Fund Raising Scenario

1. RAISING FUNDS :
DOMESTIC & GLOBAL SCENARIO

2. 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

3. 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 .

4. PROCESS OF FUND RAISING
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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

5. 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

6. 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.


7. ROLE OF EACH OF THE
PLAYERS(CONTS..)

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

8. ROLES OF EACH OF THE
PLAYERS(contd..)
 Regulators
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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

9. ROLES OF EACH OF THE
PLAYERS(contd..)
 Media
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Electronic Media like TV, Internet etc.
Print Media like Newspapers and Magazines.
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Provide excellent channel of communications for all the other
players like lenders, borrower, regulator etc.
Creates awareness about investment decisions and related risks.
Creates platform for expert’s advice.
Creates a platform for comparison between various fund raising
options.

10. 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.

11. 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

12. 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.

13. 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

14. 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)

15. REGULAR INSTRUMENTS
Secured Business Loans
 Term Loans
 Working Capital facilities
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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.

16. SPECIALIZED INSTRUMENTS
 Securitization
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It Involves creation of mezzanine instrument to cover a collection of underlying
portfolio of loans for e.g.- A lender can be approached for placement of an
instrument representing the entire portfolio of home loans granted by a
Bank/NBFC to meet its liquidity requirement at an agreed price. Better price
can be negotiated by allowing cherry picking (i.e.:- carve out good and
performing loans for securitization.
 Direct Refinancing
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SDBI and IDBI are the refinancing agencies for TUF(Technology Upgradation
Scheme) for Textile Sector
NABARD (National Bank for Agriculture and Rural Development)
Export Finance is also refinanced by RBI.
 Direct Lines of Credit
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The Export Import Bank of India operates several lines of credit for African
countries to boost Indian exports by providing coverage for political and credit
risk.

17. 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:
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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

18. SPECIALIZED INSTRUMENTS (contd…)
 Buyer’s Credit
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It is an import finance instrument whereby the usance period under the letter of credit
is enhanced by roping in another banker for the elongated period.
 Seller’s Credit
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It is extended by the EXIM Bank of the exporters country usually to boost export of
capital goods to support project of longer gestation.
 Packing Credit
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It is extended exclusively to the exporters to procure and process raw material against
confirmed order or letter of credit.
 Foreign Bill Discounting
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It is Exclusively extended to exporters to bridge the gap of credit given to foreign buyer
and the credit available from vendors.

19. SPECIALIZED INSTRUMENTS (contd…)
 Factoring
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Specialized factoring agents provides bill purchase facilities based on credit insurance
obtained from the specialized credit insurance companies.
 Forfeiting
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Method of export trade financing, especially when dealing in capital goods (which have
long payment periods) or with high risk countries. In forfeiting, a bank advances cash
to an exporter against invoices or promissory notes guaranteed by the importer's
bank. The amount advanced is always 'without recourse' to the exporter, and is less
than the invoice 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
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Letters of credit from a bank allows higher credit from the suppliers resulting in
availability of Working Capital at cheaper cost through the non fund based facilities

20. SPECIALIZED INSTRUMENTS
(contd…)
 Advance Payment Bank Guarantees
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Actual advance payment for import or local purchase can be replaced by
advance payment guarantees there by raising Working Capital at cheaper
cost through the non fund based facilities.
 Channel Financing
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It is cheaper option for Corporates to reduce interest cost of its suppliers by
providing assurance to the lenders who operates the same as bill discounting
facilities.
 Acquisition Financing
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A lender or an investor supporting the acquirer to acquire the company and/or
its business and/or its assets.

21. SPECIALIZED INSTRUMENTS (contd…)
 Rent Discounting
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A lender can discount rent receivable on a leased property to a credit worthy lessee.
 Loan against shares
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A lender provides loan against listed and liquid equity shares after leaving sufficient
margin for its distress sale value.

22. 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 separated and shared by two or more
parties.
 The lessor may finance and lessee may accept the risk through the use of it
while a third party may own it.
 Alternatively the lessor may finance and own it while the lessee enjoys the use
of it and bears the risk.
 There are various combinations in which the above characteristics are shared
by the lessor and lessee.

23. 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 lease back
(d) Leveraged leasing and
(e) Direct leasing.

