Financing operations in india
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Transcript of Financing operations in india
Financing Operations in India
Madhav KalyanCountry Manager and Chief Representative
ICICI Bank
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Sectors from US doing Business in India
Services Infotech BPO Travel / Hotels
Trading Agri Commodities Engg Machinery Textiles
Manufacturing Auto / Auto parts Chemicals Pharmaceuticals
Infrastructure Power Telecom Roads / Ports
Choice of entry vehicle
determines financial structure
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Financing Operation in India
Equity/Risk Capital
Public Equity Issue
Debt/Borrowed Capital
Foreign direct Investment
Project Finance
Term loans & Working capital finance
External Commercial Borrowings
Corporate Loan Market
Corporate Debt Market
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Financing Operation in India
Equity/Risk Capital
Public Equity Issue
Debt/Borrowed Capital
Foreign Direct Investment
Project Finance
Term loans & Working capital finance
External Commercial Borrowings
Corporate Loan Market
Corporate Debt Market
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Equity Capital
Various means of raising equity capital Bringing foreign funds
Foreign direct Investment including ADRs/GDRs and FCCBs
Preference share capital (not included in ECBs or FDI sectoral caps)
Raising domestic fundsPrivate placementsPublic issue of equity
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Foreign Direct Investment
FDI: The acquisition of physical assets such as plant and equipment in India, with operating control residing in the parent corporation.
Modes of bringing FDI 100% subsidiary Opening branch office Financial collaboration Joint ventures and technical collaborations Capital markets via GDRs/ADRs and FCCBs Private placements or preferential allotments
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FDI policy in India
Declared objective: to invite and facilitate foreign
investment in India
Minimal procedural formalities
Freely allowed in all sectors including services
except few restrictions and sectoral caps
Automatic approvals, only post entry notification to
RBI, except few restrictions
Greater transparency in case approval required
No restriction on end use (except real estate and
stock markets)
Free repatriation of investment and returns
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FDI policy in India (contd.) Sectors restricted for FDI
Nuclear Energy Railway Transport
Sectors with compulsory industrial licensing, eg. Distillation & brewing alcoholic drinks Cigars, cigarettes and manufactured tobacco
substitutes Electronic Aerospace and defence equipment, etc. All items reserved for SSI
Sectoral caps for bringing FDI, eg. 49% in Telecom 26% in Insurance 100% in power generation, transmission and
distribution 100% in Hotels & Tourism, etc.
Preference shares (without conversion option) outside sectoral caps or ECB guidelines.
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Financing Operation in India
Equity/Risk Capital
Public Equity Issue
Debt/Borrowed Capital
Foreign direct Investment
Project Finance
Term loans & Working capital finance
External Commercial Borrowings
Corporate Loan Market
Corporate Debt Market
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Raising Domestic equityPrivate Placement Can be used to raise funds and dilute equity in
favor of Indian shareholders (as per FDI sectoral caps) while limiting the no. of shareholders.
Private equity/venture capital investors who provide funding for the project from the ideation stage as well as help nurture the growth.
Public Issue Well developed Equity markets with total market
cap in excess of Rs 13,00,000 Crores (USD 285 Bn) as of Jan’04
Liquidity mainly in large cap and some mid cap companies
Main participants – Mutual funds, Insurance companies, FIIs and retail investors
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Private Equity Can be used to raise funds and dilute equity in
favor of Indian shareholders (as per FDI sectoral caps) while limiting the no. of shareholders.
Private equity/venture capital investors provide funding for BPO operations Many US based funds invest in Indian companies or
US companies with focus on India Funding for startups and small scale BPOs hard to
come by, funding mainly for second stage or later Typically look for the management team, their
speed of execution, ability to scale, managing customer expectation, infrastructure, client relationships and dependence, order book/ pipeline and profitability.
VCs/Private equity invested
USD 300 Mn in 2002 and USD
500 Mn in 2003
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Equity Markets in India
Regulatory Body SEBI (the Securities & Exchange Board of
India)Autonomous and Statutory bodyRegulates & controls capital users and all
functionaries between users and investors
The Stock Exchanges 23 exchanges, 2 main exchanges NSE & BSE
De-mutualised exchanges- ownership, management and trading in separate hands
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Equity Markets in India
The Depositories NSDL (the National Securities Depository Ltd.)
and CDSL (the Central Depository Services (I) Ltd.)
The Depository Act 1996 led to its establishment Efficient, low risk and cost infrastructure for
paperless handling of securities.
The Registered Intermediaries Consist of brokers, sub-brokers, Trading &
Clearing members, portfolio managers, Bankers to Issue, merchant bankers, registrars, underwriters and credit rating agencies.
Registered with SEBI and act under its regulation.
