the Indian stock market for the period between April 2000 and March 2012, and gives a lucrative result in the form of earning a premium of 4.50 per cent per month over liquid stocks. The Fifth paper “Leveraging emotional intelligence for the enhancement of the organizational effectiveness-paradigms and paragons” gives an insight into organizational effectiveness and concludes with suggestions to develop further scope of research in this domain. The sixth paper “An empirical study of variations in critical success factors of quality management practices in Indian manufacturing industry” is discussed with quantifications that an updated technology and leadership skills can create an edge over the variance of turnover. The last and the seventh paper envisages toward “Leadership in TQM Context: A case study” which on the whole contemplates a complete review of the practices of Leadership on Total Quality Management (TQM) in Indian automobile industry and gives a result of its incredible performance of TQM journey.
We conclude by saying that it has been our honor and pleasure to bring out this Journal. We are highly thankful to the authors who have published their research and the reviewers who have ensured the quality of IRJM. We have expanded our authorship to include more international contributions, as well as broadened the social science contributions.
Last but not the least we are greatly indebted to our chief patron Prof. Syed Waseem Akhtar, Hon'ble Vice Chancellor, Integral University, who has been our motivator and has always gone an extra mile in giving his invaluable guidance. His constant encouragement and support has given us the much needed boost to do even better.
1Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
KUWAIT FINANCE HOUSE: A CASE-STUDY IN THE ISSUES ANDCONCERNS IN THE FINANCIAL REPORTING OF ISLAMIC BANKS
1Camille Paldi
Abstract
This paper aims to shed light on the current unorganized state of financial reporting in Islamic
banks. In this exercise, I illustrate the negative effects of using conventional accounting standards in
Islamic banks rather than Islamic accounting standards and show how this leads to non-transparency
and the provision of inaccurate and misleading information to the general public and investors. I also
reveal how Islamic banks are not disclosing much of the information available on the financial
statements of a conventional bank and are inadequately providing information about Shari'ah
compliancy and the activities of the Shari'ah boards. The current state of financial reporting in Islamic
banks allows Islamic banks to conduct operations secretively and to hide negative information and
losses. The non-transparency of the emerging Islamic banking system should be a major concern for the
industry as this may lead to corruption and scandals, which may lead to the demise of the industry. At the
end of the paper, I make several key conclusions and recommendations for financial reporting in Islamic
banks. The paper is limited in proportion to the amount of limited information available in the financial
statements of Kuwait Finance House.
Key Words: Islamic Accounting, Financial Reporting, Islamic Finance, Maqasid al Shari'ah.
Executive Summary
In this financial and non-financial analysis of Kuwait Finance House Group (KFH), I have
conducted a ratio analysis of key liquidity, profitability, and efficiency ratios including the current ratio,
EPS, return on equity (ROE), return on assets (ROA), and the debt-to-equity ratio and compared KFH to
one of its main competitors, Gulf Finance House (GFH) in order to illuminate the financial health of
KFH. In addition, I have examined KFH accounting, disclosure, and reporting practices and their
suitability for an Islamic bank, remuneration practice, corporate and Shari'ah governance, corporate
social responsibility, significant changes in policy and strategy and their possible financial impact, and
have discussed risk mitigation and capital structure in order to provide a snapshot of the financial and
non-financial health of the institution for the benefit of a potential investor/depositor. I have investigated
1. Prepared in accordance with the Central Bank of Bahrain's requirements outlined in its Public Disclosure Module, Section PD 3.1.6 Additional Requirements for Semi Annual Disclosures, CBB Rule Book, Volume II for Islamic banks.
2Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
various reasons for the performance of KFH and explored the profitability of the investment and real
estate segments of the KFH conglomerate. The comprehensive analysis is based on the 2009-2011
annual reports of KFH and GFH, the 2009-2011 KFH Corporate Sustainability Reports, and the 2011
Public Disclosure Report of KFH Bahrain. In addition, I have examined and discussed relevant industry
standards including IFRS, IFSB, and AAOIFI regulations regarding accounting and capital adequacy
and explored the work of several academics including Haniffa, Safiedinne, Ahmed, Khan, Epstein,
Archer, Simon, and Karim, Sarea, Shabbir, and Van Greuning and Iqbal as well as the work of industry
practitioners such as Mohammad Amin and Michael Gassner. I conclude with recommendations to
KFH and the industry for the best way forward in terms of financial reporting practice. This paper is
directed at the stakeholders as defined in the KFH 2011 CSR Report.
Introduction: KFH at a Glance
KFH is organized into three major business segments including treasury, investment, and
banking (KFH 2011: 78). In 2011, KFH had 54 branches and was ranked among the best Islamic banks
in the world. KFH activities are conducted in accordance with the Shari'ah as approved by the Bank's
Fatwa and Shari'ah Supervisory Board (SSB) (KFH 2011: 51).
Ratio Analysis
Kuwait Finance House (KFH) has a fairly consistent current ratio for 2009 (.73:1),
2010(.73:1), and 2011(.70:1). Although the ratio is below 1:1, this doesn't necessarily indicate that KFH
is headed for a financial disaster, however, it does mean that KFH is working with negative working
capital. The current ratio for Gulf Finance House (GFH) gives a gloomy outlook for this international
financial institution in 2009 (.48:1), 2010 (.08:1), and 2011 (.01:1). In 2011, GFH only had .01 cents of
assets for every $1 of liability. Both banks are relying heavily on the fact that depositors do not withdraw
their deposits, however, GFH seems to be in a more vulnerable position. In terms of Earnings Per Share
(EPS), initially, a potential investor may feel uncomfortable with KFH as KFH starts in 2009 with (18.1
cents), 2010 (15.4 cents), and ends in 2011 at (10.8 cents). However, the reason for the sudden decline in
EPS may be due to a bonus share issue. GFH starts out in 2009 with an EPS of 272.17 cents, 2010 (76.84
cents), and ends in 2011 with .04 cents. This is an alarming rapid decline and also means that for every 1$
invested, the return for GFH is only .04 cents, indicating very low profitability for GFH.
KFH has a debt- to- equity ratio of 5.9 in 2009, 6.5 in 2010, and 7.3 in 2011. GFH's debt-to-
equity ratio is 2009(2.7), 2010(7.7), and 2011(2.53). It seems that KFH has been more aggressive than
GFH in financing its growth with debt in 2011 and appears to be a credit risk. If the cost of debt-
financing becomes greater than the return, this could negatively impact KFH's business. Therefore,
1Camille Paldi
3Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
KFH should seek the right balance of debt and equity finance so as to leverage its assets correctly,
especially with a declining EPS and turbulent economic conditions. Return on equity for KFH amounts
to 2009(22%), 2010(4%), 2011(9%) and for GFH 2009(13%), 2010(7%), 2011(31%). It appears that in
2011, GFH has a better ROE than KFH. Furthermore, KFH's ROE steadily declined from 2009 to 2011.
This is a worrying signal for potential KFH investors. Return on assets for KFH in 2009 is 6.4%,
2010(5.7%), and 2011(.01%) and for GFH in 2009(.03%), 2010(7.96%), and 2011(.09%). Once again,
GFH is more efficient in terms of return on assets although GFH also has a low figure and KFH sees a
rapid decline in ROA from 2009 to 2011, possibly worrying investors. In fact, in 2011, Moody's was
reviewing a downgrade for KFH due to the fact that the overall coverage level of provisions to problem
loans remained relatively low, approximately 73%. Provisioning needs also continued to weigh down
KFH's profitability, with the bottom-line only stabilising through relatively volatile investment income.
Moody's cited inefficient reporting as one KFH's key problems in addition to weak asset quality,
financing, and loan books, and problems in management and internal controls. Moody's stated that the
poor asset quality was due to concentrated exposures to non-banking financial institutions, real estate,
and underperforming investments. In fact, in May 2013, Moody's downgraded KFH's long term ratings
by one notch to A1 from Aa3. Moody's also downgraded KFH's baseline credit assessment (BCA) and
bank financial strength rating (BFSR) by two notches to ba1/D+ from baa2/C- respectively. The Prime-1
short term rating was confirmed. All ratings assigned to KFH in 2013 carry a negative outlook. Moody's
reported that the rating actions reflect (1) continued asset quality pressures; (2) an increasing reliance on
volatile investment income; and (3) the current organisational complexity and overall risk profile
inconsistent with global peers.
The exposure from excessive derivatives trading most likely added to the poor asset quality. In
addition, the bank may be overextended in real estate and investment. In 2011, KFH launched a one
billion KD real estate portfolio in collaboration with the Kuwait Investment Authority and KFH initiated
several real estate and special purpose financial funds including a gold traded fund and introduced
investment portfolios. KFH also partnered with Grosvenor Fund Management to invest up to £380m in
US healthcare real estate, having a combined investment capacity of £900m (Gassner: 2011). Perhaps
KFH should redirect some of these efforts towards its banking section.
Strategy
KFH introduced new products such as the al-Khumasiya five -year deposit, the gold
investment account and offers a continuous investment deposit, a three-year investment deposit, Sudra
investment deposit, and investment deposits in US dollars, Sterling Pound, and Euro. KFH also
introduced Visa, Mastercard, and pre-paid cards, ranking number one in credit card ratings in Kuwait and
Kuwait finance house: A case-study in the issues andconcerns in the financial reporting of Islamic banks
4Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
the Middle East. KFH utilizes an e-banking platform incorporating online services in addition to
iPhone, iPodTouch and iPadApp banking, SMS, as well as phone service (Allo Baitak) and provides a
service where one can open an investment deposit account through ATM machines in Kuwait. KFH also
received accreditation from Purdue University for outstanding customer service. In 2011, KFH
implemented a new five-year strategy, upgraded its operations systems, completed the change to
automated systems, and secured approval for providing e-corporate services (KFH 2011). Furthermore,
in 2011, KFH embarked on an extensive restructuring exercise to improve efficiency and internal
controls and to remove legacy management processes with the aim of addressing the company's
organisational complexity (Moody's). The three pillars of KFH's five year strategy can be seen below.
The strategic pillars include (1) Improving KFH's performance in Kuwait, (2) Enhancing KFH's
investment business; and (3) Leveraging KFH's international presence more effectively, generating
synergies across KFH banking operations in Bahrain, Malaysia, and Turkey.
New KFH 5- Year Strategy
Pillar 1 Improve KFH’s performance in Kuwait.
Pillar 2 Enhance KFH’s investment business.
Pillar 3 Leverage KFH’s international presence
more effectively, generating synergies
across KFH banking operations in Bahrain,
Malaysia, and Turkey.
Change in Board Membership
New Members of the KFH Board in 2011 included Chairman Sameer Yaquob Al-Nafeesi, a
powerhouse corporate giant who serves on the Board of numerous institutions and with over 33 years of
experience in the real estate market and Board Member Iman Al-Humaidan (female), who has written
Women and Waqf. The addition of the new Chairman may positively affect the profitability of KFH
especially in the real estate and investment sections, however, potentially steering KFH in the wrong
direction, and the addition of a well-renowned female Islamic finance academic was a good move for the
overall structure and outlook of KFH.
Accounting Practices
Although an Islamic bank and an associate member of AAOIFI, KFH Group with the exception
of KFH Bahrain does not officially adhere to the AAOIFI standards in its financial reporting. KFH
1Camille Paldi
5Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
financial statements are prepared in accordance with IFRS, however, KFH selectively and unofficially
follows FAS guidelines in some areas of reporting. New additions to IFRS in 2011 and revenue
recognition can be seen in Appendix A.
IFRS does not equip KFH with the necessary degree of disclosure and transparency in light of
Islamic modes of finance, as risk exposures of assets vary according to different types of contracts and
the mode may be used for sale or finance, which would result in different reporting implications.
Furthermore, there are many rules in the Shari'ah, which the IFI must abide by, which may affect
reporting requirements. General disclosures unique to IFI's are information about the Shari'ah Advisory
Board, policies on zakat, policies of profit distribution with IAHs, disclosures on prohibited earnings and
disclosures of concentration of asset risks involving unrestricted investment accounts. Many gaps in
disclosure occur due to use of conflicting standards.
For example, in regards to investment accounts, some IFIs treat such accounts as equity or
liability, while others report them as off-balance sheet items. Jordan Islamic Bank, Bahrain Islamic Bank
and Qatar Islamic Bank treat investment accounts that are based on mudarabah contracts as liabilities
and report them on- balance sheet. Other banks treat investment accounts as fiduciary investments and
report them off-balance sheet (Al Rajhi Bank and Shamil Bank of Bahrain)(Sarea 2012:27). KFH
reports restricted investment accounts off-balance sheet and discloses joint financial assets and
percentages of funds involving unrestricted investment account funds, which mitigates agency risk
involved with the commingling of funds (FAS1). Furthermore, in terms of FAS1, KFH discloses
compensating balances as balances with banks and financial institutions – (exchange of deposits), both
on the assets and liabilities sides of the balance sheet (Shabbir 2012).
According to Abdel Karim, reporting off balance sheet allows IFI's to hide negative
information such as losses because of misconduct or negligence (Safiddiene 2007:144). Under
mudarabah investment management, the IFI is not liable for loss arising from investments according to
Shari'ah. In IFRS, this would be presented as a liability along with other deposits, however, under
AAOIFI, unrestricted investment funds are to be presented as a separate item between liabilities and
owners' equity. In terms of Ijarah, AAOIFI requires both operating ijarah and ijarah muntahia bittamleek
to be treated as an operating lease. In IFRS, both operating ijarah and ijarah muntahia bittamleek are
classified as finance leases. Due to Shari'ah requirements, Ijarah contracts cannot be accounted for as
finance leases. Therefore, the leased assets are recognized in the books of the bank and not capitalized in
the customers books. The leased assets are then depreciated in the books of the bank, contravening IAS
17 (Ibrahim 2007). The 2011 KFH Annual report states that capitalized leased assets are depreciated
over the estimated useful life of the asset (KFH 2011:54). Furthermore, it is required for leasing with
gradual sale that the inventory be valued at fair values, not lower of historical cost or net realizable value.
Kuwait finance house: A case-study in the issues andconcerns in the financial reporting of Islamic banks
6Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Hence, IAS2 cannot be followed (Ibrahim 2007). The 2011 KFH Annual report states that finance leases
are capitalized at inception of the lease at fair value, or if lower, the present value of the minimum lease
payments (2011:54). The special nature of Islamic banking requires tailored standards in order to
promote full disclosure and transparency of the IFI. In contrast to conventional standards, one can see in
the table below the AAOIFI disclosure requirements specifically tailored for Islamic finance.
Disclosure Requirements for Islamic Finance (AAOIFI)
Capital Based on trust, profit sharing contract with no executive involvement.
Performance of fund (net asset value) and/or dividend return.
State outstanding balance, change in value and profit distributed (FAS 6).
Commingling of
Funds
IFI can utilise the funds and pool for financing or investment.
Funds utilised are to be identified vis-à-vis shareholders and other deposit funds.
Disclose joint financial assets and percentages of funds involving unrestricted investment account funds (FAS 1).
Investment
Policy
IFI can adopt a flexi investment policy in utilising IAH funds.
Decisions should be taken in the interest of an IAH.
Provide adequate disclosure on basis of investment policy
when mobilising IAH funds.
Profit and Loss Distribution
Mutually agreed profit distribution ratio and basis to be specified.
Mechanisms are specified and effectively communicated.
State PSR, income determination method, allocation basis and reserve management policy (FAS 5).
Reasonable Return
Effective return to IAHs is realised.
Smoothing of rate of return to IAHs.
Report policies, amount, and movements within PER (FAS 11).
Capital Recovery
Fund is safeguarded by ensuring capital is recovered prior to profit distribution.
Accrued profit not distributed until assurance provided that capital is not depleted.
Report policies, amount and movements of Investment Risk Reserve IRR (FAS 11).
1Camille Paldi
7Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Another area for concern in the financial reporting of Islamic banks includes using
conventional standards for capital adequacy. At Kuwait Finance House, capital adequacy and the use of
regulatory capital are governed by the Basel Committee on Banking Supervision (KFH 2011: 87) rather
than the standards issued by AAOIFI and the IFSB. However, Islamic finance standards are required to
regulate deposits based on Wadi'ah (guaranteed safe custody) or Qard Hassan (interest free loan)
contracts, which are reported as liabilities in the balance sheet. At 31 December 2011, the total Capital
Adequacy ratio for KFH was 13.73% and Tier (1) 13.51% (2010: 14.22% and Tier (1) 14.15%)
compared to the ratio required by the regulatory authorities of 12% (KFH 2011 Annual Report, 31).
However, as KFH does not use the IFSB and AAOIFI standards for capital adequacy, this may not truly
reflect KFH's capital structure and stakeholders cannot truly assess whether capital structure decisions
were made to maximize shareholder equity. The IFSB and AAOIFI Capital Adequacy Standards are
listed in the table below.
IFSB Capital Adequacy Standard The IFSB has issued a capital adequacy
standard, which is based on the Basel II
standardized approach with a similar
approach to risk weights. However, the
minimum capital adequacy requirements for
both credit and market risks are set out for
each of the Shari’ah
compliant financing
and investment instruments (Van Greuning
and Iqbal 2008:83).
AAOIFI Capital Adequacy Standard The AAOIFI Statement on the Purpose and
Calculation of the Capital Adequacy Ratio
for Islamic Banks takes into account the
differences between deposit accounts in
conventional banking and investment
accounts in Islamic banking (Van Greuning
and Iqbal, 2008:59) recommending not
including the risk-sharing account deposits
in capital (Van Greuning and Iqbal
2008:81).
Kuwait finance house: A case-study in the issues andconcerns in the financial reporting of Islamic banks
8Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
The 2011 KFH Annual Report states that no changes were made in respect to capital
management objectives, policies, and processes from the previous years, however, the dividend pay- out
to shareholders significantly decreased from 2010 to 2011, while directors' salaries increased.
Furthermore, profits distributed to investment account holders (IAH's) decreased from 2010 to 2011 as
seen in the table below. The table below reveals that Mustamera profit distribution to IAH's decreased
from 2.378% in 2010 to 1.728% in 2011, Sedra profit distribution decreased from 1.850% in 2010 to
1.344% in 2011, and Tawfeer profit distribution decreased from 1.585% in 2010 to 1.152% in 2011.
Deposit Type
2011% of Profit Distribution
to IAH’s
2010 % of Profit Distribution
to IAH’s
Khumasia: 2011 (1.920%)
Mustamera: 2011(1.728%) 2010 (2.378%)
Sedra: 2011(1.344%) 2010(1.850)
Tawfeer :
2011(1.152%)
2010(1.585%)
Investment Accounts
The Bank receives deposits from customers as part of several unrestricted investment accounts
“On Balance Sheet” and restricted “Off Balance Sheet.” In Unrestricted Deposits, these are invested by
the bank as Mudarib investing funds for limited or renewable periods at various investment ratios.
Investment returns are distributed among the bank as a Mudarib and investment account holders on
proportionate basis for each type of these accounts and the elapsed investment period (KFH 2011).
Investors' capital is not guaranteed and they incur losses if the bank does (Van Greuning and Iqbal
2008:35). KFH acts as an investment agent in restricted deposits.
In terms of depositors' accounts, non-investment deposits in the form of current accounts are not entitled
to any profits nor do they bear any risk of loss as the Bank guarantees to pay the related balances on
demand. Accordingly, these deposits are considered Qard Hasan from depositors to the Bank under
Islamic Shari'ah. Investment deposits comprising of Khumasia, Mustamera, and Sedra deposits are for
an unlimited period, initially valid for one year, and are automatically renewable for the same period
unless notified to the contrary in writing by the depositor. The Tawfeer savings accounts are investment
savings accounts valid for an unlimited period. In all cases, the investment deposits receive a proportion
1Camille Paldi
9Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
of the profit as the board of directors of the Bank determines or bear a share of loss based on the results of
the financial year. The bank generally invests approximately 100% of investment deposits for an
unlimited period (Khumasia), 90% of investment deposits for an unlimited period (Mustamera), 70% of
investment deposits for an unlimited period (Sedra) and 60% of investment saving accounts (Tawfeer).
The bank guarantees to pay the remaining un-invested portion of these investment deposits.
Accordingly, this portion is considered Qard Hasan from depositors to the Bank under Islamic Shari'ah.
Investing such Qard Hasan is made at the discretion of the Board of Directors of the Bank, the results of
which are attributable to the equity-holders of the Bank (KFH 2011:71).
According to the AAOIFI Shari'ah Standard No. 40 Distribution of Profit in Mudarabah-based
Investment Accounts, section 4/1, the method of profit distribution should be well-known so that no
room is left for uncertainty and dispute. Distribution of profits should also be in terms of ratios and not at
all by specifying a lump sum amount or a percentage of the capital for any party or any other method that
could lead to avoidance of sharing of the profit between the two parties (2004: 723). KFH has not
specified in its annual report the method of profit distribution, however, has listed the concerned ratio.
According to section 5/1, Distribution of Profit, Application of Scoring Method of Profit
Distribution, the scoring method for distribution of profit among the participants of general investment
accounts should be used. From the 2011 report, we cannot deduce the method used, however, all we can
see is that the ratio of profit decreases from 2010 to 2011 due to a decision of the Board of Directors
(AAOIFI 2004: 723). The dilemma currently experienced in terms of the divergence of accounting
standards and their implementation poses a great threat to the sustainability of Islamic financial
institutions. Appropriate management of PSIA, with proper measurement, control, and disclosure of the
extent of risk sharing and IAH's can be a powerful risk mitigant in Islamic finance (Van Greuning and
Iqbal 2008:59). The AAOIFI and the Islamic Finance Supervisory Board recommend that Islamic banks
accurately disclose the returns on IAH and shareholder funds, the bases and the percentages for the
allocation of assets, and profits and expenses in a way to enhance transparency and enable investors to
monitor the performance of their investments (Safieddine 2009: 144).
Remuneration Committee
The Board of Directors of the Bank proposed a cash dividend of 15% for the year ended 31
December 2011 decreasing from 20% in 2010. At the same time, Directors' fees increased to KD 260
thousand in 2011 from KD 160,000 in 2010 (KFH 2011: 74). As the Annual Report does not contain a
remuneration committee report, we cannot see how and why these decisions were made.
Kuwait finance house: A case-study in the issues andconcerns in the financial reporting of Islamic banks
10Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Shari'ah Governance Board
A transparent financial institution would ideally reveal the duties, decision-making,
competence, and composition of the Shari'ah Board, as well as publish all fatwa issued by the Board.
However, in a one page report, KFH merely certifies that most decisions made were Shari'ah compliant
and for those that were not, the funds have been donated to charity and provides the names and pictures of
the members (Van Greuning and Iqbal, 2008:36). KFH unofficially adheres to FAS 1 in terms of zakat
and qard-hassan reporting. In 2011, zakat was calculated at 2.5777% and charged to the consolidated
statement of income (KFH 2011:59).
Corporate Governance
KFH lacks any meaningful corporate governance structure to address potential agency
problems concerning investment accounts nor for the organization as a whole, except through unofficial
compliance with minimal FAS standards.
Disclosure
Although the statements have been certified by Ernst and Young as a true and fair representation and
KFH compliance with capital adequacy regulations, if KFH does not adhere to the standards set out
specifically for Islamic banking, the statements may not in reality be a true and fair representation of the
position of KFH and the capital structure management may not have been carried out in a manner to truly
maximize shareholder's equity and this would remain unknown to the stakeholder.
Risk Mitigation
The table below illustrates the credit risk exposure, liquidity risk, and equity price on the
Kuwait Stock Exchange for KFH in 2010 and 2011.
KD000’s
2010
2011
Credit Risk
Exposure
KD11941780 KD12588420
Liquidity Risk 23% 22%
Equity Price on
Kuwait Stock
Exchange
KD2740 KD2920
1Camille Paldi
11Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
KFH slightly reduced liquidity risk even though credit risk increased, indicating effective capital
structure management in the advent of business expansion and a slightly increasing ability to meet
demand deposit withdrawals. One cause for concern is the use of derivatives by KFH, which is not
Shari'ah compliant and which exposes the assets of its business to a whole new set of risks, potentially
resulting in loss of profits in the long-run.
Notes to the Financial Statements
As KFH Group adheres to IFRS, gaps in disclosure may occur and there runs a risk of non-
Shari'ah compliance. The table below illustrates which AAOIFI standards KFH, with the exception of
KFH Bahrain, voluntarily adheres to in its financial statements.
Are AAOIFI Standards Addressed in the Notes to KFH's 2011 Statements?
Standard Yes No
FAS No.1 requires that restricted investment accounts should be reported off -balance sheet in the statement of the changes in restricted investments.
x
FAS No.3 disclosure should be made in the notes to the financial statements for a financial reporting period if the Islamic bank has made during that period a provision for decline in the value of Mudarabah
assets.
x
FAS No.4 disclosure should be made in the notes to the financial statements for a financial reporting period if the Islamic bank has made during that period a provision for a loss of its capital in Musharaka financing transactions.
x
FAS No.5 requires bank to disclose percentages for pr ofit-allocation between investment account holders and the bank.
x
FAS No.6 disclosure should be made, in the notes on significant accounts, of the percentage of the funds of unrestricted investment. Distinguishes reporting requirements of unrestricted (on balance sheet item) and restricted (off balance sheet item) investment accounts.
x
Fas No. 9 on Zakat x
FAS No.10 requires that the Islamic bank shall disclose in its financial statements revenues and profits of Istisna’a contracts recognized for the financial period.
x
FAS No.11 requires that the Islamic bank shall disclose in the notes any deductions, either as a percentage or an amount, from mudarabah income. Introduces the Profit Equalisation Reserve (PER) and Investment Risk Reserve (IRR) to protect IAHs’ interests
by ensuring stable distribution rate of return to
IAHs as well as ensuring capital recovery prior to realisation of distributable profit.
x
Kuwait finance house: A case-study in the issues andconcerns in the financial reporting of Islamic banks
12Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Fas No. 14 on Investment Funds
x
FAS No. 17 on Investments
x
FAS No.20 requires that the bank shall disclose in the notes to the financial statements the policy adopted in financing deferred payment sale transactions.
x
FAS No.21 require that disclosures shall be made of the accounting policies adopted in the transfer of assets from unrestricted investment accounts to restricted investment accounts.
x
FAS No.23 requires consolidated financial statements shall be prepa red by combining the financial statements of the IFI.
x
It appears that KFH follows the basic disclosure requirements of AAOIFI even though it
officially adheres to IFRS, however, there is a gap in relation to the more detailed requirements of the
AAOIFI standards. However, all of these requirements appear to have been met in the KFH (Bahrain)
B.S.C.(c) Public Disclosure Report,as AAOIFI standards are officially followed in Bahrain.
