2. Fund Raising – What it means
 Fund Raising is the process of identification, soliciting and gathering capital from
individuals and businesses.
 In Accounting terms, it refers to capital under ‘Sources of funds’ of Balance Sheet.

3. Types of Capital
Sources of Funds
Shareholders Funds Deferred Tax Liability Loan Funds
Equity Preference Secured / Unsecured
Short Term Long Term

4. Capital Structure – Risk & Return
Equity Capital
M Risk &
e Return
Preference Capital
z
a Hybrid Securities
n
i Subordinated Loans
n
e Unsecured Loans
Asset
Security
Secured Loans

5. Capital Structure – Asset Liability Matching
Application of Funds Funded by
Long Term Assets Long Term Sources
Fixed Assets Equity Capital
Investments Preference Capital
Illiquid Current Assets Loans > 1 year
Short Term Assets Long Term Sources
(25% or more)
Inventory Short Term Sources
Debtors Creditors
Liquid Current Assets Loans < 1 year

6. Equity Capital

7. Sources of Equity Capital
 Promoters
 Share Capital contributed by the promoters.
 Promoter funding is traditional sourced from dividends, profits or other businesses, past
savings, sale of personal assets, contribution by friends and relatives, debt raised on
promoter’s book.
 Strategic Investor
 Equity Investment by another company in related business
 Domestic or cross border
 Venture Capital/Private Equity/Angel Investor
 Equity Investment by a Financial investor
 Exit through Secondary Sale of Shares
 Profit by increase in value of Shares
 Public Equity
 Equity Investment by a financial investor through Public Markets – IPO, FPO, QIP, Rights
Issue

8. Sources of Debt on promoter’s books
 All traditional sources available to business
 Generally more expensive due to regulatory restriction
 Banks are not allowed to lend for buying equity stake except in some cases
 Generally structured
 Security can be created on personal assets – like Property, Shares of Listed
Companies, securitization of future receivables
 Structured security can also be created on assets of subsidiary company – need to
take care of ‘deemed dividend’ clause of Income Tax Act
 Sometimes subscription are invited with a promise by promoters to buy the shares at
a price which would provide investor certain returns

9. Sources of Strategic Investment
 Individual or firm that adds value to the money it invests with its technology, contacts,
experience, and knowledge of market thus brightening the investee’s prospects for
additional investment and success.
 Could be by domestic or by overseas investors
 Involvement by Strategic Investor in day to day management and in strategic decision
making – active participation in management
 Source could also include customers, suppliers, related businesses, businesses
having consequential advantages

10. Sources of Venture Capital/Private Equity/Angel
Investors
 Largely financial investor
 Objective to enhance shareholders value
 Exits generally be selling shares
 Can be sought at various stages of business
 Seed Capital
 Angel Investing
 Venture Capital
 Private Equity
 Private Investment in Public Equity (PPE)

11. Sources of Equity criteria
Seed Capital/Angel Investing
Typical Stage At conceptualization stage or at start up stage
Business Positioning New Idea or market positioning
Funding objective Allow development of idea into a saleable product or service
Fund Usage For proof of concept, market research, initial product development
General Sources Friends and family, acquaintances, seed funds
Examples of external Hot Air Ballooning Co Raises Funds from Rajasthan Venture Capital
funding in India – first ever brand in India to have received a hot air ballooning license
Indian Angel Network Invests in Online Library – founded by IIMA
alumni allows corporates to order book online followed by a physical
delivery
Makemytrip.com raised $ 10 million from SAIF Partners
Jagdish Khattar’s Carnation Gets Rs 108 Cr from Premji, IFCI VC
Arm

12. Sources of Equity criteria
Venture Capital
Typical Stage Capital typically provided for early-stage, high-potential, growth
companies with novel business model
Business Positioning Proven novel business idea in small area of work
Funding objective Allow developed idea into a full blown market product
Fund Usage For expansion into newer areas
General Sources Venture Capital Firms
Examples of funding in India Matrix Partners has invested Rs 20 crore in Ver se Innovation Private
Limited, a mobile classifieds service firm
India Financial Inclusion Fund to invest in Allahabad-based MFI –
Sonata has reached out to nearly 85,000 women clients, with a
portfolio outstanding of over Rs 42 crore.
Siemens VC invests in Pune based Waste Heat Recovery Co –
Transparent Energy Systems plans to use the capital to expand.
Inventus Capital Backs Bus Ticketing Firm RedBus – redBus has a
network of > 500 bus operator partnerships covering over 5,000 routes
in India.

13. Sources of Equity criteria
Private Equity
Typical Stage Relatively mature companies that are looking for capital to expand or
restructure operations
Business Positioning Proven Business Model
Funding objective To finance a transformational event in their life cycle
Fund Usage Enter new markets, forward or backward integrate, capacity expansion
or finance a major acquisition
General Sources Institutional Investors – Private Equity Funds
Examples of funding in India TVSCapital puts Rs 35 Cr in Dusters Hospitality – a facility
management company
Ind-Bharat gets $ 100M from PE Trio – PE firms Bessemer, Sequoia
Capital and CVCI would be getting an 18% stake in the power
generation company
Henderson Equity Partners invests Rs 80 Cr in Genesis Colors – the
holding company of luxury fashion labels Satya Paul, Deepika Gehani,
Shobhaa De and Bwitch!