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Guidelines for Issue of Equity Capital Unlisted company can make a public issue of equity
shares or instrument convertible into equity subject
to:
Pre-issue net worth not less than Rs 10 mn in 3 out of
preceding 5 years including immediately preceding 2
years
Track record of distributable profits under Companies Act
1956, for at least 3 years out of immediately preceding 5
years
Issue to be through book building only, if not complying
with the above clauses or issue size more than 5 times
pre issue net worth.
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Financing Operation in India
Equity/Risk Capital
Public Equity Issue
Debt/Borrowed Capital
Foreign direct Investment
Project Finance
Term loans & Working capital finance
External Commercial Borrowings
Corporate Loan Market
Corporate Debt Market
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Corporate debt market in India Less deep than Equity markets contrary to world
markets Liquidity mainly in Govt. securities and highly rated
corporate papers (AAA and AA) Primarily an OTC Market Listed corporate debt market
Listed market underdeveloped Listed debt markets are also regulated by SEBI Listing requirements
Rating must for listing of debt Credit Rating Agencies – Crisil (alliance with S&P), ICRA (alliance
with Moody’s), CARE and Fitch India.
Banks investment in unlisted non SLR securities restricted to 10% of the total investments in non SLR securities.
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Corporate debt market in India
Market players
Qualified Institutional Investors (QIB) Public financial institution
Scheduled commercial banks
Mutual funds
Foreign institutional investor registered with SEBI
Multilateral and bilateral development financial institutions
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Financing Operation in India
Equity/Risk Capital
Public Equity Issue
Debt/Borrowed Capital
Foreign direct Investment
Project Finance
Corporate Loan Market
Corporate Bond Market
Term loans & Working capital finance
External Commercial Borrowings
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Project finance
Project Finance Rupee project loans to fund Land & Buildings, Plant
& Machinery, pre-operative and preliminary expenses (including interest for the construction and installation period) and margin money for working capital
Foreign currency project loans to fund imported capital equipment, services incidental to the equipment such as technology transfer and servicing fees, and domestic project expenditure.
Syndication of domestic/international debt
Use of EXIM bank US funding for import of capital equipment from US
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Project Finance (contd.) Rupee assistance by way of subscription to
debentures and shares Assistance by way of underwriting shares and
debentures Guarantees for
Foreign currency loans Export credits. Suppliers of equipment Foreign lenders Bond guarantees and confirming guarantees
Equity Mezzanine finance Equity Take-out finance
Assistance for a project loan would typically be for a longer tenure than for a corporate loan
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US EXIM Bank finance
Access to competitive all-in financing for US goods
and services, generally lower than locally available
rates
Short, medium and long term financing (up to 14 yrs)
flexibility
no collateral or security taken normally
Loan guarantees and insurance offered
Structured and project finance with limited recourse
for setting up projects (repayment from project cash
flows)
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US EXIM Bank finance Medium/Long term guarantee facility
Up to 85% of the contract value Ranges from USD 0.5 mn to 10 mn Repayment up to a period of 14 yrs Personal guarantee if turnover of importer <USD 50
mn Credit guarantee facility (CGF)
Line of credit more than USD 10 mn in one year Up to 85% of the eligible transaction
Limited recourse (project) and structured Finance No country or project dollar limits Future cash flows for repayment Appropriate where trapping of hard currency
revenue possible Risk sharing and reinsurance to facilitate
transactions
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US EXIM Bank finance Eligibility
All capital goods and services except military/defence and hazardous to environment
Capital equipments and services, including Computer hardware and software Pollution control equipment Equipments for outlets such as Burger King,
Pizza hut, etc Refurbished equipment is also eligible
Goods must be shipped from US Financeable equipment value is the lesser of
85% of the value of goods or 100% of the US content in the goods
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Financing Operation in India
Equity/Risk Capital
Public Equity Issue
Debt/Borrowed Capital
Foreign direct Investment
Project Finance
Corporate Loan Market
Corporate Debt Market
Term loans & Working capital finance
External Commercial Borrowings
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Term loans and working capital finance
Fund based working capital services
Cash credit facility Working capital demand
loan Export packing credit /
Pre-shipment credit Packing credit & foreign
currency Short term loan MIBOR linked loans Commercial paper Invoice bill discounting
(Clean & LC backed) Foreign currency non
resident (bank) loan Buyers & suppliers credit Over draft
Securitization
Receivables (present and future)
Investment monetization Off balance sheet funding
Plain vanilla corporate loans
Structured finance
Long term loans
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Working Capital Finance Cash Credit (CC)
A running account facility extended against stock of inventory. The drawing limit fixed by applying security margin over value of the stock.
Working Capital Demand Loan (WCDL)Short term loan to finance WC needs and is repayable on demand. Unlike CC its not a running facility.