Corporate Sustainability Report
KFH was the first bank in the world to issue a corporate sustainability report in 2009, which
constitutes voluntary disclosure. In 2011, KFH won the Best CSR Programme in the Middle East by
EMEA Finance and donated approximately KD 9 million including KD 4 million paid to the Zakat
House and KD 5 million to alleviating the effects of famine and drought in the region of the Horn of
Africa (KFH 2011). KFH also has many programs related to Diabetes (KFH 2011: 24-25) and
introduced the Qu'ran App for iphone as well as an iphone application for monitoring Diabetes. In
addition, KFH offers the Jameati Saving Account for Higher Education, encouraging their employees to
save for their childrens' college educations (KFH 2011) and actively supports Islamic educational and
social events, especially pertaining to Qu'ran recitation. The CSR Report also indicates employee's
welfare, training and development, recruitment schemes, equal opportunity, reward to employees, and
special services for women (Haniffa 2007:101). In terms of voluntary disclosure and social support
activity, KFH ranks number one in the world.
Conclusion
Concerns for investors include the worrying debt-to-equity, ROE, and ROA ratios, overextension in the
real estate and investment businesses, the declining dividend pay-outs and increasing salaries along with
the decreasing percentage of profits to investment account holders, and the Moody's downgrade.
Another destabilizing factor could be the use of derivatives to hedge risk and/or speculate and the lack of
transparency in the reporting of the investment accounts, remuneration committee, Shari'ah Board, and
1Camille Paldi
13Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
the Group as a whole. Agency problems involving the investment accounts can be mitigated if KFH
Group opted to adopt the structure of the KFH Bahrain Public Disclosure Report in its financial
reporting, which adheres to AAOIFI standards. My recommendation to KFH is to utilize the Bahrain
Public Disclosure Report in the KFH Group consolidated financial statements either as a separate
additional report or included in the Notes to the Group consolidated financial statements. Furthermore, I
recommend KFH to issue a Remuneration Report and to develop a comprehensive corporate governance
structure as well as issue a more substantial Shari'ah Supervisory Board Report so as to ensure Shari'ah
compliance. KFH should also consider taking the lead as the first Islamic bank to introduce a system of
guaranteeing deposits in order to attract greater clientele and ensure industry-wide stability. Otherwise,
KFH remains the best Islamic bank in Kuwait and the Middle East and is the best Islamic bank in terms of
Corporate Social Responsibility (CSR).
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Edinburgh.
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Institutions) Offering only Islamic Financial Services. Islamic Financial Services Board:
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Offering Only Islamic Financial Services. Islamic Financial Services Board: Kuala Lumpur,
[http://www.ifsb.org/standard/ifsb2.pdf].
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IRTI and the International Association of Islamic Economics: Jeddah.
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Islamic Financial Industry.IRTI: Jeddah.
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r e v i e w - - P R _ 2 5 9 1 0 9 a n d
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TLE_YYYYMMDD_PR_273062%3C/p%3E.
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Sarea, Adel Mohammed (2012). The Level of Compliance with AAOIFI Accounting
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Washington D.C.
Appendices
A Revenue Recognition for KFH 2011 Annual Report
Appendix A:
In terms of revenue recognition by KFH, financing income is income from murabahah,
istisna'a, and wakalah investments and is determined by using the effective profit method. The effective
profit method is a method of calculating the amortized cost of a financial asset and of allocating the
financing income over the relevant period; Income from leased assets is recognized on a pattern
reflecting a constant periodic return on the net investment outstanding and is included under financing
income; Operating lease income is recognized on a straight line basis in accordance with the lease
agreement; Rental income from investment properties is recognized on an accruals basis; Dividend
Income is recognized when the right to receive is established; and Fee and commission income is
recognized at the time the related services are provided (KFH 2011). The below table states the new
accounting standards for KFH in 2011.
l
l
New Accounting Standards for KFH in 2011
IAS24-
Related Party Disclosures (Amendment), effective 1 January 2011.
IAS32-
Financial Instruments: Presentation-Classification of Rights Issues (Amendment),
effective 1 February 2010.
IFRIC 14 -Prepayments of a Minimum Funding Requirement (Amendment), effective 1
January 2011.
IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments, effective 1 July
2010.
IAS1- Financial Statement Presentation – Presentation of Other Comprehensive Income.
IFRS7 - Financial Instruments: Disclosures – Enhanced De-recognition Disclosure
Requirements.
IFRS 9 - Financial Instruments: Classification and Measurement.
Kuwait finance house: A case-study in the issues andconcerns in the financial reporting of Islamic banks
16Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
IFRS10 -
Consolidated Financial Statements.
IAS27-
Separate Financial Statements.
IFRS 11 -
Joint Arrangements.
IFRS 12 -
Disclosure of Involvement with Other Entities.
IFRS 13 -
Fair Value Measurement.
IAS28 - Investments in Associates and Joint-Ventures (as revised in 2011).
1Camille Paldi
17Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
MEASURING ORGANIZATIONAL SERVICE ORIENTATION:VALIDATING SERV*OR SCALE IN INDIAN CONTEXT
1Sanjeev Kumar Saxena
Abstract
Purpose/objectives: With advent of globalizations and openness of the Indian economy after
liberalization policies, Indian firms in lines with global competitors are becoming market & service
driven. Recent marketing literature has acknowledged the role of a firm's service orientation in
achieving a sustainable competitive advantage. Given this backdrop, this study has used improved
version of the widely accepted scale SERV*OR (Lytle et al., 1998), named as i-SERV*OR, for measuring
service orientation of the organization. i-SERV*OR is validated for its application to different types of
organizations (Service, Manufacturing & hybrid). The items of the scale have been factor analyzed and
verified for internal consistency. Variations of service orientation scores across sets of organizations
have been studied using one way ANOVA. The study is first of its kind, as far as using a common scale for
measurement of Organizational Service Orientation for all types of firms. Future research may be
carried out across countries of both developed and developing economies for wider acceptance of (i-
SERV*OR) scale.
Design and Methodology:
The questionnaire based on modified version of SERV*OR scale, covered wide variety of
service and manufacturing firms from both the private and public sector across India. The response rate
of 522 responses was around 85%. The Statistical Package for Social Sector (SPSS) version 22 and MS
excel has been used to analyze the given data. A reliability analysis was performed to investigate the
internal consistency of the survey instruments used in this study. Cronbach's alpha coefficients were
calculated to examine the reliability of the scales. Variations of service orientation scores across
organization have been studied using one way ANOVA.
Findings:
This study has improvised SERV*OR scale to a modified scale called i-SERV*OR to reflect 11
Dimensions, applicable to all sets of organizations (Service, Manufacturing & hybrid) for measuring
1. Sanjeev Kumar Saxena, Doctoral Programme Fellow, BITS, Pilani and Additional General Manager, Ordnance Factory Board, Ministry of Defence, Kolkata 700001 email: [email protected]
18Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
service orientation of Indian firms. 11 dimensions include: Customer Treatment, Employee
Empowerment, Service Technology, Service Failure Prevention, Service Vision, Service Standard
Communication, Service Failure Recovery, Service Rewards, Service Leadership, Service Training &
Real time Management Information System. The extent of organizational service orientation varies
across the three sets of industries i.e. service, manufacturing and hybrid organizations. The result reveals
that a significant share of variation is associated with “within group variation”, with a minor variation
existing “between groups”. The ANOVA results show that service orientation scores are statistically
different for the three sectors.
Originality/Value:
The study is first of its kind, as far as using a common i-SERV*OR scale for measurement of
Organizational Service Orientation for all sets of firms i.e. service, manufacturing and hybrid
organizations in Indian context.
Key Words: Organizational service orientation, i-SERV*OR scale, Indian context
Paper type: Research Paper
Introduction
The interest of researchers in service orientation dates back to 1972, when Adair (1972) first
used the concept and identified it as an important trait in librarians. One of the ? rst studies exploring the
service orientation concept was carried out by Parkington and Schneider (1979) who investigated
simultaneously employees' perceptions of organizational service orientation and individual employee
service orientation. Despite the strategic importance of examining this service orientation discrepancy,
the majority of studies either focused on the exploration of employees' perceptions of organizational
service orientation (e.g. Johnson, 1996; Lytle et al., 1998; Webster, 1993) or on individual service
orientation (e.g. Cran, 1994; Hogan et al., 1984).
Lytle and Schilling (1994) defined Service orientation as 'a collection of organizational
activities undertaken by service firms designed to secure the creation and delivery of excellent services
in strategic response to market information'. Lee et al (1999) defined service orientation as 'a strategic
response to market information which is designed to implement marketing concept within the overall
framework of customer oriented services'. Thus a service-oriented organization puts a strategic
emphasis on providing an excellent service on the belief that doing so will enable the organization to
promote its value as perceived by both customer and employee and to secure customer satisfaction which
results in competitive advantage and higher performance.
India is among the fastest growing economy of the World, with GDP growing steadily at 7.3%
Sanjeev Kumar Saxena1
19Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
(2014-15) which is higher than that of the other developing economies. Indian economy has also gone
for integration with the global economy to usher in global competition. This has brought in efficient
manufacturing with economic growth. As a result, the corporate landscape has witnessed major changes
in terms of competition from both imports and multinationals in the domestic markets (Aggarwal et al,
2004; Dangayach et al, 2001). Sapna Popli et al (2015) in recent study in specific context of the private
service sector organizations in India, found that Service orientation is found to be strongly correlated to
employee engagement and employee engagement is a strong predictor of service orientation.
It is observed from the available literature that most of the research studies on Organizational
Service Orientation and how it affects organizational performance have been undertaken in context of
US, Europe and few in Chinese & Korean Service industries. Further most of the studies have used
SERV*OR scale to measure Organizational Service orientation for Service Industries in above
countries. Not much research has been undertaken to test applicability of SERV*OR scale to
Manufacturing Organizations or to develop different and/or modified scale applicable to manufacturing
firms. It is also not attempted to develop universal scale for measurement of Organisational Service
Orientation for all types of organisations i.e. service, manufacturing and hybrid (having characteristics
of both service & manufacturing). This is important in today's context of manufacturing industry
individualization in regard of a combination of products and services offer a huge differentiation factor
and there is the need for a shift from a product-centric view towards a service-dominant perspective.
Given this backdrop, this study has developed a scale for measurement of service orientation of
the organization (named as i-SERV*OR), applicable to all types of organizations i.e. Service,
Manufacturing & Hybrid. The study has also examined the extent of similarity or difference between the
service orientations across the three types of organizations. Thus an attempt has been made to develop a
common Service Orientation measurement Scale suitable for all types of organizations in the Indian
context.
Theoretical Development
In literature, Service orientation construct has been researched with wide variety of
organizational perspectives. It is argued that the interaction between employees and customers is
influenced positively by the internal processes and systems that are invisible to the customers (Gronroos,
1990; Langeard et al, 1981). Internal services management practices and procedures are important for a
positive service delivery to customers as they have an impact on how employees perceive the service
orientation of the organization (Schneider et al., 1985). The service encounter is dependent on the
attitudes and behavior of customer facing staff, a concept that has been defined as individual service
Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
20Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
orientation (Hogan et al., 1984). It is observed that service orientation has been viewed from a wide
angled view from individual employee service orientation to 'the philosophy implied by (or attributed by
others to) the policies, procedures and goals of management', as one of the key elements of
organizational characteristics responsible for creating a culture, beliefs, values and behaviors of an
organization that influence employee performance and also as 'a strategic response to market
information'.
Recent marketing literature has acknowledged the role of a company's service orientation in
achieving a sustainable competitive advantage. The service orientation, the relationship and strategy
between the company and the customer, is arguably the most important area for a business to study. Over
the last decade, it has become crucial for businesses to fundamentally understand and satisfy consumer
needs in order to succeed in a highly competitive market environment (Keillor et al., 1999). These new
considerations, while extended in scope, clarify several points about service orientation. As a result, its
antecedents and consequences have been widely studied (Homburg et al., 2002; Kelley, 1992; Lytle et al,
2006; Marinova, Ye et al., 2008).
Measurement of Service Orientation
The major breakthrough in measurement of the extent of service orientation can be credited to
Lytle et al. (1998) for the development of the SERV*OR scale. Two fundamental positions are used to
define Organization's Service Orientation (OSO). First, OSO as a dimension of an organization's overall
climate (Schneider, et al 1996; Schneider et al., 1993; & 1995).Second, OSO as a measure by soliciting
employee's perceptions, beliefs, and opinions (Schneider et al., 1993; Brief et al., 1996; Schneider et al,
1992). These studies demonstrate that service orientation is dependent on Service leadership practices,
service encounter practices, human resource management practices and service systems practices. .
Lytle et al. (1998) developed a scale named as SERV*OR and identified four major components with 10
sub dimensions of service orientation - 1) Service leadership consisting of two sub dimensions: i)
Service leadership & ii) Service vision 2) Service encounter consisting of two sub dimensions: i)
Customer focus ii) Employee empowerment 3) Service system consisting of four sub dimensions: i)
Service failure prevention ii) Service failure recovery iii) Service technology iv) Standard
communication and 4) Human resource management consisting of two sub dimensions: i) Service
training ii) Service reward.
Service leadership practices comprises of service leadership and service vision. Leadership
is, most likely, the critical and integral ingredient necessary for creating and maintaining an effective and
positive service orientation (Heskett et al., 1997; Kotter et al., 1992; Schneider, 1990). A "top-down"
service vision is important and necessary to instil widespread aspirations of providing quality service
Sanjeev Kumar Saxena1
21Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
among organizational members (Albrecht et al., 1985; Heskett, 1986; Heskett, 1987; Heskett et al.,
1990).
Service encounter basically means “employee interaction with customer”. They are
important within the service orientation paradigm because often brief encounters with customers form
the basis of important customer service quality evaluations (Parasuraman et al., 1988; Zeithaml et al.,
1996; Rust et al., 1996). Two important dimensions of service within the service orientation model are
measures of actual customer treatment practices and measures of employee empowerment. How
customers are treated directly impacts their perceptions of service performance and customer
satisfaction (Berry et al., 1994; Bitner et al., 1990; Jones et al., 1995; Schneider et al., 1992).Thus,
organizations must consistently engage in practices enacting the "golden rule" during service encounters
to create positive customer perceptions of service performance thereby enhancing customer satisfaction.
Empowered employees have the responsibility and authority to meet customers' needs as quickly and
effectively as possible. Empowerment refers to a situation in which the manager gives employees the
discretion to make day-to-day decisions about job-related activities (Conger et al., 1988). They form an
integral part of service encounter.
An organizational service orientation requires service systems that include (1) service failure
prevention and recovery practices, (2) service standards communication practices, and (3) high levels of
service technology adaptation. At the heart of a service system are practices that (1) function to pro-
actively prevent service failures and (2) function to respond effectively to customer complaints or
service failures. Service failure prevention and recovery are important determinants of service quality
(Berry et al., 1994; Kelley et al., 1994; Johnston, 1994). The utilization of "cutting-edge” technology is
critical to creating a service system for the delivery of outstanding service quality (Bowen et al., 1989;
Heskett et al., 1997; Jones and Sasser, 1995; O'Connor et al., 1995;Zeithaml et al., 1996). In order for the
service system to work effectively, service standards or benchmarks must be understood by all members
of the organization (Benoy, 1996; Bowen et al., 1989; Chase and Bowen, 1991; Hallowell et al., 1996;
Heskett, 1986; Treacy et al.,, 1993).
Human resource management: An organizational service orientation would involve a focus
on service-oriented human resource management throughout the organization, a model of service
orientation must include measures of service training and service rewards practices (Lytle et.al. 1998).
Employee contact skills such as courtesy, attitude or helpfulness (Benoy, 1996) are instrumental in
provision of quality services to customers. Advanced quality-based team training, problem-solving
training, inter-personal skills training must be imparted to employees, as Schlesinger and Heskett (1991)
suggested that value investment in people is equally important as value investment in machines; the
authors further advocated for specific investment in service skill training so as to make employees
Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
22Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
empowered to meet complex demands of customers. An important element of service quality is the link
between employee compensation/reward and service performance (Berry, Parasuraman, and Zeithaml,
1994; Heskett, Sasser, and Hart, 1990; Roach, 1991; Schlesinger and Heskett, 1991; Schneider and
Bower,, 1995). Specific compensation and rewards have found to been linked with service-related
employee behavior (Benoy, 1996; Hartline and Ferrell, 1996; O'Connor and Shewchuck, 1995). Works
of Schneider and Bowen (1993) also acknowledges the importance of service rewards and
compensation. Steve Macaulay Sarah Cook, (2001) stated that linking rewards to customer satisfaction
and taking account of the needs of internal customers, has a critical role in motivating groups and
individuals to keep the energy focused on customer; which in effect improves performance.
Management Information system: With recent technological advancements and application
of communication, internet and e-commerce other dimensions/constituents like Management
Information system (MIS), e-services & delivery etc. have also become relevant. In the context of
Management of Information Systems (MIS), Cherbakov et al (2005) argued that service oriented
enterprise is "an enterprise able to deal with the challenges of the emerging business environment".
Therefore real time management information system is also an important dimension of Service
Orientation, as it gives flexibility and faster decision making as per customers' changing requirements.
It is observed from the available literature that most of the researches focuses on Organizational Service
Orientation and how it affects organizational performance have been undertaken in the context of US,
Europe, Chinese & Korean Service industries. Further most of the studies have used SERV*OR scale to
measure Organizational Service orientation for Service Industries in above countries. Not much research
has been undertaken to test applicability of SERV*OR scale in manufacturing Organizations or to
develop suitable new and/or modified scale applicable to manufacturing firms. Further, there has been
no attempt to develop a common scale applicable for measurement of Organisational Service
Orientation for all types of organisations i.e. service, manufacturing and hybrid (having characteristics
of both service & manufacturing).
Methodology& Research framework
The research is designed to empirically validate and improvise, most widely service
orientation measurement scale SERV*OR in Indian context covering wide variety of Indian industries
from both Service sector and Manufacturing sector including hybrid organizations (having
characteristics of both service & manufacturing). This study intends to bridge the gap in research in
Indian context to develop a measure for organizational service orientation. The study also attempts to
examine the impact of organizational service orientation on the nature of the organization (i.e., whether it
is a manufacturing or service business firm). Whether a common measure of service orientation can be
Sanjeev Kumar Saxena1
23Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
used for both service firms and manufacturing firms has not been tested in the previous researches.
This study has been carried out in context of Indian business firms with an important feature of Cross-
sectional design. Cross-sectional design of research has been undertaken by many researchers to assess
the relations among the constructs so as to improve the precision of the theoretical structure connecting
the constructs (Lillis & Mundy, 2005). Hence, the time window is of no specific importance. It is known
that such a design is best suited to explore the variation in individual behavior, in our case of individual
firms, but not across time dimensions (Frethey-Bentham, 2011). To obtain the snapshot of the firms to
test the hypothesized model, this study used questionnaire-based surveys.
Sample Description
From a geographical perspective, this study is not limited to any city or region. All Business
firms in India having structure & functions like Operations/ manufacturing, marketing and Finance are
eligible for selection in this study. Convenience sampling has been resorted to covering wide variety of
Indian firms.
The profile of the firms selected in the final sample is given in Table 3.1. The table classifies the
firms into the industry sectors they are operating in at present, on the basis of the classifications provided
in the CMIE Prowess database. These firms belonged to both domestic and also to MNC categories as
well. The responses received have been classified into large corporate organizations and Mini, small and
medium enterprises (MSMEs). The table 3.1 clearly shows that the sample is heterogeneous.
Appendix
Table 3.1: Profile of the Respondent Firms (N = 174)
By industry type N
Automobile & Auto ancillaries 9
Bank & Financial services 61
Cement, Ceramics & Abrasives 3
Chemicals 16
Electrical & Electronics 7
Heavy Engineering & Equipment 59
Industrial Construction 21
Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
24Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
ITES & Software 89
Logistics & Courier 6
Machine tools 1
Market research 2
Metals & Steel 37
Petroleum, Petrochem & Plastics 6
Services (including Communication services & Telecom) 131
Others* 74
By management pattern
Indian firms 480
MNCs operating in India 42
By turnover (in Rs. crores)
50-100 80
100-1000 372
1000-10000 70
More than 10000
*Others consist of Construction, Footwear, Media content, and Media printing
Sanjeev Kumar Saxena1
25Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Schematic diagram of research methodology
Short-listing of dimensions of
Organizational Service Orientation
based on available Literature
Dimensions based on
recommendation of Expert group
Finalizing questionnaire for survey and distribution
Pilot Survey
Reliability check for pilot data
and re-examination by expert
Development of scale for Organizational Service
Orientation
Based on Literature available, dimensions of service orientation were shortlisted. These
dimensions were given to a Focus Group, consisting of 5 experts with different industry background, as
shown in Table 3.2.
Table 3.2: Formulation of expert group
No. of Experts Industry
1 Power sector
1 Petrochemicals
1 IT & Consulting
1 Financial Services
1 Academics
Development of measurement Instrument
For developing a scale for measuring Organizational Service Orientation following
methodology was adopted. The steps followed during research is presented below:
Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
26Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Based on recommendations of this Focus Group, 11 dimensions were identified for
measurement of Service Orientation. It was observed that 10 dimensions were similar to that of
SERV*OR scale Lytle et al (1998). One dimension was related to Management Information System
(MIS), (Cherbakov el at, 2005). Thus as per recommendation of Focus Group experts it was suggested
that 35 items to measure 10 Dimensions as per SERV*OR scale Lytle et al (1998) with additional two
items on Real time information and feedback system related to Dimension on real time Management
Information may be utilized in the survey Questionnaire to measure Organizational Service Orientation.
Thus survey Questionnaire includes 37 items to reflect 11 Dimensions. This scale may be termed as i-
SERV*OR. These 11 Dimensions of Organizational Service Orientation are listed below.
Table 3.3: Dimensions and items of i-SERV*OR scale
The questionnaire for this part of the survey is henceforth referred as i- SERV*OR scale Survey
is enclosed in appendix. The data for customer-based brand equity (CBBE) is received from the contacts
in the customer firms, as provided by the respondents to the Marketing Survey. We use the term
Customer Survey for this questionnaire. The data from the two surveys, Marketing and Customer needs
to be linked for the purpose of our study i.e. to test the relationships.
Analysis
The reliability construct was carried out separately for the service sector, the manufacturing
sector and the hybrid sector. The reliability analysis revealed that all the items of the scale have
converged with the respective constructs satisfactorily and with high degree of accuracy. Around 2000
questionnaires were dispatched to managers of medium and large industries. The questionnaires were
S. No. Dimension No. of items to measure the Dimension
1 Customer Treatment 4
2 Employee Empowerment 2
3 Service Technology 3
4 Service Failure Prevention 3
5 Service Vision 3
6 Service Standard Communication
5
7 Service Failure Recovery 4
8 Service Rewards 2
9 Service Leadership 6 10 Service Training 3
11 Real time MIS 2
Sanjeev Kumar Saxena1
27Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
randomizes along the cross-sectional unit of industries over space to capture the real scenario. The
questionnaires covered the service sector and the manufacturing sector as well. Further, both the private
and public sector undertakings were covered. The response rate was calculated to be around 28%. The
responses were examined and those with a near constant level of standard deviation were excluded. Thus
522 valid responses were considered to proceed with the study. The response rate for these 522
questionnaires was around 85%. The Statistical Package for Social Sector (SPSS) version 22 and MS
excel has been used to analyze the given data.
A reliability analysis was performed to investigate the internal consistency of the survey
instruments used in this study. Cronbach's alpha coefficients were calculated to examine the reliability of
the scales. Nunnally and Berstein (1994) suggested that a Cronbach's alpha coefficient greater than 0.70
is reasonably reliable. However, an alpha coefficient for a scale with less than six items can be much
smaller (0.60 or higher) and still be acceptable. Therefore, a Cronbach's alpha around 0.60 was
considered to be acceptable for this study. The tables below reveals the level of reliability for the service
sector, the manufacturing sector and the “hybrid” group of industries which exhibit characteristics of
manufacturing and service.
Table 4.1: Reliability Statistics
Service Industry
Manufacturing Industry
Hybrid Industry
Instrument
Factor
No of Items
Cronbach’s Alpha
Cronbach’s Alpha
Cronbach’s Alpha
Service Orientation
Customer Treatment
4
0.78
0.79
0.79Employee Empowerment
2
0.57
0.57
0.69
Service Technology
3
0.83
0.84
0.86Service Failure Prevention 3 0.69 0.8 0.78
Service Vision 3 0.69 0.79 0.75Service Standard Communication 5 0.76 0.8 0.84Service Failure Recovery
4
0.77
0.79
0.82
Service Rewards
2
0.58
0.72
0.58Management Information System
2
0.75
0.83
0.82
Service Leadership
6
0.87
0.9
0.88
Service Training
3
0.87
0.88
0.85
i-SERV*OR Scale 37 0.9 0.89 0.93
Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
28Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Descriptive Statistics of Factors
Descriptive statistics were calculated to show the mean and standard deviation of the factor
scores measured in this study. All the scales were five-point Likert scales (1= strongly disagree and 5=
strongly agree). The mean score of service orientation (M= 3.77) was highest for the service sector,
followed by “hybrid” and then by the manufacturing sector.
