This document discusses various topics related to corporate finance in India, including: 1. It provides an overview of the Indian capital market, sources of corporate financing, and the role of regulatory bodies like SEBI. 2. It describes different financial instruments like equity shares, debentures, preference shares, and hybrid securities. It also discusses debt financing through term loans. 3. It explains key components of the Indian financial system including financial markets, intermediaries, and various types of markets like money market and capital market.

1. Prepared and Presented by,
N. Ganesha Pandian
MSM-MBA CF 2019
Reference:
1. Financial
Management –
MY Khan and PK
Jain
2. Corporate
Finance –
Richard A
Brealey,
Stewarts C
Myers, Franklin
Allen, Pitabas
Mohanty
1

2.  Indian Capital market
 Basic problem of Industrial Finance in India
 Equity and Debenture financing
 Guidelines from SEBI
 Advantages and disadvantages and cost of various sources
of finance
 Finance from international sources
 Financing of exports
 Role of EXIM and commercial bank
 Finance for rehabilitation of sick units
MSM-MBA CF 2019 2

3.  Financial system – complex of institutions and
mechanisms which affects generation of savings
and their transfer to those who invest
 Capital market – subpart of financial system
 Elements of Financial system -
1. Financial Instruments/assets/securities
2. Financial Intermediaries
3. Financial markets
MSM-MBA CF 2019 3

4.  Claim against which store of value and for
that return is expected
 Types of financial assets:
1. Debt such as bonds, debentures and term
loans
2. Equity shares
3. Hybrid security (preference shares and
convertibles
MSM-MBA CF 2019 4

5.  Institutions that channelize the savings of
investors into investments
 Convert direct financial assets into indirect
securities
MSM-MBA CF 2019 5

6.  Performs a crucial function in the financial
system as facilitating organization
 Suppliers of funds and demanders of
loan/investments can transact business directly
MSM-MBA CF 2019
Financial Markets
Money Market
(short term)
Capital Market
(Long term)
6

7. Money market:
 Created by financial relationship between
suppliers and demanders of short term funds
having maturities of one or less
Capital Market/securities market:
 Financial relationship created by an
institutions allows suppliers and demanders
of long term funds with maturities exceeding
one year to make transactions
MSM-MBA CF 2019 7

8. MSM-MBA CF 2019
Capital Market
New issue/ Primary
market/ IPO Market
Stock/ Securities
market
8

9. 1. Connection between savings and
investment
2. Market place
3. Continuous price formation
MSM-MBA CF 2019 9

10.  The main function of new issue market is to facilitate
the transfer of resources from savers to
entrepreneurs seeking to establish new enterprise or
to expand/ diversify existing ones
1. Origination: refers to the work of investigation and
analysis and process of new proposals
2. Underwriting: form of guarantee that the new
issue would be sold by eliminating the risk arising
from uncertainty of public response
MSM-MBA CF 2019 10

11. 3. Distribution: is the sale of securities to the
ultimate investors
4. Issue Mechanism:
i. Public issue through prospectus
ii. Tender/book building
iii. Offer for sale
iv. Placement
v. Right Issue
MSM-MBA CF 2019 11

12. 1. Public issue: are securities that are offered to the
general public directly at a stated price
2. Book building: is a price discovery and investors
response mechanism
3. Offer for sale: is the sale of existing shares by
promoters to the investing public
4. Placement method: sale by an issue house or
broker to their own clients of securities which have
been previously purchased/ subscribed
5. Rights issue: is the sale of securities to the existing
shareholders
MSM-MBA CF 2019 12

13.  Stock exchange – important constituent of
capital market
 It is organized market for purchase and sale
of industrial and financial security as per
well defined rules and regulations
 Indian stock market – oldest and robust
market in Asia. (BSE – Bombay Stock
Exchange)
MSM-MBA CF 2019 13

14.  Established in 1875, 141 years of existence in
securities transaction business
 Facilitated the growth of Indian corporate sector
by providing efficient capital raising platform.
 Host services like risk management, clearing,
settlement, market data services and education
 Vision of BSE - “Emerge as the premier Indian
stock exchange with best in practice in
technology, product innovation and customer
service”
MSM-MBA CF 2019 14

15.  Located in Mumbai. Fourth largest stock exchange in
the world according to “World Federation of
Exchange” (WFE) in terms of equity trading volume in
2015
 Began operations in 1994, 25 years of existence stood
for reliability, expertise, innovation and trust along
with changing technology and Indian Economy
 Vision of NSE – “to continue to be a leader, establish
global presence, facilitate the financial well-being of
people”
MSM-MBA CF 2019 15

