Presentation on fund raising _part i

A Lowdown on Fund Raising

“Debt & Equity”

CA S.Vinod Kumar

VSK Management Solutions Pvt Ltd

Why Do Businesses Need Finance?

Businesses

need money

for…

For starting up Everyday bill payments

Expansion

Internal Growth

Take over bid

Replace

machinery/equipment


The purpose of Finance

“Different sources of finance have

different implications for a

business, so it is important that the

most appropriate method of

finance is chosen for the purpose

that the business has in mind”


Debt Finance

Fund Based

• Term Loans

• Rupee Term Loan

• ECB

• Working Capital Finance

• CC/ OD / WCDL

• Packing Credit

• Business Loan

• Factoring

• Commercial Paper

Non Fund Based

• Letter of Credit (LC) / Buyer’s Credit

• Bank Guarantee.


Banking norms – Role of Committees

Directives have stemmed from these groups

• Tandon committee.

• Daheija committee.

• Chore committee.

• Marathe committee.

Recommendations

• Norms of current asset.

• Maximum permissible bank finance.

• Emphasis on loan systems.

• Periodic information and reporting system.


Term Loan Facility

Project Report, along with other financial data, is required by Banks for funding a New Venture or major expansion / diversification of the existing unit.

Detailed Project Report (DPR) comprises of:

• Introduction of the firm

• Project viability analysis

• Manufacturing process

• Man-power requirement projections

• Requirement of plant and machinery and cost thereof

• Costing of the product and project

• Requirement of land and building and construction cost

• Capital investment requirement

• Term Loan and Working Capital requirement

• Profitability analysis

• Wages and salary structure

• 5 years of profitability analysis

• Depreciation chart for 5 years

• Loan amortization schedule during tenure of loan

• CMA Data report with Ratio Analysis

• Profit and Loss Account & balance sheets, as per banks requirements

• Any other data/report depending upon the nature of the project


Working Capital Facility

General consideration by bank

• Nature of business – service/trade/manufacturing.

• Seasonality of operations – peak/non peak

• Production cycle of the organization

• Market conditions- competition/credit terms

• Conditions of supply of RM/stores/spares etc.

• Quantum of production/Turnover(level of activity)

• Operating Cycle


Operating Cycle

It begins with acquisition of raw materials and ends with collection of receivables

• Raw materials (RM/RM consumption)

• Work-in-process (WIP/COP)

• Finished Goods (FG/COS)

• Receivables (Debtors/Credit sales)

• Less:

• Creditors (creditors/purchases)


Sector based Operating Cycle

Cash Cash Service

• Cash / Operating Expenses

• Receivables

Trade

• Receivables

• Stocks

Industry

• Raw Materials

• Semi Finished goods

• Finished goods

• Receivables


Present practice

Assessment of working capital requirement.

• Projected balance sheet method.

• Cash budget method

• Turnover method

Current ratio norm

• 1.33 is considered only as benchmark and banks do accept a lower current ratio

Adjusted Current Ratio

• (reduce export bills discounted from Bank Borrowings & Current Assets)

Total debt equity (TOL/TNW)

• (Maximum norm : 6)


Assessment Methods

Maximum permissible bank finance (MPBF)

• MPBF= 0.75(CA-CL)

• MPBF=0.75(CA)-CL

Cash budget system

• Estimation of cash inflow and outflow of business for specific time period

• Apply when borrower require credit facility more than 25 cr. (INR)

• MPBF method also apply

Turnover method

• Working capital limit is 20% of projected gross sale

• Projection will be made on the sale of previous period and demand of the products

• Under this method offices/ branches shall ensure to maintain 25% of the projected gross sale value is provided as working capital requirement

• Out of 25 % - bank will provide 20% and 5% promoter keep as margin with bank


Cash Budget

• Seasonal Industries

• (Sugar/Rice Mills/Textiles/Tea/Tobacco/Fertilizers)

• Contractors & Real Estate Developers

• Educational Institutions

Industry

• Cash receipts,

• Cash payments and

• Net cash balance

• over a period of time

Statement showing forecast of

• Peak deficit is financed and drawings regulated by monthly budgets

Financing


Prime Security

• Cash credit facility-hypothecation of paid stock or book debt of reputed company

• Bills drawn on or accepted by reputed company

Collateral security

• Securities or mortgage immovable property

• Bonds of reputed companies

• Shares of reputed companies

• Life insurance policy

• National saving certificate (NSC)

Insurance

• Securities like stock , vehicle, flat etc. should be properly insured as per bank clause

Present practice


Non Fund Based Limits

Letter of credit

• ILC/FLC

• Usance/Sight

Bank Guarantee

• Performance

• Financial – Bid Bonds/Security Deposits/

• Mobilisation advance/retention money

Deferred Payment Guarantee


Credit Rating

Definition

• A credit rating estimates the credit worthiness of an individual, corporation, or even a country.

• It is an evaluation made by credit bureaus of a borrower’s overall credit history.

• • Credit ratings are based on financial history and current assets and liabilities.

• Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.

• Commercial credit risk is the largest and most elementary risk faced by many banks and it is a major risk for many other kinds of financial institutions and corporations as well.


Credit Rating

Rating Process

• Issue of rating request letter by the issuer of the instrument

• Signing of the rating agreement.

• Meeting with Management- The analytical team obtains and analyses information relating to its financial statements, cash flow projections and other relevant information.