Table 4.2: Descriptive Statistics
A comparison between the 11 dimensions of i-SERV*OR and the service orientation score for
the three industrial segments have been carried out.
lIn the dimension of “customer treatment”, service sector leads followed by the “hybrid” sector
and then by “manufacturing”. The scores are in tally with reality in the sense that, customer
treatment forms a vital part in interaction with customers; it is a key step towards creating
business. The importance and emphasis of customer treatment in service industry has
highlighted its importance in industries.
lAverage score of the dimension “employee empowerment” in “hybrid” industry is the highest
followed by “service” and then by “manufacturing”. Indian manufacturing industry seems to
be lacking in this dimension, the reason to which can be traced to the fact that Indian
manufacturing industry is still in the nascent stage of progress.
lService technology has a significant impact in the service sector and hybrid sector. The reasons
Service Industry
Manufacturing Industry
Hybrid Industry
Instrument
Factor
Mean Std.
Dev.
Mean Std. Dev.
Mean
Std. Dev.
Service Orientation
Customer Treatment
4.01
0.66
3.84
0.68
3.95
0.69Employee Empowerment
3.17
0.97
3.1
0.87
3.2
0.98
Service Technology
3.95
0.76
3.62
0.79
3.93
0.74Service Failure Prevention 3.9 0.7 3.68 0.71 3.74 0.75
Service Vision 4.05 0.65 3.87 0.73 3.95 0.66Service Standard Communication 3.73 0.66 3.64 0.66 3.64 0.75Service Failure Recovery 3.71 0.69 3.62 0.67 3.53 0.77
Service Rewards 3.6 0.81 3.5 0.79 3.43 0.83Management Information System
3.74
0.76
3.73
0.69
3.57
0.79
Service Leadership
3.88
0.68
3.73
0.66
3.72
0.64
Service Training
3.68
0.87
3.52
0.83
3.56
0.84
i-SERV*OR Scale 3.77 0.54 3.62 0.56 3.66 0.6
Sanjeev Kumar Saxena1
29Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
being obvious that Indian Service sector being technology driven, a significant weightage is
placed in this aspect. The hybrid sector which is an amalgam of service and manufacturing also
exhibits high scores for service technology with obvious implications to that of the service
sector.
lService failure prevention scaled its highest figures for the service sector, which is not
surprising in the sense that quality emphasis is placed in this aspect for the service sector.
Competitive edge of any business is hampered if there are frequent failure and overrun of
deadlines, which further accelerates costs. The Indian service sector seems to be aware of this
fact, and is very keen in preserving this edge.
lFigures for service vision recorded a high of 4.05 for the service sector, followed by the hybrid
sector and then by the manufacturing sector. The results are quite natural because having
vision, to be precise, planning and having an idea of the future perspectives and scenario is a
pivotally important, thus the dimension has no doubt higher values for the service sector,
followed by the hybrid sector.
lService standard communication is a very important dimension of service orientation. The
service sector has quite a high magnitude of service standard communication, while that of the
manufacturing and hybrid sectors are at par with each other. The importance of this dimension
can be clearly seen by the fact that, business making is possible as an outcome of service
standard communication.
lThe probability of failure haunts every industrial segment, the picture clearly shows that the
figures for service failure recovery are highest for the service sector, followed by the
manufacturing sector, and then by the hybrid sector.
lRewards are nothing but incentives which are necessary to boost productivity. It is not
surprising that the value of service rewards have highest figures for the service sector, which
contributes about two-third of the Indian GDP.
lUse of real time information in modern business has enhanced over the years. Cutthroat
competition and the ever expanding satiety to capture markets has pushed in increased role of
information technology and enhanced the role of real time information. The Indian service
sector enjoys an edge in the world market, reasons to which can be attributed to the increased
use and accessibility of real time information. The manufacturing sector is catching behind in
this dimension, as quality thrust is being pressed in this sector recently.
lLeadership skills are very important for a headstrong organisation, form the face of an
organisation. Even in this dimension, the service sector leads, followed by the manufacturing
sector which is closely followed by the hybrid sector.
Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
30Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Training forms an important part in service delivery, it is through learning that an individual
learns and implements the ideas in reality. In tandem with theoretical logic, this dimension
scaled its highest figures for the service sector, followed by the hybrid sector, and then by the
manufacturing sector.
The overall score of service orientation as measured by i-SERV*OR scale shows that the
service industry is more service oriented, which is followed by the hybrid industry, further followed by
the manufacturing industry.
One way ANOVA was conducted to determine the difference in service orientation across the
service industry, the manufacturing industry and the “hybrid” industry. The one way ANOVA assumes
the null Research questions that the variance (or variation) of service orientation scores across the three
group of industries are same. The analysis of variability within the individual group and variability
among the group reveals that there is not much difference between service orientation scores between
groups (service, manufacturing and hybrid), but there exists significant variability within the groups
itself. Excerpts of the same are presented below.
Table4.3: Descriptive Statistics
Table 4.4: Test for Homogeneity of Variances
l
Descriptives
Score
N Mean Std.
Deviation Std.
Error 95% Confidence
Interval for Mean Minim
um Maxim
um
Lower
Bound Upper
Bound
1.0 212 3.355 .6363 .0437 3.269 3.441 2.0 5.0
2.0 237 3.438 .5950 .0387 3.361 3.514 1.4 5.0
3.0 68 3.715 .7381 .0895 3.536 3.893 2.0 5.0
Tot
al
517 3.440 .6412 .0282 3.385 3.495 1.4 5.0
1=Service sector, 2=Manufacturing sector, 3= “hybrid” sector.
Test of Homogeneity of Variances
Score
Levene Statistic df1 df2 Sig.
4.407 2 514 .013
Sanjeev Kumar Saxena1
31Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 4.5: ANOVA results
The ANOVA results show that service orientation scores are statistically different for the three
sectors. The results also reveal that the variations of service orientation scores across the three groups are
not homogenous.
Conclusion, implication and limitations
This research with its findings and conclusion drawn has wider research and managerial
implications. The extent of organizational service orientation varies across the three sets of industries i.e.
service, manufacturing and hybrid organizations. The result reveals that a significant share of variation is
associated with “within group variation”, with a minor variation existing “between groups”. The results
give clear evidence of the extent of service orientation variation across the three sets of industries.
Despite of extensive work done for this research study, it has certain limitations given the constraints of
time, availability of complete information and finance. The final sample size was satisfactory for
carrying out the as-planned statistical analysis. However there are limitations in covering samples to
cover all geographical and types of firms in India. Further classification of the samples into different
groups was not possible given the distribution of the firms. Such analysis based on groups like MNC vis-
a-vis domestic firms, etc. would have provided a deeper picture of the wide variety of Indian firms as the
framework became more refined. From methodology perspective for the Survey, though we have
gathered responses from a limited number of respondents representing the firm, it could not be extended
to more managers. In spite of the few respondents from the middle and top level in the respective
function of the firms, a larger number of responses would have provided a more vivid picture of the firm
in respect of the extent of its service orientation.
Since this study is first of its kind, as far as developing & applying a universal scale is
concerned for measurement of Organizational Service Orientation for all types of firms i.e. service,
manufacturing and hybrid (having characteristics of both service and manufacturing) in Indian context,
future research may be carried out across countries of both developed and developing economies for
ANOVA
Score
Sum of
Squares df Mean
Square F Sig.
Between
Groups
6.675 2 3.337 8.348 .000
Within Groups 205.501 514 .400
Total 212.176 516
Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
32Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
wider acceptance of i-SERV*OR scale. Further classification of the samples into different based on
groups like MNC vis-a-vis domestic firms, Large and medium size firms etc. may be conducted in
future for a deeper insight.
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Measuring Organizational Service Orientation:Validating Serv*or Scale in Indian Context
36Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
URBAN INFRASTRUCTURE INVESTMENT & ITS RELATEDDEVELOPMENTAL STATUS IN KERALA - A STUDY WITH SPECIAL
REFERENCE TO KERALA SUSTAINABLE URBANDEVELOPMENT PROJECT
1Archana Aravindan
Abstract
The style of urban infrastructure provision that encourages more efficient pattern of resource
consumption is the basis for development of sustainable cities. Conventional approach to urban
infrastructure management was based on the premise 'Facilitating Infrastructure Supply.' But in new
built developments serviced within a supply-oriented framework, any explicit consideration of various
environmental and social effects is rare. The increased awareness towards environment and a
sustainable society coupled with a need to make our cities worth living, demand side interference in the
provision and management of urban infrastructure is being advocated. But the societal, political,
personnel factors etc adversely sum up and lead towards a state of limbo when it collectively reacts to the
planning and implementation pattern of urban infrastructure in India. The present paper however
encapsulates a critical analysis of the existing planning approach to the urban infrastructure system and
the multiple facets that affects for and against the implementation of urban infrastructure projects in the
state of Kerala with special reference to the Kerala Sustainable Urban Infrastructure Programme.
Key Words: Urbanization, Urban Infrastructure Planning, Facilitating Infrastructure Supply, Demand
for Urban Infrastructure
Introduction
Urbanization and growth go together: no country has ever reached middle income status
without a significant population shift into cities. Urbanization is necessary to sustain growth in
developing countries. But it is not painless or always welcomed by policymakers or the general public.
Managing urbanization is an important part of nurturing growth; neglecting cities— even in countries in
which the level of urbanization is low—can impose heavy costs.
In terms of Urbanization trend, India is falling under the second stage of accelerated shift
where basic restructuring of the economy and investments in social overhead capitals including
transportation, communication etc is taking place and therefore India is being addressed as a developing
nation. History of Indian urbanization reveals a slow progression when compared to many developing
1 Archana Aravindan M.Com, MBA, Pursuing M.Phil is an UGC Major Project Research Fellow assisting Dr. Suresh V.N of Maharajas College, Department of Commerce, Ernakulam. Having a teaching experience of 4 yrs her specialization is in Marketing Management, Human Resource Management and Database Management System. She has published 9 research peer reviewed national and international journals and has presented a number of research papers in National and International conferences.
37Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
countries. The percentage of annual exponential growth rate of urban population reveals that in India it
grew at faster pace from the decade 1921-31 to until 1951. Thereafter it registered a sharp drop during the
decade 1951-61. The decades 1961-71 and 1971-81 showed a significant improvement in the growth and
from thereafter it steadily dropped. This slowdown tempo attracted the attention of Indian Government
and it started paying to the urbanization factor. The 74th Constitution Amendment Act (CAA) in June,
1983 led to the formation of Urban local government institutions/municipalities which acted for the
maintenance and planned development of urban areas. (State of the World Population Report, 2007)
Presently it is evaluated that the pace of urbanization in India is being triggered when compared to the
rest of the world. By 2030, 40.76 per cent of India's population will be living in urban areas compared to
about 31 per cent now. But ironically the cities and towns of India are visibly deficient in the quality of
services provided, even to the existing population. As society progresses, the process of economic
development and resulting urbanization gets momentum which in turn creates demand for urban
services and infrastructure facilities. The gap between demand and supply of essential urban services
and infrastructure deteriorates the physical environment and quality of life in the urban areas. Across the
globe, urban planners have taken up the challenge of designing urban living in ways that leave a smaller
ecological footprint.
India being a federal union comprising of 28 states and 7 union territories, within which a
momentous active urbanization by over 20% growth has been reported in the 'Gods Own Country',
Kerala. Urbanization trend in the state of Kerala shows marked peculiarities. Generally, increase in
urban population growth rate is the result of over concentration in the existing cities especially
metropolitan cities. This is true in the case of urbanization in the other states of India. But in Kerala, the
main reason for urban population growth is the increase in the number of urban areas and also
urbanization of the peripheral areas of the existing major urban centres. The urban sector in Kerala
comprise of five Municipal Corporations and 53 Municipalities. 25.97% of the population lives in urban
areas. This is a little less than the National average. However unlike other parts of the country the
Urbanization in Kerala is not limited to the designated cities and towns. Barring a few Panchayaths in the
hilly tracts and a few isolated areas here and there, the entire state depicts the picture of an urban rural
continuum. The Kerala society by and large can be termed as urbanized.
Kerala posses the distinctive characteristics of dispersed settlement pattern, a liking for
homestead type development, comparatively developed infrastructure in urban and rural areas,
geographical grounds, availability of sub-soil water etc can be considered as a prospect. In terms of
investments in infrastructure development and social services sector presently the scarce resources are
spread thinly over the entire mat of Kerala, therefore the accruing benefit is also marginal. The urban
spread demands more investment in infrastructure development. The rural to urban migration which
Archana Aravindan1
38Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
accentuates urban problems and urban poverty is only marginally present in the urban scenario of the
state. Keeping the national perspectives of Urbanization requirements the Indian Government has
initialized nationwide developmental projects for the purpose of economical and social advancement as
well as to achieve urban rural progression towards raising their standard of living. For this very purpose it
launched a country wide reform-linked urban infrastructure investment project named Jawaharlal Nehru
Urban Renewal Mission (JNNURM) in 2005 with individual State level nodal agencies. This mission
initiated within individual states an urge towards the achievement of better urban infrastructure.
Kerala with increased room for better urban infrastructural development initiated a state wide
reform-linked urban infrastructure investment project named Kerala Sustainable Urban Development
Project (KSUDP) which owns a separate entity in the accomplishment of urban infrastructure
progression projects funded by Asian Development Bank as well as by separate state Municipal
Corporations other than that it is also the State-level nodal agency (SLNA) for the Urban Infrastructure
and Governance component of JNNURM.The Kerala Sustainable Urban Development Project
(KSUDP) has come up with urban infrastructure assisted projects. With an investment of US$ 315
million, the project focuses on urban infrastructure improvement, community upgrading, local
government infrastructure development, capacity building and implementation assistance and
expansion of existing urban environmental infrastructure facilities.
Despite of, the slow initialization of urban infrastructure development projects have been
depicted in the development scenario of Kerala's urban areas is mainly due to the lack of proper vision
and master schemes, which envisage long term and short term effects of urban infrastructure
improvements. Proper development strategy should cater to the development needs of urban society
ensuring modern comfort levels and standard of living while preserving natural, cultural and historical
entity of the city.
Considering the urbanization trends in Kerala, the urbanization strategy to be adopted for the
state needs a broad based assessment. Developing infrastructure projects in a commercially viable
format helps improve management efficiency, mitigate implementation risks, and attract commercial
investment. Project development is the process of turning broad planning concepts for infrastructure into
implementable designs. A commercially viable format (1) ensures that adequate revenues from project
services and from other dedicated sources will cover project capital costs and operations and
maintenance (O&M); (2) is socially inclusive and operates in a systemic and sustainable basis; (3) is
environmentally sustainable; and (4) has a regulatory framework to enforce quality of service,
preservation of public interest, and economic sustainability.
But the current scenario is far away from reality. The projects were scheduled to be completed
by June 2012 but an extension up to June 2014 has been approved. The delays and the cost overruns have
Urban Infrastructure Investment & Its Related Developmental Status In Kerala -A Study With Special Reference To Kerala Sustainable Urban Development Project
39Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
put the ADB in a state of distrust. The extensive delay in the project implementation is leading to
discontinuity in the flow of finance for the ongoing projects. This is one of the prime factors that has led
to the present hostile scenario of the KSUDP projects. Urban Infrastructural planning in Kerala has been
prescriptive, slow, and top-down from national and state-level agencies. As a consequence, informal
development is proliferating throughout cities—congesting public and environmental spaces, sprawling
out on the periphery, constructing unsafe buildings, and settling where no services exist adding to the
miseries. These reasons leading towards the improper implementation and planning of urban
infrastructure in Kerala became a research problem that attracted interest for an in depth analysis.
This paper is a comprehensive perspective on infrastructure development in the state of Kerala.
It provides a perspective on the inefficiencies in infrastructure implementation and the challenges that
drive these inefficiencies. The basic objective of this study is to ascertain the extent of progress made in
the various project components in the prime districts and to identify the reasons that are leading to the
slow implementation of the urbanization projects in the state of Kerala. The research problem
concentrates around the identification of bottlenecks in the phase of projects planning and their further
implementation resulting in delays during construction stages.
LITERATURE REVIEW
In terms of development and growth theory, urbanization occupies a puzzling position. On the
one hand, it is recognized as fundamental to the multidimensional structural transformation that low-
income rural societies undergo to modernize and to join the ranks of middle- and high-income countries.
Lucas's Model (2004, 2007), explicitly consider how urbanization affects the growth process primarily
through the enhanced flow of ideas and knowledge attributable to agglomeration in cities.
Landes (Williamson, 1988) suggests the scenario with an historical treatment and situates
urbanization as an essential ingredient in modernization:' Industrialization is at the heart of a larger, more
complex process often designated as modernization. Modernization comprises such developments as
urbanization; the so-called demographic transition; the establishment of an effective, fairly centralized
bureaucratic government; the creation of an educational system capable of training and socializing the
children of a society; and of course, the acquisition of the ability and means to use an up-to-date
technology. '
Burgess and Venables (2004) says urbanization is relatively a little-studied area of
development economics and policy note: Spatial concentration is most dramatically demonstrated by the
role of urbanization, and of mega-cities, in development. . Despite the massive diseconomies associated
with developing country mega-cities, there are even more powerful economies of scale making it
worthwhile for firms to locate in these cities. Urbanization is one of the clearest features of the
development of manufacturing and service activity in developing countries, yet discussion of
Archana Aravindan1
40Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
urbanization is strangely absent from economic analyses of growth and development.
Davis, (1965) suggests urbanisation is an index of transformation from traditional rural
economies to modern industrial one. It is progressive concentration of population in urban unit.
Quantification of urbanization is very difficult. It is a long term process.
Davis, (1962) Kingsley Davis has explained urbanization as process of switch from spread out pattern of
human settlements to one of concentration in urban centres.
(Davis and Golden, 1954) collectively mentions urbanization as a finite process--- a cycle
through which a nation pass as they evolve from agrarian to industrial society. He has mentioned three
stages in the process of urbanization. Stage one is the initial stage characterized by rural traditional
society with predominance in agriculture and dispersed pattern of settlements. Stage two refers to
acceleration stage where basic restructuring of the economy and investments in social overhead capitals
including transportation, communication take place. Dependence on primary sector gradually dwindles
and proportion of urban population gradually increases. Third stage is known as terminal stage where
urban population exceeds 70% or more. At this stage level of urbanization (Davis, 1965) remains more or
less same or constant. Rate of growth of urban population and total population becomes same at this
terminal.
Robert Repetto focuses (Rogers et.al. (1997) p.44) his discussion of sustainable development
on “….increasing long term wealth and well being.” In his 1986 book, World Enough and Time, Repetto
wrote that “the core idea of sustainability is that current decisions should not impair the prospects for
maintain or improving future living standards. This implies that our economic system should be
managed so that we can live off the dividends of our resources”
Herman E. Daly (1987) suggested an ethical concept and said that an “increase in moral knowledge or
ethical capital for mankind.”
Mohan Munasinghe (1987) drew the “….distinction between 'survivability', which requires
welfare to be above a threshold in all periods, and 'sustainability', which requires welfares to be non-
decreasing in all time periods.”
John CV Pezzey, another former World Bank official suggests that survivability means that
you are always above some threshold at all points in time, whereas sustainability takes a sort of
millennial view that things are getting better all the time in a monotonic way.
(Isher Ahluwalia, March 2011) mentions even though cities in India are filled with vibrant
activity and energy, they are also chaotic, complicated and too often congested. There is immense wealth
and opportunity, side-by-side with immense poverty and deprivation.. Its standards and needs are rising
but the current service levels are too low in relation to the requirement of urban households
(Kundu, 1997) Problems of urbanization are manifestation of lopsided urbanization, faulty urban
Urban Infrastructure Investment & Its Related Developmental Status In Kerala -A Study With Special Reference To Kerala Sustainable Urban Development Project
41Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
planning, and urbanization with poor economic base and without having functional categories. Likewise
India's urbanization is also followed by some basic problems in the field of housing, slums, transport,
water supply, sanitation, water and air pollution, inadequate provision for social infrastructure. Class I
cities such as Calcutta, Bombay, Delhi and Madras etc have reached saturation level of employment
generating capacity Since these cities are suffering from urban poverty, unemployment, housing
shortage, crisis in urban infra-structural services collectively force these large cities to eject the
distressed rural migrants i.e. poor landless illiterate and unskilled agricultural laborers. Hence this
migration to urban class I cities causes' urban crisis to become more acute. Every state of India is facing
dynamic scenarios with respect to urbanization. It is noteworthy that Tamilnadu is the only state that is
more than 50 per cent urbanized but it is estimated that by 2030 it would be 5 states.
RESEARCH METHODOLOGY
A research design or model indicates a plan of action to be carried out of in connection with a proposed
research work. The type of research is quantitative as well as qualitative in nature. Inferential research
and descriptive research forms a part of the study to arrive at conclusions.
RESEARCH OBJECTIVES
1) To analyze the project components undertaken in 3 different districts.
2) To understand the details of different projects undergone in the state with respect to completed
projects, ongoing projects etc.
3) To conduct a comparative study between the various project components and the stages of the
projects in the separate districts with regard to KSUDP.
RESEARCH DESIGN
The nature of the research paper is analytical as well as descriptive. A combination of
qualitative and quantitative data has been applied. The observation and research is a continuous process.
Primary Data – Primary data are those data that researchers are collecting information for the
specific purposes of their study. In essence, the questions the researchers ask are tailored to elicit the data
that will help them with their study. Researchers collect the data themselves, using surveys, interviews
and direct observations (such as observing safety practices on a shop floor). It is original in character. The
data is collected by the investigator for the first time. Primary data is considered as the raw material to
which statistical methods are applied for the purpose of analysis and interpretation. It can be collected
through Interviews, questionnaires, observation etc. For this particular study primary data was collected
through questionnaire and personal interviews.
Archana Aravindan1
42Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Secondary Data – Data has also been used from websites, journals, newspapers and
magazine. Analytical reports have been utilized for the detailed study of different components. Internet
source was another method used. Secondary data is the prime source of information. References have
been made constantly with regard to journals, newspapers and online sites.
KERALA SUSTAINABLE URBAN DEVELOPMENT PROJECT (KSUDP)
The Projects are being undertaken in the following five municipal corporations of
Thiruvanthapuram ,Kollam , Kochi ,Thrissur ,Kozhikode. The authorized official in charge of the
KSUDP have identified the urban project components to be implemented and refurbished through the
programme on the basis of the data obtained from the socio-economic baseline households survey and
from the qualitative assessments obtained from the participatory rapid appraisal (PRA) method that
includes nine risk parameters.(KSUDP Report, 2005)
RESULTS & ANALYSIS
The research area covers the Kerala Sustainable Urban Development Programmes details
implemented in the districts of Thrissur, Cochin and Thiruvanthapuram. This evaluation is based on data
collected from three urban centers situated in Kerala covering the prime urban local government
characteristics – i.e. the Urban Community Upgrading, Local Government Infrastructure Development,
Urban Infrastructure & Services Improvement,.
The Table I below represents the overall fund allocation, project work distributions, their
percentage of completion, ongoing project details etc that has been made in all the 5 Municipal
Corporations where KSUDP projects are being accomplished. The Table I represent the overall
Community Infrastructure details of the collective projects in all the 5 districts.
TABLE I - COLLECTIVE STATUS OF CIF IN 5 CORPORATIONS
DISTRICTTotal
Projects
Completed Projects
% of completed Projects
Ongoing Projects
% of ongoing projects
Tender Notified
% of Tender Notified
Cancel Project
Amt
Allotted(in Mn
Rs)
% of Amt
Allotted
Disburse
d Amt(in Mn
Rs)
% of Disburse
ment
TVM 98
70
71%
8
8%
11
11%
9
146.00
19%
98.41 67%
Kochi 86
66
77%
14
16%
6
6%
-----
155.75
20%
109.04 70%
Thrissur 120 103 86% 16 13% 1 .8% ----- 159.06 21% 98.66 62%
Kollam 59
40
68%
4
7%
15
27%
-----
149.76
19%
77.49 52%
Kozhikode 65
52
80%
13
20%
-----
-----
-----
159.68
21%
139.75 88%
Total 428 331 55 33 9 770.25 523.33
(SOURCE: - KSUDP QUARTERLY REPORT FOR JULY-SEPTEMBER, 2013)
Urban Infrastructure Investment & Its Related Developmental Status In Kerala -A Study With Special Reference To Kerala Sustainable Urban Development Project
43Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
After understanding the prime necessity of the various sections of the society, KSUDP has
formulated 5 major components in which the foundation and further development shall be laid leading to
the Urban Infrastructure & Services Improvement. These components are Water Supply, Sewerage &
Sanitation, Drainage, Solid waste management, and Road & Transport. Around 90% of the KSUDP fund
has been set aside for the upgrading of these components thereby making the analysis of progress in these
project component areas very important.
The Table II below represents primarily the components under scrutinization and the detailed
financial estimates, amounts allocated for each component, the works that are being undergone in the all
the districts and finally the amount Disimbursed till 30th Sept, 2013. The Table II depicts that the
maximum projects of 16 projects have been implemented in the Sewerage component. Thereby the
maximum allocation of fund i.e. 56% has been made for the progression of this specific component. The
Table also shows that the maximum of 8 completed projects fall under the Urban Road & Transport
component and therefore maximum disbursement of fund up to 70% has also been for this component.
But to the contrary maximum percentage of the deferred projects also come under the Urban Roads and
Transport component i.e. 25%.