16.  India’ first listed commodity exchange, a state of
art commodity derivative exchange
 Facilitates online trading and clearing and
settlement of commodity derivatives
transactions, thereby providing platform for risk
management
 Operation started in November 2003 in Mumbai
MSM-MBA CF 2019 16

17. Some of other stock exchanges in India viz.,
1. National Commodity and derivative
exchange (NCDEX)
2. Calcutta stock exchange (CSE)
3. Madras Stock exchange
4. Bangalore stock exchange
5. Cochin stock exchange
And so on….
MSM-MBA CF 2019 17

18.  SEBI was established in April 12, 1992 with
the provision of SEBI act 1992.
Pre-amble:
“To protect the interests of investors in
securities and to promote the development
of, and to regulate the securities market and
for matters concerned therewith or
incidental thereto”.
MSM-MBA CF 2019 18

19. Functions of SEBI:
1. Regulating the business in stock exchanges and any other
securities market.
2. Registering and regulating the working of stock brokers, share
transfer, agents, bankers to issue, trustees to trust deeds,
registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisers, and such other intermediaries
who may be associated with securities market in any manner.
3. Registering and regulating the working of the depositories,
custodians, intermediaries as the board, may, by notification,
specify in this behalf.
MSM-MBA CF 2019
Contd..
19

20. 4. Promoting and regulating self regulatory organizations
5. Prohibiting fraudulent and unfair trade practices relating to
securities markets
6. Promoting investors’ education and training of intermediaries of
securities markets
7. Prohibiting insider trading in securities
8. Regulating substantial acquisition of shares and take over of
companies
9. Calling for information, undertaking inspection and audit
10. Performing such functions and exercising such power under the
provisions of SEBI act.
11. Levying fee or other charges for carrying out the purposes
12. Conduct research for the above process.
MSM-MBA CF 2019 20

21. 1. Suspend the trading of any security in a recognized stock
exchange
2. Restrain any persons from accessing the securities market and
prohibit any person with securities market to buy, sell or deal in
securities
3. Suspend any office bearer of any stock exchange or self
regulatory organization from holding such position.
4. Impound and retain the proceeds or securities in respect of any
transaction which is under inspection
5. Direct any intermediary or any person associated with the
securities market in any manner not to dispose of or alienate an
asset forming part of any transaction, which is under
investigation
MSM-MBA CF 2019 21

22.  Corporations invest in long term assets (property,
plant and equipment) and in working capital
(short term).
 Many research data shows that Indian
corporations use the cash generated internally
rather than equity or debt financing
 Cash flow (internal source) -> depreciation and
retained earnings(not paid to shareholders)
MSM-MBA CF 2019
Contd…
22

23.  Not only Indian companies relying on
internally generated cash, 2/3 of the
corporate financing in U.S, German, Japan
and U.K come from internally generated
cash.
 So any corporations need strong payout policy
and a debt policy for corporate financing
needs.
 Shareholders –ready to put back fund into
business -> to maximize shareholders’ value
MSM-MBA CF 2019 23

24.  Long term finance represents ownership over
capital securities and its owners equity
shareholders
 The first issue of equity shares to the public
by an unlisted company is called IPO (Initial
Public Offering)
 Subsequent offerings are called further
issues/offerings
MSM-MBA CF 2019 24

25.  Maximum amount which a company can raise from
the ordinary share holders and can be changed in the
prescribed manner called Authorized equity/share
capital
 The portion of authorized capital issued by the
company to the investors are called Issued Capital
 The part of the issued capital which has been
accepted/subscribed by the investors Subscribed
capital
 The actual amount paid by the investor called Paid up
capital
MSM-MBA CF 2019
Contd…
25

26.  The issued, subscribed and paid up capital
are same in most of the cases
Par value – value arbitrarily placed on the
shares
Book value – Paid up capital plus surplus or
reserve
Market value – the price at which equity shares
are traded in the stock market
MSM-MBA CF 2019 26

27. 1. Permanent source of fund without the
repayment liability
2. It does not involve obligatory dividend payment
3. It forms the basis for further long term
financing such as borrowing – credit worthiness
of the firm
4. The shareholders with limited liability exercise
control and share other ownership rights in the
income of firm
MSM-MBA CF 2019 27

28. 1. High cost of funds – high rate of return of investors
as compensation
2. Equity funds are non tax deductible
3. High floatation cost, in terms of underwriting,
brokerage and other expenses
4. Dilution of control of existing shareholders by
issuing new shares
5. There is a wide fluctuation in payment of dividend
due to cash flow and also robust payout policy need
to be framed
MSM-MBA CF 2019 28

