Determinants of Capital Structure – A Study of Manufacturing Sector PSUs in India Chandra Sekhar Mishra 1+ 1 Assistant Professor Vinod Gupta School of Management IIT Kharagpur Abstract. This study seeks to identify the determinants of Indian central PSUs’ capital structure. This is important since one does not come across many studies related to the PSUs. Moreover in the post disinvestment phase, the PSUs in India have become more market oriented in terms of raising funds. The gradual reduction in the budgetary resources for the PSUs is also one of the reasons. The PSUs have got to depend more on extra-budgetary resources (EBRs) for their needs. PSUs are also different in several ways than their counterparts in the private sector. For this study a sample of 48 profit making manufacturing PSUs is considered for the time period 200603 to 201003. Multiple regression has been used to find out the factors affecting capital structure. The independent variables have been considered keeping in view Agency Theory, Pecking Order Hypothesis and other established capital structure models. The results suggest that the capital structure (Total Borrowing to Total Assets) of the profit making PSUs is affected by Asset Structure (Net Fixed Assets to Total Assets, NFATA), Profitability (Return on Assets, ROA) and Tax. Unlike suggestion of pecking order hypothesis, growth (defined as growth in total assets) is positively related to leverage. As predicted by theory NFATA and ROA are respectively positively and negatively related to leverage. In contradiction to theory tax and leverage are negatively related. Firms with less effective tax rate have gone for more debt. None of the other variables like non-debt tax shield (NDTS), Volatility, Size were found to be significant. Keywords: Financing; Capital Structure; Public Sector Undertakings; Pecking Order Hypothesis; 1. Introduction The corporate finance pattern is of vital importance for the financial well being of companies. Corporate finance decisions affect the various facets of the corporate management directly or indirectly, which ultimately determine the wealth of investors. The corporate finance decisions in Public Sector Undertakings affects not only the financial soundness of the concerned PE but also the financial health of the nation as a whole, since these are essentially public investment decisions of the government and a number of agencies of the Government are involved in this process. In India, the government set up PSUs as an instrument to remove regional disparities, eradicate unemployment problems, upliftment of backward areas, and backward classes. Moreover, in the years following independence, the private sector industrialists were not forthcoming to establish industries involving huge investments. As a result, government had to step in. since the dawn of independence on August 15, 1947, PSUs have acted as a major policy instrument in the transition of the country form a planned economy to a market economy. The various industrial and economic policies of the government have highlighted the role of public sector in the economic development and it was clear form pre 1991 policies that had a pro public sector approach all these days. In the changed circumstances, the PSUs while being appreciated for their contribution in providing large- scale employment, and industrial development, are also being criticized for their financial performance in terms of return earned on the public money invested therein. Due to other compelling reasons then and dismal performance of PSUs in some of the areas, the government had to rethink and formulate a new vibrant economic policy in 1991, which marked the beginning of liberalization process in India. Post 1991, + Corresponding author 2011 International Conference on Financial Management and Economics IPEDR vol.11 (2011) © (2011) IACSIT Press, Singapore 247