Definition Business Plan

PLANT LOCATION
The provinces of Laguna, Batangas and Pampanga are considered by the
researchers as their plant location. The continuous flow of raw materials is a vital
factor in choosing the most suggested location plant construction. Furthermore,
these provinces have industrial parks that are permitted by government law to
construct industrial plants making them most suitable for any industrial
manufacturing operations.
Three alternative plant locations will be discussed in this section which are
according to the following factors: 1) Availability of Raw Materials; 2) Proximity of
Market; 3) Availability of Energy Sources; 4) Climate; 5) Transportation; 6) Water
Supply; 7) Labor Supply; 8) Site Characteristics; 9) Community Factors
Factors in Plant Location Selection
Availability of Raw Materials
Sources of raw materials are one of the most important factors to be
considered in the selection of the plant site. It permits significant reduction in
transportation and storage facilities.
Proximity of Market
The location of markets or intermediate distribution centers affects the
product distribution costs and the time required for shipping. The consumers
usually find it advantageous to purchase from nearby sources.
Availability of Energy Sources
Power and steam requirements are in high amount in most industrial
plants, and normally fuel is used and it is necessity to supply these utilities. The
local costs of water and power help determine whether power should be paid for
through power distributors or self-generated.
Climate
If the plant is located in a cold climate, costs may be increased by the
necessity for construction of protective shelters around the process equipment,
and special cooling towers or air conditioning system may be required if the
prevailing temperature are high.
Transportation
Bodies of water, railroads, and highways are the common means of
transportation used by major industrial concerns. If possible, the plant site
should have access to all three types of transportation; certainly, at least two
types should be available.
Water Supply

The process industries use large quantities of water for cooling, washing,
steam generation, and as raw material. The plant must be located where a
dependable supply of water is available.
Labor Supply
Consideration should be given to prevailing pay scale, restrictions on
number of hours worked per week, competing industries that can cause
dissatisfaction or high turnover rates among the workers, and variations in the
skill and productivity of the workers.
Site Characteristics
The topography of the tract of the land and the soil structure must be
considered, since either or both may have a pronounced effect on construction
costs. The cost of the land is important as well as local building costs and living
conditions.
Community Factors
If a certain minimum number of facilities for satisfactory living of plant
personnel do not exist, it often becomes a burden for the plant to subsidize such
facilities.

PLANT LOCATION
Plant location refers to the choice of region and the selection of a particular site
for location of a plant or factory. It is an important strategic decision which
cannot be changed once it is made. An ideal location is one where the cost of the
product is kept to the minimum with the least risk and maximum market gain.
For manufacturing a commodity or a product, a set of machines are used. These
machines are installed in a building in a systematic manner, called a factory or
plant. The selection of place for manufacturing is important for all the
manufacturing and distribution activities of the product.
The performance of a firm is significantly affected by its location. A plant site is
located after consideration various selection criterions. These criterions are
based on mainly economics of manufacturing, ease of manufacturing, skill levels
required and environmental conditions. Socio-political environment also plays a
major role in deciding the site of the plant. While selecting plant location, nature
of the product is considered as the base, if the product is non-perishable, then it
can be produced away from the market but if it is perishable then its plant
location should be very near to the market. If a product consumes heavy raw
materials then it has to be located near the raw material site.
According to Dr. Visvesvrirya the decision of plant location should be based on
nine Ms, namely, Money, Material, Manpower, Market, Motive, Management,
Machinery, Means of communication and Momentum and one P : Power, to an
early start.
In particular the choice of plant location should be based on following
considerations:
1. Nature and Availability of Raw Material: An ideal location is the one
where the main raw material needed is sufficiently available. Proximity to the
source of the raw materials is also an important criterion especially when raw
material is of perishable nature. Also if a raw material is heavy, it is difficult to
transport and if it is required in large quantities, then the manufacturing plant

has to be located at the site where such material is available. Otherwise the cost
of loading and transportation can be very high. The time consumed and
managerial effort inputs due to this will also increase. As a result, the economics
of manufacturing goes out of scale and the product becomes uncompetitive. This
is the reason why Steel Mills are located at Bihar and Sugar Mills near the
sugarcane producing regions like Kolhapur and Sangli in Maharashtra.
2. Type of Workforce Requirement: Some of the manufacturing operations
require skilled workforce in its manufacturing operations. Skilled workforce itself
requires well-cultured surroundings, opportunities of advancement through
further studies and experience sharing, competition and recreational facilities.
Normally, such a facilitating environment is there in urban areas. One can
establish such an environment in rural areas also but it is a very costly and time
consuming process. Absence of these factors makes the retaining of skilled
workers a very difficult task. Skilled workforce is already available at urban
places. So such plants are located very near to cities. The software industries are
located at Banglore, Hyderabad, and Pune. These cities have good educational
and training institutions along with other promotional factors, which are
providing ample skilled workforce for the software industry. Engineering and
Automotive sector which needs skilled workforce are located in well developed
areas.
In some manufacturing operations, unskilled labor force is required in more
numbers. Normally, rural areas have larger unskilled workforce. Hence, labor
intensive plants are located away from the city in rural areas.
3. Proximity to Market: Since perishable products do not last long, the market
has to be nearby. For low cost of transport and distribution, nearness to the
markets is necessary. This is the reason for milk and milk product industries to be
near cities while non-perishable products like TV, Fridge, and Engineering
products are in Industrial Areas.
4. Availability of Infrastructure: Basic facilities of land, well connected roads,
power and water are called as infrastructure. Such facilities are not only essential
but are the backbone of the industry. Presence of these facilities makes
management of manufacturing easy and less costly, whereas the absence of
infrastructure makes manufacturing very difficult and costly.
a) Availability of Power and Fuel: Industries consume power in large
quantities. They depend on power. An industry will choose a site where there is
uninterrupted and cheap power supply available. This is what was observed in
the Industrial Development of Maharashtra, whereas West Bengal is far behind in
industrial development. In place of power, if coal or other materials are used as
the fuel their availability will locate the plants nearby. We find a thermal power
station in Chandrapur and Nagpur where coal is available cheaply.
b) Availability of Water: Chemical industries, food industries dose a lot of
water for their processing. Similarly, waste and bi-products of these industries
are hazardous and required to be discharged in flowing water after treatment.
So, one finds that chemical and pharmaceutical industries are located near to
sea or river. At Thal Yaishet in Maharashtra and Bharuch, Ankaleshwar in Gujarat
special chemical industrial zones are created and industries such as dyes,
pigments and pharmaceutical are located there.
c) Transport Facilities: Every industry requires transport of raw materials,
finished products as well as their workforce and support services. Availability of
transport network facilities decides the site selection. Cheaper transport reduces

transportation costs. One can observe that well connectivity by rail and good
roads brings in lot of industries. Water transport is the cheapest. Where there is
sea and connecting rivers/ canals then the industries are developed very fast.
Well connectivity by sea, rail, road and air along with other promotional factors
has made Mumbai , business capital of India.
d) Land: Locating a plant\ant requires land. The land must be suitable to
support the industry. It should have good natural drainage. It should be free from
all encroachments. It should be easily accessible. Land must be available not
only as per present requirements but for future expansion also. The cost factor
should also be paid attention to, as this will lead to, low capital investment.
5. Climatic and Atmospheric Conditions: The climatic conditions of the site
wrt. Humidity, temperature and other atmospheric conditions should be
favorable to the plant. Certain manufacturing processes require special or typical
climatic and atmospheric conditions. Such factories are located in that particular
climatic conditional zone. The Tea and Coffee industry needs a cold climate
hence they are situated in cold areas such as Ooty and Assam. The textile
industry requires humid atmospheric conditions. This is why one finds that textile
industries are concentrated in Mumbai and Ahmedabad.
6. Presence of Ancillaries/Related Industries: Capital goods manufacturing
require number of sub-assemblies/spares. It is practically, the existence of
ancillaries/related industries which help the selection of the location of the
factory site. In and around Pune, Tata Motors has developed number of ancillary
units; this has given boost to other engineering units.
7. Availability of Support Services and Amenities: While selecting a factory
location one must also see availability of recreational facilities, post and
telegraph facilities, hospitals etc.If these facilities are not available, these are
made available for ease of the production operation as well as to retain the
workforce.
8. Industrial Policy of State: Governments have the challenging task of
industrial development for employment generation and overall development of a
state. State forms industrial policies for attracting industries and investment in
the state. Under industrial policy, land at low cost, cheap and ample power and
water supply, exemption of stamp duty, subsidy on capital investment and other
benefits of Sales tax concession are given. This keeps the initial cost of operation
low.

Operations Planning and Control

Essentially, the manager's task is to co-ordinate and organise the resources of
the organisation in the most efficient way to provide the best value for the
organisation's stakeholders. This is true of both profit and non-profit
organisations.
The resources available will include people, time,
equipment, technology, buildings, facilities and land.

information,

money,

This coordination task is complex and therefore the manager needs to create a
formal document called an Operational Plan. This document collects, organises
and communicates a great deal of information that enables the reader to know

and understand what needs to be done, by whom and when to make progress
towards creating the best value for the stakeholders of the organisation.
Generally, it is the task of the manager to create the Operational Plan but it will
usually go through an approval process by the board/committee of the
organisation.
Purpose of an Operational Plan
It is important to understand the difference between an "operational plan" and a
"strategic plan". The strategic plan is about setting a direction for the
organisation, devising goals and objectives and identifying a range of strategies
to pursue so that the organisation might achieve its goals. The strategic plan is a
general guide for the management of the organisation according to the priorities
and goals ofstakeholders. The strategic plan DOES NOT stipulate the day-to-day
tasks and activities involved in running the
organisation.
On the other hand the Operational Plan
DOES present highly detailed information
specifically to direct people to perform the
day-to-day tasks required in the running
the
organisation.
Organisation
management and staff should frequently refer to the operational plan in carrying
out their everyday work. The Operational Plan provides the what, who, when and
how much:
what - the strategies and tasks that must be undertaken
who - the persons who have responsibility of each of the strategies/tasks
when - the timelines in which strategies/tasks must be completed
how much - the amount of financial resources provided to complete each
strategy/task
The difference between and operational and strategic plans
Strategic Plan

Operational Plan

A general guide for the management A specific plan for the use of the
of the organisation
organisation's resources in pursuit of
the strategic plan.
Suggests strategies to be employed in Details specific activities and events to
pursuit of the organisation's goals
be undertaken to implement strategies
Is a plan for the pursuit of Is
a
plan
for
the
day-to-day
the organisation's mission in the longer management of the organisation (one
term (3 - 5 years)
year time frame)
A strategic plan enables management An operational plan should not be
to formulate an operational plan.
formulated without reference to a
strategic plan
The strategic plan, once formulated, Operational plans may differ from year
tends not to be significantly changed to year significantly

every year
The development of the strategic plan The operational plan is produced by
is a responsibility shared and involves the chief executive and staff of the
different categories of stakeholders.
organisation.
The purpose of the Operational Plan is to provide organisation personnel with a
clear picture of their tasks and responsibilities in line with the goals and
objectives contained within the Strategic Plan.
Basically, the Operational Plan is a plan for the implementation of strategies
contained within the Strategic Plan.
It is a management tool that facilitates the
co-ordination of the organisation's resources
(human, financial and physical) so that goals
and objectives in the strategic plan can be
ac
Developing an Operational Plan
An Operational Plan is the next step
after a Strategic Plan has been created
(see difference between strategic plan and
operational plan).
The task is to take every single
strategy
contained
within
the
Strategic Plan and allocate resources,
set
a
timeline
and
stipulate
performance indicators.

