Session 4-Financing Operations in India

8/3/2019 Session 4-Financing Operations in India

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Financing Operations in India

Madhav KalyanCountry Manager and Chief Representative

ICICI Bank



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Sectors from US doing Business in India

Services

Infotech

BPO

Travel / Hotels

Trading Agri Commodities

Engg Machinery

Textiles

Manufacturing Auto / Auto parts

Chemicals

Pharmaceuticals

Infrastructure

Power

Telecom

Roads / Ports

Choice of entry vehicle determines

financial structure



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Financing Operation in India

Equity/Risk Capital

Public Equity Issue

Debt/Borrowed Capital

Foreign direct Investment

Project Finance

Term loans & Working capital finance

External Commercial Borrowings

Corporate Loan Market

Corporate Debt Market



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Equity/Risk Capital

Public Equity Issue


Foreign Direct Investment

Project Finance







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Equity Capital

Various means of raising equity capital

Bringing foreign funds

Foreign direct Investment including ADRs/GDRs andFCCBs

Preference share capital (not included in ECBs or FDI

sectoral caps) Raising domestic funds

Private placements

Public issue of equity



6

Foreign Direct Investment

FDI: The acquisition of physical assets such as

plant and equipment in India, with operatingcontrol 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



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



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 sectoralcaps or ECB guidelines.




Equity/Risk Capital

Public Equity Issue



Project Finance







Raising Domestic equity

Private Placement

Can be used to raise funds and dilute equity in favor ofIndian shareholders (as per FDI sectoral caps) while limitingthe no. of shareholders.

Private equity/venture capital investors who providefunding for the project from the ideation stage as well ashelp 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



Private Equity

Can be used to raise funds and dilute equity in favor of

Indian shareholders (as per FDI sectoral caps) whilelimiting the no. of shareholders.

Private equity/venture capital investors provide fundingfor BPO operations

Many US based funds invest in Indian companies or UScompanies 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 ofexecution, 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



Equity Markets in India

Regulatory Body

SEBI (the Securities & Exchange Board of India)

Autonomous and Statutory body

Regulates & controls capital users and allfunctionaries between users and investors

The Stock Exchanges

23 exchanges, 2 main exchanges NSE & BSE

De-mutualised exchanges- ownership, management

and trading in separate hands



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 paperlesshandling of securities.

The Registered Intermediaries Consist of brokers, sub-brokers, Trading & Clearing

members, portfolio managers, Bankers to Issue,merchant bankers, registrars, underwriters and creditrating agencies.

Registered with SEBI and act under its regulation.



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 Act1956, 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.




Equity/Risk Capital

Public Equity Issue



Project Finance







16

Corporate debt market in India

Less deep than Equity markets contrary to world markets

Liquidity mainly in Govt. securities and highly ratedcorporate 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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Equity/Risk Capital

Public Equity Issue



Project Finance


Corporate Bond Market





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Project finance

Project Finance Rupee project loans to fund Land & Buildings, Plant &

Machinery, pre-operative and preliminary expenses (includinginterest for the construction and installation period) andmargin money for working capital

Foreign currency project loans to fund imported capital

equipment, services incidental to the equipment such astechnology transfer and servicing fees, and domestic projectexpenditure.

Syndication of domestic/international debt

Use of EXIM bank US funding for import of capital equipmentfrom US



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Project Finance (contd.)

Rupee assistance by way of subscription to debentures andshares

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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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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Eligibility

All capital goods and services except military/defenceand 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 thegoods



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Equity/Risk Capital

Public Equity Issue



Project Finance





T l d ki i l



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Term loans and working capitalfinance

Fund based working capitalservices

Cash credit facility

Working capital demand loan

Export packing credit / Pre-shipment credit

Packing credit & foreign

currency Short term loan

MIBOR linked loans

Commercial paper

Invoice bill discounting (Clean

& LC backed) Foreign currency non resident

(bank) loan

Buyers & suppliers credit

Over draft

Securitization

Receivables (present andfuture)

Investment monetization

Off balance sheet funding

Plain vanilla corporate loans

Structured finance

Long term loans



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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 ofthe 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 negotiableinstrument 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 equivalentas per RBI.

Liquidity only in P1+ paper

Usance promissory note negotiable by endorsement anddelivery

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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Equity/Risk Capital

Public Equity Issue



Project Finance







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Commercial loans

Suppliers credit

Buyers credit

Loans from exportcredit agencies

Borrowings from

Multilateral FinancialInstitutions



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Maturity

Automatic approval

Eligibility

Interest rate ceilings

End use requirement

End use restriction

Key regulatory guidelines



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• Tax levied on the interest paid by the Indian

corporates to overseas lenders on the loans takenfrom them

What is

withholdingtax

• Rates charged by overseas lenders are net of

taxes; tax paid is the additional cost that needs to

be borne by the borrower

Why is it a

deterrent

• Tax is paid @ 20% (as per Income Tax Act, 1961)

or as per the DTA Agreement between India and

the lender’s country

• No withholding tax on loans raised from overseas

branch of Indian Banks

Economicimpact

Withholding tax



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Case Studies



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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 financialinstitutions backed by parent guarantee to get better

rates

Working capital finance

Packing credit in foreign currency

Buyer’s credit-discounting of direct import bills fromgroup 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 ofgroup 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



Thank You

Session 4-Financing Operations in India

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Transcript of Session 4-Financing Operations in India