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Northbound ppt


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Northbound ppt

  1. 1. 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.
  2. 2. Types of Capital Sources of Funds Shareholders Funds Deferred Tax Liability Loan Funds Equity Preference Secured / Unsecured Short Term Long Term
  3. 3. 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
  4. 4. 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
  5. 5. Equity Capital
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. Sources of Venture Capital/Private Equity/AngelInvestors 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)
  10. 10. Sources of Equity criteriaSeed Capital/Angel InvestingTypical Stage At conceptualization stage or at start up stageBusiness Positioning New Idea or market positioningFunding objective Allow development of idea into a saleable product or serviceFund Usage For proof of concept, market research, initial product developmentGeneral Sources Friends and family, acquaintances, seed fundsExamples of external Hot Air Ballooning Co Raises Funds from Rajasthan Venture Capitalfunding 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  raised $ 10 million from SAIF Partners Jagdish Khattar’s Carnation Gets Rs 108 Cr from Premji, IFCI VC Arm
  11. 11. Sources of Equity criteriaVenture CapitalTypical Stage Capital typically provided for early-stage, high-potential, growth companies with novel business modelBusiness Positioning Proven novel business idea in small area of workFunding objective Allow developed idea into a full blown market productFund Usage For expansion into newer areasGeneral Sources Venture Capital FirmsExamples 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.
  12. 12. Sources of Equity criteriaPrivate EquityTypical Stage Relatively mature companies that are looking for capital to expand or restructure operationsBusiness Positioning Proven Business ModelFunding objective To finance a transformational event in their life cycleFund Usage Enter new markets, forward or backward integrate, capacity expansion or finance a major acquisitionGeneral Sources Institutional Investors – Private Equity FundsExamples 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!
  13. 13. Sources of Equity criteriaInitial Public Offering (IPO)/FPOTypical Stage Mature Stage companyBusiness Positioning Established companyFunding objective To finance growth opportunitiesFund Usage ExpansionGeneral Sources Institutional Investors – Mutual Funds, FIIs, QIBs, Retail Investors, EmployeesExamples of funding in Indiabulls Power IPO subscribed 22 timesIndia OIL Ltd IPO Oversubscribed 30 times NHPC IPO Powers ahead with 3.5 times subscription on day one
  14. 14. Sources of Equity criteriaPrivate Investment in Public EquityTypical Stage Later Stage Investment in a listed company through preferential issueBusiness Positioning Established companyFunding objective To finance growth opportunitiesFund Usage Expansion, restructuring, acquisition, etc.General Sources Institutional Investors – Mutual Funds, FIIs, QIBsExamples of funding in Aban Offshore raises Rs 698 Cr via QIP – Drilling contractorIndia 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;
  15. 15. Sources of Equity criteria Seed Capital/Angel Investing Venture Capital Private Equity IPO / FPO PIPE Risk & Management Return Involvement
  16. 16. Debt Capital
  17. 17. 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
  18. 18. 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,
  19. 19. 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)
  20. 20. 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.
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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.
  27. 27. 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
  28. 28. 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
  29. 29. 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.
  30. 30. 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
  31. 31. 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
  32. 32. Examples of Mezzanine Financing Foreign Currency Convertible Bonds – FCCBs Convertible Debentures Convertible Preference Shares
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