Scope of the operation planning and control:

Operation planning & control is the process of planning production in advance,
setting rate of each item, fixing starting & finishing dates for each item,
authorizing shop activity by releasing production orders and fixing expediting
when required.
Planning is forward thinking while control is mechanism for execution.
In brief Planning is centralised activity (in office) and includes such functions as
material control, tool control, process planning, scheduling. Control is thus a
diffused activity (in the shops) and includes functions such as dispatching,
progressing and expediting.
Scope of OPC department in organisation:
Scope of the OPC department is depends on following factors:
1) Status of OPC department in company:
a) If the work is highly repetitive & number of workman is not very large,
the work of planning performed directly by the line staff, there is no
formal OPC department.

b) And in manufacturing units where plant & machinery is laid out as per
sequence of operations & there is little difference in machine capacity
for different products OPC may be sub-division of the manufacturing
department.
c) In firm where product variety is large and plant or machinery is laid out
as per function in different department not relate to each other OPC
should be set up as independent department.
2) Degree of centralisation: implies extent to which planning activities
performed by OPC. Two system there
a) Centralised planning: where the function of production planning is
controlled by staff specialist.
b) Decentralised planning: where the planning is carried out by line
executives-foreman-who direct normal work in their respective
department.
3) The internal structure:
It implies the function to be assigned to OPC which depend on nature of the
industry, size of the company and the management policies. In general company
assigned following functions to OPC department:
a) Order preparation
b) Material control
c) Tools control
d) Process planning
e) Scheduling
f) Dispatching
g) Progressing
h) Expediting
Some optional functions are:
I.
Cost Estimation
II.
Work measurement
III.
Demand forecasting
IV.
Sub-contracting
V.
Capacity planning
OPC scope in different process.
Manufacturing methods can basically classified in following types;

1) Function of OPC in job process:

a) Materials are purchased on receipt of order unlike in batch or
continuous process where material requirement planned well in
advanced.
b) Tool control function is simple. Standard tools are stoked while special
tools are either made on shop floor by the operators or purchased on
request from supervisor.
c) Process planning activity is almost absent. Drawing and specifications
are directly given to supervisor who is expected to decide work
methods, select optimum process, fix up machine tools to be used and
estimate time required to complete operation.
d) The scheduling activity is more or less decentralised. It is prepared to
show the start and completion date of each major component of the
product. Day to day activity scheduling is left to individual shop
supervisor.
Day today information on the progress of the work on shop floor is difficult due to
slow-moving activities. Supervisors attending Production meeting to improve
control, thus expected to account for job progress.
2) Function of OPC in Batch process: are more complex than Job & Flow
process
a) Material control and tool control functions are important. Scientific
stock control system need to be used to ensure routine replacement.
b) Detailed operational layouts and route sheets are prepared for each
part of the product.

c) Loading and scheduling need to be more detailed and more

sophisticated since every machine requires to be individually
scheduled.
d) Progressing function is very important to collect information on
progress of the work. A separate progress card need to be maintained
to record progress of each component.
e) Expediting is generally necessary since job many a times due to
imbalances in work contents tend to lag behind.
3) OPC function in assemblyprocess:
a) Material control required low, as WIP inventory
manufacturing line is balanced.
b) Tool control relatively low.
c) Scheduling activity is relatively simple & routine.

is

low

since

4) OPC function in continuous process:

a) Material control function is of crucial importance. Material need to be
planned well in advanced. Scientific inventory control system is must
for such plants.
b) Tool control function is almost absent because of the nature of the
plant.
c) Process planning activity is absolutely not required since it is the plant
which decides the route.
d) Scheduling activity is very simple and is merely restricted to final
targets.
e) Progressing and expediting function are extremely simplified are merely
limited to recording of the final production at the end of the shift.

PREPARATION OF PROJECT REPORT

After the market survey and final selection of the products a project profile is to be
prepared. This is a brief description of the project and would include the following
details:
1. Introduction about the promoter, giving his complete Bio-data(i.e. age,
educational and professional qualification, Past experience, Present activity and
relationship with each other in case of partnership concerns).
2. Manufacturing process. All operations, which are to be carried out from the
Raw Material stage to be finished stage, are to be explained in detail.
3. Market Survey report (considering Market demand, market supply, competitors,
our market share) is to be included.

4. Installed capacity of the plant, capacity utilization, during initial 1-3years and
Annual Sales.
5. Complete details about the land and building (e.g. cost, area etc.). These are to
be supposed by documentary evidence and building plans prepared by an
approved Architect.
6. Details of the Plant Machinery. To be supported with quotations from three
different suppliers. This should include expenses incurred on taxes,
transportation, installation, accessories etc.
7. Details of the Annual requirement of Raw Material and consumables, also to be
supported with quotations.
8. All annual expenses (e.g. Utilities, Administrative expenses, Repair and
Maintenance, Salaries, Selling expenses, packing and forwarding expenses etc).
9. Working capital requirement, showing the margin on working capital and Bank
finance required. Items considered for working capital are:
o Raw material stock
o Finished Goods stock
o Work in process
o Bills receivable
o Working expenses
10.Cost of the project : The items to be included in this area as follows:
o Land
o Building
o Plant and Machinery
o Misc. Fixed Assets
o Contingencies
o Pre-operative Expenses

o Margin on Working Capital

Means of Finance
o Term loan
o Promoters Contribution
o Subsidy (if applicable)
o Special Capital Assistance (if applicable) (or seed capital)
Following Annexures are to be included in the Feasibility Report.
11. Calculation of Interest and Repayment of Term Loan:
The repayment schedule is prepared in equal Annual installments according to
the repayment period allowed by the financial institution. Along with this, the
interest for each year is calculated at the rate applicable in the financial
institution.
12.Calculation of Depreciation:
The depreciation of Building, Machinery and miscellaneous fixed assets is
calculated for the complete repayment period
13.The cost of production and profitability:
This is calculated for the repayment period and would include all direct and
indirect annual recurring expenses.
14.Debt Service Coverage Ratio:
the method for calculation the D.S.C.R. is given below:
Calculate the total (A), of
o Profit after Tax
o Depreciation
o Interest on term loan
Then the total (B), of

o Repayment of term loan and interest on term loan

Average D.S.C.R. is A/B
15.Cash Flow Statement:
Sources of funds is calculated by adding up the following for the complete
repayment period:
o Profit before tax with interest added back
o Depreciation
o Increase in Term Loan
o Increase in Bank Finance
o Increase in Promoters Contribution
Then calculate disposition of funds by totalling
o Increase in Fixed Assets
o Decrease in Term Loan
o Increase in Current Assets
o Interest on Term Loan and Working Capital
o Income Tax
Total of sources of funds - total of Disposition of funds = Surplus/Deficit
Opening Balance + Surplus = Closing Balance (Starting from nil doing 1st year)
This is completed for the complete repayment period
16.Projected Balance Sheet:
Preparation of project balance sheet as follows:
o Reserves and Surplus
o Term Loan

o Promoter's Contribution
o Bank Borrowing (Bank Finance of working Capital)
Assets : Total of
o Net Block Assets
o Fixed assets- Depreciation (cumulate Depreciation over the operating
years)
o Current Assets
o Cash and bank Balance
The total of liabilities and total Assets should tally for each operating year
individually, for a correct Balance Sheet.>/p>
17.Break Even Point:
This is the level of production at which the unit is running at no profit no loss.
Hence , it is essential to calculate the BEP to ascertain the level of production at
which the units starts earning profits. It is calculated as follows:
BEP=( Fixed Cost * Percentage of optimum cap. Utilization) * 100/
contribution
Contribution = Sales - Variable Cost
This is calculated for the year during which the unit reaches optimum capacity
utilization.
After preparation of the project Report the Entrepreneur is required to get the
provisional Registration Certificate from the concerned District Industries
Center, and the Application for the Term loan and Working Capital with the
Financial Institution/ Bank Depending upon the scheme under which he wishes
to apply.
Check List of Document to be submitted alongwith the loan application
The number of documents shall depend upon product size, nature and location of
project
1. Prescribe application form in Duplicate
2. Project Report in Duplicate

3. List of total movable and immovable Assets of the promoters.

4. Income Tax and Wealth Tax details of last three years, with copies of
Assessment / Return if applicable.
5. Provisional Registration Certificate from the concerned District Industries
Centre.
6. Memorandum of Articles of Association and Certificate of in corporation (in
case of Company).
7. Certified copy of Registration Certificate issued by the Registrar of firms ( if
partnership concern) if forms 'A' and 'C'.
8. Registration with the Tourism Department, and the licence for eating house in
case of Hotel Industry.
9. Permission/licence from Competent Authority (in case of Textile, Drugs, Foods
etc.).
10.Certified copy of sale deed in respect of land. (The land should be in the name
of sole proprietor/partner/company whichever applicable
OR
Rent agreement in case of rented premises.
11. Three quotation in respect of each item of plant and machinery and raw
material, proposed to be purchased.
12.Details of power requirement and tie-up with State Electricity Board.
13.Copy of instructions to your Bankers to give full information about the concern
on request to State Financial Corporation.
14.Permission from Water Pollution Control Board.
15. Approved Building plan from Competent Authority with cost estimates

The DPR is prepared by highly qualified and experienced consultants and the market
research and analysis are supported by a panel of experts and computerised data bank.
BRIEF CONTENTS ARE AS FOLLOWS
1. Introduction
2. Properties
3. Uses & Application
4. B.I.S. Specifications
5. Market Survey
6. Raw Materials
7. Manufacturing Process
8. Process Description
9. Process Flow Diagram
10. Plant Layout
11. Details of Plant & Machinery
12. Suppliers of Raw Materials
13. Suppliers of Plant & Machinery
14. Principles of Plant Layout
15. Plant Location Factors
16. List of State Industrial Development Corporations (which provide financial and other
incentives)
17. Suggested Steps
18. Plant Economics
19. Land and Building Costs
20. Plant and Machinery Costs
21. Other Fixed Assets
22. Fixed Capital Investment
23. Raw Material Costs
24. Salaries and Wages
25. Utilities and Overheads
26. Total Working Capital
27. Cost of Project
28. Total Capital Investment
29. Cost of Production
30. Turnover per Annum
31. Profitability Analysis
32. 5-year Profit Analysis
33. Break-even Point
34. Resources of Finance
35. Interest Installment Chart
36. Depreciation Chart
37. Cash Flow Statement

38. Projected Balance Sheet

Funds
INTRODUCTION
Despite all the differences among companies, there are only a few sources of
funds available to all firms.
1. They make profit by selling a product for more than it costs to produce. This is
the most basic source of funds for any company and hopefully the method that
brings in the most money.
2. Like individuals, companies can borrow money. This can be done privately
through bank loans, or it can be done publicly through a debt issue. The
drawback of borrowing money is the interest that must be paid to the lender.
3. A company can generate money by selling part of itself in the form of shares
to investors, which is known as equity funding. The benefit of this is that
investors do not require interest payments like bondholders do. The drawback is
that further profits are divided among all shareholders.
In an ideal world, a company would bring in all of its cash simply by selling goods
and services for a profit. But, as the old saying goes, "you have to spend money
to make money," and just about every company has to raise funds at some point
to develop products and expand into new markets.
When evaluating companies, it is most important to look at the balance of the
major sources of funding. For example, too much debt can get a company into
trouble. On the other hand, a company might be missing growth prospects if it
doesn't use money that it can borrow