TABLE II - COMPONENT WISE WORK STATUS OF KSUDP PROJECTS
COMPONENTNo of
Contract
Estimate
Amt
(MnRs)
Complete
Project
Amt of
Completed
Projects
(Mn Rs)
Ongoing
Projects
Ongoing
Projects
Amt (Mn
Rs)
Tender/
DPR
Tender
Amt
Project
Deferred
Project
Amt
Disbursement
as on
30/9/2013
WATER
SUPPLY
10
1164.7
2
472.59
8
692.12
----
------
------
------ 659.00
% Analysis of all
the criteria
16%
12%
20%
41%
80%
59%
-----
-------
-----
------ 57%
SEWERAGE 21
5261.58
2
764.81
7
1965.58
7
1674.69
5
856.5 735.54
% Analysis of all
the criteria
33%
56%
10%
15%
33%
37%
33%
32%
24%
16% 14%
DRAINAGE 11 904.8 3 155.97 4 445.88 2 185.2 2 116.75 277.10
% Analysis of all
the criteria
18%
10%
27%
17%
36%
49%
18%
20%
18%
13% 31%
SOLID WM 5
185.09
--------
----------
5
185.09
----------
--------
-------
------ 101.4
% Analysis of all
the criteria
10%
2%
-------
-----
100%
100%
----------
--------
-------
------ 55%
ROAD & T 16
1848.01
8
1344.06
2
168.01
2
11.54
4
324.41 1313.34
% Analysis of all
the criteria
26% 20% 50% 73% 12.5% 9% 13% .5% 25% 18% 71%
TOTAL 63 9364.19 15 2737.42 26 3756.68 11 1871.43 11 1297.66 3086.38
(SOURCE: - KSUDP QUARTERLY REPORT FOR JULY-SEPTEMBER, 2013)
Archana Aravindan1
44Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Moving on to further details the Table III shows the consolidated information about the project
components that has been implemented in the Research area i.e. Thiruvanthapuram, Cochin and
Thrissur.
TABLE III
CONSOLIDATED PROJECT COMPONENT DETAILS IN THE RESEARCH AREA
COMPONENT DISTRICTTotal
Contract
Estimate
Amt
(Mn Rs)
Complete
Projects
Amt
Complete
Project(M
n Rs)
Ongoing
Projects
Ongoing
Project
Amt
(Mn Rs)
Tender/DPR
Tender
Amt
Deferred
Project
Deferred
Project
Amt
Disbursement
as on
30/9/2013
SEWERAGE
TVM
5
1393.93
1
726.92
2
648.61
----
-----
2
18.4
461.48
KOCHI
7
1688.29
1
37.89
-----
------
5
1285.1
1
365.4
28.36
TCR
-----
-------
-----
-------
------
-----
-----
-----
-----
------
-------
DRAINAGE
TVM
1
93.73
-----
----
1
93.73
-----
-----
-----
------
30.59
KOCHI
2
123.24
-----
----
1
114.94 -----
-----
1
8.30
104.39
TCR 2 237.22 ---- ---- 2 237.22 ------ ------ ------ ----- -----
SOLID WASTE
MANAGEMENT
TVM
-----
-------
-----
-------
------
-----
-----
-----
-----
------
-------
KOCHI
-----
-------
-----
-------
------
-----
-----
-----
-----
------
-------
TCR
1
49.24
----
------
1
49.24
-----
-----
-----
-----
12.39
ROAD &
TRANSPORT
TVM
3
422.99
1
123.00
1
122.99
----
---
1
177.0
188.54
KOCHI
3
352.10
3
352.10
-----
-------
------
-----
------
-----
279.38
TCR 1 293.4 1 293.4 ---- ----- ------ ------ ------ ----- 285.53
TOTAL
(SOURCE: - KSUDP QUARTERLY REPORT FOR JULY-SEPTEMBER, 2013)
From the above information a pie diagram has been derived and it depicts the individual
districts with their respective percentage of completed projects. It displays that the Thrissur District
leads with an aggregate percentage of 37%, followed by Kochi with 33% and finally Thiruvanthapuram
with 30%. The cancellation of 9 non viable projects in the Thiruvanthapuram District is one among the
prime reason for a low performance percentile.
Urban Infrastructure Investment & Its Related Developmental Status In Kerala -A Study With Special Reference To Kerala Sustainable Urban Development Project
45Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
COMPONENT WISE IMPORTANCE IN THE STATE
WATER SUPPLY: -Drinking water supply and sanitation in India continue to be inadequate,
despite longstanding efforts by the various levels of government and communities at improving
coverage. The level of investment in water and sanitation, albeit low by international standards, has
increased in size during the 2000s. Access has also increased significantly. For example, in 1980 rural
sanitation coverage was estimated at 1% and reached 21% in 2008.Also, the share of Indians with access
to improved sources of water has increased significantly from 72% in 1990 to 88% in 2008.At the same
time, local government institutions in charge of operating and maintaining the infrastructure are seen as
weak and lack the financial resources to carry out their functions.
SEWERAGE & SANITATION:- The challenge of sanitation in Indian cities is acute. With
very poor sewerage networks, a large number of the urban poor still depend on public toilets. Many
public toilets have no water supply while the outlets of many others with water supply are not connected
to the city's sewerage system. The problem of sanitation is much worse in urban areas than in rural due to
increasing congestion and density in cities.
DRAINAGE:- Drainage systems will be improved in all corporations through rehabilitation
of existing culverts and construction of new ones; and construction of new drains to improve the storm
water drainage network. This project component has also been taken up very seriously in order to raise
the standard of living of the dwellers. But even this project implementation is not a cheese cake instead
hindrances are a part and parcel of the work.
SOLID WASTE MANAGEMENT :-The management and disposal of solid waste generated
in Indian cities leaves a great deal to be desired, though the generation of solid waste is at much lower
rates than in most countries. Neither households nor municipalities in India practise segregation of
biodegradable waste from the rest, and public awareness on the benefits of segregation is low. The
collection of the garbage from dumpsites is infrequent, processing is not done in most cases, and disposal
rules are followed more in the breach. The Municipal Solid Waste Rules were put in place in 2000 but
their enforcement has been poor.
ROADS & TRANSPORT:-Indian cities are increasingly faced with the twin challenges of
providing adequate road space for future use and improving the poor condition of existing roads due to
the neglect of maintenance over the years. The highly inadequate and poor quality of the public transport
system in Indian cities not only poses a major challenge to realising the growth potential of the economy
but also has adverse impact on the health and wellbeing of the people.
REASONS FOR SLOW IMPLEMENTATION OF THE PROJECTS
Experts (Ernst & Young,2011) have identified the following roadblocks towards urban
infrastructure development, the stagnating and even declining public sector spending levels on urban
Archana Aravindan1
46Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
infrastructure, Lack of incentives for the private investments in financing urban infrastructure, Higher
risk perceptions, Ambiguous guidelines and policies regarding PPP's, Under spending and low cost
recovery are typical of projects at the municipal levels, Projects efficiency and viability reduces
substantially due to very low allocations on maintenance-shift to new infrastructure that has high cost
escalation, Lack of recognition of the consequences of urban ills in policy making, Continuation of
multiplicity of institutional network that make service delivery complex as well as costly with less
accountability and less efficiency, Lack of sufficient capacity for urban planning and implementation at
the urban local bodies level, Inadequate compensation and finally poorly planned rehabilitation
packages.
Replacement of experienced officials with inefficient personnel leading to delays in the
execution of project during the final stage is a very crucial reason for the slow progression of the projects.
Scarce availability of filter media and the associated difficulties caused due to running the plant is a main
issue faced in the water supply works. Inadequate funding leading to contractors' protests also led to the
stagnation of the project work movements. Misuse of allotted funds makes it difficult to add continuity
and uninterrupted working pattern with regard to implementation of each component. Impending
shortfall in funding- Structural impediments in the financial system coupled with the national credit
crisis will constrain capital flows to the sector.
Lack of technical know-how leading to malfunctioning of implemented projects has been a
major setback. Incompletion of the designed projects during the stipulated period of time leading to
discontinuity in the mode of finance causes interruption in the working. Another prime reason for the
incompletion of project is the non viable project designs being submitted for approval as well as projects
being deferred and postponed is also extending the time period for completion of projects. It further
causes inefficiencies in the project that leads to retendering of the once completed projects causing
severe delay and also lapse of fund. Land Acquisition is one of the major constraints being faced by the
authorities. One more important factor is the lack of Capacity Building which suppresses the need for
adequate human resource to proceed with the projects.
Quality of planning and engineering design is poor: Project plans are of poor quality and lack
attention to detail, which creates problems such as scope changes and variations during project
execution, thereby creating disputes and delays. Also, nodal agencies often do not adopt a value
engineering mindset to project design, thereby increasing the project costs.
Lack of best-in-class procurement practices: While most Indian providers attempt to optimise
procurement, their practices are not best-in-class. Global majors commonly follow practices such as
demand consolidation, new vendor development, preferred relationships through frame contracts, and
joint cost reduction. Prevalence of these procurement practices in India remains relatively limited. As a
Urban Infrastructure Investment & Its Related Developmental Status In Kerala -A Study With Special Reference To Kerala Sustainable Urban Development Project
47Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
result, our estimates suggest that potential savings opportunities of 5 to 20 per cent of the addressable
costs are forgone. Low prevalence of lean construction principles: Lean construction is a nascent
phenomenon globally. Discussions with leading industry players suggest that most Indian providers
have not adopted lean principles. As a result, opportunities to reduce time and costs by 20 to 30 per cent
are forgone.
Lack of quality products being used to implement the work effectively makes the quality of
work fall into the sub standard segment. It further losses the confidence of the general public. The
extension of project completion dates has aroused a sense of distress to sanction more finance by the
ADB. Red Tapism being an integral part of the official formalities leading to unpredictable delay. This
makes the projects to remain in black and white alone.
Fragmented institutional set up within the multiplicity and its agencies results in overlapping
of jurisdictions and fragmented roles and responsibilities becomes a major factor in the poor delivery of
urban services. Capacity constraints lead the Municipal administration to typically suffer from
overstaffing of untrained, unskilled manpower on the one hand and shortage of qualified technical staff
and managerial supervisors on the other hand.
Performance management is weak: Nodal agencies are hampered by weak performance
management including: 1) low transparency in performance, which would help create public pressure; 2)
lack of meaningful incentives (financial or otherwise); and 3) absence of clearly defined consequences
in the event of under-performance.
Tendering unviable PPP projects is common: Many examples of unviable projects exist in the
national highways sub-sector. Three issues that hamper the viability of projects are: projects that are
planned beyond their scope, dated cost estimates that lead to insufficient viability gap funding (VGF),
and increased risk to the provider due to several contractual terms such as the possibility of termination
of concession, if traffic crosses a threshold level.
Contracts in use are inappropriate: Item rate contracts are common as opposed to lump-sum
EP&C contracts. These contracts allow the designs to be variable and increase the frictional cost of
interaction between the nodal agency and the construction contractor.Pre-tendering approval process is
centralised and slow: The multitude of approvals required across many infrastructure sectors (e.g., from
the External Finance Committee, Public Investment Board or by the Cabinet Committee for Economic
Affairs) can add almost up to one year to the pre-tendering process. Several processes, such as
ministerial approvals, do not have defined timelines. Furthermore, the individuals involved are not
always held accountable f0or delays in approvals.
Lack of sufficient capacity for urban planning and implementation at the urban local body level
results in lack of clarity regarding the projects. The low spending on O&M of existing assets has further
Archana Aravindan1
48Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
contributed to the problem of service delivery. Lack of recognition of the consequences of urban ills in
policy-making worsens the situations. An inadequate investment in urban infrastructure makes the
Municipal budgets in India to be heavily dependent on fiscal transfers from the higher tiers of
government, which tends to be inadequate considering the needs of Indian cities.
Mohanty et al. (2007) study shows that for 35 municipal corporations, there was, on average,
under spending of 76 per cent on capital investments necessary to meet minimum standards of services.
Poor maintenance of assets results in the low spending on O&M of existing assets further contributes to
the setback of service delivery.
Availability of skilled and semi-skilled manpower is insufficient: The growth of skilled and
semi-skilled manpower in India has not kept pace with the growth in infrastructure projects. While a
survey by the National Sample Survey Organisation7 estimates that 13 million workers enter the market
every year, only 3 million receive training. India's vocational training curriculum is largely outdated and
not based on clear standards. Further, the current certification process is based largely on theoretical
testing, and does not ensure employability.
Climatic conditions of the state are major hindrances that act as a barricade in the continuous
implementation of the project. The unexpected torrential rainfall causes stoppage of the projects.
Extensions of the deadlines are causing immense pressure on the authorities forcing them to complete
the projects with low quality materials and cheap technologies leading to inefficient projects. The works
have come to a standstill, and their commissioning will be further delayed. Earlier, the Asian
Development Bank, which finances the KSUDP schemes, had criticised the government for its
unenthusiastic approach to implementing the works. As the projects are in the state of limbo authorities
who are being replaced find it hard to start from the scratch due to which the projects get delayed. The
increased vehicles and traffic on the roads have made it very hard to start off such projects and as the
work duration gets extended it is unmanageable to control the public protests.
Weak risk management skills: The skills and tools Indian providers have to assess and manage
risks are weak compared with their counterparts in developed countries. McKinsey's assessment of
leading construction companies in India reveals a low prevalence of global norms of risk assessment.
This increases project costs and results in project failures when providers take up projects beyond their
capabilities.
Below-par design and engineering skills: Providers under-utilize the value engineering
opportunity in EP&C and PPP projects due to the lack of a value engineering mindset as well as poor
capabilities. Most providers do not have an adequate organizational set-up to capitalize on this
opportunity.
Urban Infrastructure Investment & Its Related Developmental Status In Kerala -A Study With Special Reference To Kerala Sustainable Urban Development Project
49Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
CONCLUSION
The tensions that urbanization creates and the structural shifts it puts into motion suggest why
developing country policy makers do not always welcome rapid urbanization. Viewed from the long
perspective of history, urbanization is necessary for achieving high growth and high incomes. In its early
stages urbanization is beneficial, but it can also be painful. Managing urbanization will affect politics,
social norms, institutional change, and the broader financial system. Policymaking in this environment
is rife with problems of the second best. Shaping strategies that make cities work for the national
economy will demand pragmatism and sensitivity to what is viable in a given context, but such strategies
will reap large rewards. The tensions that urbanization creates and the structural shifts it puts into motion
suggest why developing country policy makers do not always welcome rapid urbanization. Viewed from
the long perspective of history, urbanization is necessary for achieving high growth and high incomes. In
its early stages urbanization is beneficial, but it can also be painful. Managing urbanization will affect
politics, social norms, institutional change, and the broader financial system. Policymaking in this
environment is rife with problems of the second best. Shaping strategies that make cities work for the
national economy will demand pragmatism and sensitivity to what is viable in a given context, but such
strategies will reap large rewards. The tensions that urbanization creates and the structural shifts it puts
into motion suggest why developing country policy makers do not always welcome rapid urbanization.
Viewed from the long perspective of history, urbanization is necessary for achieving high growth and
high incomes. In its early stages urbanization is beneficial, but it can also be painful. Managing
urbanization will affect politics, social norms, institutional change, and the broader financial system.
Policymaking in this environment is rife with problems of the second best. Shaping strategies that make
cities work for the national economy will demand pragmatism and sensitivity to what is viable in a given
context, but such strategies will reap large rewards.
The findings of this study shows that projects are being structured and implemented in the
various districts but at a much slower pace. Urban local governments in Kerala continue to remain
plagued by numerous problems, which affect their performance in the efficient discharge of their duties.
These problems relate to the extent of participation and rule of law in the municipal decision making
process, transparency in the planning and implementation of infrastructure projects, and level of
efficiency in various municipal management and finance practices. A quick implementation procedure
has to be set so that the projects can be realized during the stipulated period. This shall enable to lay a
strong foundation for the urban infrastructural development programmes by creating the factor of trust in
the funding authorities resulting to provide their continuous financial support for the state. It is
concluded that fresh thinking is necessary to resolve the problems confronting urban local governments
in Kerala as well as in India as a whole. Urban Infrastructural Development is a vital necessity that has to
Archana Aravindan1
50Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
be taken care of so that the state can prosper and grow by using the complete resources.
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userhttp://en.wikipedia.org/wiki/Infrastructure%20guide_web.pdf
lhttp://www.urbaninfrastructureindia.org/pdf/1-Urban&goverance_web.pdf
lhttp://www.lse.ac.uk/asiaResearchCentre/_files/ARCWP19-Aijaz.pdf
lhttp://www.ibef.org/download%5CKerala_060710.pdf
lh t t p : / / a r t i c l e s . t i m e s o f i n d i a . i n d i a t i m e s . c o m / 2 0 1 3 - 0 8 -
21/thiruvananthapuram/41432078_1_adb-asian-development-bank-action-plan
lhttp://www.thehindu.com/news/cities/kozhikode/ksudp-sewerage-pipes-not-up-to-mark-
report/article4739090.ece
lhttp://www.thehindu.com/news/cities/kozhikode/sewerage-project-in-kozhikode-comes-to-
a-halt/article5152997.ece?ref=relatedNews
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21/thiruvananthapuram/41432078_1_adb-asian-development-bank-action-plan
lh t t p : / / a r t i c l e s . t i m e s o f i n d i a . i n d i a t i m e s . c o m / 2 0 1 3 - 0 7 -
01/thiruvananthapuram/40306383_1_septage-sewage-drainage-lines
lh t t p : / / a r t i c l e s . t i m e s o f i n d i a . i n d i a t i m e s . c o m / 2 0 1 3 - 0 5 -
26/thiruvananthapuram/39538005_1_sewage-plant-work-fund-lapse-ksudp
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ADB-approval/2013/07/27/article1704508.ece#.UwY5NvmSzVs
lhttp://www.thehindu.com/news/cities/kozhikode/sewerage-project-in-kozhikode-comes-to-
a-halt/article5152997.ece
Archana Aravindan1
52Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
LIQUIDITY AND STOCK RETURNS:A STUDY OF THE INDIAN MARKET
1Shazia Parwez
2Valeed Ahmed Ansari
Abstract
This paper examines the effect of liquidity on returns in the Indian stock market for the period
between April 2000 and March 2012, using Amihud's illiquidity measureas the proxy. It is found that
illiquid stocks earn a premium of 4.50 per cent per month over liquid stocks. Further, an empirical
comparison of the three-moment CAPM, the Fama and French model and a liquidity-augmented four
factor model reveals that liquidity as a risk factor is priced in India. The Fama-French three factors
model augmented with liquidity factor has the maximum explanatory power to account for the cross
section of returns. The results remain robust in sub-periods and to different market conditions.
JEL Classification: G12
Key Words: Liquidity, asset pricing, stock returns, Indian stock market
1. Introduction
Traditional asset pricing models such as Capital Asset Pricing Model assume a frictionless
market and ignore liquidity. However, the seminal work of Amihud and Mendelson(1986) and
subsequent studies by Brennan and Subrahmanyam (1996); Brennan, Chordia and Subrahmanyam
(1998); Datar, Naik and Radcliffe (1998); Jacoby, Fowler and Gottesman (2000); Amihud (2002);
Huberman and Halka (2001); Chordia, Roll and Subrahmanyam (2000); Hasbrouck and Seppi (2001);
Pastor and Stambaugh (2003) and Acharya and Pederson (2005) proved that illiquid stocks command
higher expected returns than relatively liquid ones. Liquidity may be priced in two ways. One strand of
literature considers the level of liquidity of a stock as a determinant of asset returns (Amihud and
Mendelson, 1986). The second strand considers liquidity as a risk factor i.e. the sensitivity of stock
returns to changes in market liquidity that may not be diversifiable (Acharya and Pederson, 2005).
Most of the empirical evidence on the liquidity- return relation is US centric and represents
developed markets. A few studies such as by Dey (2005); Bekaert, Harvey and Lundblad (2007); Lee
(2011) and Amihud, Hameed, Kang and Zhang (2015), have examined markets other than developed
ones. India also figures in these studies. However, a detailed examination of liquidity is missing.The
1 Research Scholar, Department of Business Administration, Faculty of Management Studies & Research, Aligarh Muslim University, Aligarh, Uttar Pradesh-202002Email- [email protected], Ph. no. 9411415075
2. Dean Faculty of Management Studies & Research, Chairman and Professor, Department of Business Administration, Faculty of Management Studies and Research Aligarh Muslim University, Aligarh, Uttar Pradesh-202002. Email- [email protected], Ph. no. 9897920437
53Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
paper attempts to fill the empirical void by conducting the study in an Indian context to investigate
whether expected returns in the Indian stock market are related to liquidity. India is one of themost
important emerging market economies of the world. The study attempts to answer whether the evidence
is a product of data snooping, as noted by Lo and Mackinlay (1990). Liquidity as a risk factor is of
particular importance in the context of such emerging markets which are likely to have greater friction
due to the lesser number of securities, fewer traders and lower efficiency of trading mechanisms.
The paper proceeds as follows. Section 2 reviews relevant literature. Section 3 details the
methodology, section 4 has the results of the regression and the robustness tests and section 5 concludes.
2. Related literature
This relationship was studied for the first time by Amihud and Mendelson (1986) who used the
bid-ask spread as liquidity proxy and found a positive relation between illiquidity and stock returns for
the US market. It has since been re-examined extensively and generally found to hold good with a few
exceptions. Eleswarapu and Reinganum (1993) for example, find this effect to be restricted to the month
of January.
The strength of the liquidity-return relation has been put to test in various ways. Firstly, it has
been found to be robust to different trading mechanisms by including stocks being traded on different
stock exchanges. Haugen and Baker (1996) find a statistically significant negative return-turnover rate
relationship for Russell 3000 stocks. Eleswarapu (1997) re-examines the Amihud and Mendelson study
for NASDAQ stocks, which is a dealer driven exchange, finding stronger support for the model
compared to earlier results for NYSE listed stocks. Jones (2001) covers the Dow Jones Index, Hegde and
McDermott (2003) investigate the S&P 500 index and Acharya and Pederson (2005) study the AMEX.
Secondly, the liquidity-return relationship has been documented to be robust to the use of a
variety of liquidity proxies. Jones (2001) uses quoted spread and turnover to find liquidity to be a
positively significant factor affecting asset prices; Easley, Hvidkjaer and O'Hara (2002) use the
probability of information tradingto proxy for liquidity; Amihud (2002) uses 'Illiq', the daily ratio of
absolute stock return and dollar volume, averaged over a period; Pastor and Stambaugh (2003) construct
a return reversal based liquidity measure and Liu (2006) develops LMx, the standardized turnover-
adjusted number of zero daily trading volumes over the prior x months, said to capture the dimension of
trading speed. All these studies find liquidity, as proxied by various measures, to be a significant factor
affecting asset prices.
Third, the effect of liquidity on returns has not been examined in isolation. Studies reveal that
liquidity has an effect that is significant and clearly distinct from other factors that affect stock returns.
Davila (2001) using a model containing real stock returns, excess liquidity and real interest rate finds that
1Shazia Parwez2Valeed Ahmed Ansari
54Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
stock returns were negatively affected by excess liquidity. Chordia et al (2000) find a negative and strong
relation between liquidity volatility and expected stock returns even after controlling for size, book-to-
market ratio, momentum, price level and dividend yield effects.
A fourth trial of the significance of liquidity as a factor in asset pricing has been to subject the
liquidity-return relation to out-of-sample stocks i.e. stocks traded in different markets of the world, even
though it is the US market that has been examined the most. Marshall and Young (2003), for example,
study the Australian Stock Exchange (ASX), to find the liquidity-turnover relation to be statistically
significant and negative throughout the year. Demir, Muthuswamy and Walter (2004); Chan and Faff
(2005) and Domowitz, Hansch and Wang (2005) also study the Australian market and obtain the same
results. Loderer and Roth (2005) study the Swiss Exchange (SWX); Wang and DiIorio (2007) examine
the Shanghai and Shenzhen stock exchanges; Chang, Faff and Hwang (2010) study the Tokyo Stock
Exchange; Lam and Tam (2011) study the Hong Kong market; Chung and Wei (2005) examine the
Chinese stock market and Chuang and Lee (2010) deal with the Taiwanese stock market. All studies find
the liquidity-return relation holds good.
It can be noted that most of studies have been carried out on developed markets. There are,
however, a few studies which have covered Asia and other emerging markets of the world. Dey (2005),
using portfolio turnover as liquidity proxy, studies 48 developed and emerging stock markets spanning
all the five continents, through the Federation of International Stock Exchanges (FIBV). He finds that,
though, there generally exists a positive return-liquidity relationship, further tests show this to be
exclusive to emerging markets. Bekaert et al (2007) study 18 emerging markets and find that liquidity is
priced in these. Hearn (2010) using the bid-ask spread and Liu's measure proposes a size and liquidity
augmented CAPM to explain the cross-section of stock returns in South Asian emerging markets
including India. He finds the size effect to be all pervasive but the liquidity effect to be present in only a
few industries of India. Hearn replicates this study for four markets of West Asia and Africa namely
Egypt, Morocco, Algeria and Tunisia. He finds that though the relationship between liquidity and stock
returns holds across all of them it is particularly robust in Morocco. Lee (2011) studies 50 different
markets of the world to find that liquidity risks are priced in international financial markets even after
controlling for liquidity level, size and the book-to-market ratio. The study by Amihud et al. (2015)
examines 45 markets of the world, both developed and developing. Controlling for the three Fama-
French factors both at the regional and the global level they find that a liquidity premium exists across
markets and it is higher in the emerging markets than in the developed ones. Illiquid stocks in India in
particular earn a monthly premium of 2.60 per cent over liquid ones.
It is evident from the foregoing discussion that the liquidity-return relationship has been
Liquidity and Stock Returns: A Study of The Indian Market
55Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
scantly studied in the Indian context. We investigate whether liquidity as a characteristic (stock level)
and liquidity as risk factor is priced in India. We employ a time-series regression approach and use three
different models for the purpose of comparison. These are the three-moment CAPM, the Fama-French
three factor model, and a liquidity-augmented four factor model. We thus account for all the well-
documented factors considered to affect asset returns. Amihud's proxy for illiquidity (hereafter 'Illiq'),
which represents the price-impact of a trade, is our liquidity proxy as well. Market capitalization and
book-to-market ratio are used to construct the Fama-French SMB and HML factors. The liquidity factor
is constructed as the difference in the returns of the least and most liquid stocks, a method previously
employed by Marcelo and Quiros (2006); S. Kim, D. Kim and Shin (2012), and Amihud et al (2015). The
factor of coskewness has been constructed on the lines of Lam and Tam (2011). Finally, as a test of
robustness we subject the data to a sub-period analysis as well as testing during up-market and down
market conditions.