29.  Corporate enterprises raise long term funds from
creditors in the form of term loans, debentures,
bonds and so on…
1. Term loans:
- also termed as project finance
- It is a loan made by a bank/financial institution to a
business having an initial maturity of more than one
year.
- Financial institutions provide project finance for new
projects also for expansion/diversification and
modernization
MSM-MBA CF 2019 29

30. 1. Negotiated – the term loans are negotiated loans between the
borrowers and the lenders
2. Maturity – period term loans typically 6-10 years range provided
by financial institutions
3. Secured loan – loan that has specific assets pledged as collateral
4. Covenants – are contractual clauses in loan agreements that
place certain constraints on borrower’s operating and financial
process
5. Repayment schedule – the term loans have to be amortized
according to pre determined schedule. The payment has 2 terms
1. Interest 2. Repayment of principal
MSM-MBA CF 2019 30

31. It is a debt instrument indicating
that a company has borrowed
certain sum of money and promises
to repay it in future under clearly
defined terms
MSM-MBA CF 2019 31

32.  Debentures have some contrasting features compared to equities
1. Trust indenture: when a debenture is sold to investing public, a trustee
is appointed through an indenture or trust deed.
- A complex and lengthy legal documents stating the conditions under
which a bond has been issued
2. Interest: the debentures carry a fixed (coupon) rate of interest, the
payment of which is legally binding/enforceable
- the debenture interest is tax deductible and is payable annually/half
yearly/quartely
3. Maturity: maturity period or redemption for non convertible
debentures is typically 7-10 yrs
- redemption accomplished in two ways 1. DRR (Debenture redemption
reserve) 2. Call and put provision
MSM-MBA CF 2019 32
Contd…

33. 4. Debenture redemption reserve: DRR – created for the redemption of
all debentures with a maturity period exceeding 18 months to at
least 50% amount of redemption before commencement
5. Call and put provisions: the call or put provision provides an option
to the issuing company to redeem the debentures at a specified
price before maturity
6. Security: debentures are generally secured by a charge on the
present and future immovable assets of the company by the way of
equitable mortgage
7. Convertibility: Apart from non-convertible debentures (NCD),
debentures can be converted into equity shares at the option of the
debenture holders
- the conversion ratio and the period during which conversion can be
affected are specified at the time of issue of the debenture itself.
MSM-MBA CF 2019 33
Contd…

34. 8. Credit rating: the timely payment of
interest and redemption of principal by a
borrower ensured with help of credit
rating agencies such as CRISIL, ICRA, CARE
and FITCH India
9. Claim on Assets and Income: the payment
of interest and repayment of principal is a
contractual obligation enforceable by law
MSM-MBA CF 2019 34

35. 1. Zero Interest bonds/debentures (ZIB): also
known as Zero coupon bonds/debentures, ZIB’s
do not carry any explicit or coupon rate of
interest
2. Deep Discount bond (DBB): DDB is a form of
ZIB. It is issued at a deep/steep discount over
its face value
- it implies that the interest (coupon) rate is
far less than that the yield to Maturity (YTM)
MSM-MBA CF 2019 35
Contd…

36. 3. Secured premium notes (SPN’s): the SPN is a
secured debenture redeemable at a premium
over the face value/purchase price. It
resembles a ZIB
4. Floating rate bonds (FRBs): the interest on
such bonds is not fixed. It is floating and linked
to a benchmark rate such as interest on
treasury bills, bank rate, maximum rate on
term deposits
- It is typically a certain percentage point
higher than the bench mark rate
MSM-MBA CF 2019 36

37.  Hybrid source of financing has characteristics
of straight debt and straight equity falling in
between
Sources of Financing (Hybrid Instruments)
1. Preference share/capital
2. Convertible/exchangeable/bonds
3. Warrants
4. Options
MSM-MBA CF 2019 37

38.  Preference capital – a unique type of long
term financing which it combines some of
the features of equity as well as debentures
1. It carries a fixed/stated rate of dividend
2. It ranks higher than equity as a claimant to
the income/assets
3. It normally does not have voting rights
4. It does not have a share in residual
earnings/assets
MSM-MBA CF 2019 38