SOURCES OF FUNDS
Grants are made to non-profit organizations by development assistance
agencies and foundations. Usually grants do not have to be repaid. Grant money
is available to enhance country institutional capacity, to support governmental
and non-governmental institutions and to finance project formulation, policy
reform and sector management and development. Grants are provided by
bilateral donors, multilateral grant aid institutions, United Nations organizations
and specialized agencies, international financing institutions, international nongovernmental organizations, the private sector, foundations and charity
organizations.
Loans, unlike grants, have to be repaid. Loans can be obtained from most
banks, but development assistance agencies may provide loans for development
priorities at preferential rates of interest, with an initial interest free period,
repayable over the long term. To justify a loan a strong business case must be
made. Loans are made to borrowing countries that are further up the

development ladder and to the private sector and development groups in all
countries. Loans are made at near-to-commercial conditions reflecting the cost of
resource mobilization on capital markets plus a small fund administration margin
to cover a donor's operational costs. Interest rates are generally variable. Loans
are generally repayable over 15 to 20 years and often include up to a five-year
grace period. There are some interest-free loans but these carry an annual
service charge and a commitment fee is usually applied. These loans are
repayable over 25 to 50 years with a maximum ten-year grace period.
Equity investments enable persons and institutions to invest in shareholding of
a company managing or implementing a sustainable forest management project.
The investment may make an enterprise viable or enable it to expand, while the
new shareholder will benefit through shareholder voting rights and dividends on
profits.
Co-funding is provided by some donor agencies to complement existing
funding. Depending on the proposal, it may be possible to find an agency that
provides the full cost of a project proposal. However, it is frequently the case
that funding is only available on the basis of shared cost. It may be necessary,
therefore, to identify perhaps as much as 50% of the project cost from other
sources of funding. If an agency requires co-funding, it is important to include a
co-funding component in the project proposal. To secure co-funding it is
necessary to identify existing matching funds. Complementary projects being
formulated by other groups may provide possible sources of co-funding.
Large corporations could not have grown to their present size without being able
to find innovative ways to raise capital to finance expansion. Corporations have
five primary methods for obtaining that money.
Issuing Bonds. A bond is a written promise to pay back a specific amount of
money at a certain date or dates in the future. In the interim, bondholders
receive interest payments at fixed rates on specified dates. Holders can sell
bonds to someone else before they are due.
Corporations benefit by issuing bonds because the interest rates they must pay
investors are generally lower than rates for most other types of borrowing and
because interest paid on bonds is considered to be a tax-deductible business
expense. However, corporations must make interest payments even when they
are not showing profits. If investors doubt a company's ability to meet its interest
obligations, they either will refuse to buy its bonds or will demand a higher rate
of interest to compensate them for their increased risk. For this reason, smaller
corporations can seldom raise much capital by issuing bonds.
Issuing Preferred Stock. A company may choose to issue new "preferred"
stock to raise capital. Buyers of these shares have special status in the event the
underlying company encounters financial trouble. If profits are limited, preferredstock owners will be paid their dividends after bondholders receive their
guaranteed interest payments but before any common stock dividends are paid.
Selling Common Stock. If a company is in good financial health, it can raise
capital by issuing common stock. Typically, investment banks help companies
issue stock, agreeing to buy any new shares issued at a set price if the public
refuses to buy the stock at a certain minimum price. Although common
shareholders have the exclusive right to elect a corporation's board of directors,
they rank behind holders of bonds and preferred stock when it comes to sharing
profits.

Investors are attracted to stocks in two ways. Some companies pay large
dividends, offering investors a steady income. But others pay little or no
dividends, hoping instead to attract shareholders by improving corporate
profitability -- and hence, the value of the shares themselves. In general, the
value of shares increases as investors come to expect corporate earnings to rise.
Companies whose stock prices rise substantially often "split" the shares, paying
each holder, say, one additional share for each share held. This does not raise
any capital for the corporation, but it makes it easier for stockholders to sell
shares on the open market. In a two-for-one split, for instance, the stock's price
is initially cut in half, attracting investors.
Borrowing. Companies can also raise short-term capital -- usually to finance
inventories -- by getting loans from banks or other lenders.
Using profits. As noted, companies also can finance their operations by
retaining their earnings. Strategies concerning retained earnings vary. Some
corporations, especially electric, gas, and other utilities, pay out most of their
profits as dividends to their stockholders. Others distribute, say, 50 percent of
earnings to shareholders in dividends, keeping the rest to pay for operations and
expansion. Still other corporations, often the smaller ones, prefer to reinvest
most or all of their net income in research and expansion, hoping to reward
investors by rapidly increasing the value of their shares.
Funds from operations: Funds from Operations (FFO) is a measure of cash
generated by a real estate investment trust (REIT). It is important to note that
FFO is not the same as Cash from Operations, which is a key component of the
indirect-method cash flow statement.
The formula for FFO is:
Funds from Operations = Net Income + Depreciation + Amortization - Gains on
Sales of Property
Issue of shares: Shares in Issue amount, is the current number of ordinary
shares in issue and it is expressed in millions.
Issue of debenture: A debenture is an instrument of debt executed by the
company acknowledging its obligation to repay the sum at a specified rate and
also carrying an interest. It is only one of the methods of raising the loan capital
of the company. A debenture is thus like a certificate of loan or a loan bond
evidencing the fact that the company is liable to pay a specified amount with
interest and although the money raised by the debentures becomes a part of the
company's capital structure, it does not become share capital.
Internal Methods of Improving Cash Flow
If a business faces ongoing cash flow problems, then if the business is in other
ways successful, it is good management to look for internal methods of solving
or reducing the problem, some of the more successful methods are outlined
below.
1. Stock management - Often cash flow problems arise because too much
capital is tied up in stock. When we talk about stock we mean raw
materials, work-in-progress and finished goods. Many firms are now
implementing practices such as Just-in Time, and Kan Ban, which are
designed to reduce capital tied up in stock and allow it to be used in more
effective ways within the business.
2. Manpower management - Examining manpower costs can reduce
outflows of cash. Is it necessary to have permanent contracts for all
workers? Can some work be sub-contracted, or can some work be

transferred to temporarily contracted workers? Doing this can save

expenditure on pensions, National Insurance, holiday pay etc.
3. Budgeting - Why base next years budgets on last year's budgets? Why
not start with a clean slate and opt for Zero Budgeting?
These methods can save on business costs and in larger organizations often
prove the best long-term solution to cash flow and liquidity management
problems.
UTILISATION OF FUNDS OR FINANCE MANAGEMENT
Finance is the science of funds management. The general areas of finance are
business finance, personal finance, and public finance. Finance includes
saving money and often includes lending money. The field of finance deals with
the concepts of time, money and risk and how they are interrelated. It also deals
with how money is spent and budgeted.
Finance works most basically through individuals and business organizations
depositing money in a bank. The bank then lends the money out to other
individuals or corporations for consumption or investment, and charges interest
on the loans.
Loans have become increasingly packaged for resale, meaning that an investor
buys the loan (debt) from a bank or directly from a corporation. Bonds are debt
sold directly to investors from corporations, while that investor can then hold the
debt and collect the interest or sell the debt on a secondary market. Banks are
the main facilitators of funding through the provision of credit, although private
equity, mutual funds, hedge funds, and other organizations have become
important as they invest in various forms of debt. Financial assets, known as
investments, are financially managed with careful attention to financial risk
management to control financial risk. Financial instruments allow many forms of
securitized assets to be traded on securities exchanges such as stock exchanges,
including debt such as bonds as well as equity in publicly-traded corporations.
Central banks act as lenders of last resort and control the money supply, which
affects the interest rates charged. As money supply increases, interest rates
decrease.
Loss from operations
Amount by which the cost of goods sold plus operating expenses exceeds
operating revenues. The net loss from operations applies only to the normal
business activities of the entity. Excluded are financial revenue and expense
items and ancillary operations of the firm (i.e., extraordinary items). However,
interest would be an includable expense in calculating Net Operating Loss for
carryforward purposes.
Redemption of shares
The company may choose to repurchase if it has cash available, as an alternative
to investing it in expanding the business. Or it may issue bonds to raise the
money it needs to repurchase, which changes the company's debt-to-equity
ratio.
Corporate finance
Managerial or corporate finance is the task of providing the funds for a
corporation's activities. For small business, this is referred to as SME finance. It

generally involves balancing risk and profitability, while attempting to maximize

an entity's wealth and the value of its stock.
Long term funds are provided by ownership equity and long-term credit, often in
the form of bonds. The balance between these forms the company's capital
structure. Short-term funding or working capital is mostly provided by banks
extending a line of credit.
Another business decision concerning finance is investment, or fund
management. An investment is an acquisition of an asset in the hope that it will
maintain or increase its value. In investment management in choosing a
portfolio one has to decide what, how much and when to invest. To do this, a
company must:
Identify relevant objectives and constraints: institution or individual goals,
time horizon, risk aversion and tax considerations;
Identify the appropriate strategy: active v. passive hedging strategy
Measure the portfolio performance
Financial management is duplicate with the financial function of the Accounting
profession. However, financial accounting is more concerned with the reporting
of historical financial information, while the financial decision is directed toward
the future of the firm.
Capital
Capital, in the financial sense, is the money that gives the business the power to
buy goods to be used in the production of other goods or the offering of a
service.
The desirability of budgeting
Budget is a document which documents the plan of the business. This may
include the objective of business, targets set, and results in financial terms, e.g.,
the target set for sale, resulting cost, growth, required investment to achieve the
planned sales, and financing source for the investment. Also budget may be long
term or short term. Long term budgets have a time horizon of 510 years giving
a vision to the company; short term is an annual budget which is drawn to
control and operate in that particular year.
Capital budget
This concerns proposed fixed asset requirements and how these expenditures
will be financed. Capital budgets are often adjusted annually and should be part
of a longer-term Capital Improvements Plan.
Cash budget
Working capital requirements of a business should be monitored at all times to
ensure that there are sufficient funds available to meet short-term expenses.
The cash budget is basically a detailed plan that shows all expected sources and
uses of cash. The cash budget has the following six main sections:
1. Beginning Cash Balance - contains the last period's closing cash
balance.
2. Cash collections - includes all expected cash receipts (all sources of cash
for the period considered, mainly sales)
3. Cash disbursements - lists all planned cash outflows for the period,
excluding interest payments on short-term loans, which appear in the
financing section. All expenses that do not affect cash flow are excluded
from this list (e.g. depreciation, amortisation, etc)

4. Cash excess or deficiency - a function of the cash needs and cash

available. Cash needs are determined by the total cash disbursements
plus the minimum cash balance required by company policy. If total cash
available is less than cash needs, a deficiency exists.
5. Financing - discloses the planned borrowings and repayments, including
interest.
6. Ending Cash balance - simply reveals the planned ending cash balance.
Management of current assets
Credit policy
Credit gives the customer the opportunity to buy goods and services, and pay for
them at a later date.
Advantages of credit trade
Usually results in more customers than cash trade.
Can charge more for goods to cover the risk of bad debt.
Gain goodwill and loyalty of customers.
People can buy goods and pay for them at a later date.
Farmers can buy seeds and implements, and pay for them only after the
harvest.
Stimulates agricultural and industrial production and commerce.
Can be used as a promotional tool.
Increase the sales.
Modest rates to be filled.
Disadvantages of credit trade
Risk of bad debt.
High administration expenses.
People can buy more than they can afford.
More working capital needed.
Risk of Bankruptcy.
May lose peace of mind.
Forms of credit
Suppliers credit:
Credit on ordinary open account
Installment sales
Bills of exchange
Credit cards
Contractor's credit
Factoring of debtors
Cash credit
Cpf credits
Exchange of product
Factors which influence credit conditions
Nature of the business's activities
Financial position
Product durability
Length of production process
Competition and competitors' credit conditions
Country's economic position

 Conditions at financial institutions

Discount for early payment
Debtor's type of business and financial positions
Credit collection
Overdue accounts
Attach a notice of overdue account to statement.
Send a letter asking for settlement of debt.
Send a second or third letter if first is ineffectual.
Threaten legal action.
Effective credit control
Increases sales
Reduces bad debts
Increases profits
Builds customer loyalty
Builds confidence of financial industry
increase company capitlisation
Sources of information on creditworthiness
Business references
Bank references
credit agencies
Chambers of commerce
Employers
Credit application forms
Credit repair companies
Duties of the credit department
Legal action
Taking necessary steps to ensure settlement of account
Knowing the credit policy and procedures for credit control
Setting credit limits
Ensuring that statements of account are sent out
Ensuring that thorough checks are carried out on credit customers
Keeping records of all amounts owing
Ensuring that debts are settled promptly
Timely reporting to the upper level of management for
management.
Stock
Purpose of stock control
Ensures that enough stock is on hand to satisfy demand.
Protects and monitors theft.
Safeguards against having to stockpile.
Allows for control over selling and cost price.

better

Stockpiling
This refers to the purchase of stock at the right time, at the right price and in the
right quantities.
There are several advantages to the stockpiling, the following are some of the
examples:

 Losses due to price fluctuations and stock loss kept to a minimum

Ensures that goods reach customers timeously; better service
Saves space and storage cost
Investment of working capital kept to minimum
No loss in production due to delays
There are several disadvantages to the stockpiling, the following are some of the
examples:
Obsolescence
Danger of fire and theft
Initial working capital investment is very large
Losses due to price fluctuation
Rate of stock turnover
This refers to the number of times per year that the average level of stock is
sold. It may be worked out by dividing the cost price of goods sold by the cost
price of the average stock level.
Determining optimum stock levels
Maximum stock level refers to the maximum stock level that may be
maintained to ensure cost effectiveness.
Minimum stock level refers to the point below which the stock level may
not go.
Standard order refers to the amount of stock generally ordered.
Order level refers to the stock level which calls for an order to be made.
Cash
Reasons for keeping cash
Cash is usually referred to as the "king" in finance, as it is the most liquid
asset.
The transaction motive refers to the money kept available to pay
expenses.
The precautionary motive refers to the money kept aside for unforeseen
expenses.
The speculative motive refers to the money kept aside to take
advantage of suddenly arising opportunities.
Advantages of sufficient cash
Current liabilties may be catered for.
Cash discounts are given for cash payments.
Production is kept moving
Surplus cash may be invested on a short-term basis.
The business is able to pay its accounts in a timely manner, allowing for
easily-obtained credit.
Liquidity
Management of fixed assets
Depreciation
Depreciation is the allocation of the cost of an asset over its useful life as
determined at the time of purchase. It is calculated yearly to enforce the
matching principle.
Insurance
Insurance is the undertaking of one party to indemnify another, in exchange for
a premium, against a certain eventuality.