BillsUsed to finance trade transactions, is in the form of a negotiable instrument but can’t be payable on demand and bearer at the same time.
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Working Capital Finance
Commercial Paper(CP)Corporates with minimum P2 rating from CRISIL or
equivalent as per RBI.Liquidity only in P1+ paperUsance promissory note negotiable by endorsement and
deliveryCheaper source of funds than credit facilities.15 to 364 days tenor, issued at discount.
Foreign Currency Non-Resident (Banks) loans (FCNR-B)Drawn from funds maintained in foreign currency with
banks, freely repatriable.Cheaper cost than INR finance with pricing linked to
LIBOR
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Export Finance
Offered at concessional rates per directions of RBI to encourage exports
Pre shipment Finance
Extended to exporters on existence of an export order and/or irrevocable LC and liquidated from proceeds of the export bills
Packing credit
Evidence of export- Irrevocable LC, confirmed order with details from overseas buyer
Not to exceed the FOB value of goods, secured or unsecured
For a period of 180 days, further extendable by 90 days
Can be in INR or foreign currency
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Export Finance
Post shipment FinanceTo enhance exporters’ ability to offer credit and gain business in global trade markets.
Based on shipping documents evidencing exports or supply to designated agencies in case of deemed exports
Forms of finance Negotiation of documents under LC Purchase/Discount of bills under export orders Advance against bills on collection/consignment basis Advances against deemed export supplies
In INR or foreign currencyLiquidation from proceeds of exports through inward remittances, can be liquidated through domestic sources but attracts higher rates
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Leasing
Financial Lease not a popular method of financing in India due to taxation issues Depreciation benefit not available to Lessor Sales tax and service tax payable on lease rentals
However, operating lease can be used to converting Capex to Opex Companies not comfortable putting capital initially Use of vendor financing, hiring equipment and
premises on lease to convert Capex to Opex Entities willing to take assets on their books and
lease out the facilities With growing comfort can put the required capital.
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Financing Operation in India
Equity/Risk Capital
Public Equity Issue
Debt/Borrowed Capital
Foreign direct Investment
Project Finance
Term loans & Working capital finance
External Commercial Borrowings
Corporate Loan Market
Corporate Debt Market
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External Commercial Borrowings Commercial loans
Loans taken from banks /
financial institutions
Credit extended by supplier to the Indian importer
Financing arranged by
Indian importer
from offshore banks (LC
discounting)
Loans extended by
exports promotion
organizations in different countries
Loans from institutions such as IFC, ADB, World bank, etc.
Suppliers credit
Buyers credit
Loans from export credit agencies
Borrowings from Multilateral Financial Institutions
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External Commercial Borrowings
Maturity
Automatic approval
Eligibility
Interest rate ceilings
End use requirement
End use restriction
Key regulatory guidelines
All corporates registered
under Companies Act except financial
intermediaries
Automatic approval for raising ECBs upto US$ 500 million or for refinancing
existing ECBs
Minimum maturity of 3
years for loans < US$ 20 million
and 5 years for loans in
excess
‘All-in-cost’ ceiling of 6
mth LIBOR+200
bps for 3 to 5 yrs and
L+350 bps for >5 yrs.
For investment
in real-industrial
sector, SME, infrastructur
e and participation
in Divestment
process
Prohibition on on-
lending, investments
in stock market and real estate
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• Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them
• Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them
What is withholdin
g tax
What is withholdin
g tax
• Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower
• Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower
Why is it a deterrentWhy is it a deterrent
• Tax is paid @ 20% (as per Income Tax Act, 1961) or as per the DTA Agreement between India and the lender’s country
• No withholding tax on loans raised from overseas branch of Indian Banks
• Tax is paid @ 20% (as per Income Tax Act, 1961) or as per the DTA Agreement between India and the lender’s country
• No withholding tax on loans raised from overseas branch of Indian Banks
Economic impact
Economic impact
Withholding tax
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Case Studies
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Automobile Major
Project Finance Formed a JV with Indian company Equity infusion to the extent of its share in the
form of FDI Long term INR loans/NCDs from local financial
institutions backed by parent guarantee to get better rates
Working capital finance Packing credit in foreign currency Buyer’s credit-discounting of direct import bills
from group cos. Commercial papers
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Agri trading and processing major Project finance
Equity infusion from parent in the form of FDI Long term debt using global credit lines with global
bankers Plant and Machinery import on Buyers credit from
suppliers Working capital finance
FCNR (B) loans Short term MIBOR linked loans Buyer’s credit on import LCs
Indian company opens LCs with local bank in favor of group companies for sourcing of raw materials
Buyer’s credit is availed backed by these LCs from foreign banks (global bankers)
Thereby getting very cheap finance
38
Thank You