PRESENTATION ON RAISING FUNDS DOMESTIC AND … · SYNOPSIS Introduction Process of Fund raising Role of each of the players Regulatory Environment Instruments ... Mutual Funds Units

PRESENTATION ON RAISING FUNDS DOMESTIC AND GLOBAL SCENARIO

At

WIRC-ICAI

On

Saturday

04th February,2012

By

CA Pankaj Sanghavi, Director

Aarayaa Advisory Services Pvt .Ltd.

SYNOPSIS

Introduction

Process of Fund raising

Role of each of the players

Regulatory Environment

Instruments

Specialized Instruments

Cost structure

Risk assessment

Challenges faced by Corporates

Challenges faced by the SME

INTRODUCTION

Fund raising a peculiar activity can be associated with a country raising funds for its development projects or to Trusts raising donations.

Fund raising is a process where several stake owners play vital role apart from the actual investor and the investee.

Since this is a Banking Seminar we shall focus on Fund Raising through the banks .

PROCESS OF FUND RAISING

Identification of usage for productive purposes.

Appointment of appropriate Investment Bankers.

Feasibility study

Evaluation of various Instruments

Evaluation of regulatory framework

Evaluation of cost structure

Evaluation of Liquidity particularly for Foreign Currency

Approach the appropriate Lender

Appraisal by the Lender

Documentation

Credit Process Audit

Disbursement

Monitoring

IMPORTANT TERMS OF NEGOTIATIONS

Promoters Contribution and

Core promoters' Contribution

Security margin Primary & Collateral

Rates of Interest

Personal Guarantees of the Promoters

Processing and other Charges

ROLES OF EACH OF THE PLAYERS

The Parliament

Identification of priority sector like Agriculture

Writing off the Agriculture loans

The Government

Ministry of Finance frames the budget and highlights growth orientation of various sectors.

Interest subsidy is offered through Refinance i.e. Export/Agriculture/SME or through direct disbursement like in the state of Gujarat.

Capital subsidies

Deferment of Tax payments

Ministry of Company Affairs monitors Capital Structures and regulates borrowing powers of companies.

ROLE OF EACH OF THE PLAYERS(contd..)

Service Providers

Credit information agencies like CIBIL

Credit rating agencies like CIRISIL

Credit insurance and guarantee corporate agencies like ECGC

Assurance Providers like CA, CS, Lawyers, Valuers

Investment Bankers

Investment Advisors/Brokers

Asset Reconstruction Companies

Depository Participants

Trusteeship Companies

Asset Management Companies

Registrar and transfer agents

Public relations and advertising agencies

ROLES OF EACH OF THE PLAYERS(contd..)

Regulators

SEBI regulates fund raising activities from public

RBI regulates Banks and NBFC through regulations on aspects like

Risk Weightage for different sectors for capital adequacy

Priority sector identification

Liquidity management through CRR and OMO

Interest rate guidance through credit policies

PLR & Base rate Policies

Foreign currency availability

ECB norms

Asset quality guidance through NPA provisions

Export Refinance

ROLES OF EACH OF THE PLAYERS(contd..)

Media

Electronic Media like TV, Internet etc.

Print Media like Newspapers and Magazines.

Provide excellent channel of communications for all the otherplayers like lenders, borrower, regulator etc.

Creates awareness about investment decisions and related risks.

Creates platform for experts advice.

Creates a platform for comparison between various fund raisingoptions.

ROLE OF SOME GLOBAL PLAYERS(contd..)

Multilateral Investment Guarantee Agencies(MIGA)

It is a World Bank Group enterprise

Its basic role is to absorb the political risks of non criminal nature

Provides shelter for the Projects undertaken by Indian Companies in politically unstable countries

This shelter induces lenders to fund these projects

Aarti Steel Nigeria Ltd is one such Project funded by SBI has guarantee of USD 12.83 Million.

ROLE OF SOME GLOBAL PLAYERS(contd..)

The International Finance Corporation (IFC) is World Bank Group which provides loans, equity and technical assistance to stimulate private sector investment in developing countries.

Asian Development Bank ADB funds activities in various sectors or for specific themes through loans and grants, financed from ordinary capital resources as well as special and trust funds.

Asian Development Fund, the ADF offers loans at very low interest rates as well as grants to help reduce poverty in ADB's poorest borrowing countries

REGULATORY ENVIRONMENT

Government Guidelines like PPP Projects for Viability Gap

Funding

SEBI Act and Guidelines

RBI Guidelines

The Companies Act 1956

The Taxation Laws like Income Tax, Service Tax, Interest Tax

Each of the Players mentioned is regulated under one legal

frame work or the other.