Uninsured risks
Bad debt
Changes in fashion
Time lapses between ordering and delivery
New machinery or technology
Different prices at different places
Requirements of an insurance contract
Insurable interest
The insured must derive a real financial gain from that which he is
insuring, or stand to lose if it is destroyed or lost.
The item must belong to the insured.
One person may take out insurance on the life of another if the
second party owes the first money.
Must be some person or item which can, legally, be insured.
The insured must have a legal claim to that which he is insuring.
Good faith
Uberrimae fidei refers to absolute honesty and must characterise
the dealings of both the insurer and the insured.
Shared Services
There is currently a move towards converging and consolidating Finance
provisions into shared services within an organization. Rather than an
organization having a number of separate Finance departments performing the
same tasks from different locations a more centralized version can be created.
Finance of states
Country, state, county, city or municipality finance is called public finance. It is
concerned with
Identification of required expenditure of a public sector entity
Source(s) of that entity's revenue
The budgeting process
Debt issuance (municipal bonds) for public works projects
Financial Economics
Financial economics is the branch of economics studying the interrelation of
financial variables, such as prices, interest rates and shares, as opposed to those
concerning the real economy. Financial economics concentrates on influences of
real economic variables on financial ones, in contrast to pure finance.
It studies:
Valuation - Determination of the fair value of an asset
How risky is the asset? (identification of the asset appropriate
discount rate)
What cash flows will it produce? (discounting of relevant cash flows)
How does the market price compare to similar assets? (relative
valuation)
Are the cash flows dependent on some other asset or event?
(derivatives, contingent claim valuation)
Financial markets and instruments
Commodities - topics
Stocks - topics
Bonds - topics

 Money market instruments- topics

Derivatives - topics
Financial institutions and regulation
Financial Econometrics is the branch of Financial Economics that uses
econometric techniques to parameterise the relationships.
Financial mathematics
Financial mathematics is a main branch of applied mathematics concerned with
the financial markets. Financial mathematics is the study of financial data with
the tools of mathematics, mainly statistics. Such data can be movements of
securitiesstocks and bonds etc.and their relations. Another large subfield is
insurance mathematics.
Experimental finance
Experimental finance aims to establish different market settings and
environments to observe experimentally and provide a lens through which
science can analyze agents' behavior and the resulting characteristics of trading
flows, information diffusion and aggregation, price setting mechanisms, and
returns processes. Researchers in experimental finance can study to what extent
existing financial economics theory makes valid predictions, and attempt to
discover new principles on which such theory can be extended. Research may
proceed by conducting trading simulations or by establishing and studying the
behaviour of people in artificial competitive market-like settings.
Behavioral finance
Behavioral Finance studies how the psychology of investors or managers affects
financial decisions and markets. Behavioral finance has grown over the last few
decades to become central to finance.
Behavioral finance includes such topics as:
1. Empirical studies that demonstrate significant deviations from classical
theories.
2. Models of how psychology affects trading and prices
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of models to forecast
experiments.
A strand of behavioral finance has been dubbed Quantitative Behavioral Finance,
which uses mathematical and statistical methodology to understand behavioral
biases in conjunction with valuation. Some of this endeavor has been lead by
Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral
Finance during 2001-2004) and collaborators including Vernon Smith (2002
Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva,
Ahmet Duran, Huseyin Merdan). Studies by Jeff Madura, Ray Sturm and others
have demonstrated significant behavioral effects in stocks and exchange traded
funds. Among other topics, quantitative behavioral finance studies behavioral
effects together with the non-classical assumption of the finiteness of assets.

UNIT-3
MARKETING OF FINANCIAL SERVICES
Financial Institutions
Financial sector plays an indispensable role in the overall development of a country. The most
important constituent of this sector is the financial institutions, which act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than
their earnings to those who spend more than their earnings. The financial institutions have
traditionally been the major source of long-term funds for the economy. These institutions
provide a variety of financial products and services to fulfill the varied needs of the commercial
sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to
the industries established in backward areas. Thus, they have helped in reducing regional
disparities by inducing widespread industrial development.
The Government of India, in order to provide adequate supply of credit to various sectors of the
economy, has evolved a well developed structure of financial institutions in the country. These
financial institutions can be broadly categorised into All India institutions and State level
institutions, depending upon the geographical coverage of their operations. At the national level,
they provide long and medium term loans at reasonable rates of interest. They subscribe to the
debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred
payments, etc. Though, the State level institutions are mainly concerned with the development of
medium and small scale enterprises, but they provide the same type of financial assistance as the
national level institutions.
National Level Institutions
A wide variety of financial institutions have been set up at the national level. They cater to the
diverse financial requirements of the entrepreneurs. They include all India development banks
like IDBI, SIDBI, IFCI Ltd, IIBI; specialised financial institutions like IVCF, ICICI Venture
Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc.
1. All-India Development Banks (AIDBs):- Includes those development banks which
provide institutional credit to not only large and medium enterprises but also help in
promotion and development of small scale industrial units.

Industrial Development Bank of India (IDBI):- was established in July 1964 as an

apex financial institution for industrial development in the country. It caters to the
diversified needs of medium and large scale industries in the form of financial
assistance, both direct and indirect. Direct assistance is provided by way of project
loans, underwriting of and direct subscription to industrial securities, soft loans,
technical refund loans, etc. While, indirect assistance is in the form of refinance
facilities to industrial concerns.

Industrial Finance Corporation of India Ltd (IFCI Ltd):- was the first development
finance institution set up in 1948 under the IFCI Act in order to pioneer long-term
institutional credit to medium and large industries. It aims to provide financial
assistance to industry by way of rupee and foreign currency loans,
underwrites/subscribes the issue of stocks, shares, bonds and debentures of
industrial concerns, etc. It has also diversified its activities in the field of merchant
banking, syndication of loans, formulation of rehabilitation programmes,
assignments relating to amalgamations and mergers, etc.

Small Industries Development Bank of India (SIDBI):- was set up by the

Government of India in April 1990, as a wholly owned subsidiary of IDBI. It is the
principal financial institution for promotion, financing and development of small
scale industries in the economy. It aims to empower the Micro, Small and Medium
Enterprises (MSME) sector with a view to contributing to the process of economic
growth, employment generation and balanced regional development.

Industrial Investment Bank of India Ltd (IIBI):- was set up in 1985 under the
Industrial reconstruction Bank of India Act, 1984, as the principal credit and
reconstruction agency for sick industrial units. It was converted into IIBI on March
17, 1997, as a full-fledged development financial institution. It assists industry
mainly in medium and large sector through wide ranging products and services.
Besides project finance, IIBI also provides short duration non-project asset-backed
financing in the form of underwriting/direct subscription, deferred payment
guarantees and working capital/other short-term loans to companies to meet their
fund requirements.

2. Specialised Financial Institutions (SFIs):- are the institutions which have been set up to
serve the increasing financial needs of commerce and trade in the area of venture capital,
credit rating and leasing, etc.

IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital &
Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was
promoted with the objective of broadening entrepreneurial base in the country by
facilitating funding to ventures involving innovative product/process/technology.
Initially, it started providing financial assistance by way of soft loans to promoters
under its 'Risk Capital Scheme' . Since 1988, it also started providing finance
under 'Technology Finance and Development Scheme' to projects for
commercialisation of indigenous technology for new processes, products, market
or services. Over the years, it has acquired great deal of experience in investing in
technology-oriented projects.

ICICI Venture Funds Ltd:- formerly known as Technology Development &

Information Company of India Limited (TDICI), was founded in 1988 as a joint
venture with the Unit Trust of India. Subsequently, it became a fully owned
subsidiary of ICICI. It is a technology venture finance company, set up to sanction
project finance for new technology ventures. The industrial units assisted by it are
in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines,
biotechnology, environmental engineering, etc.

Tourism Finance Corporation of India Ltd. (TFCI):- is a specialised financial

institution set up by the Government of India for promotion and growth of tourist
industry in the country. Apart from conventional tourism projects, it provides
financial assistance for non-conventional tourism projects like amusement parks,
ropeways, car rental services, ferries for inland water transport, etc.

3. Investment Institutions: - are the most popular form of financial intermediaries, which
particularly catering to the needs of small savers and investors. They deploy their assets
largely in marketable securities.

Life Insurance Corporation of India (LIC):- was established in 1956 as a whollyowned corporation of the Government of India. It was formed by the Life
Insurance Corporation Act, 1956, with the objective of spreading life insurance
much more widely and in particular to the rural area. It also extends assistance for
development of infrastructure facilities like housing, rural electrification, water
supply, sewerage, etc. In addition, it extends resource support to other financial
institutions through subscription to their shares and bonds, etc. The Life Insurance
Corporation of India also transacts business abroad and has offices in Fiji,
Mauritius and United Kingdom . Besides the branch operations, the Corporation
has established overseas subsidiaries jointly with reputed local partners in Bahrain,
Nepal and Sri Lanka.

Unit Trust of India (UTI):- was set up as a body corporate under the UTI Act,
1963, with a view to encourage savings and investment. It mobilises savings of
small investors through sale of units and channelises them into corporate
investments mainly by way of secondary capital market operations. Thus, its
primary objective is to stimulate and pool the savings of the middle and low
income groups and enable them to share the benefits of the rapidly growing
industrialisation in the country. In December 2002, the UTI Act, 1963 was
repealed with the passage of Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I
and UTI-II with effect from 1st February 2003.

General Insurance Corporation of India (GIC) :- was formed in pursuance of the

General Insurance Business (Nationalisation) Act, 1972(GIBNA), for the purpose
of superintending, controlling and carrying on the business of general insurance or
non-life insurance. Initially, GIC had four subsidiary branches, namely, National
Insurance Company Ltd , The New India Assurance Company Ltd , The Oriental
Insurance Company Ltd and United India Insurance Company Ltd . But these
branches were delinked from GIC in 2000 to form an association known as
'GIPSA' (General Insurance Public Sector Association).

State Level Institutions

Several financial institutions have been set up at the State level which supplements the financial
assistance provided by the all India institutions. They act as a catalyst for promotion of
investment and industrial development in the respective States. They broadly consist of 'State
financial corporations' and 'State industrial development corporations'.