39. 1. Prior claim on income or assets: it has a prior
claim/preference over equity capital both on
income and assets of company
2. Cumulative dividend: Preference capital is
cumulative in the sense, that all unpaid dividends
are carried forward and paid in full
3. Redeem ability: preference capital has a limited
life / specified maturity after which it must be
retired
- however there is no serious penalties for breach
of redemption stipulation
MSM-MBA CF 2019 39
Contd…

40. Fixed dividend: preference dividend is fixed and is
expressed as a percentage of par value.
- Yet it is not a legal obligation and failure to pay will
not force bankruptcy
Convertibility: Preference share capital may sometimes
be convertible partly/fully into equity shares or
debentures at certain ratio during a specified period
Voting rights: preferential share capital does not carry
voting rights
Participation: may participate in surplus profits after
the payment of interest and other claims
MSM-MBA CF 2019 40

41. For company:
1. lower cost due to lower risk and tax
deductibility for interest payment
2. No dilution of control – debentures do not
carry voting rights
For investors:
1. It offers stable return, have a fixed maturity,
are protected by the debenture deed
2. They enjoy preferential claim on income
MSM-MBA CF 2019 41

42.  For company:
1. Restrictive covenants in the trust deed
2. legally enforceable schedule in respect of payment
of interests and repayment
3. Increased financial risk
4. Associated high cost of equity
 For Investors:
1. the debenture holders have no voting rights
2. debenture prices are vulnerable to charges in
interest rates
MSM-MBA CF 2019 42

43.  For investors:
1. stable dividend
2. the exemption to corporate investors on preference
income
 For Issuing company:
1. No legal obligation to pay preference dividend
2. Redemption can be delayed without significant
penalties
3. It proves the credit worthiness/borrowing capacity
4. No dilution of control
MSM-MBA CF 2019 43

44.  Vulnerability to arbitrary managerial action
as they cannot enforce their right to dividend
to right to payment in case of redemption
 Modest dividend in the context of the
associated risk
For company:
1. It is expensive source of finance
2. Non tax deductibility of preference shares
MSM-MBA CF 2019 44

45. 1. Convertible debentures/bonds:
- give the holders the right to change the equity
shares into debentures in stated numbers
2. Warrants:
- is an instrument that gives its holders the right
to purchase a certain number of shares at a specified
price over a certain period of time
3. Options:
- is an instrument that provides its holders with
the opportunity to purchase/sell a specified asset at a
stated price on or before set expiration date
MSM-MBA CF 2019 45

46. MSM-MBA CF 2019 46

47.  The provisions of these rules shall apply to –
a) All unlisted public companies
b) All private companies
c) Listed companies
So far as they do not conflict or contradict
with any other provision framed in this
regard by SEBI
MSM-MBA CF 2019 47

48.  No company limited by shares shall issue equity shares
with differential rights as to dividend, voting or
otherwise, unless it complies with the following
conditions; namely
1. The articles of association of the company authorizes
the issue of shares with differential rights;
2. The issue of shares is authorized by an ordinary
resolution passed at a general meeting of the
shareholders
3. The shares with differential rights shall not exceed
26% of total post paid up equity shares with
differential rights issue
MSM-MBA CF 2019 48
Contd…

49. 4. The company having consistent track record of
distributable profits for last 3 years
5. The company has not defaulted in filing financial
statements and annual returns for 3 years
immediately preceding financial year which it
decided to issue such shares
6. The company having no subsisting default in the
payment of a declared dividend to its shareholders or
repayment of its matured deposits or redemption of
its preference shares or debentures that have
become due for redemption or payment of interest
on such deposits or debentures or payment of
dividend
MSM-MBA CF 2019 49
Contd…

50. 7. The company has not defaulted in payment of the dividend
on preference shares or repayment of any term loan from
a public financial institution or state level financial
institution or scheduled bank that has become repayable
or interest repayable thereon or dues with respect to
statutory payments relating to its employees to any
authority or default in crediting the amount in investor
education and protection fund to the central government
8. The company has not been penalized by court or tribunal
during the last three years of any offence under the RBI
act 1934; the SEBI act 1992; SCRA act 1956; the foreign
exchange management act 1999 or any other special act,
under such companies being regulated by sectoral
regulators
MSM-MBA CF 2019 50
Contd…

51.  The Board of directors shall, disclose in the board’s report for
the financial year in which the issue of equity shares with
differential rights was completed, the following details,
namely –
1. The total number of shares allotted with differential right;
2. The details of the differential rights relating to voting rights
and dividends;
3. The percentage of the shares with differential rights to the
total post issue equity capital with differential rights issued at
any point of time and percentage of voting rights which the
equity share capital with differential voting rights shall carry
to the total voting right of the aggregate equity share capital
4. The piece at which such shares have been issued;
MSM-MBA CF 2019 51
Contd…