24. LEASE
 FINANCIAL LEASE
 Long-term, non-cancellable lease contracts are known as financial leases.
 The essential point of financial lease agreement is that it contains a condition whereby
the lessor agrees to transfer the title for the asset at the end of the lease period at a
nominal cost.
 The lease agreement is irrevocable. Practically all the risks incidental to the asset
ownership and all the benefits arising there from are transferred to the lessee who bears
the cost of maintenance, insurance and repairs.
 Only title deeds remain with the lessor.
 Financial lease is also known as ‘capital lease’. In India, financial leases are very popular
with high-cost and high technology equipment.

25. LEASE(CONTD..)
 OPERATING LEASE
An operating lease stands in contrast to the financial lease in almost all
aspects. This lease agreement gives to the lessee only a limited right to use the
asset. The lessor is responsible for the upkeep and maintenance of the asset.
 The lessee is not given any uplift to purchase the asset at the end of the lease
period.
 Normally the lease is for a short period and even otherwise is revocable at a
short notice.
 Mines, Computers hardware, trucks and automobiles are found suitable for
operating lease because the rate of obsolescence is very high in this kind of
assets.
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26. 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 (the buyer), who in
turn leases back the same asset to the owner in consideration of lease rentals.
 However, under this arrangement, the assets are not physically exchanged but it
all happens in records only.

27. SALE & LEASE BACK
Under this transaction, the seller assumes the role of a lessee and the buyer
assumes the role of a lessor. The seller gets the agreed selling price and the buyer
gets the lease rentals. It is possible to structure the sale at agreed value (below or
above the fair market price) and to adjust difference in the lease rentals. Thus the
effect of profit/loss on sale of assets can be deferred.

28. 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 party
i.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 after
meeting the claims of the lender goes to the lessor.
 The lessor, the owner of the asset is entitled to depreciation allowance associated with
the asset

29. LEASE (CONTD..)
 DIRECT LEASING
 Under direct leasing, a firm acquires the right to use an asset from the manufacturer
directly.
 The ownership of the asset leased out remains with the manufacturer itself.
 The major types of direct lessor include manufacturers, finance companies, independent
lease companies, special purpose leasing companies etc

30. HIRE PURCHASE
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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 is inclusive of the
repayment of principal as well as interest, with an option to purchase.
Under this transaction, the hire purchaser acquires the property (goods) immediately on
signing the hire purchase agreement but the ownership or title of 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 let on hire and
under which the hirer has an option to purchase them in accordance with the terms of the
agreement .
Hire purchase should be distinguished from installment sale wherein property passes to
the purchaser with the payment of the first installment.
But in case of HP (ownership remains with the seller until the last installment is paid)
buyer gets ownership after paying the last installment. HP also differs from leasing.

31. DIFFERENCE BETWEEN LEASE
FINANCING AND HIRE PURCHASE

32. PERSONAL LOANS
HOME LOANS
CAR LOANS
LOANS AGAINST PROPERTY
LOANS AGAINST GOLD
LOANS AGAINST CONSUMER DURABLES
UNSECURED PERSONAL LOANS
LOANS AGAINST CREDIT CARDS

33. COST STRUCTURE
 The cost of raising funds mainly depends on
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the type of instrument
time for raising the same.
Credit worthiness of the borrower.
 The cost encompass the following
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One Time Cost
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Preparation of project report or feasibility study
Merchant Bankers fees
Printers charges
Logistics cost
Fees of various service providers like Bankers, Registrar, PR agencies and Assurance
Providers
Brokerage and Commission
Stamp duty on security documents
Banks processing fees
Investment Bankers Indication fees

34. COST STRUCTURE (contd…)
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Recurring Cost
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Interest
Commitment charges
LC opening charges
Bank guarantee commission
Hedging cost
Foreign Currency Remittance Costs
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35. RISK ASSESSMENT AND MITIGATION
 The cost of raising funds is directly related to the risks perceived by the
lender or the investors.
 Accordingly risk assessment and its mitigation can result in substantial
saving in cost of raising funds.
 The following are the major risks which determine cost of funds
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Country risk
Political risk
Regulatory risk
Industry risk
Performance risk
Credit risk

36. RISK ASSESSMENT AND MITIGATION
(contd…)
 Country Risk
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Country with stable democracy, rich resources, favorable demography and potential
growth is considered better investment avenue as compared to dictatorship, monarchy
etc.
 Political Risk
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Political stability with clear mandate under democratic environment is considered
favorable investment avenue as compared to unstable government without a clear
majority.
 Regulatory Risk
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Political will to bring about reforms in terms of repatriation benefits, avoidance of
double taxation, sectoral limits for higher foreign direct investment are considered
better regulatory frame work.