State Financial Corporations (SFCs):- are the State-level financial institutions which
play a crucial role in the development of small and medium enterprises in the concerned
States. They provide financial assistance in the form of term loans, direct subscription to
equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital,
etc. SFCs have been set up with the objective of catalysing higher investment, generating
greater employment and widening the ownership base of industries. They have also
started providing assistance to newer types of business activities like floriculture, tissue
culture, poultry farming, commercial complexes and services related to engineering,
marketing, etc. There are 18 State Financial Corporations (SFCs) in the country:1. Andhra Pradesh State Financial Corporation (APSFC)
2. Himachal Pradesh Financial Corporation (HPFC)
3. Madhya Pradesh Financial Corporation (MPFC)
4. North Eastern Development Finance Corporation (NEDFI)
5. Rajasthan Finance Corporation (RFC)
6. Tamil Nadu Industrial Investment Corporation Limited
7. Uttar Pradesh Financial Corporation (UPFC)
8. Delhi Financial Corporation (DFC)
9. Gujarat State Financial Corporation (GSFC)
10. The Economic Development Corporation of Goa ( EDC)
11. Haryana Financial Corporation ( HFC )
12. Jammu & Kashmir State Financial Corporation ( JKSFC)
13. Karnataka State Financial Corporation (KSFC)
14. Kerala Financial Corporation ( KFC )
15. Maharashtra State Financial Corporation (MSFC )
16. Odisha State Financial Corporation (OSFC)
17. Punjab Financial Corporation (PFC)
18. West Bengal Financial Corporation (WBFC)

State Industrial Development Corporations (SIDCs):- have been established under the
Companies Act, 1956, as wholly-owned undertakings of State Governments. They have
been set up with the aim of promoting industrial development in the respective States and
providing financial assistance to small entrepreneurs. They are also involved in setting up
of medium and large industrial projects in the joint sector/assisted sector in collaboration
with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety
of promotional activities such as preparation of feasibility reports; conducting industrial
potential surveys; entrepreneurship training and development programmes; as well as
developing industrial areas/estates. The State Industrial Development Corporations in the
country are:1. Assam Industrial Development Corporation Ltd (AIDC)
2. Andaman & Nicobar Islands Integrated Development Corporation Ltd
(ANIIDCO)
3. Andhra Pradesh Industrial Development Corporation Ltd (APIDC)
4. Bihar State Credit and Investment Corporation Ltd. (BICICO)
5. Chhattisgarh State Industrial Development Corporation Limited (CSIDC)
6. Goa Industrial Development Corporation
7. Gujarat Industrial Development Corporation (GIDC)

Venture Capital Financing

'Venture Capital' is an important source of finance for those small and medium-sized firms,
which have very few avenues for raising funds. Although such a business firm may possess a
huge potential for earning large profits in the future and establish itself into a larger enterprise.
But the common investors are generally unwilling to invest their funds in them due to risk
involved in these types of investments. In order to provide financial support to such
entrepreneurial talent and business skills, the concept of venture capital emerged. In a way,
venture capital is a commitment of capital, or shareholdings, for the formation and setting up of
small scale enterprises at the early stages of their life cycle.
Venture capitalists comprise of professionals of various fields. They provide funds (known as
Venture Capital Fund) to these firms after carefully scrutinizing the projects. Their main aim is to
earn huge returns on their investments, but their concepts are totally different from the traditional
moneylenders. They know very well that if they may suffer losses in some project, the others will
compensate the same due to high returns. They take active participation in the management of the
company as well as provide the expertise and qualities of a good banker, technologist, planner
and managers. Thus, the venture capitalist and the entrepreneur literally act as partners.
The venture capital recognises different stages of financing, namely:

Early stage financing - This is the first stage financing when the firm is undertaking
production and need additional funds for selling its products. It involves seed/ initial
finance for supporting a concept or idea of an entrepreneur. The capital is provided for
product development, R&D and initial marketing.

Expansion financing - This is the second stage financing for working capital and
expansion of a business. It involves development financing so as to facilitate the public
issue.

Acquisition/ buyout financing - This later stage involves:i.

Acquisition financing in order to acquire another firm for further growth

ii.

Management buyout financing so as to enable the operating groups/ investors for

acquiring an existing product line or business and
Turnaround financing in order to revitalise and revive the sick enterprises.

iii.

In India, the venture capital funds (VCFs) can be categorised into the following groups:

Those promoted by the Central Government controlled development finance institutions,

for example:

ICICI Venture Funds Ltd.

IFCI Venture Capital Funds Limited (IVCF)

SIDBI Venture Capital Limited (SVCL)

Those promoted by State Government controlled development finance institutions, for

example:

Gujarat Venture Finance Limited (GVFL)

Kerala Venture Capital Fund Pvt Ltd.

Punjab Infotech Venture Fund

Hyderabad Information Technology Venture Enterprises Limited (HITVEL)

Those promoted by public banks, for example:

Canbank Venture Capital Fund

SBI Capital Markets Limited

Those promoted by private sector companies, for example:

IL&FS Trust Company Limited

Infinity Venture India Fund

Those established as an overseas venture capital fund, for example:

Walden International Investment Group

SEAF India Investment & Growth Fund

BTS India Private Equity Fund Limited

All these venture capital funds are governed by the Securities and Exchange Board of India
(SEBI) . SEBI is the nodal agency for registration and regulation of both domestic and overseas
venture capital funds. Accordingly, it has made the following regulations, namely, Securities and
Exchange Board of India (Venture Capital Funds) Regulations 1996 and Securities and Exchange
Board of India (Foreign Venture Capital Investors) Regulations 2000. These regulations provide
broad guidelines and procedures for establishment of venture capital funds both within India and
outside it; their management structure and set up; as well as size and investment criteria's of the
funds.

Merchant Banking
A Merchant bank is a financial institution primarily engaged in internal finance and long term
loans for multinational corporations and governments. It can also be used to describe the private
equity activities of banking. Merchant banks tend to advise corporations and wealthy individuals
on how to use their money. The advice varies from counsel on mergers and acquisitions to
recommendation on the type of credit needed. The job of generating loans and initiating other
complex financial transactions has been taken over by investment banks and private equity firms.
Thus, the function of merchant banking which originated, and grew in Europe was enriched by
American patronage, and these services are now being provided throughout the world by both
banking and Non-banking Institutions. The word Merchant Banking originated among the
Dutch and the Scottish Traders, and was later on developed and professionalized in Britain.
Securities and Exchange Board of India (Merchant Bankers) Rules, 1992 A merchant
banker has been defined as any person who is engaged in the business of issue management either
by making arrangements regarding selling, buying or subscribing to securities or acting as
manager, consultant, adviser or rendering corporate advisory services in relation to such issue
management.
Functions of merchant Banking:
(i) Corporate counseling: Corporate counseling covers counseling in the form of project
counseling, capital restructuring, project management, public issue management, loan
syndication, working capital fixed deposit, lease financing, acceptance credit etc., The scope of
corporate counseling is limited to giving suggestions and opinions to the client and help taking
actions to solve their problems. It is provided to a corporate unit with a view to ensure better
performance, maintain steady growth and create better image among investors.
(ii) Project counseling: Project counseling is a part of corporate counseling and relates to project
finance. It broadly covers the study of the project, offering advisory assistance on the viability
and procedural steps for its implementation. a. Identification of potential investment avenues. b.
A general view of the project ideas or project profiles. c. Advising on procedural aspects of
project implementation d. Reviewing the technical feasibility of the project e. Assisting in the
selection of TCOs (Technical Consultancy Organizations) for preparing project reports f.
Assisting in the preparation of project report g. Assisting in obtaining approvals , licenses, grants,
foreign collaboration etc., from government h. Capital structuring i. Arranging and negotiating
foreign collaborations, amalgamations, mergers and takeovers. j. Assisting clients in preparing
applications for financial assistance to various national and state level institutions banks etc., k.
providing assistance to entrepreneurs coming to India in seeking approvals from the Government
of India.
(iii) Capital Structure:
Here the Capital Structure is worked out i.e., the capital required, raising of the capital, debtequity ratio, issue of shares and debentures, working capital, fixed capital requirements, etc.,
(iv) Portfolio Management: It refers to the effective management of Securities i.e., the merchant
banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are
taken into account while advising on investment in different securities. The merchant banker also
undertakes the function of buying and selling of securities on behalf of their client companies.
Investments are done in such a way that it ensures maximum returns and minimum risks.

(v) Issue Management: Management of issues refers to effective marketing of corporate

securities viz., equity shares, preference shares and debentures or bonds by offering them to
public. Merchant banks act as intermediary whose main job is to transfer capital from those who
own it to those who need it. The issue function may be broadly divided in to pre issue and post
issue management. a. Issue through prospectus, offer for sale and private placement. b. Marketing
and underwriting c. pricing of issues
(vi) Credit Syndication: Credit Syndication refers to obtaining of loans from single development
finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise
syndicated loans from commercials banks. Merchant banks helps in identifying which financial
institution should be approached for term loans. The merchant bankers follow certain steps before
assisting the clients approach the appropriate financial institutions. a. Merchant banker first
makes an appraisal of the project to satisfy that it is viable b. He ensures that the project adheres
to the guidelines for financing industrial projects. c. It helps in designing capital structure,
determining the promoters contribution and arriving at a figure of approximate amount of term
loan to be raised. d. After verifications of the project, the Merchant Banker arranges for a
preliminary meeting with financial institution. e. If the financial institution agrees to consider the
proposal, the application is filled and submitted along with other documents.
(vii) Working Capital: The Companies are given Working Capital finance, depending upon their
earning capacities in relation to the interest rate prevailing in the market.
(viii)Venture Capital: Venture Capital is a kind of capital requirement which carries more risks
and hence only few institutions come forward to finance. The merchant banker looks in to the
technical competency of the entrepreneur for venture capital finance.
(ix)Fixed Deposit: Merchant bankers assist the companies to raise finance by way of fixed
deposits from the public. However such companies should fulfill credit rating requirements.
LEASING
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a
series of contractual, periodic, tax deductible payments.
The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of
the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or
an indefinite period of time (called the term of the lease). The consideration for the lease is called rent. A
gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges
regularly incurred by the ownership from lawnmowers and washing machines to handbags and jewelry.[1]
Under normal circumstances, a freehold owner of property is at liberty to do what they want with their
property, including destroys it or hand over possession of the property to a tenant. However, if the owner has
surrendered possession to another (the tenant) then any interference with the quiet enjoyment of the
property by the tenant in lawful possession is unlawful.
Similar principles apply to real property as well as to personal property, though the terminology would be
different. Similar principles apply to sub-leasing, that is the leasing by a tenant in possession to a subtenant. The right to sub-lease can be expressly prohibited by the main lease.
Finance Lease and Operating Lease: Finance lease, also known as Full Payout Lease, is a type of lease
wherein the lessor transfers substantially all the risks and rewards related to the asset to the lessee.
Generally, the ownership is transferred to the lessee at the end of the economic life of the asset. Lease term
is spread over the major part of the asset life. Here, lessor is only a financier. Example of a finance lease is
big industrial equipment.

On the contrary, in operating lease, risk and rewards are not transferred completely to the lessee. The term
of lease is very small compared to finance lease. The lessor depends on many different lessees for recovering
his cost. Ownership along with its risks and rewards lies with the lessor. Here, lessor is not only acting as a
financier but he also provides additional services required in the course of using the asset or equipment.
Example of an operating lease is music system leased on rent with the respective technicians.
Sale And Lease Back and Direct Lease: In the arrangement of sale and lease back, the lessee sells his
asset or equipment to the lessor (financier) with an advanced agreement of leasing back to the lessee for a
fixed lease rental per period. It is exercised by the entrepreneur when he wants to free his money, invested
in the equipment or asset, to utilize it at whatsoever place for any reason.
On the other hand, direct lease is a simple lease where the asset is either owned by the lessor or he
acquires it. In the former case, the lessor and equipment supplier are one and the same person and this case
is called bipartite lease. In bipartite lease, there are two parties. Whereas, in the latter case, there are three
different parties viz. equipment supplier, lessor, and lessee and it is called tripartite lease. Here, equipment
supplier and lessor are two different parties.

Single Investor Lease and Leveraged Lease: In single investor lease, there are two parties lessor and lessee. The lessor arranges the money to finance the asset or equipment by way of
equity or debt. The lender is entitled to recover money from the lessor only and not from the
lessee in case of default by lessor. Lessee is entitled to pay the lease rentals only to the lessor.
Leveraged lease, on the other hand, has three parties lessor, lessee and the financier or lender.
Equity is arranged by the lessor and debt is financed by the lender or financier. Here, there is a
direct connection of the lender with the lessee and in case of default by the lessor; the lender is
also entitled to receive money from lessee. Such transactions are generally routed through a
trustee.
Domestic and International Lease: When all the parties of the lease agreement reside in the
same country, it is called domestic lease.
International lease are of two types Import Lease and Cross Border Lease. When lessor and
lessee reside in same country and equipment supplier stays in different country, the lease
arrangement is called import lease. When the lessor and lessee are residing in two different
countries and no matter where the equipment supplier stays, the lease is called cross border lease.

