1PROJECT ON PRIVATE EQUITY, VENTURE CAPITAL, CREDIT RATING AGENCY, SEBI AND RBI

Presented by:Dharmil C. Gosalia PG-11-077Abhijit D. Shah PG-11-105

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Private Equity

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.

It is made by private equity firms, VC or angel investors.

Each of these categories of investor has its own set of goals, preferences and investment strategies; each however providing working capital to a target company to nurture expansion, new product development, or restructuring of the company’s operations, management, or ownership.

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Venture Capital (VC)

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies.

It happens after seed capital has been brought in and after which VC is dissolved.

It is subset of PE It is attractive for new companies with limited

operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering.

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Financial Stages in VC

Seed Money: Low level financing needed to prove a new idea, often provided by angel investors. Crowd funding is also emerging as an option for seed funding.

Start-up: Early stage firms that need funding for expenses associated with marketing and product development

First-Round (Series A round): Early sales and manufacturing funds

Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit

Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company

Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process

Between the first round and the fourth round, venture-backed companies may also seek to take venture debt.

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Factors influencing VC decision

Business situation: Some VCs tend to invest in new ideas, or fledgling companies.

Some invest solely in certain industries. Some prefer operating locally while others

will operate nationwide or even globally. VC expectations often vary. Some may want

a quicker public sale of the company or expect fast growth. The amount of help a VC provides can vary from one firm to the next.

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Credit Rating Agency (CRA)

A Credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves.

In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market,

A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.

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Uses of CRA

Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.

It helps investor to make wise decision and invest in good company only.

Eg. S&P (U.S.), Moody’s Investors Service (U.S.), Fitch Rating (U.S.), CRISIL (India), Dun and Bradstreet (U.S.) etc.

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SEBI and Role of SEBI

SEBI is regulator to control Indian capital market.

It is doing hard work for protecting the interests of Indian investors.

It provides advice to Government to open a new stock exchange in India.

Power to make rules for controlling stock exchange

To provide license to dealers and brokers To Stop fraud in Capital Market

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Contd…

To Control the Mergers , Acquisition and Takeover the companies

To educate the investors  To Control the Mergers, Acquisition

and Takeover the companies To audit the performance of stock

market

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Role of RBI (Monetary Policy)

The Reserve Bank of India (RBI) is the central banking institution of India and controls the monetary policy of the rupee as well as US $300.21 billion (2010).

CRR: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

Current CRR is 6%

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Contd…

SLR: Statutory liquidity ratio is the amount of liquid assets such as precious metals or other approved securities, that a financial institution must maintain as reserves other than the cash with the Central Bank.

Current SLR is 24% Repo Rate: Whenever the banks have any shortage of

funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive

Repo Rate is 8.50%

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Contd…

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. 

Reverse Repo Rate is 7.50%