14. Sources of Equity criteria
Initial Public Offering (IPO)/FPO
Typical Stage Mature Stage company
Business Positioning Established company
Funding objective To finance growth opportunities
Fund Usage Expansion
General Sources Institutional Investors – Mutual Funds, FIIs, QIBs, Retail
Investors, Employees
Examples of funding in Indiabulls Power IPO subscribed 22 times
India
OIL Ltd IPO Oversubscribed 30 times
NHPC IPO Powers ahead with 3.5 times subscription on day
one

15. Sources of Equity criteria
Private Investment in Public Equity
Typical Stage Later Stage Investment in a listed company through
preferential issue
Business Positioning Established company
Funding objective To finance growth opportunities
Fund Usage Expansion, restructuring, acquisition, etc.
General Sources Institutional Investors – Mutual Funds, FIIs, QIBs
Examples of funding in Aban Offshore raises Rs 698 Cr via QIP – Drilling contractor
India Aban Offshore has raised 6.98 billion rupees by selling new
shares to institutions at 1,224.30 rupees each.
Axis Bank raises $720 Mn via QIP, GDR
Glenmark Mops Up Rs 413 Cr via QIP
Educomp raises Rs 607 Cr via QIP
Unitech Mops Up $ 575 Mn via Private Placement;

16. Sources of Equity criteria
Seed Capital/Angel Investing
Venture Capital
Private Equity
IPO / FPO
PIPE
Risk & Management
Return Involvement

17. Debt Capital

18. Classification of Debt
 Based on Security
 Senior Secured Debt
 Sub-ordinate Debt
 Unsecured Debt
 Preference Shares
 Based on Tenure
 Short Term - < 1 year
 Long Term - > 1 year

19. Secured Debt
 Security can be created on any asset
 Security can also be created on assets owned by others
 Typically security is created on
 Fixed Assets – Land, Building, Plant and Machinery
 Investments – Shares, Debentures, etc.
 Stocks – Raw Material, WIP, Finished Goods
 Book Debts – Against supply to customers
 Future Receivables even when not due – Toll Collection, Credit Card Receivables, Customer
Payment Escrow,

20. Short Term Loans
 Short Term Loans usually take the form of overdraft or cash credit facility
 These finance the day-to-day operations of the business, including wages of
employees and purchases of inventory and supplies until the customer pays.
 Such loans are typically secured by Inventory and Book Debts
 It may be advisable to use fixed term loans to finance accounts receivable, which are
relatively risk-free, but delayed for one to three months. Such financing is normally
secured by assignment of the receivables.
 Lenders generally charge higher rate of interest for overdraft facility or cash credit
facility whereas the rate of interest for fixed tenure loan is lower.
 The amount of the short term loans will be determined from the projected cash flow
information in the business plan. Lenders favour businesses that exhibit strong
management, steady growth potential and reliable projected cash flow (demonstrating
the business ability to pay the monthly interest payments on this line of credit from its
projected revenues in a written business plan)

21. Short Term Loans - Sources
 Cash Credit facility – It is the primary method in which Banks lend money against the
security of commodities and debt. It runs like a current account except that the money that can
be withdrawn from this account is not restricted to the amount deposited in the account. Instead,
the account holder is permitted to withdraw a certain sum called “limit” or “credit facility” in excess
of the amount deposited in the account. Cash Credits are, in theory, payable on demand.
 Based on assessment banks grant standby facility for usage as per need.
 Such facility is determined based on paid stock and debtors level after providing for margin
from long term sources
 Such facility can only be granted by Banks
 Cost reduction ideas
 Working Capital Demand Loan (WCDL) – Such loans are usually conversion of Cash Credit
facility into fixed tenure loans for a period ranging upto 90 days. Cannot be repaid earlier.
Typically rate of interest is lower due to fixed tenure.
 Foreign Current Non-Resident (FCNR – B) Loans – Typically foreign currency loans provided
by banks out of deposits raised from NRIs – protected from currency risk through hedging.
Cost can be lower than WCDL.

22. Short Term Loans – Debtors based
 Bill/Invoice Discounting – It is provided after supply of material to customers and
customer acknowledgement thereof. Could by through bill of exchange acceptance
by customer or simple presentation of invoices to bank.
 All payments are made directly to lenders
 Lenders usually insists on margin
 Customers are counter parties and stronger customer reduces cost of funds
 Usually with recourse to supplier
 Securitization of Future Receivables – Where receivables are regular in receipt,
such future receipt can be securitized to avail of short term loans even though goods
may have not been supplied or services not provided
 Credit Card Receivables
 Pre-Shipment Financing
 Generally unsecured except customer escrow

23. Short Term Loans - Structured
 Supplier Bill Discounting – Invoice discounting facility for suppliers
 Can reduce cost significantly when there are unused LC lines for not so strong companies.
 Commercial Paper – Raising debt from Mutual Funds through issue of transferable
security – strictly regulated by RBI
 Generally unsecured
 Significant cost reduction
 Based on exceptional Credit Rating

