Financing Operations in India

Madhav Kalyan
Country Manager and Chief Representative
ICICI Bank
 Sectors from US doing Business in India

 Manufacturing  Trading
 Auto / Auto parts  Agri Commodities
 Chemicals  Engg Machinery
 Pharmaceuticals  Textiles

 Services  Infrastructure
 Infotech  Power
 BPO  Telecom
 Travel / Hotels  Roads / Ports

Choice of entry vehicle determines

financial structure

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 Financing Operation in India
Equity/Risk Capital
Foreign direct Investment
Public Equity Issue

Debt/Borrowed Capital
Corporate Debt Market
Corporate Loan Market
Project Finance
Term loans & Working capital finance
External Commercial Borrowings

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 Financing Operation in India
Equity/Risk Capital
Foreign Direct Investment
Public Equity Issue

Debt/Borrowed Capital
Corporate Debt Market
Corporate Loan Market
Project Finance
Term loans & Working capital finance
External Commercial Borrowings

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 Equity Capital
 Various means of raising equity capital
 Bringing foreign funds
 Foreign direct Investment including ADRs/GDRs and
FCCBs
 Preference share capital (not included in ECBs or FDI
sectoral caps)
 Raising domestic funds
 Private placements
 Public issue of equity

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 Foreign Direct Investment
 FDI: The acquisition of physical assets such as plant
and equipment in India, with operating control
residing in the parent corporation.

 Modes of bringing FDI

 100% subsidiary
 Opening branch office
 Financial collaboration
 Joint ventures and technical collaborations
 Capital markets via GDRs/ADRs and FCCBs
 Private placements or preferential allotments

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 FDI policy in India
Declared objective: to invite and facilitate foreign investment in India
 Minimal procedural formalities
 Freely allowed in all sectors including services except few restrictions
and sectoral caps
 Automatic approvals, only post entry notification to RBI, except few
restrictions
 Greater transparency in case approval required
 No restriction on end use (except real estate and stock markets)
 Free repatriation of investment and returns

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 FDI policy in India (contd.)
 Sectors restricted for FDI
 Nuclear Energy
 Railway Transport

 Sectors with compulsory industrial licensing, eg.

 Distillation & brewing alcoholic drinks
 Cigars, cigarettes and manufactured tobacco substitutes
 Electronic Aerospace and defence equipment, etc.
 All items reserved for SSI

 Sectoral caps for bringing FDI, eg.

 49% in Telecom
 26% in Insurance
 100% in power generation, transmission and distribution
 100% in Hotels & Tourism, etc.
 Preference shares (without conversion option) outside sectoral caps or
ECB guidelines.

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 Financing Operation in India
Equity/Risk Capital
Foreign direct Investment
Public Equity Issue

Debt/Borrowed Capital
Corporate Debt Market
Corporate Loan Market
Project Finance
Term loans & Working capital finance
External Commercial Borrowings

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 Raising Domestic equity
Private Placement
 Can be used to raise funds and dilute equity in favor of Indian
shareholders (as per FDI sectoral caps) while limiting the no. of
shareholders.
 Private equity/venture capital investors who provide funding for
the project from the ideation stage as well as help nurture the
growth.

Public Issue
 Well developed Equity markets with total market cap in excess of
Rs 13,00,000 Crores (USD 285 Bn) as of Jan’04
 Liquidity mainly in large cap and some mid cap companies
 Main participants – Mutual funds, Insurance companies, FIIs and
retail investors

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 Private Equity
 Can be used to raise funds and dilute equity in favor of Indian
shareholders (as per FDI sectoral caps) while limiting the no. of
shareholders.
 Private equity/venture capital investors provide funding for BPO
operations
 Many US based funds invest in Indian companies or US companies
with focus on India
 Funding for startups and small scale BPOs hard to come by,
funding mainly for second stage or later
 Typically look for the management team, their speed of execution,
ability to scale, managing customer expectation, infrastructure,
client relationships and dependence, order book/ pipeline and
profitability.

VCs/Private equity invested USD 300 Mn

in 2002 and USD 500 Mn in 2003

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 Equity Markets in India
 Regulatory Body
 SEBI (the Securities & Exchange Board of India)
 Autonomous and Statutory body
 Regulates & controls capital users and all functionaries
between users and investors

 The Stock Exchanges

 23 exchanges, 2 main exchanges NSE & BSE
 De-mutualised exchanges- ownership, management and
trading in separate hands

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 Equity Markets in India
 The Depositories
 NSDL (the National Securities Depository Ltd.) and CDSL
(the Central Depository Services (I) Ltd.)
 The Depository Act 1996 led to its establishment
 Efficient, low risk and cost infrastructure for paperless handling
of securities.

 The Registered Intermediaries

 Consist of brokers, sub-brokers, Trading & Clearing
members, portfolio managers, Bankers to Issue, merchant
bankers, registrars, underwriters and credit rating agencies.
 Registered with SEBI and act under its regulation.