3. Methodology
The data are obtained from Prowess, a database maintained by the Centre for Monitoring the
Indian Economy (CMIE).The sample consists of the stocks that constitute BSE 500 index. It represents
93 per cent of the universe by market capitalization. The study covers a period of 12 years from April
2000 to March 2012.
Our proxy for the main independent variable i.e. illiquidity is the 'Illiq', a measure of the price
impact of (il) liquidity on the market, developed by YakovAmihud (2002). It is the average ratio of the
absolute daily stock return to the trading volume.
Illiqit = (1/Nit) Ód (|rid| / volid)
Nit is the number of trading days for stock i in period t.
|rid| is the absolute return in rupees on stock i on day d.
Volid is the trading volume in rupees, obtained by multiplying the number of shares traded by
the closing price.
Illiqit is calculated for each stock i based on daily data over the previous 12 months and
averaged for the year.
We sort stocks on their annual illiquidity and aggregate them into ten equal size portfolios
every year. The equally weighted average returns of these portfolios are computed in the following year.
This is in keeping with the methodology followed in previous studies (Lam and Tam, 2011; Amihud et
al., 2015 etc.).
We test three different models of asset pricing in this study. These are the three-moment
CAPM, the Fama-French three factor model and the liquidity-augmented four-factor model. All of the
1Shazia Parwez2Valeed Ahmed Ansari
56Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
factors in these models have been documented to have an effect on the variation of stock returns. The
three-moment CAPM was studied for the first time by Kraus and Litzenberger (1976). More recently,
Harvey and Siddique (2000) and Chen, Hong and Stein (2001) have also found a relationship between
coskewness and stock returns. The Fama- French factors are supported by a plethora of studies in various
markets of the world. The effect of liquidity is also considered to be an important factor. Apart from the
three main models, for the purpose of comparison, two other combinations of factors have also been
subject to regression. These are a market factor only model and a 'market and liquidity' factors model. We
estimate the Ordinary Least Squares (OLS) time-series regressions for the ten portfolios on the said
models. This procedure is repeated for every month for the period between May 2000 and March
2012.The three main models examined in our study are:
R – R = a + b R -R + ö CSK+ å (1)pt ft p p M f p pt
R – R = a + b R -R + s SMBt+ h HML + å (2)pt ft p p M f p p t pt
R – R = a + b R -R + s SMBt+ h HML + ø LIQ + å (3)pt ft p p M f p p t P t pt
Where (R – R ) is portfolio excess returns; RM-Rf is market excess return where RM is the pt ft
market return represented by the BSE 500 index return and Rf is the risk-free rate represented by the
yield on the 91 days treasury bill (RBI website); CSK is coskewness, calculated as the square of the
difference between market excess return and its time series average; SMBt is the size factor; HMLtis the
book-to-market factor and LIQt is the liquidity factor; åpt is the error term assumed to have a zero mean
and uncorrelated to all the other explanatory factors. The factor sensitivities/loadings, bp, öp, sp, hp, and
øP, are the slope coefficients in the regressions for RM-Rf, CSK, SMB, HML and LIQ respectively.
The SMB and HML factors are formed as follows. All stocks in a year are divided into two
groups based on the median market capitalization at the beginning of the year (in this case March). Both
the size groups are further divided into three groups based on their annual book-to-market ratio. This
results in the formation of six portfolios. The SMB factor is the difference in the average returns of the
small market capitalization and the large market capitalization portfolios. HML is the difference in the
average returns of the high and low book-to-market ratio portfolios within the size portfolios. The
liquidity risk factor 'LIQ' is composed on the lines of Kim et al (2012), by the difference of returns
between the most illiquid stocks (top 20 per cent) and most liquid stocks (bottom 20 per cent).
To check the soundness of our results, we also conduct two robustness tests: a sub-period test
(dividing the total period into two equal sub-periods) and a conditionality test (dividing the total period
into up-market and down-market periods). For both of these we perform monthly regressions on
equations (2) and (3).We divide the entire period into two equal sub-periods of six years each i.e. from
May 2000 to March 2006 and April 2006 to March 2012. Up and down markets are classified in
accordance with the procedure of Petengill, Sundaram and Mathur (1995). If the market excess return is
Liquidity and Stock Returns: A Study of The Indian Market
57Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
positive (negative) the market is classified as up-market (down market). The months in which the market
is up, are separated from the months in which the market is down, and separate regressions are run on
equations (2) and (3) for these months.
The purpose of this study is to investigate whether liquidity has a role to play in stock returns.
To evaluate whether one model performs better than other, the improvement in the number of
insignificant intercepts and the percentage in the adjusted R squared values is checked. For instance, if
one model is better than the other, it will yield an increase in the number of insignificant intercept and in
the adjusted R squared percentage (Lam and Tam, 2011).
4. Results
4.1 Descriptive statistics and correlations
Table 1 presents the descriptive statistics of the 10 portfolios sorted by our main proxy 'Illiq'. The average
illiquidity decreases from 1.069 for portfolio one to the almost negligible value of 0.00015 for portfolio
10. Average returns for the 10 'Illiq' based portfolios show a decreasing trend from 4.63 per cent for the
least liquid (P1) to 0.13 per cent for the most liquid portfolio (P10). As expected, the average size of
companies also shows a fairly smooth, increasing trend, from 18,460 million rupees (278 million USD)
to 694,860 million rupees (10 billion USD), between portfolios one and ten respectively. The average
book-to-market ratio declines from 2.054 for the most illiquid portfolio to 0.522 for the most liquid
portfolio.
1Shazia Parwez2Valeed Ahmed Ansari
58Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
L1
L2
L3
L4
L5
L6
L7
L8
L9
L10
L1-
L10
Mea
n0.
0463
0.02
92
0.02
22
0.01
96
0.02
14
0.01
88
0.01
66
0.01
51
0.00
97
0.00
13
0.04
5
Med
ian
0.03
7
0.
0314
0.
0279
0.
0317
0.02
6 0.
0293
0.
0196
0.
0144
0.01
51
0.
0104
0.
0263
Max
imu
m0.
4742
0.
4199
0.
4976
0.
4668
0.51
68
0.53
72
0.49
29
0.57
46 0.
4237
0.
4909
0.
4283
Min
imu
m-0
.221
8
-0.3
004
-0
.286
4
-0.3
256
-0
.343
2 -0
.347
8
-0.3
01
-0.3
086
-0.3
441
-0
.347
8
-0.1
773
Std
. Dev
.0.
1199
0.
1087
0.
1001
0.
1081
0.11
04
0.10
54
0.10
33
0.11
28 0.
0977
0.
1011
0.
0899
Sk
ewn
ess
0.59
72
0.29
18
0.54
91
0.11
86 0.
2593
0.
3776
0.
2483
0.
9738
0.0
122
0.
4031
0.
9574
Ku
rtos
is3.
785
4.
1132
5.
9732
4.
7462
5.53
8 6.
9805
5.
984
8.
167
5.3
788
6.
7291
5.
1985
Ave
rage
R
etu
rns
4.63
%
2.92
%
2.22
%
1.96
%
2.14
%
1.88
%
1.66
%
1.51
% 0.
97%
0.
13%
4.
50%
t-st
ats
(4.6
16)*
*
(3.2
09)*
*
(2.6
53)*
*
(2.1
66)*
(2
.314
)*
(2.1
32)*
(-
1.92
5)
(-1.
602)
(-1.
19)
(-
0.15
)
(5.9
87)*
*
Av.
Ill
iq1.
0690
0.
3855
0.
2077
0.
1119
0.04
89
0.
0190
0.
0073
0.
0033
0.00
09
0.
0002
A
v S
ize
1,84
1.80
64
1,47
8.09
83
1,72
4.88
16
2,48
4.03
99
3,76
9.29
57
6,22
1.91
20
7,73
8.71
11
11,1
27.7
222
19,6
22.0
647
69,4
86.2
164
Av.
BM
2.05
441.
0401
0.96
890.
9040
0.86
090.
7951
0.72
390.
7121
0.57
960.
5221
Tab
le 1
.
Des
crip
tive
sta
tist
ics
of t
he 1
0 p
ort
foli
os
sort
ed o
n IL
LIQ
on
ly f
or t
he p
erio
d b
etw
een
May
20
00
and
Mar
ch 2
01
2. '
L1
-L10
' is
the
hed
ge p
ortf
olio
. T
he d
aily
Ill
iq v
alue
of
ever
y st
ock
lis
ted
on
th
e B
SE
50
0 f
or t
he
give
n p
erio
d i
s ca
lcul
ated
in
acc
ord
ance
wit
h
Am
ihud
's f
orm
ula.
The
dai
ly I
lliq
val
ues
are
then
ave
rag
ed a
t th
e en
d o
f M
arch
eve
ry y
ear
for
the
prec
edin
g 1
2 m
on
ths.
Sto
cks
are
then
so
rted
in d
esce
nd
ing
ord
er o
f th
ese
valu
es. T
hey
are
su
bse
quen
tly
div
ided
into
10
port
foli
os w
ith
L1
bein
g th
e le
ast l
iqui
d (m
ost
illi
quid
) and
L1
0 b
eing
the
mo
st li
qu
id (l
east
illi
quid
).Y
earl
y ti
me-
seri
es a
ver
age
retu
rn v
alu
es a
re re
port
ed h
ere
for t
he 1
0 p
ortf
olio
s.
Ave
rage
ret
urn
s (i
n pe
rcen
t) a
re t
he r
etu
rns
of a
ll t
he
sto
cks
in a
por
tfo
lio
fo
r th
e en
tire
12
year
per
iod.
T-s
tati
stic
s fo
r th
e av
erag
e
retu
rns
are
repo
rted
in p
aren
thes
es a
nd
mar
ked
wit
h '*
*' t
o de
note
sig
nif
ican
ce a
t th
e 1%
lev
el a
nd w
ith
'*' t
o d
eno
te s
ign
ific
ance
at
the
5% l
evel
. Av.
Ill
iq i
s th
e av
erag
e il
liqu
idit
y c
alcu
late
d u
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Liquidity and Stock Returns: A Study of The Indian Market
59Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 2 has the descriptive statistics of the explanatory variables. The average value of the
excess market return (RM-Rf) is 0.87 per cent (t= 1.23) per month. The pre sub-prime crisis excess
market return values for the US was 0.41per cent (Keene and Peterson, 2007). Compared to this value,
the return in India is roughly twice. The monthly size premium (SMB) and the average monthly book-to-
market value premium (HML) are 1.79 per cent (t= 5.70) and 1.93 per cent (t= 4.74) respectively. While
the SMB value for India is more than eight times that of the US market (0.21 per cent, Keene and
Peterson, 2007), the HML value is four times that of the US (0.43 per cent, Keene and Peterson, 2007).
This shows that investors in India are much more sensitive to the size and the book-to-market ratio of
stocks as compared to investors of the US market.The liquidity factor (LIQ) registers an average
monthly return of 3.11 per cent. This is the return obtained on a zero investment portfolio, by buying long
the top 20 per cent (most illiquid) firms and selling short the bottom 20 per cent (most liquid) firms. On
the other hand, the returns yielded bottom decile and top decile illiquidity portfolio generates a return of
4.50 per cent which is 16 times that of the US liquidity premium (Amihud et al, 2015). This is an
indication that Indian investors are more concerned about the liquidity of the stocks they invest in than
investors in the US market.
Table 2.
These are the descriptive statistics of the explanatory variables in the time-series regressions
for May 2000 to March 2012. 'Rm-Rf' is the monthly market excess return, calculated as the difference
between the return on the BSE 500 index and the 10 year government security rate of return. Following
Fama and French (1993) SMB is the difference in the average returns of the two size based portfolios
(small minus big), HML is the difference between the returns of two extreme book-to-market ratio based
portfolios across the two size portfolios. CSK is the coskewness factor, calculated as the square of the
monthly market excess return minus its time-series average, and LIQ is the liquidity factor represented
by the difference between the returns of the least liquid 20 per cent and the most liquid 20 per cent of
stocks.
RM_RF
SMB
HML
CSK
LIQ
Mean
0.00873
0.017947
0.019367
0.00718 0.03114
Median 0.014486 0.013269 0.015666 0.002921 0.019877
Maximum 0.330631 0.164276 0.277793 0.109317 0.31754
Minimum -0.27844 -0.06821 -0.06123 1.52E-06 -0.12349
Std. Dev. 0.084581 0.037653 0.048819 0.013426 0.06575
Skewness -0.22565 0.797138 1.464936 4.630854 1.106773
Kurtosis 4.597637 4.352156 7.648132 30.38887 5.643648
1Shazia Parwez2Valeed Ahmed Ansari
60Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 3 has the 'Pearson's pair-wise correlation's between the explanatory factors. Overall, the
highest correlation between any two explanatory variables is 0.71, between the liquidity factor' LIQ' and
Fama and French's size factor SMB. The weakest correlation is '-0.00982' found between the market
factor (Rm-Rf) and the coskewness factor (CSK). Correlations among all the other factors are also quite
weak with three of the ten being negative (all of them with CSK). Apart from the highest correlation
between size and liquidity, they never go beyond 0.28 (between the liquidity factor and HML). The low
correlations lead us to conclude that none of the factors are proxies for each other.
Table 3.
The table reports Pearson's pair-wise correlations between the explanatory variables Rm-Rf
(the market factor), SMB and HML (Fama-French size and book-to-market factors), CSK (coskewness)
and LIQ (the liquidity factor), for the entire sample period between May 2000 and March 2012.
RM_RF
SMB
HML
CSK
LIQ
RM_RF 1
SMB 0.0884 1
HML 0.2123 0.2507 1
CSK -0.0098 0.0166 -0.0118 1 LIQ 0.0180 0.7102 0.2869 -0.0565 1
4.2 Regression analysis
Table 4 contains the regression results for the three models examined in this study. Panel A has
the results of the three-moment CAPM model. Three of the ten intercepts are found to be significant, two
of them at the one per cent level. They are large and positive for the portfolios of the least liquid firms and
steadily decrease, turning negative for the most liquid firms.The market factor coefficients are highly
significant at the one per cent level and with double digit t-statistics. The average market factor
coefficient is almost one which is consistent with results of previous studies (e.g. Fama and French,
1993). Six of the ten coefficients of the coskewness factor are significant. The adjusted R squared values
increase from 40 per cent for the least liquid portfolio to 63 per cent for the most liquid portfolio. The
average adjusted R squared value for the model is 57.67 per cent.
Panel B shows results for a market and liquidity factors model. All intercepts are now
insignificant. The increasing trend that they exhibited in the three- moment CAPM model has
disappeared as well giving way to an irregular pattern. All but the hedge portfolio coefficient for the
market factor are significant. Six of ten coefficients for the liquidity factor are significant, four of them at
the one percent level. Their magnitude is also decreasing consistently,with the least liquid firms having
Liquidity and Stock Returns: A Study of The Indian Market
61Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
the largest liquidity factor coefficients and the two portfolios of the most liquid firms having the smallest
coefficients in relative terms. The average adjusted R squared value for this model is 62.11 per cent.
Panel C has the regression results for the three-factor Fama-French model. All intercepts continue to be
insignificant. Similar to the three-moment CAPM they show a generally decreasing trend, with the least
liquid firms having the highest coefficients and the most liquid firms having smallest coefficients,
relatively. All coefficients for the market factor, seven of ten for SMB and two out of ten for the HML
factor are significant. The significance of the SMB and HML coefficients means that they are relevant in
the Indian stock market, the latter albeit less so. The adjusted R squared values range between 70 per cent
(P1) to 60 per cent (P8).The average value is 65 per cent.
Panel D shows the results of the four-factor liquidity-augmented model. All intercepts are insignificant
and show no discernible trend. All coefficients of the market factor, nine of ten coefficients for SMB and
six of ten coefficients for HML are significant. For the fourth factor 'LIQ' depicting liquidity, seven out of
ten coefficients are significant, four of them at the one per cent level. Also there is a fairly clear
decreasing trend where the LIQ coefficient is positive and largest for the most illiquid portfolio (P1), and
turns negative from the third portfolio onwards till the most liquid portfolio (P10). The adjusted R
squared values range from 75 per cent (P1) to 59 per cent (P8) with the average adjusted R squared being
68.04 per cent, an increase of three percentage points over the average adjusted R squared of the three-
factor model.
Table 4.
The table reports the coefficients with the corresponding t-statistics (in parentheses) from
regressions run on the monthly returns of the 10 portfolios formed of BSE 500 stocks sorted on the basis
of their liquidity for the period May 2000 to April 2012. The models covered are – The three-moment
CAPM :Rpt – Rft= ap+ bpRM-Rf + öpCSK+ åpt (Panel A), Market and Liquidity factors model: Rpt –
Rft= ap+ bpRM-Rf+ øPLIQt+ åpt the Fama-French model Rpt – Rft= ap+ bpRM-Rf+spSMBt+
hpHMLt+ åpt(Panel C), and the four-factor Liquidity augmented model : Rpt – Rft= ap+ bpRM-Rf +
spSMBt+ hpHMLt+ øPLIQt+ åpt(Panel D).The last but one column contains the coefficients for hedge
portfolio (L1-L10). The last column contains the average adjusted R squared values of portfolios one to
ten, computed for the three models for the purposes of comparison. ** indicate significance at the 1%
level, * indicates significance at the 5% level.
1Shazia Parwez2Valeed Ahmed Ansari
62Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
L1 L2 L3 L4 L5 L6 L7 L8 L9 L10 L1-L10 Av.adj R 2
Panel A –Three Moment CAPM
C 0.0334** 0.0167* 0.0084 0.0063 0.0058 0.003 0.0025 0.0016 -0.0047 -0.0145* 0.0478**
(3.7766) (2.3594) (1.2957) (0.944) (0.8888) (0.5043) (0.4393) (0.2113) (-0.8253) (-2.4833) (5.5551)
RM_RF 0.9019** 0.9408** 0.8593** 0.9785** 1.0189** 1.003** 0.9984** 0.9425** 0.9139** 0.9436** -0.0417
(9.803) (12.7829) (12.6687) (14.1826) (14.9957) (16.3872) (17.0151) (11.9036) (15.5621) (15.5759) (-0.4653)
CSK 0.6974 0.5939 0.8699* 0.6651 0.9278* 0.9839* 0.756* 0.7338 0.892* 1.0422** -0.3448
(1.2033) (1.2809) (2.0357) (1.5304) (2.1676) (2.5518) (2.0452) (1.4712) (2.4113) (2.7309) (-0.6107)
Adjusted R-squared
0.4017 0.534 0.5331 0.5861 0.6151 0.6572 0.6721 0.4992 0.6333 0.6352 -0.0101 0.5767
Panel B - Market + LIQ
C 0.0069 0.0025 0.0061 0.0048 0.0076 0.007 0.0072 0.0019 0.0067 0.0011 0.00582
(1.1502) (0.4239) (0.984) (0.7499) (1.1837) (1.2063) (1.2963) (0.2585) (1.2214) (0.1923) (1.9254)
RM_RF 0.8866** 0.9315** 0.8541**
0.9746**
1.0153**
1.0001**
0.9969**
0.9391**
0.9147** 0.9456** -0.0590
(13.846) (14.8181) (12.865)
(14.2689)
(14.8648)
(16.0542)
(16.7446)
(11.8728)
(15.504) (15.811) (-1.8269)
LIQ 1.0157** 0.5952** 0.2768**
0.2014*
0.1582
0.0969
0.0222
0.1603
-0.1608* -0.259** 1.2748**
(12.3309) (7.3599) (3.2407)
(2.2918)
(1.8003)
(1.2095)
(0.2897)
(1.5753)
(-2.1189) (-3.3672) (30.7000) Contd.
L1 L2 L3
L4
L5
L6
L7
L8
L9 L10 L1-L10 Av. adj R 2
Adjusted R squared
0.7102 0.6601 0.5528
0.5944
0.6112
0.645
0.6625
0.5003
0.63 0.6446 0.8690 0.6211
Panel C – Fama French Model
C 0.0036 -0.001 -0.0024
-0.0052
-0.0011
-0.0007
-0.0022
-0.009
-0.0043 -0.0094 0.0130**
(0.578) (-0.1739) (0.0059)
(-0.8575)
(-0.1751)
(-0.1231)
(-0.4098)
(-1.317)
(-0.7531) (-1.5718) (2.1033)
RM_RF 0.7951** 0.8776** 0.8076**
0.9251**
0.9694**
0.9632**
0.9584**
0.8438**
0.8904** 0.9291** -0.1341**
(12.0583) (14.1698) (13.0127)
(14.4005)
(14.6485)
(15.7803)
(16.4858)
(11.6547)
(14.7127) (14.5894) (-2.0399)
SMB 1.6227** 1.0808** 0.8165**
0.7178**
0.5447**
0.4304**
0.3726**
0.1119
0.2355 0.048 1.5746*
(10.8531) (7.6964) (5.8016)
(4.9281)
(3.6302)
(3.1099)
(2.8266)
(0.6815)
(1.7162) (0.3325) (10.5675)
HML 0.3414** 0.161 0.1487
0.1967
0.2176
0.1735
0.1968
0.7599**
0.1044 0.0892 0.2522**
(2.9042) (1.4586) (1.3441)
(1.7173)
(1.8443)
(1.5945)
(1.8992)
(5.8881)
(0.9678) (0.7855) (2.1527)
Adjusted R squared
0.7069 0.6853 0.6272
0.6578
0.6518
0.6748
0.693
0.6006
0.6286 0.6155 0.4821 0.6542
Panel D – Four factor liquidity augmented model
C -0.0005 -0.0028 -0.0012 -0.0033 0.0005 0.0009 0.0002 -0.0084 -0.0003 -0.0052 0.0048
(-0.0797) (-0.4751) (-0.1997) (-0.5542) (0.0722) (0.1595) (0.0325) (-1.2112) (-0.0672) (-0.9647) (1.5153)
RM_RF 0.8276** 0.8916** 0.7978** 0.9101** 0.957** 0.9502** 0.939** 0.8387** 0.8587** 0.8952** -0.0676*
(13.7293) (14.5477) (12.864) (14.336) (14.5268) (15.6995) (16.7138) (11.5071) (15.744) (15.6579) (-2.0352)
SMB 0.9108** 0.7749** 1.0309** 1.0457** 0.816** 0.7157** 0.798** 0.2239 0.9303** 0.7900** 0.1208
(4.8387) (4.0494) (5.3236) (5.2756) (3.967) (3.7869) (4.5492) (0.9839) (5.4626) (4.425) (1.164) Contd.
L1 L2 L3 L4 L5 L6 L7 L8 L9 L10 L1-L10 Av. adj R 2
HML 0.2367* 0.116 0.1803 0.2449* 0.2575* 0.2155 0.2594* 0.7764** 0.2066* 0.1983 0.0384
(2.1785) (1.0507) (1.6127) (2.1405) (2.1687) (1.9753) (2.562) (5.9112) (2.1019) (1.9245) (0.6406)
LIQ 0.5963** 0.2562* -0.1796 -0.2746* -0.2272 -0.2389* -0.3563** -0.0938 -0.5819** -0.6214** 1.2177**
(5.4719) (2.313) (-1.6022) (-2.3932) (-1.908) (-2.1835) (-3.5085) (-0.7123) (-5.9022) (-6.0127) (20.2715)
Adjusted R-squared
0.7574 0.6948 0.6314 0.669 0.6583 0.6834 0.7161 0.5992 0.7013 0.6931 0.8689 0.6804
Liquidity and Stock Returns: A Study of The Indian Market
63Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
4.3 Comparison of the three moment, three-factor and four factor models
We compare the intercepts, variable coefficients and adjusted R squared values of the three
models as well as the market factor only and the 'market and liquidity' factors model. The following
results emerge. The number of significant intercepts goes down from the market factor and three-
moment CAPM models (four and three significant intercepts respectively), to the four-factor liquidity
model (nil significant intercepts). A stronger argument in favour of the four-factor liquidity augmented
model is the average adjusted R squared value. This value increases steadily from 52 per cent for the
'market only' model, to 56 per cent for the 'three-moment CAPM', to 62 per cent for the 'market and
liquidity' model. It becomes 65 per cent for the Fama and French model and finally peaks at 68 per cent
for the four-factor liquidity-augmented model.
A separate examination of the 'market and liquidity factors' model brings out the significance
of the liquidity factor. The average adjusted R squared value for it is 62 per cent, which is higher than the
'market factor' model's average adjusted R squared of 56 per cent. The liquidity factor alone has therefore
contributed eight per cent to the explanatory power of the market factor model. Also, this value is only
three per cent lower than the Fama-French model's average adjusted R squared value of 65 per cent. The
four-factor liquidity-augmented model has by far the most explanatory power. It is a corollary that the
liquidity factor has enhanced the explanatory power of the asset pricing model. Thus it may be said that
(il) liquidity is a relevant factor in the consideration of pricing of assets in the Indian market.
4.4 Robustness tests
Table 5 has the results of the first sub-period for the Fama and French model (Panel A) and the
liquidity-augmented four factor model (Panel B). The pattern of results obtained is the same as that for
the entire period. Though the intercepts are insignificant for both the Fama-French and the four-factor
models, for the first sub-period, the adjusted R squared values show an increase of three percentage
points from the Fama-French to the four-factor model (37.6 per cent to 40.2 per cent resp.). Similarly for
the second sub-period (Table 6, panels A and B), there is an increase in the average adjusted R squared
value from the three-factor to the four-factor model (91.02 per cent and 92.03 per cent resp.).