24. Long Term Loans
 Long term financing is a form of financing that is provided for a period of more than a
year
 Long term financing services are provided to those business entities that face a
shortage of capital
 Long term financing is necessary for all kinds of business entities irrespective of their
sizes or stature. These companies need to avail the long term financing resources
from the lenders when they have to pay off a debt.
 Following are some other requirements that could be met by availing long term
financing:
 Increasing facilities
 Expansion of Companies
 Buying Fixed Assets
 Buying Machinery
 Construction Projects on a big scale
 Provide Capital for funding the Operations. This helps in adjusting the cash flow

25. Long Term Loans - Sources
 Term Loans – It is primary tool for lending by Banks and Financial Institutions
 A loan from a bank for a specific amount that has a specified repayment schedule.
 Term loans almost always mature between one and 10 years
 Capital intensive projects like power project could have longer tenure
 Cost reduction ideas
 External Commercial Borrowings (ECB) – Foreign Currency loans from foreign lenders.
Restricted to capital expenditure. Severe restriction on borrowings for rupee spend.
 Foreign Current Non-Resident (FCNR – B) Loans - Typically foreign currency loans provided
by banks out of deposits raised from NRIs
 Protected from currency risk through hedging at nominal cost
 Cost is significant lower than term loans in view of lower cost abroad
 Debentures
 Instrument based debt with advantage of transferability
 Lenders are not monitoring closely
 Only possible for top rated corporate

26. Long Term Loans - Sources
 Equipment Financing – Generally applicable where assets are general purpose.
Typical examples include Vehicles, construction equipment, general purpose
machines
 Top rated corporate can even get for special purpose equipment
 High Loan to asset value due to specific asset charge
 Hire Purchase/Leasing
 Used to obtain off balance sheet financing
 Fixed Payment to financier for use of asset with an option to buy at the end of tenure

27. Long Term Loans – Asset Backed Financing
 Asset Backed financing – An asset-backed security is a security whose value and
income payments are derived from and collateralized (or “backed”) by a specified
pool of underlying assets. The pool of assets is typically a group of small and
illiquid assets that are unable to be sold individually. Pooling the assets into
financial instruments allows them to be sold to general investors, a process called
securitization, and allows the risk of investing in the underlying assets to be
diversified because each security will represent a fraction of the total value of the
diverse pool of underlying assets. The pools of underlying assets can include
common payments from credit cards, auto loans, and mortgage loans, to esoteric
cash flows from aircraft leases, royalty payments and movie revenues.
 Often a separate institution, called a special purpose vehicle, is created to handle
the securitization of asset backed securities. The special purpose vehicle, which
creates and sells the securities, uses the proceeds of the sale to pay back the
bank that created, or originated, the underlying assets.
 Thus, one incentive for banks to create securitized assets is to remove risky assets
from their balance sheet by having another institution assume the credit risk, so that
they (the banks) receive cash in return. This allows banks to invest more of their
capital in new loans or other assets and possibly have a lower requirement.

28. General Rules for Rate of Financing
 Rate of financing is
 In case of Debt – Rate of interest
 In case of Equity – Expected Rate of Return
 Lower of risk – lower the rate of financing
 Short Term rates are generally cheaper than long term rates
 Exceptions – credit crisis of 2008

29. Lending Institutions
Institutions Typical Lending
Lending Financial Institutions – IFCI, Long Term Loans
State Financial Corporation, SIDBI
Mutual Funds and Pension Funds – LIC, General transferable instrument backed
Private Funds, General Insurance
Companies
Public Sector Banks Term Loans, Working Capital facilities
Private Banks Term Loans, Working Capital facilities
Foreign Banks in India Term Loans, Working Capital facilities
Overseas Banks External Commercial Borrowings
NBFCs Term Loans, Structured Debt

30. Non-Banking Financial Companies (NBFCs)
 Lesser regulation by RBI
 Allows all kind of debts based on repayment capabilities
 Specialised in special situation financing including NPAs
 Generally higher cost of funds except in case of some specific NBFCs
 Typical NBFCs in the market include
 Tata Capital
 Reliance Capital
 GE Commercial Finance
 Religare
 JM Financials
 Bajaj Capital
 Birla Global Finance, etc.

31. Critical Lending Parameters
 Debt Equity Ratio
 Gearing – Total Outstanding Liability/Tangible Net worth Ratio
 Current Ratio
 Operating Margins
 Total Debt to EBIDTA
 Debt Service Coverage Ratio

32. Capital Structure – Risk & Return
Equity Capital
M Risk &
e Return
Preference Capital
z
a Hybrid Securities
n
i Subordinated Loans
n
e Unsecured Loans
Asset
Security
Secured Loans

33. Examples of Mezzanine Financing
 Foreign Currency Convertible Bonds – FCCBs
 Convertible Debentures
 Convertible Preference Shares

34. Thank You
307 Raheja Plaza, 15-B Shah Ind. Estate, Off Link Road, Andheri (W), Mumbai – 400 053 India.
Tel: +91-22-61512000 | Fax: +91-22-61512010 | Email: info@northboundinvestments.com