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 Guidelines for Issue of Equity Capital
 Unlisted company can make a public issue of equity shares or
instrument convertible into equity subject to:
 Pre-issue net worth not less than Rs 10 mn in 3 out of preceding 5
years including immediately preceding 2 years
 Track record of distributable profits under Companies Act 1956, for
at least 3 years out of immediately preceding 5 years
 Issue to be through book building only, if not complying with the
above clauses or issue size more than 5 times pre issue net worth.

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 Financing Operation in India
Equity/Risk Capital
Foreign direct Investment
Public Equity Issue

Debt/Borrowed Capital
Corporate Debt Market
Corporate Loan Market
Project Finance
Term loans & Working capital finance
External Commercial Borrowings

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 Corporate debt market in India
 Less deep than Equity markets contrary to world markets
 Liquidity mainly in Govt. securities and highly rated corporate
papers (AAA and AA)
 Primarily an OTC Market
 Listed corporate debt market
 Listed market underdeveloped
 Listed debt markets are also regulated by SEBI
 Listing requirements
 Rating must for listing of debt
 Credit Rating Agencies – Crisil (alliance with S&P), ICRA (alliance with
Moody’s), CARE and Fitch India.
 Banks investment in unlisted non SLR securities restricted to 10% of
the total investments in non SLR securities.

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 Corporate debt market in India
Market players
 Qualified Institutional Investors (QIB)
 Public financial institution
 Scheduled commercial banks
 Mutual funds
 Foreign institutional investor registered with SEBI
 Multilateral and bilateral development financial
institutions

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 Financing Operation in India
Equity/Risk Capital
Foreign direct Investment
Public Equity Issue

Debt/Borrowed Capital
Corporate Bond Market
Corporate Loan Market
Project Finance
Term loans & Working capital finance
External Commercial Borrowings

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 Project finance
 Project Finance
 Rupee project loans to fund Land & Buildings, Plant & Machinery,
pre-operative and preliminary expenses (including interest for the
construction and installation period) and margin money for working
capital

 Foreign currency project loans to fund imported capital equipment,

services incidental to the equipment such as technology transfer and
servicing fees, and domestic project expenditure.

 Syndication of domestic/international debt

 Use of EXIM bank US funding for import of capital equipment from

US

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 Project Finance (contd.)
 Rupee assistance by way of subscription to debentures and shares
 Assistance by way of underwriting shares and debentures
 Guarantees for
 Foreign currency loans
 Export credits.
 Suppliers of equipment
 Foreign lenders
 Bond guarantees and confirming guarantees
 Equity
 Mezzanine finance
 Equity
 Take-out finance
 Assistance for a project loan would typically be for a longer
tenure than for a corporate loan

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 US EXIM Bank finance
 Access to competitive all-in financing for US goods and services,
generally lower than locally available rates

 Short, medium and long term financing (up to 14 yrs) flexibility

 no collateral or security taken normally

 Loan guarantees and insurance offered

 Structured and project finance with limited recourse for setting

up projects (repayment from project cash flows)

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 US EXIM Bank finance
 Medium/Long term guarantee facility
 Up to 85% of the contract value
 Ranges from USD 0.5 mn to 10 mn
 Repayment up to a period of 14 yrs
 Personal guarantee if turnover of importer <USD 50 mn
 Credit guarantee facility (CGF)
 Line of credit more than USD 10 mn in one year
 Up to 85% of the eligible transaction
 Limited recourse (project) and structured Finance
 No country or project dollar limits
 Future cash flows for repayment
 Appropriate where trapping of hard currency revenue possible
 Risk sharing and reinsurance to facilitate transactions

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 US EXIM Bank finance
 Eligibility
 All capital goods and services except military/defence and
hazardous to environment
 Capital equipments and services, including
 Computer hardware and software
 Pollution control equipment
 Equipments for outlets such as Burger King, Pizza hut, etc
 Refurbished equipment is also eligible
 Goods must be shipped from US
 Financeable equipment value is the lesser of
 85% of the value of goods or 100% of the US content in the goods

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 Financing Operation in India
Equity/Risk Capital
Foreign direct Investment
Public Equity Issue

Debt/Borrowed Capital
Corporate Debt Market
Corporate Loan Market
Project Finance
Term loans & Working capital finance
External Commercial Borrowings

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 Term loans and working capital finance
Fund based working capital Long term loans
services
 Cash credit facility  Plain vanilla corporate loans
 Working capital demand loan
 Structured finance
 Export packing credit / Pre-
shipment credit
 Packing credit & foreign currency
 Short term loan Securitization
 MIBOR linked loans
 Commercial paper
 Invoice bill discounting (Clean &  Receivables (present and future)
LC backed)  Investment monetization
 Foreign currency non resident  Off balance sheet funding
(bank) loan
 Buyers & suppliers credit
 Over draft

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 Working Capital Finance
 Cash Credit (CC)
A running account facility extended against stock of inventory. The
drawing limit fixed by applying security margin over value of the stock.