Marketing of Insurance
Wherever there is uncertainty there is risk. We do not have any control over uncertainties which
involves financial losses. The risks may be certain events like death, pension, retirement or
uncertain events like theft, fire, accident, etc. Insurance is a financial service for collecting the
savings of the public and providing them with risk coverage. The main function of Insurance is to
provide protection against the possible chances of generating losses. It eliminates worries and
miseries of losses by destruction of property and death. It also provides capital to the society as
the funds accumulated are invested in productive heads. Insurance comes under the service sector
and while marketing this service, due care is to be taken in quality product and customer
satisfaction. While marketing the services, it is also pertinent that they think about the innovative
promotional measures. It is not sufficient that you perform well but it is also important that you
let others know about the quality of your positive contributions. The creativity in the promotional
measures is the need of the hour. The advertisement, public relations, word of mouth
communication needs due care and personal selling requires intensive care.
INSURANCE MARKETING:
The term Insurance Marketing refers to the marketing of Insurance services with the aim to create
customer and generate profit through customer satisfaction. The Insurance Marketing focuses on
the formulation of an ideal mix for Insurance business so that the Insurance organisation survives
and thrives in the right perspective.
MARKETING MIX FOR INSURANCE COMPANIES:

The marketing mix is the combination of marketing activities that an organisation engages in so
as to best meet the needs of its targeted market. The Insurance business deals in selling services
and therefore due weightage in the formation of marketing mix for the Insurance business is
needed. The marketing mix includes sub-mixes of the 7 Ps of marketing i.e. the product, its
price, place, promotion, people, process & physical attraction. The above mentioned 7 Ps can be
used for marketing of Insurance products, in the following manner:
1. PRODUCT:
A product means what we produce. If we produce goods, it means tangible product and when we
produce or generate services, it means intangible service product. A product is both what a seller
has to sell and a buyer has to buy. Thus, an Insurance company sells services and therefore
services are their product .In India, the Life Insurance Corporation of India (LIC) and the General
Insurance Corporation (GIC) are the two leading companies offering insurance services to the
users. Apart from offering life insurance, they also offer underwriting and consulting services.
When a person or an organisation buys an Insurance policy from the insurance company, he not
only buys a policy, but along with it the assistance and advice of the agent, the prestige of the
insurance company and the facilities of claims and compensation. It is natural that the users
expect a reasonable return for their investment and the insurance companies want to maximize
their profitability. Hence, while deciding the product portfolio or the product-mix, the services or
the schemes should be motivational.
2. PRICING:
In the insurance business the pricing decisions are concerned with, i) The premium charged
against the policies, ii) Interest charged for defaulting the payment of premium and credit facility,
and iii) Commission charged for underwriting and consultancy activities. With a view of
influencing the target market or prospects the formulation of pricing strategy becomes significant.
In a developing country like India where the disposable income in the hands of prospects is low,
the pricing decision also governs the transformation of potential policyholders into actual policy
holders. The strategies may be high or low pricing keeping in view the level or standard of
customers or the policyholders. The pricing in insurance is in the form of premium rates. The
three main factors used for determining the premium rates under a life insurance plan are
mortality, expense and interest.
3. PLACE:
This component of the marketing mix is related to two important facets i) Managing the
insurance personnel, and ii) Locating a branch. The management of agents and insurance
personnel is found significant with the viewpoint of maintaining the norms for offering the
services. This is also to process the services to the end user in such a way that a gap between the
services- promised and services offered is bridged over. In a majority of the service generating
organizations, such a gap is found existent which has been instrumental in making worse the
image problem.

4. PROMOTION:
The insurance services depend on effective promotional measures. In a country like India, the rate
of illiteracy is very high and the rural economy has dominance in the national economy. It is
essential to have both personal and impersonal promotion strategies. In promoting insurance
business, the agents and the rural career agents play an important role. Due attention should be
given in selecting the promotional tools for agents and rural career agents and even for the branch
managers and front line staff. They also have to be given proper training in order to create
impulse buying. Advertising and Publicity, organisation of conferences and seminars, incentive to
policyholders are impersonal communication. Arranging Kirtans, exhibitions, participation in
fairs and festivals, rural wall paintings and publicity drive through the mobile publicity van units
would be effective in creating the impulse buying and the rural prospects would be easily
transformed into actual policyholders.
5. PEOPLE:
Understanding the customer better allows designing appropriate products. Being a service
industry which involves a high level of people interaction, it is very important to use this resource
efficiently in order to satisfy customers. Training, development and strong relationships with
intermediaries are the key areas to be kept under consideration. Training the employees, use of IT
for efficiency, both at the staff and agent level, is one of the important areas to look into.
6. PROCESS:

The process should be customer friendly in insurance industry. The speed and accuracy of
payment is of great importance. The processing method should be easy and convenient to the
customers. Installment schemes should be streamlined to cater to the ever growing demands of
the customers. IT & Data Warehousing will smooth the process flow. IT will help in servicing
large no. of customers efficiently and bring down overheads. Technology can either complement
or supplement the channels of distribution cost effectively. It can also help to improve customer
service levels. The use of data warehousing management and mining will help to find out the
profitability and potential of various customers product segments.
7.PHYSICAL DISTRIBUTION:
Distribution is a key determinant of success for all insurance companies. Today, the nationalized
insurers have a large reach and presence in India. Building a distribution network is very
expensive and time consuming. If the insurers are willing to take advantage of Indias large
population and reach a profitable mass of customers, then new distribution avenues and alliances
will be necessary. Initially insurance was looked upon as a complex product with a high advice
and service component. Buyers prefer a face-to-face interaction and they place a high premium
on brand names and reliability. As the awareness increases, the product becomes simpler and they
become off-the-shelf.

Marketing of Not-For-Profit Organization

A non-profit organization (also known as an NPO) is an organization that uses its funding to pursue a specific
purpose, such as a charitable cause, rather than pursuing profits for its own benefit as a for-profit business
does. Some might not believe that investing in marketing strategies is necessary for non-profits, but it is
quite beneficial for an NPO to effectively market itself. Non-profits use marketing tactics to assist with
growth, funding and prosperity. Without these things, the overall mission of the NPO is diminished.

Target Market
Just as a for-profit business targets a certain audience with its marketing, so should a non-profit. NPOs
should develop a picture of the person most likely to support them in their cause or benefit and create
promotion and advertising around that target. Recent television advertising campaigns reflecting a large
religious affiliation reach out to those who have walked away from their faith and those who need the support
and guidance the church can provide. A church group would probably not spend advertising dollars on those
who already regularly attend church services, but rather on attracting new church goers.

Branding
It is crucial for the non-profit to build its brand. The brand is typically a logo, wording, motto or design that
identifies the group. The look and content of all communication, events, service, leadership, alliances and the
organizations office expresses the brand of the non-profit. The experiences that clients have with the NPO
also lead to the overall brand of the organization. The brand allows donors, supporters and clients to
remember, recognize and trust the organization. It keeps the NPO separate from similar organizations by
building an identity.

Offline Practices
Typical marketing practices by a non-profit organization include large and small-scale events, print materials,
alliances and networking. Print materials are highly important for educational and promotional purposes.
Events offer fundraising opportunities in the non-profit world, whether it is a small silent auction or a fivecourse banquet offered to hundreds of potential donors. Creating alliances with other local NPOs builds a
larger mass of people who hear of the groups goals while building the brand through other philanthropists.
In addition, networking is very effective marketing for non-profits as people spread the word about the goals
of the organization.

Online Practices
A primary focus of an NPO's marketing strategies are dynamic, quality websites that are designed to allure
new donors, share the groups mission, display images, build awareness of the cause, educate the public,
reduce printing and mailing costs and establish credibility. E-mail communication with current and potential
donors builds relationships and loyalty. Many NPOs are also entering the world of social networking, with the
goal of becoming personal to donors and clients and spreading their message.

Public Relations
Non-profits are beneficial for individual groups of people, but they also benefit the community. For this
reason, public relations are a large part of marketing. The local press should know the story of the non-profit
and be aware of new programs that reach out to the community. NPOs should utilize newspaper stories to
share statistics, provide pictures and advertise fundraising events and community services. The NPO should

include media outlets in events by inviting them directly. Local news outlets should be on NPO mailing lists
for newsletters and other informational mailings.

TIPS for Marketing

It may seem that marketing a non-profit is counter-intuitive, but company owners must concede that no
matter what your business, you are always competing for support. To make your non-profit successful you
need to develop sound promotional strategies. According to branding expert Laura Reis, the more powerful a
non-profit brand is, the more money it will raise and the more volunteers it attracts.

Branding
Like any business, philanthropies have no choice but to compete for supporters money. The best way to do
so is by creating a strong brand. According to ARCH, a national resource for respite and crisis care centers, in
order to best market the business your company must identify its constituents, design programs to suit their
needs, measure the constituents' satisfaction with their programs, and use the results to fine tune their
program. Once your program is clear, you are able to present your service--your brand--to potential
supporters. One way to strengthen your brand is to develop a slogan. For example, Building community
deep in the hearts of Texans is the slogan of Texas Nonprofits.

Publish Your Message

When selling a message or viewpoint, and not simply a product, communication is a necessity. Every nonprofit should have a newsletter or electronic newsletter (e-mail) according to Community Driven Institute. By
writing for the general public or for membership associations or others interested in your work, in
conjunction with your community distributions, your written wisdom will not just go to those who already
know you, but to those who do not know you yet. Non-profits should attempt everything from starting a
blog to publishing a book or telling your story in as many publications as possible. Actively writing about your
work allows you control over perceptions about the company and will give supporters a better understanding
of what they are taking part in.

Public Speaking
One great attribute for your non-profit is a spokesperson. According to Reis, Ideally, the founder is the best
person to take on this role. He or she has a powerful connection to the brand and can sell the story to the
media, donors, volunteers and supporters. Many supporters question how contributions are used. When you
provide them with a person who actively engages with them, answers questions, shares stories and relates
successes, they become immediately involved in who you are and what you do.

Community Outreach
In the world of community outreach, consistency is the key to success, says Reis. Determine the best
programs to suit your mission and work on those until they are stable and you do them every year. People
appreciate being able to see how their time and money are used; and it feels good to see the results of your
donation continue year after year. To figure out what programs help your constituents the best, you must ask
them, otherwise what you plan may not appropriately serve their needs. Once you implement a program,
innovate constantly, advises Non Profit Times. Always search for better ways to reach your goals, and to
allow your company to branch out in the future while continuing programs already in place.

An Online Presence
Online accessibility is an important marketing tactic. Create a web page for your non-profit and build a social
media presence. Put your cause out there, writes Network for Good, optimize your search engine

marketing. Get as many good links to your companys web page as possible and make sure all your online
outreach and presences enable two-way conversation with your supporters, fans and non-fans.

Tourism Marketing
Tourism involves travelling to relatively undisturbed or uncontaminated natural areas with the
specific objects of studying, admiring and enjoying the scenery and its wild flora and fauna, as
well as other existing cultural and historical aspects. A visit with a motto to know these areas is
nothing but tourism. Places of tourist interest are numerous and of varied nature. These include
places of archeological and historical importance, pilgrimage centres, sanctuaries, national parks,
hill resorts and sea beaches, etc. The number of foreign tourists have been increased to more than
21 lakhs by 2001. India has a minimal share of only 0.39% of the world tourism trade. India
employs nearly 10 million people in this industry making it the second largest employer of the
country. Recent political unrest, fear of violence, terrorism, strikes and epidemics etc. are
detrimental to our tourism business. However, considering the recent development, it is hoped
that India will get her due share in world tourism.
Differences between tourism marketing and other services
The marketing of services dependent much on interdependence of Marketing, Operations, and
Human Resources. The differences between tourism marketing and other services are,
(1) Principal products provided by recreation/tourism businesses are recreational experiences and
hospitality,
(2) Instead of moving product to the customer, the customer must travel to the product
(area/community),
(3) Travel is a significant portion of the time and money spent in association with recreational and
tourism experiences,
(4) Is a major factor in peoples decisions on whether or not to visit your business or community?
Components of Tourism

Tourism has many components comprising

1. Travel experience
2. Accommodations
3. Food
4. Beverage services
5. Shops
6. Entertainment
7. Aesthetics and
8. Special events
Let us look at the 8 Ps in detail.
1. Product
Product in Tourism is basically the experience and hospitality provided by the service provided.
In general the experience has to be expressed in such a way that the tourists see a value in them.
2. Process
The process in Tourism include, (a) trip planning and anticipation, (b) travel to the site/area,
(c)recollection, (d) trip planning packages. The trip planning packages include, maps, attractions
enroute and on site, information regarding lodging, food, quality souvenirs and mementoes
3. Place and Time Location and Accessibility

The place and time in tourism is providing directions and maps, providing estimates of travel
time and distances from different market areas, recommending direct and scenic travel routes,
identifying attractions and support facilities along different travel routes, and informing potential
customers of alternative travel methods to the area such as airlines and railroads.
4. Productivity and Quality
This is similar to other service industries. The quality is assessed by time taken for a service, the
promptness of the service, reliability and so on.