INSTRUMENTS (DOMESTIC)

Equity Shares

Warrants

Preference Shares

Debentures and Bonds

Government Securities

Mutual Funds Units

Fixed Deposits - Banks

Company Fixed Deposits

Business Loans

Personal Loans

Patron/Membership Cards by societies

INSTRUMENTS (GLOBAL)

American Depository Receipts(ADR)

Global Depository Receipts(GDR)

Foreign Currency Convertible Bonds(FCCB)

Foreign Currency Term Loans

World Bank Project Finance

Development Bank Loans (Asian Development Bank)

REGULAR INSTRUMENTS

Secured Business Loans

Term Loans

Working Capital facilities

Term Loans for Project having larger gestation periods involve provision for convertibility in equity.

Corporate Loans for short term gap in net working capital margin.

Qualified Institutional Placement

Indian-listed company can raise capital from its domestic

markets without the need to submit any pre-issue filings tomarket regulators.

A measure to counter ADR/GDR

SPECIALIZED INSTRUMENTS

Securitization

o It Involves creation of mezzanine instrument to cover a collection of underlyingportfolio of loans for e.g.- A lender can be approached for placement of an instrumentrepresenting the entire portfolio of home loans granted by a Bank/NBFC to meet itsliquidity requirement at an agreed price. Better price can be negotiated by allowingcherry picking (i.e.:- carve out good and performing loans for securitization.

Direct Refinancing

o SIDBI and IDBI are the refinancing agencies for TUF(Technology UpgradationScheme) for Textile Sector

o NABARD (National Bank for Agriculture and Rural Development)o Export Finance is also refinanced by RBI.

Direct Lines of Credit

o The Export Import Bank of India operates several lines of credit for African countriesto boost Indian exports by providing coverage for political and credit risk.

PECULIARITIES OF EXPOSURE TO FOREIGN CURRENCY BOROWINGS

Foreign Currency is considered cheaper compared to Indian Rupee however the latest volatility has brought out several risk factors as follows:

Oscillating liquidity position resulting in non availability of foreign currency for even sanctioned and committed lending making INR borrowing compulsory even at a huge difference of over 7% for exporters with natural hedge.

Volatility in FX market reducing limits used in Foreign currency sanctioned with INR cap.

Non availability of PCFC requiring cost adjustments for exporters

Wait and watch policy of overseas customers for payments and orders creating overdues in FBP limits and lack orders resulting non availability of EPC.

Temptation to speculate

SPECIALIZED INSTRUMENTS (contd)

Buyers Credit

It is an import finance instrument whereby the usance period under the letter of creditis enhanced by roping in another banker for the elongated period.

Sellers Credit

It is extended by the EXIM Bank of the exporters country usually to boost export ofcapital goods to support project of longer gestation.

Packing Credit

It is extended exclusively to the exporters to procure and process raw material againstconfirmed order or letter of credit.

Foreign Bill Discounting

It is Exclusively extended to exporters to bridge the gap of credit given to foreignbuyer and the credit available from vendors.


Factoring

Specialized factoring agents provides bill purchase facilities based on credit insuranceobtained from the specialized credit insurance companies.

Forfeiting

Method of export trade financing, especially when dealing in capital goods (whichhave long payment periods) or with high risk countries.

In forfeiting, a bank advances cash to an exporter against invoices or promissorynotes guaranteed by the importer's bank.

The amount advanced is always 'without recourse' to the exporter, and is less than theinvoice or note amount as it is discounted by the bank. The discount rates depends on

the terms of the invoice/note and the level of the associated risk.

Letter of Credits

Letters of credit from a bank allows higher credit from the suppliers resulting inavailability of Working Capital at cheaper cost through the non fund based facilities


Advance Payment Bank Guarantees

Actual advance payment for import or local purchase can be replaced byadvance payment guarantees there by raising Working Capital at cheapercost through the non fund based facilities.

Channel Financing

It is cheaper option for Corporates to reduce interest cost of its suppliers byproviding assurance to the lenders who operates the same as bill discountingfacilities.

Acquisition Financing

A lender or an investor supporting the acquirer to acquire the company and/orits business and/or its assets.


Rent Discounting

A lender can discount rent receivable on a leased property to a credit worthy lessee.