• Discussion on management philosophy, competitive position, financial policies and future plans.

• Review of financial projections based on objectives and growth plan , risks and opportunities.

• Rating committee- reviews the analysts report and decides on the rating.

• Assignment of rating

• Communicating the decision to the issuer, with reasons or rationale supporting the rating.

• Dissemination to the Public: Once the issuer accepts the rating, the CRAs disseminate it, along with the rationale, to the print media.


Credit Rating

Rating Scale

• AAA - (Highest Safety) Highest degree of safety regarding timely servicing of financial obligations.

• AA - (High Safety) High degree of safety

• A - (Adequate Safety) Adequate degree of safety

• BBB - (Moderate Safety) Moderate degree of safety

• BB - (Moderate Risk) Moderate risk of default

• B - (High Risk) High risk of default

• C - (Very High Risk) Very high risk of default

• D - (Default) Instruments with this rating are in default or are expected to be in default soon.

Bank needs to make capital provision based on the Credit rating of the client and hence better rating would involve lower cost for the bank and lower cost and relaxation of various norms for the client.


ECB

External Commercial Borrowings (ECBs) include bank

loans, suppliers' and buyers' credits, fixed and floating

rate bonds (without convertibility) and borrowings from

private sector windows of multilateral Financial

Institutions such as International Finance Corporation.

Euro-issues include Euro-convertible bonds and

GDRs.


ECB Usage

In India, External Commercial Borrowings are being

permitted by the Government for providing an

additional source of funds to Indian corporates and

PSUs for financing expansion of existing capacity and

as well as for fresh investment, to augment the

resources available domestically.

ECBs can be used for any purpose (rupee-related

expenditure as well as imports) except for investment

in stock market and speculation in real estate.


ECB are defined to include

commercial bank loans,

buyer’s credit,

supplier’s credit,

securitised instruments such as floating rate notes,

fixed rate bonds etc.,

credit from official export credit agencies,

commercial borrowings from the private sector window

of multilateral financial institutions such as IFC, ADB,

AFIC, CDC etc.

and Investment by Foreign Institutional Investors (FIIs)

in dedicated debt funds


ECB Regulations

Applicants are free to raise ECB from any

internationally recognised source like banks, export

credit agencies, suppliers of equipment, foreign

collaborations, foreign equity - holders, international

capital markets etc.

REGULATOR

The department of Economic Affairs, Ministry of

Finance, Government of India with support of Reserve

Bank of India, monitors and regulates Indian firms

access to global capital markets. From time to time,

they announce guidelines on policies and procedures

for ECB and Euro-issues.


ECB Guidelines

The important aspect of ECB policy is to provide

flexibility in borrowings by Indian corporates, at the

same time maintaining prudent limits for total external

borrowings. The guiding principles for ECB Policy are

to keep maturities long, costs low, and encourage

infrastructure and export sector financing which are

crucial for overall growth of the economy.

The ECB policy focuses on three aspects:

a. Eligibility criteria for accessing external markets.

b. The total volume of borrowings to be raised and

their maturity structure.

c. End use of the funds raised.


Mortgage Loans

Very Useful for clients with mismatch in current ratio

Requires freehold properties to avail the same

LTV is in the range of 50-65%

Interest rates are attractive and sometimes better

than working capital facility lending rates

Tenor ranges between period of 3 years to 12 years

Does not require yearly renewals

End use is generally not monitored


Lease Rental Discountiing

• Rentals spread over the agreement period is

discounted

• Acts similar to Mortgage loan with Rentals go towards

meeting the monthly loan commitments

• Good Tenant profile can be leveraged by the client

• Interest rates are attractive

• Does not require yearly renewals

• End use is generally not monitored


Business Loan

• Business should be in existence for more than 3 years

with upward trend in Sales and profitability

• Unsecured loans are offered based on client credentials

• Interest rates are higher than mortgage loans

• Tenor ranges from 12 months to 36 months

• End use is generally not monitored

• Process time is very quick (5-7 working days) and is

generally preferred in case of cash deficit by businesses


Packing Credit

Pre Shipment

• This facility is available to exporters for production of

goods against export orders

Post Shipment

• This facility is available to exporters to discount the

export receivables on completion of shipment

• The facility can be availed as Rupee Packing Credit

or Packing Credit in Foreign currency.


Incentive Scheme for Exporters

The Government has approved the Interest Equalisation Scheme for Pre and Post Shipment Rupee Export Credit with effect from 1st April, 2015 for 5 years.

2. The details of the Scheme are as follows:

• (a) The rate of interest equalisation @ 3% per annum will be available on Pre Shipment Rupee Export Credit and Post Shipment Rupee Export Credit.

• (b) The scheme would be applicable w.e.f 01.04.2015 for 5 years.

• (c) The scheme will be available to all exports under 416 tariff lines [at ITC (HS) code of 4 digit]as per Annexure A and exports made by MSMEs across all ITC(HS) codes.

• (d) Scheme would not be available to merchant exporters.


Thank You

CA S.Vinod Kumar

Director - VSK Management Solutions Pvt Ltd

7,Lettangs Road,Vepery,Chennai-7.

[email protected]

+91-98410-90109


mailto:[email protected]

Presentation on fund raising _part i

Economy & Finance

Transcript of Presentation on fund raising _part i