52. 5. The particulars of promoters, directors or key
managerial personnel to whom such share are
issued.
6. The change in control, if any, in the company,
consequent to the issue shares with differential
voting rights;
7. The diluted EPS(Earnings per share) pursuant to
the issue of each class of shares, calculated in
accordance with the applicable accounting
standards
8. The pre and post issue share holding pattern
along with voting rights in the format specified
MSM-MBA CF 2019 52

53.  The company shall not issue secured debentures, unless it
complies with the following conditions, namely: -
1. An issue of secured debentures may be made, provided the date
of its redemption shall not exceed 10 years from the date of issue
2. Properties or assets of the company or its subsidiaries or its
holding company or its associates companies having a value which
is sufficient for the due repayment of the amount of the interests
3. The company shall appoint a debenture trustee before the issue
of prospectus or letter of offer for subscription of its debentures
and not later than 60 days after the allotment of the debentures,
execute a debenture trust deed to protect the interest of the
debenture holders
MSM-MBA CF 2019 53
Contd…

54. 4. The security for the debentures by way of a charge or mortgage
shall be created in favor of the debenture trustee on any
specified movable or immovable property of the company
II. The company shall appoint debenture trustees under subsection
(5) of sec 71, after complying the following conditions namely –
1. The names of debenture trustees shall be stated in letter of
offer inviting subscription for debentures and also in all the
subsequent notices or other communications sent to the
debenture holders
2. Before the appointment of debenture trustee or trustees, a
written consent shall be, obtained from such debenture trustee
or trustees proposed to be appointed and a statement to that
effect shall appear in the letter of offer issued for inviting
subscription of the debentures
MSM-MBA CF 2019 54
Contd…

55. 3. A person shall not be appointed as a debenture trustee if he –
a. beneficially holds shares in the company
b. is a promoter, director or key managerial personnel or any other
officer or an employee of the company or its holding, subsidiary or
associate company
c. is beneficially entitled to money which are to be paid by the
company otherwise than as remuneration payable to the debenture
trustee
d. is indebted to company, or its subsidiary or its holding or
associate company or a subsidiary of such holding company
4. The board may fill any casual vacancy in the office of trustee
5. Any debenture trustee may be removed from office before the
expiry of term only if it is approved by debenture holders.
MSM-MBA CF 2019 55
Contd…

56.  Sources of finance may be classified on the basis of
time as
1. Long term source of finance
2. Medium term source of finance
3. Short term source of finance
 Classification on the basis of ownership and control
1. Own fund
2. Borrowed fund
 Classification on the basis of source of generation
1. Internal source
2. External source
MSM-MBA CF 2019 56

57.  Means capital requirements for the period of more than 5 years to 10, 15, 10 or
may be more.
 Capital expenditures in fixed assets like plant and machinery, land and building
and etc.,
 Long term financing sources can be in the form of
1. Share capital/equity shares
2. Preference capital or preference shares
3. Retained earnings or internal accruals
4. Debentures/bonds
5. Term loans from financial institutions, government and commercial banks
6. Venture funding
7. Asset securitization
8. International financing – Euro issue, Foreign currency loans, GDR and ADR and
etc.,
MSM-MBA CF 2019 57

58.  Financing for a period of 3-5 years and is used
for long term capital or revenue expenditure
Sources of finance can be in the form of
1. Preference capital
2. Debenture/bonds
3. Medium term loans
4. Lease Finance
5. Hire purchase finance
MSM-MBA CF 2019 58

59.  Financing for a period of less than one year
 Need for short term finances like inventory of raw materials, debtors,
minimum cash requirements and etc.,
 Also called as “Working capital financing”
 Short term finance in the form of:
1. Trade credit
2. Working capital loans from commercial banks
3. Fixed deposits less than one year
4. Advances received from customers
5. Creditors
6. Payables
7. Factoring services
8. Bill discounting
MSM-MBA CF 2019 59

60.  Also refers to equity
 Sourced from promoters of the company or from
the general public by issuing new equity shares.
1. Equity
2. Preference
3. Retained earnings
4. Convertible debentures
5. Venture funds or private equity
MSM-MBA CF 2019 60

61.  Finance arranged from outside sources
 Sources of debt financing include –
1. Financial Institutions
2. Commercial banks or
3. The general public – debentures
MSM-MBA CF 2019 61