Loan against shares

A lender provides loan against listed and liquid equity shares after leaving sufficientmargin for its distress sale value.

LEASE

CONCEPT OF LEASE FINANCING

Lease as a concept involves a contract whereby the ownership,financing and risk taking of any equipment or asset are separatedand shared by two or more parties.

The lessor may finance and lessee may accept the risk through theuse of it while a third party may own it.

Alternatively the lessor may finance and own it while the lesseeenjoys the use of it and bears the risk.

There are various combinations in which the above characteristicsare shared by the lessor and lessee.

TYPES OF LEASE AGREEMENTS

Lease agreements are basically of two types. They are (a) Financial lease and(b)Operating lease. The other variations in lease agreements are (c) Sale and leaseback (d) Leveraged leasing and (e) Direct leasing.

LEASE

FINANCIAL LEASE

Long-term, non-cancellable lease contracts are known as financialleases.

The essential point of financial lease agreement is that it contains acondition whereby the lessor agrees to transfer the title for the assetat the end of the lease period at a nominal cost.

The lease agreement is irrevocable. Practically all the risksincidental to the asset ownership and all the benefits arising therefrom are transferred to the lessee who bears the cost ofmaintenance, insurance and repairs.

Only title deeds remain with the lessor.

Financial lease is also known as capital lease. In India, financialleases are very popular with high-cost and high technologyequipment.

LEASE (CONTD..)

OPERATING LEASE

An operating lease stands in contrast to the financial lease in almostall aspects. This lease agreement gives to the lessee only a limitedright to use the asset. The lessor is responsible for the upkeep andmaintenance of the asset.

The lessee is not given any uplift to purchase the asset at the end ofthe lease period.

Normally the lease is for a short period and even otherwise isrevocable at a short notice.

Mines, Computers hardware, trucks and automobiles are foundsuitable for operating lease because the rate of obsolescence is veryhigh in this kind of assets.

LEASE (CONTD..)

SALE AND LEASE BACK

It is a sub-part of finance lease.

Under this, the owner of an asset sells the asset to a party (thebuyer), who in turn leases back the same asset to the owner inconsideration of lease rentals.

However, under this arrangement, the assets are notphysically exchanged but it all happens in records only.

SALE & LEASE BACK

Under this transaction, the seller assumes the role of a lessee and thebuyer assumes the role of a lessor. The seller gets the agreed selling priceand the buyer gets the lease rentals. It is possible to structure the sale atagreed value (below or above the fair market price) and to adjustdifference in the lease rentals. Thus the effect of profit/loss on sale ofassets can be deferred.

LEASE (CONTD..)

LEVERAGED LEASING

Under leveraged leasing arrangement, a third party is involved beside lessor and lessee.The lessor borrows a part of the purchase cost (say 80%) of the asset from the third partyi.e., lender and the asset so purchased is held as security against the loan.

The lender is paid off from the lease rentals directly by the lessee and the surplus aftermeeting the claims of the lender goes to the lessor.

The lessor, the owner of the asset is entitled to depreciation allowance associated withthe asset

LEASE (CONTD..)

DIRECT LEASING

Under direct leasing, a firm acquires the right to use an asset fromthe manufacturer directly.

The ownership of the asset leased out remains with the manufactureritself.

The major types of direct lessor include manufacturers, financecompanies, independent lease companies, special purpose leasingcompanies etc

HIRE PURCHASE

Hire purchase is a type of installment credit under which the hire purchaser,called the hirer, agrees to take the goods on hire at a stated rental, which isinclusive of the repayment of principal as well as interest, with an option topurchase.

Under this transaction, the hire purchaser acquires the property (goods)immediately on signing the hire purchase agreement but the ownership or titleof the same is transferred only when the last installment is paid.

The hire purchase system is regulated by the Hire Purchase Act 1972.

This Act defines a hire purchase as an agreement under which goods are leton hire and under which the hirer has an option to purchase them inaccordance with the terms of the agreement .

Hire purchase should be distinguished from installment sale wherein propertypasses to the purchaser with the payment of the first installment.

But in case of HP (ownership remains with the seller until the last installment ispaid) buyer gets ownership after paying the last installment. HP also differsfrom leasing.

DIFFERENCE BETWEEN LEASE FINANCINGAND HIRE PURCHASE

PERSONAL LOANS

HOME LOANS

CAR LOANS

LOANS AGAINST PROPERTY

LOANS AGAINST GOLD

LOANS AGAINST CONSUMER DURABLES

UNSECURED PERSONAL LOANS

LOANS AGAINST CREDIT CARDS

COST STRUCTURE

The cost of raising funds mainly depends on

the type of instrument

time for raising the same.