37. RISK ASSESSMENT AND MITIGATION
(contd…)
 Industry Risk/Sector risk
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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 share
broking business is considered riskier as compared to education and healthcare
sector.
 Performance Risk
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Availability of factors of production like materials, machine, men and management
(4Ms). Successful track record of growth in turnover, profitability, net worth for a long
run is a mitigating factor.
 Credit Risk
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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 passed
on specialized credit insurance companies.

38. CHALLENGES FACED BY CORPORATES
 The Corporate under following sectors are facing challenges
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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
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Crude, Precious Metals users

39. 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 refinanced
by domestic ‘expensive’ debt in most cases, creating refinancing risk as well as
impacting 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).

40. CHALLENGES FACED BY CORPORATES
FCCB REDEMPTION
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An FCCB is basically like this:
• You give me dollars I give you “bonds” that have a coupon interest rate, which I don’t
pay you, it accumulates over the period.
•At the end – or anywhere in between – you can convert some or all of your bonds,
with accrued interest, into equity shares at a predefined “conversion” price.
• If you don’t convert, I pay you back the principal plus interest, in dollars.
Most offerings had conversion prices at a “premium” to the then market price,
assuming, as investors do, that stocks only go up in the long term. Interest
rates, or “coupons”, were at zero percent or extremely low figures of 1-2% .
The typical term of an FCCB was five to seven years.

41. CHALLENGES FACED BY CORPORATES
FCCB REDEMPTION
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India went gung-ho on FCCBs in the 2004-07 timeframe, when stocks went nuts. This
is now reaching redemption zone, and hurting.
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More than 50,000 cr. worth FCCBs are nearing maturity soon, and of this the next two
years will see between 35,000 and 40,000 cr. worth of bonds maturing.

Conversion prices are far above current market prices, so the companies have to pay
investors back.

42. CHALLENGES FACED BY CORPORATES
FCCB REDEMPTION
 What can companies do?
Their choices are:
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Borrow in dollars, through more FCCBs, to pay back current investors: That will
probably take a leap of faith because investors have been burnt badly. Conversion
prices will be required to be much lower, meaning more dilution for existing
shareholders. Coupon rates will also need to be higher.

Change the conversion price of the bonds to near market prices. Considering that
some issues have conversion prices 90% below conversion prices, a drop to market
price will mean 10x the dilution of the share. e.g. S Ltd has to pay $131 million or
convert at a price of 646 in one tranche the stock price is at Rs. 40 today. (Additionally
lowering conversion prices may need RBI approval, or breach FDI limits)

43. CHALLENGES FACED BY CORPORATES
FCCB REDEMPTION
 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 a
private placement. Given the situation in the market, these options look bleak.
 Default. This is the least preferred option but it’s what companies will have to do if they
can’t do any of the above steps. If a default occurs, the lenders will take the company to
court, 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.

44. CHALLENGES FACED BY CORPORATES
FCCB REDEMPTION
 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 is
at 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 that
if 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 the
stock stays at Rs.440, it will be worth just $8.46 – a loss of 15%. To break even, the stock
needs to be at least Rs. 520.
 This hurts more when companies borrowed to deploy money in India – if they used the
funds abroad, the return on those funds would also be in dollars so the impact is lesser.

45. 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.

46. 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.

47. CHALLEGES FACED BY SME
SECTOR(contd..)
SME Sector faces severe challenges at each stage
of its fund raising programme as follows:
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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

48. 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

49. CHALLENGES FACED BY SPECIFIC
SECTORS
PROJECTS PROMOTING SPORTS
INFRASTRUCTURE
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Perceived as Real Estate project
Viability Gap Funding only under PPP projects
No subsidies
Not covered under Infrastructure Projects for softer terms

50. CHALLENGES FACED BY SPECIFIC
SECTORS
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

51. FUND RAISERS ARE ALWAYS VIEWED WITH
GREATER RESPECT DUE TO THE CHALLENGES
OVERCOME BY THEM IN A TIMELY MANNER.