62. - same characteristics of owned capital
- Internal source means business by itself
through profit
1. Retained profits
2. Reduction/ Controlling of working capital
3. Sale of Assets
MSM-MBA CF 2019 62

63.  capital generated from outside the business
 Deciding the right sources of funds
 Crucial business decision taken up by the top
level finance managers
MSM-MBA CF 2019 63

64.  Companies may also avail borrowings and investments from
the International lenders and investors
I. External Commercial Borrowings (ECB)
- refers to commercial loans in the form of bank loans,
buyer’s credit, securities instruments, such as floating
rate notes and fixed interest bonds availed from non
resident lenders with minimum average maturity of 3
years
The policy for ECB is also applicable to FCCB (Foreign
Currency convertible bond)
The ECB’s under the automatic route do not required
RBI/Government approval
MSM-MBA CF 2019 64

65.  Eligible borrowers:
1. Only corporate other than financial intermediaries
and NGOs engage in microfinance can avail ECB’s
2. To be eligible, the NGO should have at least a 3
years satisfactory relationship with a bank dealing in
foreign exchange and would require a certificate of
due diligence on ‘fit and proper’ status of the
board/ committee of management of the borrowing
entity from the designated authorized dealer
3. Individuals/trusts/non profit making organizations
are not eligible
MSM-MBA CF 2019 65

66.  Recognized lenders:
The ECB’s can be raised from internationally recognized sources
such as international banks/capital markets, multi lateral
financial institutions such as IFC, ADB, CDC and so on, Export
credit agencies, supplier of equipment, foreign collaborators and
foreign equity holders
 Amount and Maturity:
The maturity of ECB’s would range between 3years and 5years for
amount up to US dollars/equivalent 20 million and 500 million
respectively
The maximum amount of ECB during a financial year by a
corporate and NGO would be US dollars 500 million and 5 million
respectively
The ECB’s upto US dollars 20 million can have call/put option
provided the minimum average maturity of 3years
MSM-MBA CF 2019 66

67.  As a part of globalizing the Indian economy after 1991, Indian
corporate – permitted to float/raise funds from Euro markets
1. FCCB – Foreign currency Convertible bonds
2. ADR/GDR – American Depository receipts/ Global depositary
receipts
FCCB – Foreign currency convertible bonds are subscribed by a
non resident in a foreign currency and convertible into
ordinary shares of the issuing company in India
ADR/GDR – implies an instrument in the form of depository
receipts/ certificate issued to non resident investors against
the issue of ordinary shares of the issuing Indian Company
MSM-MBA CF 2019 67

68.  An issuing company – raising fund through FCCB or ADR/GDR should
get prior permission from department of Economic Affairs, Ministry
of Finance, Government of India.
 Prices determined by lead manager that are 1. listed in India or 2.
not listed in India, but overseas
 An approval intermediary – investment banker registered with
securities and exchange commission in USA or under Financial
services Authority in UK or appropriate regulatory authority in
Germany, France, Singapore or in Japan
 Need to conform to FDI policy and other mandatory statutory
requirements and detailed guidelines issued in this regard
MSM-MBA CF 2019 68
Contd…

69.  An Indian company – not eligible to raise fund from Indian capital market
(restrained by SEBI) would not be eligible to issue FCCB or ADR/GDR
 Unlisted Indian Companies issuing GDR/FCCB should be simultaneously listed in
Indian Stock exchange
 The issuing Company should maintain consistent financial track record
 After that finalization of capital structure in consultation with lead manager
 The issuing company should obtain from the government finally
 A DCB means a banking company that cats as a custodian for ordinary
shares/FCCB’s of an Indian Company, which are issued by it against ADR/GDR
certificates
 FCCB should be denominated in any convertible foreign currency and ordinary
shares of issuing company denominated in Indian Currency
 The issued ordinary shares or bonds should be delivered to DCB who would ODB to
issue GDR/ADR certificates to share holders
MSM-MBA CF 2019 69
Contd…

70.  Transfer and redemption:
A non resident holder of ADR/GDR may transfer
them or ask the ODB to redeem them
In Case of redemption, the ODB should requires
the DCB to get the corresponding underlying
shares released in favor of the non resident
investor
 Taxation of FCCB or GDR/ADR:
under the provisions of Income Tax act, income
by way of interest on bonds or dividend on shares
would be taxed at 10%
MSM-MBA CF 2019 70

71. 1. Backward financial system:
- Industrial finance in India is not fully developed, the
extent of capital market which is a source of long term
finance including equity and debt is quite small
- The development of on bank financial intermediaries is
also very poor
- The system is very much inadequate in respect of
financial deepening
- Very little arrangement is made about venture capital
which makes risky investment for high returns
MSM-MBA CF 2019 71
Contd…