1Shazia Parwez2Valeed Ahmed Ansari
64Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Sub-period 1
L1 L2 L3 L4 L5 L6 L7 L8 L9 L10 L1-L10 Av adj R2
Panel A – Fama - French model
C 0.0028 -4.67E-05 -0.0003 0.0012 0.0076 0.0067 0.0007 -0.0048 0.0027 -0.0072 0.01
(0.2343) (-0.0041) (-0.0251) (0.1037) (0.6589) (0.6167) (0.0717) (-0.3702) (0.252) (-0.6509) (0.9316)
RM_RF 0.6558** 0.7238** 0.5379** 0.6382** 0.6262** 0.6284** 0.6304** 0.4954** 0.5514** 0.5199** 0.1359
(5.3468) (6.1416)
(4.6757)
(5.2462)
(5.3113)
(5.6103)
(6.051)
(3.7213)
(4.9437)
(4.5922) (1.2356)
SMB 1.8638** 1.2018**
0.8117**
0.5843*
0.521*
0.3979
0.3114
-0.0371
0.2384
0.1397 1.7242**
(8.0551) (5.4057)
(3.7404)
(2.5462)
(2.3424)
(1.8832)
(1.5843)
(-0.1476)
(1.133)
(0.6539) (8.3122)
HML 0.4826** 0.2726
0.2645
0.2707
0.2441
0.1917
0.1665
0.9457**
0.061
0.0745 0.4082**
(2.8758) (1.6907)
(1.6807)
(1.6261)
(1.5132)
(1.2506)
(1.168)
(5.1911)
(0.3994)
(0.4806) (2.7131)
Adjusted R-squared
0.6161 0.515
0.3672
0.3512
0.3451
0.3447
0.3671
0.3799
0.2558
0.2201 0.5448 0.37622
Panel B – Four factor liquidity augmented model
C 2.26E-05 -0.0009 0.0005 0.0021 0.0085 0.0074 0.0016 -0.0051 0.005 -0.0049 0.0049
(0.0021) (-0.0758) (0.0464) (0.1794) (0.7374) (0.6766) (0.1598) (-0.3909) (0.4888) (-0.47) (0.8431)
RM_RF 0.5414** 0.6898**
0.5709**
0.6753**
0.6634**
0.6564**
0.6671**
0.4825**
0.6441**
0.6157** -0.0743
(4.6349) (5.6453)
(4.7867)
(5.3591)
(5.4358)
(5.6412)
(6.2012)
(3.4703)
(5.9406)
(5.6091) (-1.2092)
Contd.
L1 L2
L3
L4
L5
L6
L7
L8
L9
L10 L1-L10 Av adj R2
SMB 0.9617** 0.9337**
1.0724**
0.8766*
0.8143*
0.619
0.6007*
-0.1389
0.9696**
0.8948** 0.0669
(2.9636) (2.7504)
(3.2362)
(2.504)
(2.4013)
(1.9149)
(2.01)
(-0.3596)
(3.2188)
(2.9341) (0.3917)
HML 0.2886 0.2149 0.3206 0.3336 0.3072 0.2392 0.2287 0.9238** 0.2183 0.2369 0.0516
(1.772) (1.2618) (1.9282) (1.8987) (1.8055) (1.4747) (1.5253) (4.7655) (1.444) (1.5481) (0.6026)
LIQ 0.6813** 0.2025 -0.1969 -0.2207 -0.2215 -0.167 -0.2185 0.0769 -0.5523** -0.5703** 1.2517**
(3.6767) (1.0448) (-1.0404) (-1.1042) (-1.1437) (-0.9047) (-1.2805) (0.3487) (-3.2106) (-3.2749) (12.8344)
Adjusted R-squared
0.6766 0.5157 0.368 0.3533 0.3481 0.343 0.3731 0.3717 0.3466 0.3189 0.868 0.4015
Table 5.
Results from the regressions for the first sub-period (May 2000 to March 2006), run for the
monthly returns of the 10 portfolios formed of BSE 500 stocks sorted on the basis of Amihud's Illiq.
Panel A has results of the Fama-French model and Panel B of the liquidity-augmented four-factor model.
The last but one column contains the regression coefficients for the hedge portfolio. The last column
represents the average adjusted R squared values (averaged L1 to L10), for the models. ** indicate
significance at the 1% level, * indicates significance at the 5% level.
Liquidity and Stock Returns: A Study of The Indian Market
65Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 6.
Results from the regressions for the second sub-period (April 2006 to March 2012), run for the
monthly returns of the 10 portfolios formed of BSE 500 stocks sorted on the basis of Amihud's Illiq.
Panel A has results of the Fama-French model and Panel B of the liquidity-augmented four-factor model.
The last but one column contains the regression coefficients for the hedge portfolio (L1-L10). The last
column represents the average adjusted R squared values for the models. ** indicate significance at the
1% level, * indicates significance at the 5% level.
Sub-period 2
L1 L2 L3 L4 L5 L6 L7 L8 L9 L10 L1-L10 Av.adj R 2
Panel A – Fama-French model
C 0.0035 -0.0015 -0.0019 -0.0069 -0.0042 -0.0029 -0.0006 -0.0089 -0.0059 -0.0073 0.0108
(0.7694) (-0.3407) (-0.4383) (-1.7095) (-0.8389) (-0.735) (-0.1558) (-2.069) (-1.6032) (-1.9519) (1.9438)
RM_RF 0.9661** 1.0426** 1.0533** 1.1652** 1.2441** 1.2263** 1.1901** 1.1669** 1.1354** 1.2361** -0.27**
(19.0628) (21.3415) (21.917) (25.9625) (22.1889) (28.0587) (27.1239) (24.2784) (27.4916) (29.4861) (-4.3441)
SMB 1.2156** 0.8883**
0.8792**
0.9793**
0.5288**
0.4406**
0.4609**
0.4952**
0.1409
-0.1624 1.378**
(8.3179) (6.3054)
(6.344)
(7.5671)
(3.2708)
(3.4958)
(3.6427)
(3.5727)
(1.1829)
(-1.3437) (7.6882)
HML -0.1547 -0.2561
-0.3083*
-0.1746
-0.0267
-0.0238
0.2307
0.0258
0.1259
0.0692 -0.2239
(-1.1317) (-1.9434)
(-2.3781)
(-1.4423)
(-0.1766)
(-0.2016)
(1.949)
(0.1993)
(1.13)
(0.6122) (-1.3356)
Adjusted R-squared
0.8799 0.8886
0.8922
0.9237
0.8931
0.9297
0.9301
0.9103
0.9273
0.9336 0.5123 0.91085
Panel B – Four factor liquidity augmented model
C -0.0001 -0.0044 -0.0022 -0.0065 -0.0051 -0.0032 -0.0003 -0.0089* -0.0039 -0.0052 0.0051
(-0.0313) (-1.1439)
(-0.4999)
(-1.5921)
(-1.0164)
(-0.7964) (-0.065)
(-2.0271)
(-1.1419)
(-1.5182) (1.5155)
RM_RF 1.0865** 1.1388**
1.0634**
1.153**
1.2753**
1.2362**
1.1784**
1.1666**
1.0669**
1.1655** -0.0791
(24.676) (24.5117)
(19.9642)
(23.2025)
(20.7118)
(25.5241)
(24.2526)
(21.864)
(25.8417)
(27.9083) (-1.9315) Contd.
L1 L2
L3
L4
L5
L6
L7
L8
L9
L10 L1-L10 Av. Adj.R 2
SMB 0.5163** 0.3297
0.8203**
1.05**
0.3475
0.3833*
0.5292**
0.4973*
0.539**
0.2475 0.2688
(3.2776) (1.9833)
(4.3043)
(5.9054)
(1.5774)
(2.2122)
(3.0446)
(2.6052)
(3.6489)
(1.6567) (1.8355)
HML -0.0528 -0.1747 -0.2997* -0.1849 -0.0003 -0.0154 0.2207 0.0255 0.0679 0.0095 -0.0623
(-0.4847) (-1.52) (-2.2745) (-1.5041) (-0.0019) (-0.1288) (1.8364) (0.1935) (0.6645) (0.0917) (-0.615)
LIQ 0.6933** 0.5538** 0.0584 -0.07 0.1798 0.0568 -0.0678 -0.0021 -0.3947** -0.4064** 1.0997**
(6.5103) (4.9289) (0.4531) (-0.5826) (1.2071) (0.4847) (-0.5767) (-0.0164) (-3.9526) (-4.0239) (11.1098)
Adjusted R-squared
0.9253 0.917 0.8909 0.923 0.8938 0.9289 0.9295 0.9089 0.9401 0.9457 0.8259 0.92031
1Shazia Parwez2Valeed Ahmed Ansari
66Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 7 has the results for the robustness check of conditionality where the previous results are
checked for consistency during up and down market conditions. The up and down markets test also
reveals the same pattern of results as that for the entire period, albeit with differing magnitudes. During
up-market conditions the number of significant intercepts for the three-factor model is two which is
reduced to one on the addition of liquidity. Average adjusted R squared values go up from 53.7 per cent to
56.8 per cent for the Fama-French and four-factor model respectively. Similarly during down market
conditions (Table 8), though the intercepts are insignificant throughout, the adjusted R squared values
increase from 39.06 per cent to 44.36 per cent for the three and four-factor models respectively.
Table 7.
Table shows results of the regressions for up-market conditions run on 10 portfolios. In
accordance with the procedure followed by Petengill et al (1995) the period where excess market returns
are positive is classified as a period of up-market conditions. Panel A has results of the Fama-French
model and Panel B of the liquidity-augmented four-factor model. The last column represents the average
adjusted R squared values for the three models. ** indicate significance at the 1% level, * indicates
significance at the 5% level.
Up-market
L1 L2 L3 L4 L5 L6 L7 L8 L9 L10 L1-L10 Av.adj R 2
Panel A – Fama-French model
C -0.013 -0.0177 -0.0199 -0.0103 -0.0191 -0.0181 -0.012 -0.0267* -0.0142 -0.0253* 0.0124
(-0.9647) (-1.4795) (-1.6281) (-0.8694) (-1.5708) (-1.6219) (-1.075) (-2.4922) (-1.4251) (-2.1899) (0.8861)
RM_RF 1.0171** 1.0875** 1.0509** 1.0275** 1.2145** 1.2086** 1.1106** 1.1515** 1.094** 1.2131** -0.196
(6.8028) (8.1743)
(7.7128)
(7.7917)
(8.9662)
(9.7299)
(8.9553)
(9.6448)
(9.8602)
(9.4263) (-1.2622)
SMB 1.774** 1.1886**
0.9477**
0.5918**
0.5375**
0.3891*
0.3629*
0.3888*
0.1248
0.0502 1.7238**
(8.9662) (6.7517)
(5.256)
(3.3912)
(2.9984)
(2.3671)
(2.2114)
(2.461)
(0.8499)
(0.295) (8.3895)
HML 0.2104 0.1005
-0.0481
0.2397
0.19
0.153
0.1581
0.2644
0.0761
-0.0655 0.276
(1.1207) (0.6016)
(-0.281)
(1.4472)
(1.1168)
(0.9807)
(1.015)
(1.7634)
(0.5458)
(-0.4055) (1.4153)
Adjusted R-squared
0.6141 0.5673
0.4851
0.4784
0.5246
0.5536
0.5133
0.5645
0.5498
0.5211 0.535 0.53718
Panel B – Four factor liquidity augmented model
C -0.0169 -0.0194 -0.0194 -0.0094 -0.0189 -0.0178 -0.0102 -0.0258* -0.0123 -0.0231* 0.0061
(-1.5206) (-1.6834)
(-1.5747)
(-0.7935)
(-1.5437)
(-1.5844)
(-0.9555)
(-2.4191)
(-1.3155)
(-2.1333) (0.8445)
RM_RF 1.0881** 1.119**
1.0406**
1.0109**
1.2112**
1.2033**
1.0798**
1.1344**
1.0592**
1.1729** -0.0848
(8.7506) (8.6772)
(7.5864)
(7.6712)
(8.8498)
(9.5959)
(9.0221)
(9.5408)
(10.1894)
(9.7199) (-1.0477) Contd.
L1 L2
L3
L4
L5
L6
L7
L8
L9
L10 L1-L10 Av. Adj. R 2
SMB 0.6807** 0.7033**
1.1061**
0.8473**
0.5884*
0.471
0.8378**
0.652**
0.6607**
0.6686** 0.012
(2.8033) (2.7931)
(4.1297)
(3.293)
(2.2018)
(1.9235)
(3.5849)
(2.8081)
(3.2551)
(2.8377) (0.0762)
HML 0.0598 0.0336 -0.0262 0.2749 0.197 0.1643 0.2235 0.3006* 0.1499 0.0197 0.0401
(0.3798) (0.2061) (-0.1512) (1.6477) (1.1369) (1.0347) (1.4752) (1.9974) (1.139) (0.1287) (0.3917)
LIQ 0.8156** 0.362* -0.1182 -0.1906 -0.038 -0.0611 -0.3542** -0.1963 -0.3998** -0.4613** 1.2769**
(6.1007) (2.6111) (-0.8013) (-1.3456) (-0.2584) (-0.4531) (-2.7531) (-1.5356) (-3.5773) (-3.5558) (14.6786)
Adjusted R-squared
0.7354 0.597 0.4827 0.4837 0.5189 0.549 0.5507 0.5718 0.6083 0.5826 0.8748 0.56801
Liquidity and Stock Returns: A Study of The Indian Market
67Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 8.
The table shows results of the regressions for down-market conditions run on 10 portfolios
sorted on Amihud's Illiq. In accordance with the procedure followed by Petengill et al (1995) the period
where excess market returns are negative is classified as a period of down-market conditions. Panel A
has results of the Fama-French model and Panel B of the liquidity-augmented four-factor model. The last
but one column contains the regression coefficients for the hedge portfolio (L1-L10). The last column
represents the average adjusted R squared values for the model. ** indicate significance at the 1% level,
* indicates significance at the 5% level.
Down-market
L1 L2 L3 L4 L5 L6 L7 L8 L9 L10 L1-L10 Av.adj R 2
Panel A – Fama-French model
C -0.0015 -0.0045 0.0004 -0.0089 -0.0011 -0.0006 -0.0061 -0.0096 -0.0158 -0.0199 0.0184
(-0.1171) (-0.3507) (0.0341) (-0.6434) (-0.0804) (-0.0484) (-0.507) (-0.5578) (-1.1282) (-1.476) (1.5931)
RM_RF 0.6744**
0.7773**
0.7906**
0.8818**
0.9233**
0.9254**
0.8889**
0.7871**
0.742**
0.7701**
-0.0957
(4.7567)
(5.3798)
(5.7303)
(5.5765)
(5.7138)
(6.2485)
(6.4516)
(4.0153)
(4.6522)
(5.0146)
(-0.7255)
SMB 1.4543**
0.9759**
0.8546**
1.0333**
0.7665*
0.7335*
0.4962
0.0272
0.5553
0.2553
1.199**
(5.3131)
(3.4984)
(3.2083)
(3.3846)
(2.4568)
(2.5652)
(1.8653)
(0.0719)
(1.8033)
(0.8612)
(4.7098)
HML 0.4211**
0.192
0.2764
0.1764
0.2334
0.1875
0.225
1.0972**
0.137
0.2029
0.2183
(2.8447)
(1.2724)
(1.9185)
(1.0684)
(1.3833)
(1.2121)
(1.5637)
(5.3604)
(0.8226)
(1.2652)
(1.5852)
Adjusted R-squared
0.4744
0.3786
0.4142
0.3825
0.3795
0.4157
0.433
0.4541
0.267
0.307
0.3128 0.3906
Panel B – Four factor liquidity augmented model
C -0.0043 -0.0055 0.0029 -0.0058 0.0032 0.0035 -0.0029 -0.0103 -0.0084 -0.0122 0.0079
(-0.3446) (-0.4268) (0.2356) (-0.4194) (0.231) (0.2751) (-0.2462) (-0.5875) (-0.6821) (-1.0639) (1.398)
Contd.
L1
L2
L3
L4
L5
L6
L7
L8
L9
L10
L1-L10 Av. Adj. R 2
RM_RF 0.6909**
0.7835**
0.7763**
0.8632**
0.8978**
0.9013**
0.87**
0.7911**
0.6981**
0.7245**
-0.0336
(4.9355)
(5.3774)
(5.6693)
(5.5301)
(5.7467)
(6.3146)
(6.4557)
(3.9927)
(5.0401)
(5.5949)
(-0.5246)
SMB 1.2039**
0.8823**
1.0722**
1.3139**
1.1529**
1.0993**
0.7817*
-0.0346
1.2196**
0.9441**
0.2598
(3.8929)
(2.7411)
(3.5449)
(3.8104)
(3.3407)
(3.4868)
(2.6258)
(-0.079)
(3.9861)
(3.3002)
(1.8361)
HML 0.3745*
0.1745
0.3169*
0.2287
0.3054
0.2556
0.2781
1.0857**
0.2607
0.3311*
0.0434
(2.5217) (1.1292) (2.1818) (1.3809) (1.8426) (1.6881) (1.9455) (5.1648) (1.7743) (2.4104) (0.6382)
LIQ 0.3039 0.1136 -0.264 -0.3405 -0.4689* -0.4439* -0.3464 0.075 -0.8061** -0.8357** 1.1396**
(1.6527) (0.5938) (-1.4682) (-1.6611) (-2.2854) (-2.3685) (-1.9575) (0.2881) (-4.4315) (-4.914) (13.5478)
Adjusted R-squared
0.4901 0.3713 0.426 0.4013 0.423 0.4602 0.4603 0.445 0.45 0.5097 0.8387 0.44369
1Shazia Parwez2Valeed Ahmed Ansari
68Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
The coefficients of the liquidity factor, similar to those for the total period, are positive for the
most illiquid first two portfolios and turn negative thereon, decreasing consistently, till the most liquid
portfolio. This pattern is the same across the two sub-periods as well as the two conditions of the market.
The liquidity factor is therefore independent of the period as well as the market conditions as the four-
factor model works equally well across all the above specifications.
5. Conclusions
In this study, we examine the role of liquidity in pricing of stock returns in India. The results
show that portfolio of illiquid stocks earn a premium of 4.50 per cent per month over liquid ones, which
underlines the significance of liquidity as a characteristic of a stock. The significant magnitude of the
liquidity premium leads us to investigate whether liquidity as a risk factor is priced. An evaluation of the
performance of the three-moment CAPM, Fama and French three-factor model, the liquidity-
augmented four factor model and other specifications,provides evidence of the explanatory power of the
models. The results indicate that liquidity augmented Fama-French model has the maximum
explanatory power. Further, the intercepts show no pattern in terms of magnitude suggesting that
characteristic liquidity does not subsume liquidity risk.The results are robust to a sub-period test and
different market conditions.It implies that liquidity is an important factor in the determination of stock
returns in the Indian market. It has important implications for investors in portfolio construction as they
must take into reckoning the impact of liquidity on expected returns.
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1Shazia Parwez2Valeed Ahmed Ansari
72Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
LEVERAGING EMOTIONAL INTELLIGENCE FOR THE ENHANCEMENTOF THE ORGANIZATIONAL EFFECTIVENESS –
PARADIGMS AND PARAGONS
1Dr. Navdeep Kumar
Abstract
The present paper attempts to examine the relevance of emotional intelligence for the
enhancement of the organizational effectiveness. The recognition of emotional intelligence has sprouted
to cope with the challenges of human behaviour in the dynamic and diverse environment that requires
emotionally intelligent human resources to adopt the changes without conflicts. The core aspect of
emotional intelligence focuses on understanding and managing emotions for better understanding. In
this context, the role of a manger as leader becomes more significant to augment organizational
performance through his emotional intelligence skills to incorporate the change by resolving conflict.
The present study represents the relationship of emotionally intelligent leader as a transformational
leader to act as an agent between conflict and change for enhancing organizational effectiveness. The
paper concludes with suggestions to develop emotional intelligence skills and also provides further
scope of research in this domain.
Key Words: Emotional Intelligence, Organisational Effectiveness, Change, Conflict, Leader.
1. Introduction
The transitional era in the 21st century has remarked incessant changes and it has become key
challenge for a leader to recognize the need for change and implement the changes with his positive
approach and cooperation to contribute towards organizational excellence. Every organization is a blend
of diverse elements that requires proficient functioning to ensure overall organizational performance. In
this process, the human element is vital because the responsibility as well as accountability lies with the
human resources to make optimum use of the resources. The efficiency of human resources is
significantly affected by their capabilities to contribute towards the success of organisational goals.
However, the personal competencies play an important role to create and maintain effective work culture
to enhance organizational effectiveness. In today's competitive environment, the concept of emotional
intelligence has gained considerable recognition as it directly impacts the human behaviour in a given
situation and organisational effectiveness. Emotional intelligence refers to the ability of a person to
1. Assistant Professor, PG Department of Commerce and Business Administration, Lyallpur Khalsa College, Jalandhar. - [email protected]
73Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
understand and respond to a situation in a rational manner. The importance and relevance of emotional
intelligence has increased owing to the various drivers such as escalated competition due to the wave of
liberalisation, privatisation and globalisation, stress, anxiety, skill gaps in a changing environment,
performance standards etc. The recognition of strategic significance of emotional intelligence has
surfaced as it affects the organisational effectiveness by contributing towards leadership development,
change management and conflict management. These three factors are very crucial in the present
scenario of competition that demands continuous scope for the flexibility to cope with the changing
environment through effective leadership to avoid conflict. Normally, conflict arises due to
misunderstanding among the persons. Better understanding is possible only if the level of emotional
intelligence is high in a given situation. It is possible only if there is high level of emotional intelligence
prevails among the human force in the organization (Bunker, 1997).
Against the above backdrop, the present article intends to examine the relevance of emotional
intelligence for enhancing organisational effectiveness through effective leadership that acts as an agent
of change by resolving conflicts. For this purpose, the paper has been structured in the following mode.
Besides introduction in Section-I, the conceptual framework of emotional intelligence has been
described in Section-II. The relevance of emotional Intelligence for enhancing organizational
effectiveness has been elucidated in Section-III of the paper. Section-IV deals with the concluding
remarks as well as provides areas of further research in this perspective.
II. Emotional Intelligence – Conceptual Framework
Emotional intelligence depicts human capabilities concerning self and social awareness for
better relationship management. It is not only confined to the self understanding but also understating of
others. Creation and maintenance of a healthy work culture depends upon the level of understanding
among various levels of workforce that sprouts into rational understanding, effective decision making
and managing conflicts. The cohesiveness of relationships depends upon the competencies to adjust
ourselves as well as emotions of others. Emotions refer to the response of an individual in a particular
situation that reflects the level of emotional intelligence to understand self and others. Emotions contain
vital information that assists various employees' different levels “to be better at what we do” (Wolfe and
Caruso, 2004).
The concept of emotional intelligence was initiated by Solvency and Mayer (1990) following
the Gardner's (1983) theory of motivation. Emotional intelligence is a set of competencies that perceive,
understand and direct emotions in ourselves and in others in different changing circumstances provides
better team work while dealing with people having different ideas, opinions and suggestions (Ashforth
et. al., 1995).
1Dr. Navdeep Kumar
74Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Mayer and Salovey (1993) and Goleman (1995) describes emotional intelligence as the ability
to identify, understand and regulate one's own emotions and those of others in order to have efficient
impact on relationship management. Salovey and Mayer (1990) summarized five domains of emotional
intelligence:-
lKnowing one's emotions.
lManaging emotions.
lMotivating oneself.
lRecognising emotions in others.
lHandling relationships.
Following the above model, Goleman (1998) described five emotional and social
competencies:-
lSelf awareness
lSelf-regulation
lMotivation
lEmpathy
lSocial skills.
Further, Anjula et. al. (2013) opines that the human capabilities create competitive edge in a
competitive business environment. Emotional intelligence plays a pivotal role in organisational
performance through the development of the personal and social skills. Emotional intelligence is also a
powerful strategic weapon for the mangers to deal with diverse workforce by maintaining balanced
approach even in a stressing situation to avoid conflicts. Diverse workforce is healthy for the
organization as it bring multidimensional capabilities in the organization and on the same side it also
creates stress when there is misunderstanding due to inherent differences among various groups.
Emotional intelligence facilitates to cope with the dynamic changes of business environment. Emotional
intelligence develops a great sense of understanding and mange emotional responses for greater
comforts in relationships, effectiveness in interactions and inner peace (Jofri et. al., 2010 and
Gardenswartz et.al., 2010).
Various studies found a positive correlation of emotional intelligence of the leaders with the
job satisfaction and performance. Emotional intelligence of leaders has favourable impact on
influencing the behaviour and attitudes of the subordinates towards the accomplishment of
organizational goals. Highly emotionally intelligent leaders can act as transformational leaders and
make subordinates self-confident to face the challenges of working environment (Sosik and Megerian,
1999).
Leveraging Emotional Intelligence for the Enhancementof the Organizational Effectiveness – Paradigms And Paragons
75Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
III. Emotional Intelligence and Organisational Effectiveness
The current wave of development in the Indian context has created new challenges for HRM
especially related to Emotional Intelligence, which focuses on conflict management, teamwork,
interpersonal sensitivity, change management which are more significant than other skills. Emotionally
intelligent behaviour facilitates conducive work culture in the organizations for improving
organizational excellence. The development of emotional capabilities among the human resources
resolves behavioral issues that results into the enhanced organizational performance (Elakumaran et. al.,
2005 and Singh, 2010).
The relationship between organisational effectiveness and emotional effectiveness connotes
work culture in an organization. Organisational effectiveness is crucial for enhanced business
performance that depends up on various factors. It requires appropriate strategic alliance of
organisational resources for the achievement of organisational objectives. The most significant factor
for the organisational effectiveness is the workforce in the organization; it requires capable and credible
leadership and conducive work culture to utilize the human capital as per business strategy. Cherniss
(2008) outlined the various aspects of emotional intelligence and organizational effectiveness such as:-
lEmployee retention.
lHuman resource development conducive
lTeamwork
lInnovation
lCustomer loyalty
Efficiency in any factor that affects organisational effectiveness, the role of emotional
intelligence is very significant. However, there are also certain challenges that includes coping with
rapid changes as well as resistance, managing diverse workforce, maintaining favourable work
environment etc.