5. Promotion and Education

Like other services, the promotion should address, the accurate and timely information helping to
decide whether to visit target audience, the image to be created for the organization, objectives,
budget, timing of campaign, media to be selected, and evaluation methods.
6. People
People is the centre for Tourism. It is more a human intensive sector. For hospitality and guest
relations it is very important to focus on people. It also plays a vital role in quality control,
personal selling, and employee morale.
7. Price and other user costs
The price of the tourism services depend on business and target market objectives, cost of
producing, delivering and promoting the product, willingness of the target, prices charged by
competitors offering similar product/service to the same target markets, availability and prices of
substitute products/services, and economic climate. The possibility of stimulating high profit
products/services by offering related services at or below cost.
8. Physical Evidence
In Tourism the physical evidence is basically depends on travel experience, stay, and comfort.
Here, the core product is bed in case of stay.
Marketing of shipping services
The marketing of shipping companies activating in merchant shipping, is the science of Business to Business
Marketing (B2B marketing), which deals with the satisfaction of charterers shippers needs for the carriage of
goods by sea, with main aim the profit of the enterprise. This satisfaction presupposes on the one hand correct
diagnosis of the shipping market to better understand and forecast clients (charterers shippers) transport
needs and on the other hand appropriate organization, planning and control of the shipping enterprises means.
The more the shipping enterprise tries to discover what its clients need, to adapt the chartering policy to their
requirements, to offer appropriate transport services, to negotiate the freight as a function to what it offers, as well
as to communicate effectively with the market it targets, the more are the possibilities to achieve the most
appropriate, efficient and long-lasting commercial operation of its vessels.
1. All shipping enterprises have limited capabilities concerning the means, the resources and the management
abilities for their ships. This means that it is impossible to exploit all the chances of the shipping market with
equal effectiveness. The matching of the shipping enterprise capabilities with the needs and the desires of its
clients is fundamental for the provision of the desired transport services, the satisfaction and retention of
charterers and thus the commercial success of the enterprise.
2. The shipping company must organize its resources in such a manner as to be able to apply the marketing
process stages and to achieve a long-lasting and more effective commercial operation of its ships. The
application of marketing presupposes correct diagnosis, planning, organization, implementation and control of

marketing effort. This process is continuous and it is presented at figure 1. Figure 1: Stages of Marketing
Implementation in Shipping Companies

AIRLINES AS A SERVICE INDUSTRY

The Airline industry came into existence during the 17th centuries.

Origin of Indian aviation industry can be traced back to the year 1912.

Air travel remains a large and growing industry. It facilitates economic growth,
world trade, international investment and tourism and is therefore central to the
globalization taking place in many other industries

India has the private airlines as its key players

75% of the market share is owned by the private sector.

India is the 9th largest aviation market in the world.

THE SERVICE MARKETING TRIANGLE

One can better understand the workings of airlines by looking at its marketing triangle.

Product Mix

Giving a Feel For The Product Inside a Service Wrapper .

Consumers are demanding not products, or features of products but the benefits
they will be offered.

The airline product includes of two types of services:

1. On the Ground Services.
2. In-Flight Services.

Price Mix
Premium pricing:- Use a high price where there is a uniqueness about the product or service.
Such high prices are charge for luxuries
Cheap-value pricing:- This approach is used where external factors such as recession or
increased competition force companies to provide 'value' products and services to retain sales
APEX fares:- Apex or advance purchase fares are special fares valid on economy class on
specified sectors. They are much lower than the normal fares.
Place mix
Online 24-hour reservation Systems.
Tour Operator
Travel Agent
Promotion Mix
Advertising- keep in mind the image of the country,
tourist attraction, cultural heritage
Publicity- Travel agent, PRO, media people
Sales promotion- Tour operators, frontline staff

Meaning of the term Loan

A loan is a type of debt. All material things can be lent. Like all debt instruments,
a loan entails the redistribution of financial assets over time, between the lender
and the borrower. It is also defined as: Something lent for temporary use.
A sum of money lent at interest.
For example: - An act of lending; a grant for temporary use: asked for the
loan of a garden.
A temporary transfer to a duty or place away from a regular job: an
efficiency expert on loan from the main office.
Loans represent the majority of a banks assets. a bank can typically earn
a higher rate of interest on loans than on securities. Loans however, come
with risk. If a bank makes bad loans to consumers or businesses, the
banks may suffer on defaulter of repayments.
-Loan is an advance paid by the bank to the customer either with security or
without security is called as loan. If a loan is given without security it is called as
an advance. It is given for a fixed period of time and aggregate rate of interests.
Repayments are spread over from a period of 1-5 years. It is also known as
demand loan and it is repayable on demand.
-The loans are granted to meet long term working capital needs and for
expansion and modernization. Interest is
charged on the actual amount sanctioned, whether withdrawn or not. Loans may
be short-term, medium-term or loan term. Long term loans are generally for
meeting the working capital requirements. Such loans are also called as term
loans. When a loan
is meant for meeting both fixed and working
capital requirement of a borrower, it is called as a Composite loan.
Advantages of the loan system are as follows; Financial discipline on the borrower
Periodic review of local Account

 Profitability
The system is quite simple
It is given for a fixed period and specific purpose.
Meaning of syndication
An association of individuals formed for the purpose of conducting a
particular business or a joint venture.
Pooling of resources by financial institutions in a financing project to
spread the risk. Individual return from the investment is proportionate to
the degree of risk or amount of funds that each has put up or
underwritten.
A syndicate is a general term describing any group that is formed to
conduct some type of business. For example, a syndicate may be formed
by a group of investment bankers who underwrite and distribute new
issues of securities or blocks of outstanding issues. Syndicates can be
organized as corporations or partnerships.
A Syndicated loan (orsyndicated bank facility) is a large loan in which a
group of banks work together to provide funds for a borrower. There is
usually one lead bank (the "Arranger" or "Agent") that takes a percentage
of the loan and syndicates the rest to other banks. A syndicated loan is
the opposite of a bilateral loan, which only involves one borrower and one
lender (often a bank or financial institution.
A syndicate only works together temporarily. They are commonly used for
large loans or underwritings to reduce the risk that each individual firm
must take on.

It can also be termed as an association of people or firms formed to

engage in an enterprise or promote a common interest or an association of
people or firms authorized to undertake a duty or transact specific
business.

The cost of a syndicated loan consists of interest and a number of feesmanagement fees, participation fees, agency fees and underwriting fees
when the loan is underwritten by a bank or a group of banks. Spreads over
LIBOR depend upon borrower's credit worthiness, size and term of the
loan, state of the market (e.g. the level of LIBOR, supply of non-bank
deposits to the EURO banks,) and the degree of competition for the loan.

INTRODUCTION TO LOAN SYNDICATION

Loan syndication refers to services rendered by an organization in

arranging and procuring credit from financial institutions, banks, other
lending and investment companies for financing the project or meeting the
working capital requirements.

The loan syndication work involves identification of sources where from

funds would be arranged, approaching these sources with requisite
application and supporting documents and complying with all the
formalities involved in the sanction and disbursal of loan.

In loan syndication there is a leader bank who undertakes all the duties
and functions of finance. The fees charged by merchant banker for
undertaking loan syndication varies upto one percent of the total loan
amount.

Syndicated loans provide borrowers with a more complete menu of

financing options. In effect, the syndication market completes a continuum
between traditional private bilateral bank loans and publicly traded bond
market.

Loan syndications is responsible for arranging co-financing with

commercial banks and other financial institutions directly or indirectly with
export credit agencies (ECAS).

Loan syndications has chosen a flexible and market oriented approach.

Loan syndication refers to assistance rendered by merchant banks to get

mainly term loans for projects. Such loans may be obtained from a single
financial institution or a syndicate or consortium.

 Merchant bankers provide help to corporate clients to raise syndicated

loans from commercial banks. Merchant bankers help corporate clients to
raise syndicated loans from commercial banks.

Merchant banking is an institution which covers a wide range of activities

such as portfolio management, credit syndication, and corporate advisory
services. They help clients approach financial institutions for term loans.

The Loan Syndications team includes dedicated professionals in Chicago,

New York, Toronto and London who are active in the bank market and have
an in-depth knowledge of the current trends in loan pricing, structure and
trading activities.

As the size of the individual loans increased, individual banks found it

difficult to take the risk single handed- regulatory authorities in most
countries limit the size of the individual exposures. Hence the practice of
inviting other banks to participate in the loan, to form a syndicate, came
into being; thus the term Syndicated loans

A loan syndicate refers to the negotiation where borrowers and lenders sit
across the table to discuss about the terms and conditions of lending. At
present Large groups of banks are forming syndicates to arrange huge
amount of loans for corporate borrowers.

The need for syndication arises as the size of the loan is huge and a single
bank cannot bear the whole risk of lending. Also the corporate going for
the issue is not aware about the banks which are willing to lend. Hence
syndication assumes significance.

In the case of syndication the risk gets diversified. The process of

syndication starts with an invitation for bids from the borrower. The
borrower mentions the funds requirement, currency, tenor etc. the
mandate is given to a particular bank or an institution that will take the
responsibility of syndicating the loan by arranging for financing the banks.

 Syndication is done on a best effort basis or on underwriting basis. It is

usually the lead manager who acts a syndicator of loans. The lead
manager has dual tasks i.e. formation of syndicate documentation and
loan agreement.

Common documentation is signed by the participating banks on the

common terms and conditions.

Features of syndicated loans

The syndicated loan is a financing method evolved from bilateral loan. Under the
arrangement of syndicated loan, one bank or several banks (as the arrangers)
organize other banks to grant loans to the same borrower under one loan
agreement according to agreed terms.
Syndicated loans have the following features:
Huge amount and long term loans.
Less pressure on banks and diversified risk.
As for the borrower, syndicated loans provide large amounts of loans with
longer term and easy operation management (only need to contact with
the agent bank).
Fewer restriction on the use of proceeds (compared with government
loans and export credit)
Easier management (Compared with loans borrowed separately from
different banks)
Syndicated loans can be structured to incorporate various options. As in
the case of FRS, a drop lock feature converts the floating rate loan into a
fixed rate loan if the benchmark index hits a specified floor. A multicurrency option allows the borrower to switch the currency of
denomination on a rollover date.
Security in the form of government guarantee or mortgage on assets is
required for borrowers in developing countries like India.
Syndicated loan is more suitable as compared to a simple loan from single
or multiple banks.

The borrower does not have to deal with a large number of lenders.
It has permitted the issuers to achieve more market-oriented and
effective financing.

cost-

Loan syndications are a cost-effective method for participating institutions

to diversify their banking books and to exploit any funding advantages
relative to agent banks.
Syndicated loans have increasingly become the corporate financing
choice of large- and mid-size firms. As a result, syndicated lending has
become a major component of today's financial landscape.
Syndicated lending also allows banks to compete more effectively with
public debt markets for corporate borrowers. To a large extent, the
development of the loan syndication market has stemmed, if not
reversed, the trend toward disintermediation of corporate debt by
reducing the differences between intermediated and public debt markets.
STAGES IN SYNDICATION

PRE-MANDATE STAGE

PLACING THE LOAN AND

DISBURESEMENT

POST-CLOSURE STAGE

viz., Pre-mandate phase,

closure stage.