Credit worthiness of the borrower.

The cost encompass the following

One Time Cost

Preparation of project report or feasibility study

Merchant Bankers fees

Printers charges

Logistics cost

Fees of various service providers like Bankers, Registrar, PR agenciesand Assurance Providers

Brokerage and Commission

Stamp duty on security documents

Banks processing fees

Investment Bankers Indication fees

COST STRUCTURE (contd)

Recurring Cost

Interest

Commitment charges

LC opening charges

Bank guarantee commission

Hedging cost

Foreign Currency Remittance Costs

RISK ASSESSMENT AND MITIGATION

The cost of raising funds is directly related to the risks perceived by thelender or the investors.

Accordingly risk assessment and its mitigation can result in substantialsaving in cost of raising funds.

The following are the major risks which determine cost of funds

Country risk

Political risk

Regulatory risk

Industry risk

Performance risk

Credit risk

RISK ASSESSMENT AND MITIGATION (contd)

Country Risk

Country with stable democracy, rich resources, favorable demography and potentialgrowth is considered better investment avenue as compared to dictatorship, monarchyetc.

Political Risk

Political stability with clear mandate under democratic environment is consideredfavorable investment avenue as compared to unstable government without a clearmajority.

Regulatory Risk

Political will to bring about reforms in terms of repatriation benefits, avoidance ofdouble taxation, sectoral limits for higher foreign direct investment are consideredbetter regulatory frame work.

RISK ASSESSMENT AND MITIGATION (contd)

Industry Risk/Sector risk Each Industry has its own cycle of growth and recession. The sector passing growth

phase is less riskier compared to an industrial sector for e.g. Real estate and sharebroking business is considered riskier as compared to education and healthcaresector.

Performance Risk Availability of factors of production like materials, machine, men and management

(4Ms). Successful track record of growth in turnover, profitability, net worth for a longrun is a mitigating factor.

Credit Risk Businesses which have to be heavily dependant on customer demanding larger credit

period. Size of the customer and its credit worthiness for realization of unpaid bills is a credit

risk. Improved KYC norms, constant monitoring of credit limits and upto date credit

information are the mitigating factors for the credit risk further creditors can be passedon specialized credit insurance companies.

CHALLENGES FACED BY CORPORATES

The Corporate under following sectors are facing challenges

Aviation Industry

Multi Brand Retail Trade

Real estate & related Ancillaries like Ceramic Tiles, EPC Providers.

Share Broking Services

NBFC

Diamonds

Micro Finance

Import Dependent Industries for its Raw materials like

Crude, Precious Metals users

CHALLENGES FACED BY CORPORATES FCCB REDEMPTION

Large FCCB redemptions in 2012:

Between 2005 and 2010, Indian companies issued FCCBs of US$23bn of which

US$7.8bn (at redemption value) worth of FCCBs mature in 2012. With stock prices

depressed, a large majority of the issues would need to be redeemed, and refinancedby domestic expensive debt in most cases, creating refinancing risk as well asimpacting profitability.

Pledging of promoter holdings an added risk:

While in aggregate, promoter share pledges remain low and have not

increased in the recent quarter, they are concentrated in a few

sectors and represent non-business risk for stocks where promoter

shareholding is large (22 stocks out of BSE500 with more than 75%

promoter shareholding pledged as of Sept).


An FCCB is basically like this:

You give me dollars I give you bonds that have a coupon interest rate,which I dont pay you, it accumulates over the period.

At the end or anywhere in between you can convert some or all of yourbonds, with accrued interest, into equity shares at a predefinedconversion price.

If you dont convert, I pay you back the principal plus interest, in dollars.

Most offerings had conversion prices at a premium to the thenmarket price, assuming, as investors do, that stocks only go up in thelong term. Interest rates, or coupons, were at zero percent orextremely low figures of 1-2% .

The typical term of an FCCB was five to seven years.


India went gung-ho on FCCBs in the 2004-07 timeframe, whenstocks went nuts. This is now reaching redemption zone, and hurting.

More than 50,000 cr. worth FCCBs are nearing maturity soon, and ofthis the next two years will see between 35,000 and 40,000 cr. worthof bonds maturing.

Conversion prices are far above current market prices, so thecompanies have to pay investors back.