72. 2. Paucity of funds:
- it is grossly inadequate for the continuously growing and large
requirements, especially to meet the needs of large industries
- The security and servicing of foreign funds are becoming
difficult and expensive
- Thus a result of paucity of fund, the expansion of industries is
becoming very difficult
3. Unsatisfactory Interest structure:
- The interest rate structure for different type of loans like
short term and long term are more or less satisfactory
- Indigenous money lenders also charges high rate of interest
from small and village industries distorting the market interest
of rate structure
MSM-MBA CF 2019 72
Contd…

73. 4. Lack of adequate capital formation:
there are inherent difficulties of mobilizing
quantum of incremental rural incomes which could
have been utilized for financing rural industries
5 Difficulties of small industries:
Small industries located both in urban and rural
areas are facing serious problem in realizing
adequate finance
Thus the industrial finance as a system in India has
been suffering from several drawbacks
MSM-MBA CF 2019 73

74.  There are serious attempts should be made to improve the set up
and to remove its shortcomings
1. Strengthening the domestic source of finance: Reliance on foreign
aid needs to be reduced gradually because of its unreliability
nature
2. Diversity sources: In order to tone up industrial finance, sources
of the finance should be diversified by setting up new institutions
and expanding the existing ones
3. Expanding market finance: the development of capital market
and financial instrument to promote financial deepening of the
system
Promoting market finance- to attract household savings, especially
from the rural untapped areas
MSM-MBA CF 2019 74
Contd…

75.  Improvement of banking institutions: Reforming the
banking structure and its activities improving the
management of banks should be done to strengthen
banking institutions
 Strengthening NBFC’s:
Development of long term finance institutions,
mutual funds industry etc., and establishing proper
monitoring framework can strengthening this sector
of industrial finance
 Encouraging foreign capital: Foreign capital also
facilitate entry of advanced technology and improved
business practices
MSM-MBA CF 2019 75

76.  In order to be competitive, exporters are
often expected to offer attractive credit
terms to overseas buyers
 Such credits – affects the liquidity of the
exporting company
 So the companies need external sources of
finances even during the post shipment stage
MSM-MBA CF 2019 76

77.  RBI (Reserve bank of India) prescribes a ceiling
rate for the rupee export credit linked to
(BPLRS)Bench mark prime lending rates
 This BPLR available to domestic borrowers
1. pre-shipment credit (from the date of advance)
a. Upto 180 days
b. Against incentives receivables from the
government covered by ECGC – Export credit
guarantee corporation upto 90 days
MSM-MBA CF 2019 77
Contd…

78. 2. Post shipment credit: (from the date of advance)
a. upto 90 days
b. on demand bills for transit period, as specified by FEDAI
(foreign Exchange dealers Association of India)
c. Against retention money (for supplies portion only)
payable within one year from the date of shipment (upto
90 days)
The post shipment can mainly take form of:
1. Export bills purchased, discounted or negotiated
2. Advance against bills for collection
3. Advances against duty drawback receivable from
government
MSM-MBA CF 2019 78
Contd…

79. Post shipment finance can be categorized as:
1. Advances against undrawn balances on
export bills
2. Advances against retention money
3. Exports on consignment basis
4. Exports of goods for exhibition of sale
5. Post shipment credit on deferred payment
terms
Post shipment credit to be liquidated by
the proceeds of export bills received from
abroad in respect of goods exported
MSM-MBA CF 2019 79

80.  Export credit available to exporters credit in
foreign currency at LIBOR (London Interbank
offered rates) Euro LIBOR – rates
denominated in EURO LIBOR
 LIBOR is a daily reference rate based on the
interest rates at which banks offer to lend
unsecured funds to other banks on the
London wholesale money market
MSM-MBA CF 2019 80

81.  ECGC – Export credit guarantee corporation
of India established in 1957 by Government
of India
 Principal organization for promoting exports
by covering the risk of exporting on credit
 EGCG is the world’s fifth largest credit
insurer in terms of coverage of national
exports
MSM-MBA CF 2019 81

82.  Provides a range of credit risk insurance covers
to exporters against loss in export of goods and
services
 Offers guarantee to banks and financial
institutions to enable exporters obtain better
facilities from them
 Provides overseas investment insurance to Indian
companies investing in joint ventures abroad in
form of equity or loan
MSM-MBA CF 2019 82