 Working Capital Demand Loan (WCDL)

Short term loan to finance WC needs and is repayable on demand. Unlike
CC its not a running facility.

 Bills
Used to finance trade transactions, is in the form of a negotiable
instrument but can’t be payable on demand and bearer at the same time.

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 Working Capital Finance
 Commercial Paper(CP)
 Corporates with minimum P2 rating from CRISIL or equivalent as per
RBI.
 Liquidity only in P1+ paper
 Usance promissory note negotiable by endorsement and delivery
 Cheaper source of funds than credit facilities.
 15 to 364 days tenor, issued at discount.

 Foreign Currency Non-Resident (Banks) loans (FCNR-B)

 Drawn from funds maintained in foreign currency with banks, freely
repatriable.
 Cheaper cost than INR finance with pricing linked to LIBOR

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 Export Finance
Offered at concessional rates per directions of RBI to encourage
exports
Pre shipment Finance
Extended to exporters on existence of an export order and/or irrevocable
LC and liquidated from proceeds of the export bills
Packing credit
 Evidence of export- Irrevocable LC, confirmed order with details
from overseas buyer
 Not to exceed the FOB value of goods, secured or unsecured
 For a period of 180 days, further extendable by 90 days
 Can be in INR or foreign currency

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 Export Finance
Post shipment Finance
To enhance exporters’ ability to offer credit and gain business in global
trade markets.
 Based on shipping documents evidencing exports or supply to designated
agencies in case of deemed exports
 Forms of finance
 Negotiation of documents under LC
 Purchase/Discount of bills under export orders
 Advance against bills on collection/consignment basis
 Advances against deemed export supplies
In INR or foreign currency
Liquidation from proceeds of exports through inward remittances, can
be liquidated through domestic sources but attracts higher rates

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 Leasing
 Financial Lease not a popular method of financing in India due to
taxation issues
 Depreciation benefit not available to Lessor
 Sales tax and service tax payable on lease rentals
 However, operating lease can be used to converting Capex to
Opex
 Companies not comfortable putting capital initially
 Use of vendor financing, hiring equipment and premises on lease to
convert Capex to Opex
 Entities willing to take assets on their books and lease out the
facilities
 With growing comfort can put the required capital.

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 Financing Operation in India
Equity/Risk Capital
Foreign direct Investment
Public Equity Issue

Debt/Borrowed Capital
Corporate Debt Market
Corporate Loan Market
Project Finance
Term loans & Working capital finance
External Commercial Borrowings

31
 External Commercial Borrowings
 Commercial loans
 Suppliers credit
extended
Financing
Loans
 Buyers credit arranged
Loans from
by exports by
Credit
Loans taken from
extended
promotion
institutions
Indian such
importer
by supplier
banks to the
/ financial
 Loans from export credit agencies as IFC,
from ADB,in
offshore
organizations
importer
institutions
Indian
(LCetc.
bank,
different
banks
World
countries
discounting)
 Borrowings from Multilateral Financial
Institutions

32
 External Commercial Borrowings
Key regulatory guidelines
 Eligibility For investment in
Automatic
Minimum
real-industrial
‘All-in-cost’
 Automatic approval All corporates
Prohibition
approval on
for
sector,ofSME,
ceiling
maturity 3
6ofmth
under
ECBs
on-lending,
raising
registered
 Maturity for loans
LIBOR+200
infrastructure
years bps<
upto US$ 500
Companies
investments Act
in
US$
and
for yrs and
205million
to
3participation
 Interest rate ceilings except
million
stock and
or for
financial
market
in Divestment>5
and
L+350 5 years
bps for
for
real estate
refinancing
intermediaries
loans in excess
yrs.
process
 End use requirement existing ECBs

 End use restriction

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 Withholding tax
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34
 Case Studies

35
 Automobile Major
 Project Finance
 Formed a JV with Indian company
 Equity infusion to the extent of its share in the form of FDI
 Long term INR loans/NCDs from local financial institutions
backed by parent guarantee to get better rates

 Working capital finance

 Packing credit in foreign currency
 Buyer’s credit-discounting of direct import bills from group
cos.
 Commercial papers

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 Agri trading and processing major
 Project finance
 Equity infusion from parent in the form of FDI
 Long term debt using global credit lines with global bankers
 Plant and Machinery import on Buyers credit from suppliers
 Working capital finance
 FCNR (B) loans
 Short term MIBOR linked loans
 Buyer’s credit on import LCs
 Indian company opens LCs with local bank in favor of group
companies for sourcing of raw materials
 Buyer’s credit is availed backed by these LCs from foreign banks
(global bankers)
 Thereby getting very cheap finance

37
 Thank You

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