What can companies do?

Their choices are:

Borrow in dollars, through more FCCBs, to pay back current investors: That willprobably take a leap of faith because investors have been burnt badly. Conversionprices will be required to be much lower, meaning more dilution for existingshareholders. Coupon rates will also need to be higher.

Change the conversion price of the bonds to near market prices. Considering thatsome issues have conversion prices 90% below conversion prices, a drop to marketprice will mean 10x the dilution of the share. e.g. S Ltd has to pay $131 million orconvert at a price of 646 in one tranche the stock price is at Rs. 40 today. (Additionallylowering conversion prices may need RBI approval, or breach FDI limits)

Repay through cash or selling assets. ET says some can like JP Associates, FT,L&T or Moser Baer.

Raise cash through equity offers: Companies can use rights issues, an FPO or aprivate placement. Given the situation in the market, these options look bleak.

Default. This is the least preferred option but its what companies will have to do if they

cant do any of the above steps. If a default occurs, the lenders will take the company tocourt, and most likely require it to be wound up and assets sold to recover their money.Importantly, this will hurt all other lenders even domestic banks that have lent money as such an action will prompt them to have to restructure or write-off their loans as well.


The problem is compounded by

The Rupee Fall

When the FCCBs were taken, the rupee was at values of Rs. 40-44. Today, the rupee isat Rs. 50 to a dollar. That means to buy the same number of dollars and pay back,companies need to pay 20% more! This is apart from the coupon interest; and given thatif they try to pay back the FCCBs, they will end up flooding the market with buy orders,the rupee will fall even more.

This rupee fall hurts conversion as well. Consider an FCCB issue with the dollar at 44,and a conversion price of Rs. 440. That means one share = $10 worth. Today, even if thestock stays at Rs.440, it will be worth just $8.46 a loss of 15%. To break even, the stockneeds to be at least Rs. 520.

This hurts more when companies borrowed to deploy money in India if they used thefunds abroad, the return on those funds would also be in dollars so the impact is lesser.


CHALLEGES FACED BY SME SECTOR

It is observed that the NPA ratio in SME sector is normally lower than that of the Corporate Sector. Hence it is safer to lend to SME.

Most of the banks have identified SME as their growth driver and have created specialized branches.

However several challenges are faced by SME while raising funds.

CHALLEGES FACED BY SME SECTOR (contd..)

Lenders comfort is limited due to

Lack of delegation and team work

Lack of proper Accounting & Reporting Systems

Lack of Qualified staff

Large number related parties Transactions

Substantial orientation towards tax savings

Lower capital base

Lower level of financial discipline

Lack of succession planning

Risk of diversion of funds

Difficult to assess requirements due to lower level of information.

SME Sector faces severe challenges at each stage of its fund raising programme as follows:

Non availability of talented and professional team due to limited growth opportunities and lack of delegation.

Lack of time or inclination for knowledge about various financial parameters affecting credit rating

Lack of time or inclination for knowledge for evaluation of fund raising options.

Lack of proper planning resulting in panicked attempts and huge costs

Focus on short term gains at the cost of loosing huge long term benefits.

Averse to paper work

CHALLEGES FACED BY SME SECTOR (contd..)

CHALLENGES FACED BY SPECIFIC SECTORS

SCHOOLS & HOSPITALS

Perceived as Real Estate due to Land acquisition

Forced recovery is perceived to be difficult due to social angle.

Considered as non profit making activities

Norms of normal Term loans like promoters margin etc have to be fulfilled.

Issues on Collateral security availability.

Promoters are perceived to have Political background

PROJECTS PROMOTING SPORTS INFRASTRUCTURE

Perceived as Real Estate project

Viability Gap Funding only under PPP projects

No subsidies

Not covered under Infrastructure Projects for softer terms


SOFTWARE FIRMS & MEDIA COMPANIES IN SME

Lower asset base

Lease finance on most of the assets

Enforceability of IPR or the contents by lenders

High credit risk of the customers


FUND RAISERS ARE ALWAYS VIEWED WITH

GREATER RESPECT DUE TO THE CHALLENGES

OVERCOME BY THEM IN A TIMELY MANNER WITHIN COST CONSTRAINTS .

THANK YOU

Documents

PRESENTATION ON RAISING FUNDS DOMESTIC AND … · SYNOPSIS Introduction Process of Fund raising Role of each of the players Regulatory Environment Instruments ... Mutual Funds Units