83.  The export-import bank of India (EXIM) was
setup on January 1, 1982 to take over the
operations of the international finance using
wing of IDBI
 Provide financial assistance to exporters and
importers to promote India’s foreign trade
 Also provide refinance to the commercial banks
and financial institutions against their export
import financing activities
MSM-MBA CF 2019 83

84. 1. Financing of export and import of goods and services both
of India and of outside India
2. Providing finance for joint venture in foreign countries
3. Undertaking merchant banking functions of companies
engaged in foreign trade
4. Providing technical and administrative assistance to the
parties engaged in export and import business
5. Offering buyer’s credit and lines of credit to the foreign
governments and banks
6. Providing advance information and business advisory
services to Indian exports in respect of multilaterally
funded projects overseas
MSM-MBA CF 2019 84

85. What is a sick unit?
 As per the extant guidelines, a micro or small enterprise (as defines
in the MSMED act 2006)
 Sick unit as any of the borrower account of the enterprise remains
NPA (Non performing Assets) for three months or more
 Otherwise there is erosion in the net worth due to accumulated losses
to the extent of 50% of its net worth during the previous accounting
year
 SICA, also known as the Sick Industrial Companies (special provisions)
act 1985, defines a sick industrial unit as one that had existed for at
least five years and had incurred accumulated losses equal to or
exceeding its entire net worth at the end of financial year
MSM-MBA CF 2019 85

86.  A unit may be regarded as potentially viable – after
implementing a relief package - period of five years from
the commencement of package from banks, financial
institutions or Government
 The repayment for restructured debts should not exceed 7
years from date of implementation of the package
 Based on the norms specified above, it will be for the
banks/financial institutions to decide whether a sick SSI
unit is potentially viable or not
 The rehabilitation package should be fully implemented
within 6 months from the date in which unit is declared as
“potentially viable”
MSM-MBA CF 2019 86

87.  The reliefs and concessions specified are not to be given in a routine manner and have
to be decided by concerned bank or financial institutions
 In fact, viability of firm study – sensitivity analysis in respect of risk involved – should
enable firm up of the corrective matrix
The guidelines on various parameters on reliefs and concessions are as follows:
1. Interest dues on cash credit and term loan
2. Unadjusted interest dues
3. Term loans
4. Working capital term loans
5. Cash losses
6. Working capital
7. Contingency loan assistance
8. Funds for startup expenses and margin for working capital
MSM-MBA CF 2019 87

88.  SIDBI was established as a wholly owned
subsidiary of IDBI bank under a special act of
the parliament 1988 and started its
operations on April 2, 1990
 It is managed by a team of 10 boards of
directors
 The authorized capital of the bank is Rs.
1000 Crore and paid up capital is Rs. 450
Crore
MSM-MBA CF 2019 88

89. 1. Direct Finance:
In the form of term loan assistance, working capital
assistance, support against receivables, foreign currency
loan, equity support and etc.,
2. Indirect Finance:
The indirect assistance in the form of refinance provided
to primary lending institutions (PLI), comprising banks,
state level financial institutions
3. Micro finance:
provides micro finance (i.e.) credit to small
entrepreneurs and business men.
MSM-MBA CF 2019 89

90.  SIDBI refinances loans extended by the primary
lending institutions to small scale industrial units and
also provides resources support to them
 SIDBI discounts and rediscounts bills – sale of
machinery – in the small scale sector
 To expand the channels for marketing the products
of SSI sector in domestic and international markets
 It provides services like leasing, factoring etc., to
industrial concerns in the small scale sector
MSM-MBA CF 2019 90
Contd…

91.  To promote employment oriented industries –
semi urban areas
 To initiate steps for technological up
gradation and modernization of existing units
 SIDBI facilitates timely flow of credit for
both term loans and working capital
 SIDBI co-promotes state level venture funds
 Grants direct assistance and refinance loans
extended by primary lending institutions
MSM-MBA CF 2019 91

92.  Industrial development bank of Indian (IDBI)
established under IDBI act 1964
 Principal financial institution for providing
credit and other facilities for developing
industries and assisting development
institutions
 Head office –Mumbai
 Regional offices – Kolkata, Gawahati, Chennai
and Mumbai and 21 branch offices
MSM-MBA CF 2019 92

93. 1. To provide financial assistance to industrial
enterprises
2. To promote institutions engaged in industrial
development
3. To provide technical and administrative
assistance for promotion management or
expansion of industry
4. To undertake market and investment research
and survey – development of industries
MSM-MBA CF 2019 93

94. MSM-MBA CF 2019 94