Emotional competence in a workplace is very essential to deal with different situations. The
persons with higher emotional intelligence can recognize and mange emotions efficiently (The Tribune,
2014b). Conducive work culture is the hallmark of emotionally intelligent leadership that enhances the
morale and productivity of team members to contribute towards organizational performance by better
understanding of emotions. In a study by Williams (1994) of CEO's in U.S. insurance sector, observed
that high level of emotional intelligence resulted into better financial performance in terms of
profitability and growth. The main determinants of work culture include clear communication,
innovation, change management, conflict management and the behaviour of team leader (Litmin and
Stringer, 1968; Tagiuri and Litman, 1968). Further, Mayer and Caruso (2002) explained that
relationships are affected by behaviour, cooperation and dominance arising out of emotions. The leaders
1Dr. Navdeep Kumar
76Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
with effective understanding of emotions gains competitive strength in the organization.
In the present complex, dynamic and competitive global regime, the strength level of emotional
intelligence determines the organizational performance, growth and development (Jorfi et. al., 2010).
The development of emotional intelligence leads to the development of interpersonal skills those results
into effective organizational effectiveness. The analytical study of emotional intelligence provides a
comprehensive framework regarding organization structure and outlines the various factors affecting
the emotions that have profound impact o the organizational effectiveness. Although it is a human
behaviour aspect, still it accounts significantly as far as the organizational performance is concerned.
Enhanced level of emotional intelligence indicates higher interpersonal and social skills. Such
skills are more essential as compared to the other technical skills, though these are related with the
human behaviour. The vast amount of literature advocates the relevance of emotional intelligence for
directing and regulating the human emotions for attaining the desired results. Different models have
been developed by various researchers to establish the role of emotional intelligence.
OrganisationalEffectiveness
EmotionalIntelligence
Conflict
Leadership
Change
Figure 1: Relationship Between Emotional Intelligence andOrganisational Effectiveness
The core philosophy behind the emotional intelligence lies on the understanding of emotions.
Since it is concerned with the human behaviour, which is difficult to predict leads to different perceptions
for different situations. In any organization, the need of change arises owing to the changes in the internal
and external environment. It demands considerable scope for the adoption of required changes to cope
and compete for survival as well as growth. On the other hand, there are also chances of resistance for the
change as it is inherent feature of human nature. In such state of affairs, conflicts arises that signals
impasse over the change to be incorporated owing to conflicting interests of different stakeholders. Now,
Leveraging Emotional Intelligence for the Enhancementof the Organizational Effectiveness – Paradigms And Paragons
77Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
the role of emotional intelligence evolves around the leadership qualities to handle the situation through
high level of emotional intelligence. Highly emotionally intelligent leader can tackle with more
efficiency and effectiveness. Thus, results into the enhanced organisational effectiveness by
incorporating change through effective leadership by way of resolving the conflicts (Figure-1).
An emotionally intelligent leader responds to the situation after analyzing the various factors in
most appropriate manner. Effective conflict management is imperative for healthier relationship
management. A visionary leader is able to march towards organizational vision and mission with
confidence and act as agent of change (George and Bettenhausen, 1990). Emotional intelligence
supports in influencing the behaviour of the team members towards the accomplishment of a given task.
However, the leadership qualities need to be sharpen as far as emotional intelligence is concerned. The
effectiveness of a leader is determined by the achievement of the goals assigned to the team without any
conflict. It happens only when there is better understanding among all the team members and it is only
teamwork that leads any organization towards the ultimate success by the achievement of the
organisational objectives. The level of cohesiveness determines the output of the teamwork that is
significantly depends upon the understanding level among the diverse elements in a team.
Understanding of different aspects and implications of emotional intelligence and its interrelationships
with various factors will help organization to meet the new challenges and leadership effectiveness
(Bratlon et al., 2011).
Developing Emotional Intelligence Skills
The development of emotional intelligence skills requires muti-dimensional approach for the
enhancement of individual performance and organsational effectiveness. The most crucial factor is the
healthy atmosphere that encourages effective communication for better understanding. For this purpose
an effective emotional environment should be created that promotes healthy work culture and conducive
working environment. Further, the reconciliation of individual's interests with the organizational
interests also plays a vital role. It is possible only when there is rational behaviour of the superiors with
their subordinates particularly in a climate of continuous changes. The management of diverse
workforce is also a challenging task through strategic approach in the preset competitive regime for
organizational excellence.
The competition wave has increased the stress and anxiety levels among the human beings
which is adversely affecting the job performance and organizational efficiency. Efforts must be made to
reduce the stress level among the workforce. Further, the focus of emotional intelligence is on the
understanding of emotions and in this process non-verbal communication has a critical role. The
development of non-verbal communication skills should also be given due attention for creating
1Dr. Navdeep Kumar
78Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
emotional intelligence. Creating an interactive learning environment in which employees have the
opportunity to explore the bond between social and social skills would also facilitate towards the
advancement of emotional intelligence environment. Emotional intelligence skills should be developed
to attain leadership effectiveness and organizational performance. Modern leaders require to focus on
intellectual capital besides traditional resources to generate emotional capital. Emotional capital is the
value of the energy, motivation and commitment held by everyone connected with the business that can
be enhanced through emotional intelligence. Basically, leadership is a relationship to influence human
behaviour. Although some aspects of emotional intelligence are innate, the evidence is overwhelming
that anyone who is motivated can develop his or her emotional intelligence and boost their emotional
competence (The Tribune, 2014b). The role of a leader determines the performance of subordinates and
organization. For effective leadership, there is no single style is suitable for all situations. There must be
flexibility approach for effective leadership to resolve conflicts by understanding the situation smartly.
Moreover, in increasingly diverse and inclusive workplace, conflict became inevitable. Leaders who
realize the positive aspects of conflict resolution skills to construct better teams, gain productivity and
develop better communication among employees. For this strong communication and crisis solving
skills are essential. Nevertheless, objectivity, honesty, creativity and tolerance are crucial in this process
(The Tribune, 2014a). Thus, combination of aforementioned factors would contribute towards the
improvement of emotional intelligence in an organization for the enhancement of organizational
effectiveness.
III. Conclusion
The level of organizational affects the organizational effectiveness as it establishes the shared
sense of relationship among team members towards the achievement of organizational goals. Although
the quality of emotional intelligence is personal in nature to a great extent but it considerably influences
the individual's behaviour and organisational performance. Emotionally intelligent leader facilitates the
transformational process by incorporating changes to cope with the dynamic environment by resolving
conflicts to enhance organizational effectiveness.
Further Scope of Research
The following are the some areas for the further research in this perspective:-
lEmotional Intelligence and Competitive Work Culture
lRole of HR Practices in Developing Emotional Intelligence Skills.
lAdoption of Emotional Intelligence models for Effective Leadership.
lLeadership Styles and Emotional Intelligence.
Leveraging Emotional Intelligence for the Enhancementof the Organizational Effectiveness – Paradigms And Paragons
79Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
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AN EMPIRICAL STUDY OF VARIATIONS IN CRITICAL SUCCESSFACTORS OF QUALITY MANAGEMENT PRACTICES
IN INDIAN MANUFACTURING INDUSTRY
1Dr. Anu Kohli
2Ram Singh
Abstract
This paper is an empirical study on the critical success Factors (CSFs) of Quality Management
in the Indian Manufacturing Sector with special reference to industries in Uttar Pradesh. The
preliminary list of forty-five CSFs of Quality Management Practices were identified and compiled
through in depth literature review. Subsequently 74 Quality Professionals representing 74 different
manufacturing units operating in Uttar Pradesh were surveyed. The study analyzes the differences in
various critical success factors of Quality Management across Sectors, across companies in different
Age Groups and also across companies with different annual turnovers. The research concluded that
there are significant differences in factors like Team work, Updated Technology, Leadership Skills,
Strategic planning and social Responsibility across various sectors. It was also observed that Updated
Technology, Leadership skills and Strategic planning showed significant variations across companies
with different Annual turnover. The Organizational Age affects the Friendly working Environment,
Continuous improvement, Top management commitment towards TQM, Steering Groups, Updated
Technology, Leadership skill and Conducting frequent Quality meetings in the organizations.
Key Words: Critical Success Factors, Quality Management, Indian Manufacturing Sector
JEL: L1-L15
1. Introduction
Quality has emerged as one of the most important factor needed for the survival and growth of
an organization in manufacturing sector. This sector provides employment to the growing labor force
and stimulates the growth of other sectors. However it has not reached its true potential and is far from
performance level it can reach. In general manufacturing sector involves technical issues related to
reliability, measurement of defects and statistical Quality control. Today quality aspects have diversified
into other Management dimensions like human resource management, employee's participation, supply
chain management, Benchmarking etc. Hence this paper identifies the critical success factors
responsible for the successful implementation of TQM practices in the Indian Manufacturing sectors and
1. Assistant Professor, Department of Business Administration, University of Lucknow, Lucknow2. Junior Research Fellow, Department of Business Administration, University of Lucknow, Lucknow
82Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
also examines their variations across sectors, organizational age and annual turnover.
2. Literature Review
Critical Success factors help the organization to yield competitive advantage. These are the
areas where company should perform in a right direction in order to sustain business. The Review of
Literature reveals forty-five critical Success Factors. These are further grouped into six groups i.e.
Organization related, Employee related, Vendor related, Effective Communication related, Quality
Techniques related and Customers' related CSFs of Quality Management.
The Organizational Factors include friendly working environment, Continuous improvement,
Top management commitment towards TQM initiatives, Formation of Steering Group, conducting
Frequent Quality Meetings, working for sustainable development, Team Work, updated Technology
implementation, leadership skills of top level management, Effective and Efficient Strategic planning,
Social Responsibility, organization Culture & support and knowledge management & innovation.
Continuous improvement is the path towards the quality goals of the organization. It is required for the
success of the Quality Policies in the organization [Faisal Talib et al (2011), Christos et al (2009), David
Gallier et al (2004)]. Strategic planning is the long term planning of the organization, which focuses on
the organizational goals and the customers' requirement in the upcoming future. Friendly working
environment is required for smooth working of the organization [Faisal Talib et al (2011), Christos et al
(2009)]. Social Responsibility leads the organization towards quality goals by providing them
sustainable development, environment protection, social equity and growth [R Sarvanan et al (2007),
Kureshi et al (2009)], Knowledge Management and innovation along with the integration of IT enabled
TQM (Rahman 2006) helps the organization to adapt itself according to the dynamic business
environment by updating them with the recent trends in the market and the technology.
The CSFs related to Effective Communication includes Publishing Newsletter consisting of
TQM results, Written & Well Communicated Policies and Information Circulation about the corporate
results, which in turn helps in defining the role of each and every employee of the organization for
achieving quality goals [Dixit et al (2011), Mehmatet al (2008)].
The CSFs related to Employees includes Trust between Management &Workforce, Job
Security, Regular feedback to workers about their performance, Staff attitude towards management,
Implementation of health and safety measures, respect to humanity and flexible workforce[ John
Mcmanus et al (2007), Nadine et al (2014)]. Employee Training [Mehmet et al (2008) Ben Clegg et al
(2010)], Employee Empowerment and Organization culture alsohelps in the development of the certain
skills like Leadership, which in turn motivates the employees towards quality goals [Prattana
Punnakitikashem et al (2010), Deepak Chawla et al (2010].
1Dr. Anu Kohli2Mr. Ram Singh
83Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
The Quality Techniques related CSFs' include Use of Six Sigma, Use of Statistical Process
Control, Frequent Benchmarking[ R Sarvanan et al (2007), Lee, et al 2006)], Periodic measure of
quality cost, internal quality audits at regular interval, automation of work process, preventive
maintenance, smooth flow of production, lean Manufacturing [Bhim Singh et al (2010), Shahram et al
(2009)], Application of Ergonomics (Lee et al, 2005), Reliability of Tools &equipment and Work
Measurement system(Shrivastava et al, 2006). These factors help the organization to assure the
production of defect free product.
Factors related to Vendors of the organization includes Periodic Evaluation of Vendors, Supply
Chain Management and integration of value chain which plays a vital role in the implementation of Total
quality Management in the organization. The poor quality of the raw material and purchased parts are the
source of quality problems in the organization [Rashid et al (2012), Kwai et al (2006), Victor et al
(2006)].
Satisfied Customers are the key to the success of the organization. Well-educated and aware
customers require accurate customers' need identification, which enhances customers' satisfaction.
Efficient Customers' feedback Mechanism is one of the important factor for maintaining quality in the
organization and must be regularly recorded in order to make improvements in the existing product
[Jitendra Kumar et al (2014), Assadej et al (2014), Ali Mohammad et al (2006), Evangloes et al ( 2010),
Satish Mehra et al (2008), Rahman et al (2005)]. The organization should focus on the quick redressal of
the customers' complaint in order to increase the product loyalty among customers.
3. Research Objectives:
The main objectives of this paper are: -
1. To analyze the variations in various critical success factors of Quality Management across
Sectors.
2. To analyze the variations in various critical success factors of Quality Management across
companies in different Age Groups.
3. To analyze the Variations in various critical success factors of Quality Management across
companies with different Annual Turnover.
4. Research Methodology
After reviewing the literature the preliminary list of forty-five CSFs of Quality Management
Practices were identified and compiled. Subsequently a survey was conducted and responses from
Quality Professionals were collected by sending 150 questionnaires to the various Manufacturing
Industries operating in Uttar Pradesh. Convenience Sampling Technique is used for selecting the
respondents. 74 Questionnaire were received with response rate of 49%. The data was then tabulated for
An Empirical Study of Variations In Critical Success FactorsOf Quality Management Practices In Indian Manufacturing Industry
84Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
analysis. The normality of the data was tested using Kolmogorov-Smirnov and Shapiro Wilk Test and
was found to be not normal (Annexure 1). Therefore Kruskal Wallis Test is used to analyze the
differences in CSFs across different sectors on the basis of annual turnover and Organizational Age. Five
point Likert scale for each of the45 items was used to record the responses of the respondents. The scale
represents 1as Strongly Disagree and 5 as Strongly Agree. The Reliability of the scale used in
Questionnaire is tested by using Cronbach's Alpha Test. The Value of Cronbach's Alpha is found to be
.893, which shows the higher internal consistency and reliability of the scale.
5. Analysis
5.1 Description of Data:
The Data is first analyzed by using the descriptive statistics. TABLE 1 shows the profile of the
organizations surveyed. ISO 9000/2000 and ISI Certifications are common in all sectors. It was also
observed that Graphical Measurement Index (GMI) Certifications is common in Pharmaceuticals sector.
Table1 : Profile of Organization Surveyed
Sector Frequency
Certification
ISO 9000/2000
ISI
GMI
Automobile
10
7
3
0
Chemical
9
7
2 0
Pharmaceuticals 25 25 0 20
Food processing 13 7 6 0
FMCG 1 1 0 0
Electrical and
Electronics
5
3
2
0
Iron and steel
10
9
1
0
Plastic 1 1 00
Total 7460 14 0
The Organizational Age and Annual Turnover of organization surveyed are shown in TABLE
2.The sample is categorized into three-sub group on the basis of the Organizational Age, wherein Young
represents less than 10 years; Adult represents 10 to 20 years and mature organization, which has more
than 20 years of operation. It can also be observed that most of the organizations surveyed belong to
Adult category. Further, the Sample is categorized into three groups on the basis of Annual turnover of
the organization i.e. organizations having annual turnover of less than Rupees 10 lakhs, 10 to 20 lakhs
and more than 20 lakhs.
1Dr. Anu Kohli2Mr. Ram Singh
85Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 2 :Organizational Age
and Annual Turnover of Organization
surveyed
Organizational Age
Frequency
Annual Turnover
(Rs
in lakhs) Frequency
Young 17 Less than 10 lakhs
14
Adult43
10 to 20 lakhs 19
Mature14
More than 20 lakhs 41
Total74
Total
74
5.2 Impact of Sector, Annual Turnover and Organization's Age on Critical Success Factors of
Quality Management.
5.2.1 CSFs related to Organization
Null Hypothesis were formulated and tested at 5 % level of significance using the Kruskil
Walis Test. It can be observed from the TABLE 3 that factors like Teamwork, Organization's attitude
towards Social Responsibility, and organization culture &support show significant variations across
Sectors. Other factors like Friendly Working Environment, implementation of continuous improvement,
Top management commitment towards TQM initiatives and the Leadership skills of top-level
management and implementation of updated Technology show significant variations due to the
organizational age. These factors did not show any variations across companies with different annual
turnover.
Table 3: The variation in CSFs of Quality Management related to Organization across Companies in different Sectors, Having Different Annual Turnover and Belonging to Different Age GroupS. No. Hypothesis Variation across Sectors Variation across Annual Turnover Variations across Organizational Age
Chi-Square
Df Sig. Result Chi-Square Df Sig. Result Chi-Square
Df Sig. Result
1. There is no variation in Friendly Working Environment across companies in different sectors, having different annual turnover and belonging to different age group.
8.059 7 .327 Accepted 2.399 2 .301 Accepted 9.970 2 .007 Not Accepted
2. There is no variation in implementation of continuous improvement ac ross companies in different sectors, having different annual turnover and belonging to different age group.
5.487 7 .601 Accepted 1.100 2 .577 Accepted 11.002 2 .004 Not Accepted
3. There is no variation in the Top management commitment towards TQM initiatives across companies in different sectors, having different annual turnover and belonging to different age group.
6.626
7
.469
Accepted
.458
2
.795
Accepted
7.956 2 .019 Not Accepted
4. There is no variation in the formation of Steering group
across companies in different sectors, having different annual turnover and belonging to different age group .
7.325
7
.396
Accepted
.138
2
.933
Accepted
12.423 2 .002 Not Accepted
5. There is no variation in Conducting frequent Quality meetings
across companies in different sectors, having different annual turnover and belonging to different age group
.
8.695
7
.275
Accepted
2.344
2
.310
Accepted
2.720 2 .257 Accepted
6. There is no variation in Team work across companies in different sectors, having different annual turnover and belonging to different age group .
14.618
7
.041
Not Accepted
2.375
2
.305
Accepted
2.394 2 .302 Accepted
7. There is no variation in the implementation of Working for sustainable development across companies in different sectors, having different annual turnover and belonging to different age group .
2.549 7 .923 Accepted 6.000 2 .050 Accepted 2.847 2 .241 Accepted
8. There is no variation in the implementation of Updated Technology across companies in different sectors, having different annual turnover and belonging to different age group
.
.
11.748
7
.109
Accepted
1.502
2
.472
Accepted 12.299 2 .002 Not Accepted
9. There is no variation in the Leadership skills of top level management across companies in different sectors, having different annual turnover and belonging to different age group
.
13.735
7
.056
Accepted
.051
2
.975
Accepted 8.554 2 .014 Not Accepted
10. There is no variation in the Effective and Efficient Strategic planning across companies in different sectors, having different annual turnover and belonging to different age group .
12.563
7
.083
Accepted
1.258
2
.533
Accepted .020 2 .990 Accepted
11. There is no variation in the attitude of Organization towards Social Responsibility across companies in different sectors, having different annual turnover and belonging to different age group .
16.016 7 .025 Not Accepted
1.495 2 .474 Accepted 4.107 2 .128 Accepted
12. There is no variation in the Organization Culture and Supportacross companies in different sectors, having different annual turnover and belonging to different age group .
14.715 7 .040 Not Accepted
1.169 2 .557 Accepted 5.902 2 .052 Accepted
13. There is no variation in the Knowledge Management and Innovation across companies in different sectors, having different annual turnover and belonging to different age group .
6.541 7 .478 Accepted 1.547 2 .461 Accepted 3.718 2 .156 Accepted
An Empirical Study of Variations In Critical Success FactorsOf Quality Management Practices In Indian Manufacturing Industry
86Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
5.2.2 CSFs related to Effective Communication
Null Hypothesis were formulated and tested at 5 % level of significance using the Kruskil
Walis Test. It can be observed from TABLE 4 that in general there is no significant impact of Sectors,
Annual Turnover and Organizational Age on these CSF. Information circulation about the corporate
results is the only factor that shows significant variation across Companies belonging to different
organizational age.
5.2.3 CSFs related to Employees
Null Hypothesis were formulated and tested at 5 % level of significance using the Kruskil
Walis test. It can be observed from TABLE 5 that factors like Regular Feedback to worker, Staff attitude
towards management, and implementation of health & safety measures show significant variations
across sectors. The only factor i.e. Implementation of health & safety measures varied across companies
with different Annual Turnover. Trust between Management and workforce is the only factor that varied
across companies with different Organizational age.
5.2.4 CSFs related to Vendors of the Organization
Null hypothesis were formulated and tested at 5 % level of significance using the Kruskil Walis
test. The conclusion of the test is deciphered in TABLE 6. It can be seen that these factors did not show
any variation across companies with different sectors, different turnover and belonging to different
Organizational age.
5.2.5 CSFs related to Quality Techniques used in the Organization
Null hypothesis were formulated and tested at 5 % level of significance using the Kruskil Walis
Test. The conclusion of the Test is deciphered in TABLE 7.It shows that the Use of Six Sigma varies
across Sectors, while the Annual Turnover of the organization affect implementations of Work
Measurement Systems and Reliability of Tools & Equipment. Implementation of Lean Manufacturing
varies with the Organizational age.
5.2.6 CSFs related to Customers
Null hypothesis were formulated and tested at 5 % level of significance using the Kruskil Walis
Test. It can be seen from the TABLE 8, that the Mechanism of Quick Redressal of the customers'
complaints varied across Sectors, while there is no impact of the Annual Turnover on these factors.
Implementation of Customers' need identification and Mechanism of Quick Redressal of the customers'
complaints also varied with Organizational age.
1Dr. Anu Kohli2Mr. Ram Singh
87Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 4 : The variation in CSFs of Quality Management related to Effective Communication across Companies in different Sectors, Having Different Annual Turnover and Belonging to Different Age GroupS. No. Hypothesis Variation across Sectors Variation across Annual Turnover Variations across Organizational Age
Chi-Square
Df
Sig.
Result
Chi-Square
Df
Sig.
Result
Chi-Square
Df Sig. Result
1. There is no variation in the implementation of Written and well communicated company policy across companies in different sectors, having different annual turnover and belonging to different age group .
3.826
7
.800
Accepted
.260
2
.878
Accepted
3.853 2 .146 Accepted
2. There is no variation in Information circulation about the corporate results across companies in different sectors, having different annual turnover and belonging to different age group
.
5.473
7
.602
Accepted
1.638
2
.441
Accepted
11.153 2 .004 Not Accepted
3. There is no variation in Publishing Newsletter consist of TQM results across companies in different sectors, having different annual turnover and belonging to different age group .
12.697 7 .080 Accepted .971 2 .615 Accepted 1.756 2 .416 Accepted
Table 5: The variation in CSFs of Quality Management related to Employees across Companies in different Sectors, Having Different Annual Turnover and Belonging to Different Age GroupS. No. Hypothesis Variation across Sectors Variation across Annual Turnover Variations across Organizational Age
Chi-Square
Df Sig. Result Chi Square
Df Sig. Result Chi-Square
Df Sig. Result
1. There is no variation in Trust between Management and work
force across companies in different sectors, having different
annual turnover and belonging to different age group.
1.649 7 .977 Accepted .823 2 .662 Accepted 6.064 2 .048 Not Accepted
2. There is no variation in perception about Job Security
across
companies in different sectors, having different annual turnover
and belonging to different age group.
4.053
7
.774
Accepted
1.252
2
.535
Accepted
1.892 2 .388 Accepted
3. There is no variation in Employee Empowerment
across
companies in different sectors, having different annual turnover
and belonging to different age group.
9.247
7
.235
Accepted
.986
2
.611
Accepted
2.363 2 .307 Accepted
4. There is no variation in the Regular Feedback Mechanism to
worker across companies in different sectors, having different
annual turnover and belonging to different age group.
15.128
7
.034
Not
Accepted
.135
2
.935
Accepted
4.876 2 .087 Accepted
5. There is no variation in Staff attitude towards management
across companies in different sectors, having different annual
turnover and belonging to different age group.
10.525
7
.161
Not
Accepted
1.072
2
.585
Accepted
3.653 2 .161 Accepted
6. There is no variation in implementation of health and safety
measures across companies in different sectors, having different
annual turnover and belonging to different age group.
6.065
7
.532
Not
Accepted
6.176
2
.046
Not
Accepted
1.807 2 .405 Accepted
7. There is no variation in the implementation of Staff training
across companies in different sectors, having different annual
turnover and belonging to different age group.
8.519 7 .289 Accepted .628 2 .730 Accepted 1.284 2 .526 Accepted
8. There is no variation in giving respect to humanity across
companies in different sectors, having different annual turnover
and belonging to different age group.
5.688 7 .577 Accepted 2.706 2 .258 Accepted 2.049 2 .359 Accepted
9. There is no variation in the flexibility of work force across
companies in different sectors, having different annual turnover
and belonging to different age group.
2.554 7 .923 Accepted 2.339 2 .311 Accepted 1.663 2 .435 Accepted
Table 6: The variation in CSFs of Quality Management related to vendors
across Companies in different Sectors, Having Different Annual Turnover and Belonging to Different Age Group
S. No. Hypothesis Variation across Sectors
Variation across Annual Turnover Variations across Organizational Age
1. There is no variation in the implementation of Periodic
evaluation of vendors across companies in different sectors,
having different annual turnover and belonging to different age
group.
2.500
7
.927
Accepted
1.452
2
.484
Accepted 5.80
9
2 .055 Accepted
2. There is no variation in the implementation of Supply chain
management across companies in different sectors, having
different annual turnover and belonging to different age group.
5.829 7 .560 Accepted 5.293 2 .071 Accepted 3.44
3
2 .179 Accepted
3. There is no variation in the implementation of Integration of
value chain across companies in different sectors, having
different annual turnover and belonging to different age group.
3.692 7 .814 Accepted 3.004 2 .223 Accepted 2.06
8
2 .356 Accepted
An Empirical Study of Variations In Critical Success FactorsOf Quality Management Practices In Indian Manufacturing Industry
88Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Table 7: The variation in CSFs of Quality Management related to Quality Techniques across Companies in different Sectors, Having Different Annual Turnover and Belonging to Different Age GroupS. No. Hypothesis Variation across Sectors Variation across Annual Turnover Variations across Organizational Age
Chi-Square
Df Sig. Result Chi-Square
Df Sig. Result Chi Square
Df Sig. Result
1. There is no variation in the implementation of Use of Six Sigmaacross companies in different sectors, having different annual turnover and belonging to different age group.
6.567 7 .475 Not Accepted
1.969 2 .374 Accepted .807 2 .668 Accepted
2. There is no variation in the implementation of Use of Statistical Process control Techniques across companies in different sectors, having different annual turnover and belonging to different age group.
2.509 7 .926 Accepted .542 2 .762 Accepted .487 2 .784 Accepted
3. There is no variation in the implementation of Frequent Benchmarking across companies in different sectors, having different annual turnover and belonging to different age group.
6.318
7
.503
Accepted
2.869
2
.238
Accepted 1.974 2 .373 Accepted
4. There is no variation in the implementation of Periodic measure of quality cost .
6.287
7
.507
Accepted
1.714
2
.424
Accepted .324 2 .850 Accepted
5. There is no variation in the implementation of Internal quality audits at regular interval across companies in different sectors, having different annual turnover and belonging to different age group.
6.402
7
.494
Accepted
4.245
2
.120
Accepted 1.491 2 .474 Accepted
6. There is no variation in the implementation of Automation of work process across companies in different sectors, having different annual turnover and belonging to different age group.
4.078
7
.771
Accepted
1.736
2
.420
Accepted 2.395 2 .302 Accepted
7. There is no variation in the implementation of Preventive Maintenance across companies in different sectors, having different annual turnover and belonging to different age group.
4.619
7
.706
Accepted
2.219
2
.330
Accepted 2.706 2 .259 Accepted
8. There is no variation in the implementation of Smooth flow of production across companies in different sectors, having different annual turnover and belonging to different age group.
6.083
7
.530
Accepted
4.998
2
.082
Accepted 4.807 2 .090 Accepted
9. There is no variation in the implementation of Lean Manufacturing across companies in different
sectors, having different annual turnover and belonging to different age group.
13.790
7
.055
Accepted
1.819
2
.403
Accepted 6.542 2 .038 Not Accepted
10. There is no variation in the implementation of Application of Ergonomics across companies in different sectors, having different annual turnover and belonging to different age group.
5.478 7 .602 Accepted 2.129 2 .345 Accepted .313 2 .855 Accepted
11. There is no variation in the implementation of Reliability of Tools and equipment across companies in different sectors, having different annual turnover and belonging to different age group.
8.085 7 .325 Accepted 7.404 2 .025 Not Accepted
.855 2 .652 Accepted
12. There is no variation in the implementation of Work Measurement System across companies in different sectors, having different annual turnover and belonging to different age group.
2.835 7 .900 Accepted 7.090 2 .029 Not Accepted
1.279 2 .527 Accepted
Table 8: The variation of CSFs of Quality Management related to Customers across Companies in different Sectors, Having Different Annual Turnover and Belonging to Different Age GroupS. No. Hypothesis Variation across Sectors Variation across Annual Turnover Variations across Organizational
Age Chi-Square
Df Sig. Result Chi-Square
Df Sig. Result Chi-Square
Df Sig. Result
1. There is no variation in the implementation of Well educated and
aware customers across companies in different sectors, having
different annual turnover and belonging to different age group.
4.622
7
.706
Accepted
1.461
2
.482
Accepted
3.254
2 .197 Accepted
2. There is no variation in the implementation of Customers’ need
identification ac ross companies in different sectors, having
different annual turnover and belonging to different age group .
4.144
7
.763
Accepted
.785
2
.675
Accepted
6.621
2 .037 Not Accepted
3. There is no variation in
the implementation of practices
enhancing customers’ satisfaction across companies in different
sectors, having different annual turnover and belonging to
different age group.
6.756
7
.455
Accepted
.611
2
.737
Accepted
.487 2 .784 Accepted
4. There is no variation in
the implementation of Efficient
Customers’ feedback mechanism
across companies in different
sectors, having different annual turnover and belonging to
different age group.
12.276
7
.092
Accepted
.462
2
.794
Accepted
5.126
2 .077 Accepted
5. There is no variation in the implementation of Quick Redressal of
the customers’ complaints across companies in different sectors,
having different annual turnover and belonging to different age
group.
15.893 7 .026 Not
Accepted
1.034 2 .596 Accepted 13.360
2 .001 Not Accepted
1Dr. Anu Kohli2Mr. Ram Singh
89Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
6. Findings
6.1 ISO 9000/2000 and ISI Certifications are common in all sectors.
6.2 It was also observed that Graphical Measurement Index (GMI) Certifications is common in
Pharmaceuticals sector's organizations
6.3 CSFs such as Teamwork, Social Responsibility, Organization culture & Support, Regular
Feedback to worker, Staff Attitude towards management, Health &Safety measures, Use of Six
Sigma and Quick Redressal of customers' complaints varied across various Sectors.
6.4 Annual Turnover of the organization affects the implementation of Health & safety measures,
Reliability of Tools & Equipment and Implementation of Work Measurement system.
The Factors like Friendly work Environment, Continuous improvement, Top management
commitment towards TQM initiatives, Steering Groups, Updated Technology, Leadership skill of Top
Level Management, Information Circulation about the corporate results, Trust between Management &
Workforce, Lean Manufacturing, Customers' Need Identification, and Quick Redressal of customers'
complaints shows significant variation on the basis of the Organizational age.
7. Conclusion
It can be concluded that Quality Management Policies are all pervasive in Manufacturing Industry while
their certain practices vary across sectors, Annual Turnover of the Organization and Organizational age.
CSFs are the enablers of the Quality Management Practices. These CSFs are classified into five sub
groups i.e. Organization related, Employee related, Vendors related, Quality Techniques related and
Customers related. The paper concludes that CSFs are significantly affected by Organizational age, as
organization becomes more awakened about quality with age. It is also concluded that specific
requirement of the sectors leads to variation in the quality practices. Annual turnover also impacts the
Quality practices as the organization with large turnover has more resources to effectively and efficiently
work for quality goals as compared to the organization with lower turnover.
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An Empirical Study of Variations In Critical Success FactorsOf Quality Management Practices In Indian Manufacturing Industry
Kolmogorov-Smirnova Shapiro-Wilk
Statistic Df Sig. Statistic Df Sig.
Friendly Working Environment
.285
74
.000
.768
74
.000
Believes in continuous improvement
.301
74
.000
.759
74
.000
Top management commitment towards TQM initiatives
.294
74
.000
.759
74
.000
Steering group
.252
74
.000
.791
74
.000
Conducting frequent Quality meetings
.300
74
.000
.761
74
.000
Team work
.285
74
.000
.768
74
.000
Publishing Newsletter consist of TQM results
.276
74
.000
.778
74
.000
Updated Technology implementation
.270
74
.000
.795
74
.000
Leadership skills of top level management
.294
74
.000
.759
74
.000
Effective and Efficient Strategic planning
.316
74
.000
.749
74
.000
Social Responsibility
.253
74
.000
.788
74
.000
Organization Culture and Support
.253
74
.000
.788
74
.000
Knowledge Management and Innovation
.267
74
.000
.785
74
.000
Written and
well communicated company policy
.279
74
.000
.781
74
.000
Information circulation
about the corporate results
.238
74
.000
.800
74
.000
Trust between Management and workforce
.316
74 .000
.764
74
.000
Job Security
.307
74 .000
.749
74
.000
Employee Empowerment
.302
74 .000
.767
74
.000
Regular Feedback to worker about their performance
.293
74 .000
.780
74
.000
Staff attitude towards management .272 74 .000 .792 74 .000
Implementation of health and safety measures .268 74 .000 .783 74 .000
Staff training .307 74 .000 .749 74 .000
Respect to humanity .308 74 .000 .734 74 .000
Flexible work force .349 74 .000 .730 74 .000
Use of Quality Tools .335 74 .000 .735 74 .000
Use of Statistical Process control Techniques
.364
74 .000
.712
74
.000
Frequent Benchmarking
.291
74 .000
.771
74
.000
Periodic measure of quality cost
.281
74 .000
.767
74
.000
Internal quality audits at regular interval
.329
74 .000
.723
74
.000
Automation of work process
.291
74
.000
.748
74
.000
Preventive Maintenance
.335
74
.000
.744
74
.000
Smooth flow of production
.321
74
.000
.737
74
.000
Lean Manufacturing
.349
74
.000
.730
74
.000
Application of Ergonomics
.377
74
.000
.703
74
.000
Reliability of Tools and equipment
.337
74
.000
.758
74
.000
Work Measurement System
.373
74
.000
.694
74
.000
Working for sustainable development
.352
74
.000
.703
74
.000
Periodic evaluation of vendors
.308
74
.000
.723
74
.000
Supply chain management
.315
74
.000
.732
74
.000
Integration of value chain
.358
74
.000
.708
74
.000
Well educated and aware customers
.443
74
.000
.594
74
.000
Customers’ need identification
.417
74
.000
.639
74
.000
Enhancing customers’ satisfaction
.427
74
.000
.624
74
.000
Efficient Customers’ feedback mechanism .429 74 .000 .620 74 .000
Quick Redressal of the customers’ complaints .438 74 .000 .604 74 .000
Annexure 1
Tests of Normality
Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
1Dr. Anu Kohli2Mr. Ram Singh
92
93Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
LEADERSHIP IN TQM CONTEXT:A CASE STUDY
1Dr. K.K. Garg
2Pranav Mishra
Abstract
Purpose- The increasing competition is motivating the Indian automobile industry to
implement Total Quality Management (TQM) by using a wide variety of Critical Success Factors of
TQM. Purpose of this paper is to review the practices of Leadership on Total Quality Management
(TQM) in Indian Automobile Industry.
Design/Methodology/Approach- In this paper, an effort is made for the analysis covering a
sample of 35 organizations from Indian automobile industry in a case study mode.
Findings- the paper reveals that total quality management has a direct bearing on the
performance of TQM journey. The Survey findings indicate that quality scenario in the Indian
automobile industry is improving and automobile manufacturer (OEMs) & Suppliers (Tier-I) are more
focusing on quality Leadership of TQM practices and sub-contractors (Tier-II) is not responding as the
changing needs of market.
Originality/value- the value of the paper is point out which Leadership component to
successfully implement TQM context in Indian automobile industry.
Research limitations/implications- the investigation and research findings are still exploratory.
Key Words: Total Quality Management
Introduction
The TQM concept refers to company-wide quality assurance from supplier to customer using
system approach of documented sets of procedures and control of process variability in a team spirit with
top management commitment. “Leadership” is a process of creating a vision for the future, and
developing a strategy for moving towards that vision. Vision is the foundation for creating right focus in
the company. The role of Leadership metamorphoses into that of a change agent, working for “clock
building, not time telling”. Leadership in a TQM system is not a single individual; it is the top
management team that leads and provides systems and platform for the organization to operate.
Leadership is the degree of which top management sets up QM objectives and strategies, provides and
1. Associate Professor,Dept. of Management, Lingaya's Lalita Devi Institute of Management & Sciences, Mandi road, Mandi, New Delhi-110047 Email:- [email protected] Phone no.- 9650687688
2. Associate Professor,Dept. of Management, Lingaya's Lalita Devi Institute of Management & Sciences, Mandi road , Mandi, New Delhi-110047 Email:- [email protected] Phone no.- 9212472425
94Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
allocates necessary resources, contributes in quality improvements efforts, and assesses QM 2
implementation and performance.
Indian Automobile Industry
The automobile industry is one of the core industries in Indian economy, whose prospect is
reflective of the economic resilience of the country. With 4 percent contribution to the GDP and nearly 5
percent of the total industrial output, the automotive industry has become a significant contribution to the
exchequer. Continuous economic liberalization over the years by government of India has resulted in
making India as one of the prime business destination for many global automotive players3. The Indian
automobile industry comprises of the automobile and auto component industry.
India is the largest three-wheeler market and second largest two –wheeler market in the world and is the
fourth largest and fastest growing passenger car market in Asia. India is also the second largest producer
of motorcycles in the world. The percentage distribution of different types of vehicles in total production 4is tabulated in table:1
Table 1: Indian Auto Production
Type of Vehicles Percentage Production (in %)
Number of Vehicles(2011 -12)
Two Wheelers 77% 13,435,769
Three Wheelers 3% 513,251 Passenger Cars 15% 2,618,072 Commercial Vehicles 5% 809,532
Indian companies such as Bharat Forge, Brakes India and Sundaram Clayton Limited have moved into
high value added areas of production. According to the Automotive Component Manufacturers
Association (ACMA), the Indian auto component manufacturers would see and exponential growth in
output over the next decade. They have become reliable suppliers to global manufacturers such as
Toyota, Honda, Suzuki, General Motors, Ford, Cummins, Volvo and Daimler Chrysler. Instead of a high
production rate of the vehicles in India, the share of export in total output is low. The complete vehicle
export share is lower than the auto components export. The auto component industry can be divided into
six main segments, which are illustrated in table.2
S.No.
Segment
Component
1. Engine Parts
Components piston, piston rings, cylinder, and fuel delivery system like, carbure tor, diesel -
based fuel delivery systems,
engine valves.
2. Electrical parts Starter motors, generators, spark plugs and distributors. 3. Drive transmission
and steering parts Gears, wheels, steering systems, axles and clutches.
Table: 2 Segments of Auto Component Industry
1Dr. K.K. Garg2Mr. Pranav Mishra
95Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
4. Suspension and
Breaking Parts
Brakes and leaf springs, Shock absorbers.
5. Lighting and dashboard equipment
Headlights and dashboards instruments.
6. Others Sheet metal components and plastic molded parts
These auto components produced in India and the production range of these components in shown in 5
table.3 this table is graphically represented in Fig.1
Table: 3 Indian Auto Component Market
Auto Components Production (in %)
Engine parts 31%
Equipments-Dashboards Headlight 10% Suspension & Breaking Parts 12% Drive Transmission &Steering Parts 19% Electrical parts 9% Body & chassis 12% Others 7%
, 31%
Equipments-
Dashboards
, 10%
Suspension &
Breaking
, 12%
Drive Transmission
&Steering Parts
, 19%
Electrical
, 9%
Body &
, 12%
, 7%
Fig.1 Indian Auto Components Markets
The size of auto component industry in India is around USD 34.7 billion and has growth at 26% p.a. since
FY056.
The automobile Industry is one of the largest industries with deep forward and backward linkage and
hence has a strong multiplier effect. Among the forward linkages the key generators of employment are
the oil industry, distribution, after-sales service network and supply of spares and replacement by the
auto component industry. Other critical forward linkages include auto finance and leasing industry. As
for the backward linkages, the automobile industry is the largest consumer of raw material like CR/HR
steel, aluminum and Zink alloys, and also of high value of rubber and plastics. Moreover, the automobile
industry is the most important driver of machine tool industry, the bed-rock of industrial growth7.
In early 80's Government of India, making a turning point for the automobile sector, announced some of
liberal policy changes as Maruti Udyog Limited (MUL), a joint venture with Suzuki Motors Ltd. of
Japan was set up and Indo-Japanese joint ventures were set up in two- wheeler industry like Hero Honda,
Leadership in TQM Context: A Case Study
96Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
TVS Suzuki, Escorts Yamaha, Kinetic Honda etc. Further, the deli censing of auto sector in 1993 opened
up the gates to a virtual flood of international automakers into the country to tap the large population base
of more than one billion people. This revolution brought a greater systems emphasis, more market
orientation\customer focus, continuous improvement culture, latest tools & technique and practices of
TQM and top management commitment towards quality.
LITERATURE REVIEW
Leadership is fundamental to management and organizational behavior and is on just about
everyone's short list of prerequisites for organizational success. Thus, it is not surprising that leadership
plays a crucial role in Total Quality Organization. “Teach & institute leadership” is one of Deming's 14
points. Leadership is the first category in the Malcolm Baldridge National Quality Award, and it is
recognized as the “Driver” of successful quality system8. Levinson & Dehont (1992) emphasized that
“Without management Leadership, quality and productivity will result only as fortunate accident9”.
India's interest about TQM came about by years of selfless contribution of one Japanese
Professor yoshikazu tsuda, invited by confederation of Indian industry (CII) to introduce TQM to Indian
manufacturing industry. He was the guide assigned by Japanese union of scientist and engineers that is
responsible of the promotion of TQM in Japan & the world over.
The resounding success of several Indian manufacturing and service firms in recent times has
invariably been linked to excellent practices to quality management. If you consider the auto-component
manufactures in India, many of them won the Deming Award for quality, the largest number outside
Japan.
Indian companies seem to be in the favorites list of the Deming Awards (termed as the Nobel
Prize in the world of manufacturing) of Japan. The Japanese Union of Scientists and Engineers (JUSE)
Started the Deming prize in 1951. Initially, this prize was open only to the Japanese industry, but in 1985
it was open thrown open to the rest of the world. From 1998 onwards, Indian companies started figuring
in the Deming prize list, with Sundaram Clayton's brakes division claiming the honor first. Deming
Grand Prize is the highest honor in quality awarded to a company for excellence in Total Quality
Management. This prize given to companies for demonstrating practicing TQM in areas of production,
customer service, safety, human resource, corporate social responsibility, environment
1Dr. K.K. Garg2Mr. Pranav Mishra
97Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
1998 Sundram-Clayton Limited, Brakes Division2001 Sundaram Brake Lining Limited2002 TVS Motor Company Limited
2003 Brakes India Limited, Foundry Division
Mahindra and Mahindra Limited, Farm Equipment SectorRane Brake Linings Limited
Sona Koyo Steering System Limited
2004 SRF Limited,
Industrial Synthetics Business
Business Lucas-
TVS
Indo-Gulf Fertilizers Limited 2005 Krishna Maruti Limited, Seat Division
Rane Engine Valves Limited Rane TRW Steering System Limited, Steering Gear Division
2007 Aashi India Glass Limited, Auto Glass Divi sion
Rane (Madras) Limited 2008 Tata Steel Limited
2010 National Engineering Industries Limited (India)
2011 Sanden Vikas ( India ) Limited
The Deming Grand Prize
2012 Tata Steel Limited (India)
Rane (Madras) Limited (India)Lucas-TVS Limited (India)
10Table: 4 List of India Deming Prize Winners
Significant number of auto component companies are focusing on global best practices like 5-S, Kaizen,
TPM, 6-SIGMA etc.
11Table: 5 Auto Component Manufacturer- Quality Certification and Recognitions
Category
ISO
9001 TS
16949 ISO
14001 OHSAS
18001 JIPM
Deming
Award TPM
Award Japan
Quality medal
Shingo
Silver Medallion
QS9000
No. of Firms
576 467 208 105 3 12 15 2 1 34
RESEARCH METHODOLOGY
OBJECTIVES OF THE STUDY
1. Understanding the concept of Leadership in TQM context of Indian Automobile Industry.
2. To analyze Practices & Importance of TQM in Indian Automobile Industry.
3. To Review the experiences with the development of Leadership in TQM context of Indian
Automobile Industry.
To obtain an insight on the awareness of TQM practices in the Indian Automobile Industry, a sample of
35 respondents (05 automobile manufacturers, 20 suppliers, and 10 sub-contractors) were obtained
while 200 organizations were requested to participate in the study. The study indicated a comparative
level of awareness and practice of Total Quality Management in the Automobile Industry. The
questionnaire was checked for reliability and validity by expert and practicenors. The questionnaire was
Leadership in TQM Context: A Case Study
98Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
validated by sample data from original equipment manufactures (OEMs), suppliers (Tier-I), sub-
contractors (Tier-II). In the global scenario, the automobile components manufacturing companies are
classified as Tier-I and Tier-II suppliers12. The Tier-I Suppliers are those which supply components to
the original equipment manufactures (OEMs). Tier-II suppliers are those which supply components to
Tier-I suppliers13. The survey reported here was conducted from March, 2013 to May, 2013 and was
restricted to companies located in NCR region of India.
RESULTS & DISCUSSION
The average score of 2.51 of the Indian automobile sector on leadership as shown in Table 6. It
is particularly more predominant in case of automobile manufacturers and supplier categories where
average score is 2.66 and 2.69 respectively on a 5- point scale.
The key value emphasized is the importance of the customer focus, continuous improvement,
teamwork, database decisions, mutual contributions and open communication. Some organizations
developed core values, vision and mission statement also as change of leadership style and attitude from
commanders to coaches.. This is evident by the higher average score of 2.71 lowest score is assigned to
the aspect,” the top management gives effective consideration to quality of work in appraisal system”.
This score is 2.67 in automobile manufacturer category, 2.74 in supplier category and only 2.11 in sub-
contractor category on a 5-point scale. This implies that most of the organizations are not giving due
consideration to the performance appraisal system with the quality of work. Another weak area is for the
aspect, “benchmarking the organization's performance against the best performer”. The average score is
2.55, 2.48 and 1.44 in case of automobile manufacturer, supplier and sub-contractor categories,
respectively. This implies challenge is to change the mindset through leadership in TQM practice.
Visible change management is weak due to internal factors as is evident from the average score
of 2.31 on a 5-point scale. However the appreciation that quality management is not a “quick fix” but
requires along –term commitment for continuous improvement is very much there. Deming (1993),
Juran (1986) also give great emphasis on developing leadership.
Table 6: Leadership
Leadership Automobile manufacturers category
Supplier category
Sub-contractor category
Automobile sector
1. The top management is having personal visible involvement in all aspects of quality
management.
2.70 3.06 2.14 2.63
1Dr. K.K. Garg2Mr. Pranav Mishra
9.
The top management shows
trust and confidence in their subordinates and empowers
them to take decision.
2.73
2.87
2.1
2.57
10. The top manag ement commits itself to the organization vision and mission and informs everyone down the line.
2.90
2.98
2.63
2.84
11. The top management views customers and suppliers as an integral part of value chain.
2.64
2.86
2.63
2.71
2. The top manag ement trains the members of the core team (constitute of senior level managers) on group jobs. Always active in providing and receiving training.
2.78 2.54 1.92 2.41
3. The top management actively involve themselves in timely recognition and appreciation of Individual’s/Team’s contribution
2.73
2.71
2.21
2.55
4.
The top management encourages the core team to set high performance goals and provide appropriate resources
2.53
2.72
1.72
2.32
5.
The top management gives effective consideration to qu ality of work in appraisal system.
2.67
2.74
2.11
2.51
6.
The top management encourages core team to monitor and evaluate the level of performance and assess its effectiveness.
2.78
2.84
1.86
2.49
7.
The top management respect
and value all emp loyees and encourage open communication and exchange of information among different teams for enhancing innovativeness and creativeness in each individual.
3.02
2.47
2.14
2.54
8. The top management is supportive and pays sufficient attention to the n eeds of the people and maintains comparative status with other similar organization.
2.47 2.66 1.96 2.36
99Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
Leadership in TQM Context: A Case Study
100Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
12. The top management give s importance to the suggestions made by the employees and encourages taking up incremental improvement efforts.
2.78
2.8
2.91
2.83
13. The top management is committed to change management through
14 Benchmarking the organization’s performance agai nst the ‘best’ performer,
2.55
2.48
1.44
2.16
15
Challenges due to the changes in the environmental factors,
2.35
2.55
2.13
2.34
16
Poor performance of the organization due to internal factors.
2.31
2.07
2.56
2.31
Total 39.94 40.35 32.46 37.58
Average 2.66 2.69 2.16 2.51
Standard Deviation 0.19 0.25 0.38 0.27
One of the important roles of the senior managers is to provide clear vision and values that
promote total quality. The top management needs to spell a clear quality policy or mission as the
underpinning process to realize the value and vision14. The top management needs to build culture, and
progressively remove cross – departmental barriers. It needs to act as facilitators to improve the ways
things are done by encouraging participation, involvement and development of employees. Leaders
need to become a part of the team to pursue customer satisfaction both internal and external
Top management leadership is paramount importance to the success of any organization.
Unless top managers provide clear vision and values that promote total quality in the organization, other
enabling variables (such as strategic planning, human resource focus, customer and market focus,
supplier focus, process management and information management) are unlikely to make a positive
impact. Thus, for the success of any organization, developing leadership attributes and skills should be at
the top of the management agenda15
Finally, a proactive l and supportive Leadership is crucial for success of TQM process.
Reference:
1. Oakland, JS, 1989, Total Quality Management, Heinemann Publishing Co, Oxford.
2. Saraph, G.V, Benson, G.and Schroeder, R.G., 1989, an instrument for measuring the critical
factors of TQM, Decision Sciences, Vol. 20, No. 4
3. In Overdrive Mode, November 19, 2006, Business India
4. www.siam.in SIAM Annual Report 2011-12
1Dr. K.K. Garg2Mr. Pranav Mishra
101Integral Review- A Journal of Management, Vol.8 No. 2, December 2015
5. www.acmainfo.com ACMA Overview(2012-13)
6. www.acmainfo.com ACMA Industry Statistics june,2013
7. J.P. Sharma & Anjali Bhatnagar (2006), Automobile Industry and Productivity, Productivity,
Vol 47, 1-2 April-September
8. James R. Evans (2005) Total Quality Management, Organization, and Strategy, 4th Edition
9. Harry J. Levinson and Chuck DeHont, “Leading to Quality”, Quality Progress, May 1992, pp.
55-60
10. www.juse.or.jp/e/deming
11. www.acma.info
12. Bennett D and O'Kane J (2006), “Achieving Business Excellence through Synchronous
Supply in the Automotive Sector”, Benchmarking: An Introduction Journal, Vol. 13, No. ½, pp.
12-22.
13. M (2003), “JIT Inventory and Aghazadeh S Completion in the Global Environment: A
Comparative Study of American and Japanese Values in Auto Industry”, Cross Cultural
Management, Vol. 10, No. 4, pp. 29-42
14. Waldman, D.A., 1994, The contributions of total quality management to a theory of work
performance, Academy of Management Review, Vol. 19, No. 3, pp. 510-536
15. Deming, W.E., 1993, Out of the Crises- Quality, Productivity and Competitive Position,
Cambridge University Press, Productivity and Quality Private Limited Madras
Leadership in TQM Context: A Case Study
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