Broadly there are three stages in syndication,

Placing the loan and disbursement and post-

1) PRE-MANDATE STAGE: - This is the initiated by the prospective

borrower. It may liaise with a single bank or it may invite competitors bids
from a number of banks. The borrower has to mandate the lead bank, and
the underwriting bank, if desired. Once the lead bank is selected and
mandated by the borrower, the lead bank has to undertake the appraisal
process. the lead banks needs to identify the needs of the borrower,
design an appropriate loan structure, and develop a persuasive credit
proposal.

2)
At this stage, the
marketplace i.e. to
the lead bank needs to
term sheet, prepare
and invite
borrower are
concerns.

PLACING THE LOAN AND DISBURSEMENT: lead bank can start to sell the loan in the
prospective participating banks. this means that
prepare an information memorandum, prepare a
legal documentation, approach selected banks
participation. A series of negotiations with the
undertaken if prospective participants raise

achieve closing of the

underwriting bank has to

To conclude this stage the lead bank must

syndication, including signing. If need be,
sign the balance portion of the loan.

loan contract. Loan is

created exclusively
withdrawals are monitored by
only for the purpose
funds are not diverted to

Loan is disbursed in phases as agreed in the

disbursed in no-lien account i.e. a bank account
to disburse loan. This account and its
banks. This is to ensure that the loan is used
defined in the loan agreement and that the
any other purpose.

3)
POST-CLOSURE STAGE:- This is monitoring and follow-up phase. It has
many times done through an escrow account. Escrow account is
the account
in which the borrower has to deposit its revenues and the
agent ensures that
the loan repayment is given due priority before payments to any other parties.

Hence in this stage, the agent handles

facility.

the day-to-day running of the loan

Reasons/Purpose for syndicated lending

Like insurance, a loan is an assumption of risk. For a certain class of loan, with
certain rules, the bank might believe that it is likely that 5% of all borrowers may
go bankrupt. If the bank's cost of funds is a hypothetical 5%, the bank needs to
charge more than 10% interest on the loan to make a profit. In general, banks
and the financial markets use risk-based pricing, charging an interest rate
depending on the risk of the loan product in general or the risk of the specific
borrower.
The problem with larger businesses loans, however, is that there are fewer of
them. So, if the bank has the only large business loan and if that business

happens to be one of that defaults, then the bank loses all its money. For this
reason, it is in the best interest of all banks to split, or "syndicate" their large
loans with each other, so each get a representative sample in their loan
portfolios.
A second, often criticized reason for syndicating loans is that it avoids large or
surprising losses and instead usually provides small and more predictable losses.
Smaller and more predictable losses are favored by many management teams
because of the general perception that companies with "smoother" or more
steady earnings are awarded a higher stock price relative to their earnings
(benefiting management who is often paid primarily by stock). Critics, such as
Warren Buffett however, say that many times this practice is irrational.If the
bank could still get a representative sample by not syndicating, and if
syndication would reduce their profit margins, then over the long term a bank
should make more money by not syndicating. This same dynamic plays out in
the investment banking and insurance fields, where syndication also takes place.
To avoid that the borrower has to deal with all syndicate banks individually, one
of the syndicate banks usually acts as an Agent for all syndicate members and
acts as the focal point between them and the borrower.

Advantages/Benefits of Syndicated Loans

In addition, economists and syndicate executives contend that there are other,
less obvious advantages to going with a syndicated loan.
These benefits include: Syndicated loan facilities can increase competition for your business,
prompting other banks to increase their efforts to put market information
in front of you in hopes of being recognized.
Flexibility in structure and pricing. Borrowers have a variety of options in
shaping their syndicated loan, including multicurrency options, risk
management techniques, and prepayment rights without penalty.
Syndicated facilities bring businesses the best prices in aggregate and
spare companies the time and effort of negotiating individually with each
bank.
Syndicate banks sometimes are willing to share perspectives on business
issues with the agent that they would be reluctant to share with the
borrowing business.

 Syndicated loans bring the borrower greater visibility in the open market.
Bunn noted that "For commercial paper issuers, rating agencies view a
multi-year syndicated facility as stronger support than several bilateral
one-year lines of credit."
Benefits to the borrower
Raising a loan which would exceed the capacity of a single bank.
Cutting down on management capacity since the borrower communicates
only with the arranger/agent.
Broadening the financing base through the participation of other banks.
Typically less costly than numerous lines through multiple institutions.
It helps to enhance broader financial relationships.
Deals with a single bank.
Quicker and simpler than other ways of raising capital. E.g. Issue of equity
or bonds.
Benefits to the investor
Establishing direct relationships with new customers.
Enables much broader risk diversification without significant additional
marketing efforts.
Due to uniform documentation there is a better chance for a
subsequent placement on the secondary market.
Contract documents and information provided at no expense.
Benefits to the lead banks
Fund arrangement and other fees can be earned without committing
capital.
Enhancement of banks reputation.
Enhancement of banks relationship with the client.
Benefits to the participating banks
Access to lending opportunities with low marketing/ processing costs.

 It triggers more opportunities to participate in future syndications as

network of the banks establishes a level of comfort with each other.
In case the borrower runs into difficulties, participant banks have equal
treatment.

CHAPTER NO.3
PROJECT FINANCE AND LOAN SYNDICATION
Working Capital Finance
Working capital finance is done in order to meet the entire range of short-term
fund requirements that arise within a corporates day-to-day operational cycle.
The working capital loans can help the company in financing inventories,
managing internal cash flows, supporting supply chains, funding production and
marketing operations, providing cash support to business expansion and carrying
current assets.
The working finance products comprise a spectrum of funded and non-funded
facilities ranging from cash credit to structured loans, to meet the different
demands from all segments of industry, trade and the services sector. Funded
facilities include cash credit, demand loan and bill discounting. Demand loans
are considered also under the FCNR (B) scheme. Non-funded instruments
comprise letters of credit (inland and overseas) as well as bank guarantees
(performance and financial) to cover advance payments, bid bonds etc.
Project Finance
In general, project finance covers Greenfield industrial projects, capacity
expansion at existing manufacturing units, construction ventures or other
infrastructure projects. Capital intensive business expansion and diversification

as well as replacement of equipment may be financed through the project term

loans.
Project finance is quite often channeled through special purpose vehicles and
arranged against the future cash streams to emerge from the project.
The loans are approved on the basis of strong in-house appraisal of the cost and
viability of the ventures as well as the credit standing of promoters.

Corporate Term Loan

The corporate term loans can support the company in funding ongoing business
expansion, repaying high cost debt, technology up gradation, leveraging specific
cash streams that accrue into the company, implementing early retirement
schemes and supplementing working capital.
Corporate term loans can be structured under the FCNR (B) scheme as well, with
the option of switching the currency denomination at the end of interest periods.
This will helps to take advantage of global interest rate trends vis--vis domestic
rates to minimize your debt cost.
The banks corporate term loans are generally available for tenors from three to
five years, synchronized with your specific needs.
The corporate term loans carry fixed or floating rates, as befits the exact
requirement of the client and the risk context. Again, these rates will be linked to
the banks prime lending rate.
The corporate term loans can have a bullet or periodic repayment schedule, as
required by the client. The repayment mode may be linked to the cash accruals
of the company.
The Banks expert credit crew gauges the applicants particular fund
requirements and evaluates the companys credit worthiness, factoring in the
cash flows generated by it.
Structured Finance
The structured finance involves assembling unique credit configurations to meet
the complex fund requirements of large industrial and infrastructure projects.
Structured finance can be a combination of funded and non-funded facilities as
well as other credit enhancement tools, lease contracts for instance, to fit the
multi-layer financial requirements of large and long-gestation projects.

Channel Financing
Channel financing is an innovative finance mechanism by which the bank meets
the various fund necessities along the supply chain at the suppliers end itself,
thus helping to sustain a seamless business flow along the arteries of the
enterprise.
Channel finance ensures the immediate realization of sales proceeds for the
clients supplier, making it practically a cash sale. On the other hand, the
corporate gets credit for a duration equaling the tenor of the loan, enabling
smoother liquidity management.

PARTIES AND THEIR ROLES WITHIN THE SYNDICATION PROCESS

The lead bank and participating banks are the main parties involved in loan
syndication. In large loan amounts, sometimes there are four parties involved,
other than the borrower, in the syndication process. These are arranger {lead
manager/ bank}, underwriting Bank, Participating Banks and the facility
manager {agent. their roles are defined as follows:-

1. Arranger/lead manager:- It is a bank which is mandated by the prospective

borrower and is responsible for placing the syndicated loan with other
banks and ensuring that the syndication is fully subscribed. This bank
charges arrangement fees for undertaking the role of lead manager. Its
reputation matters in the success of syndication process as the
participating banks would agree or disagree based on the credibility and
assessment expertise of this bank. In other words , since the appraisal of
the borrower and its proposed venture is primarily carried out by this bank,
onus of default is indirectly on this bank. Thus this bank carries reputation
risk in the syndication process.

2. Underwriting bank:- Syndication is a process of arranging loans, success of

which is not guaranteed. The arranger bank may underwrite to supply the
entire remainder(unsubscribed) portion of the desired loan and in such a
case arranger itself plays the role of underwriting bank. Alternatively a
different bank may underwrite (guarantee) the loan or portion (percentage
of the loan). This bank would be called the underwriting bank. It may be
noted that all the syndicated loans may not have this underwriting
arrangement .Risk of underwriting is obviously the underwriting risk. It
means it will have to carry the credit risk of the larger portion of the loan.

3. Participating banks:- These are the banks that participate in the

syndication by lending a portion of the total amount required. These banks
charge participation fees. These banks carry mostly the normal credit risk
i.e. risk of default by the borrower. As like any normal loan. These banks
may also be led into passive approval and complacency risk. It means that
these banks may not carry rigorous appraisal of the borrower and has
proposed project as it is done by the lead manager and many other
participating banks. It is this bankers trust that so many high profile banks
cannot be wrong. This may be seen in the light of reputation risk of the
lead manager.
4. Facility manager/agent:- Facility manager takes care of the administrative
arrangements over the term of the loan (e.g. Disbursements, repayments

and compliance). It acts for and on behalf of the banks. In many cases the
arranging/underwriting bank itself may undertake this role. In larger
syndications co-arranger and co-manager may be used.

CHAPTER NO.4
Loan Syndicating Financial Institutions
Union Bank of India, has entered into a Memorandum of Understanding
[MOU] with IDFC, one of the leading Infrastructure Financing Institution and
Bank of India, another leading Public Sector Bank for jointly Syndicating &

Financing the large Infrastructure & core industrial projects, which are
coming up in the country.
This is the first time when a premier Infrastructure financing Institution
and two large Public Sector Banks are coming together to share the skill
sets developed over a period of time, to Syndicate/Underwrite the Debt
and extend total financial solution for large projects coming up in the
Public Private Partnership [PPP] domain as well as in the Private Sector.
IDFC (Industrial Development Financial Corporation) is a premier
Infrastructure Financing Institution having vast experience in financing
mega projects over a broad spectrum of industries. Union Bank of India &
Bank of India are amongst the large Public Sector Banks having vast
experience in providing Working Capital besides extending project finance.

This arrangement will facilitate joint identification, marketing and appraisal

of Syndicated Loans with underwriting arrangements.
It is envisaged that the promoters in the PPP would largely benefit from
this Tie-up, which would provide a total financial solution, Term Loan for
the project as well as Working Capital.
In fact, the benefits of Syndication would accrue to all the concerned
parties especially the borrower:
-

Single point contact with the Lead Arranger.

Submission of papers only to the Lead Arranger.
Joint Appraisal leading to quick decisions.
Possibility of securing competitive terms.

Financial sector plays an indispensable role in the overall development of a

country. The most important constituent of this sector is the financial
institutions, which act as a conduit for the transfer of resources from net
savers to net borrowers, that is, from those who spend less than their
earnings to those who spend more than their earnings. The financial
institutions have traditionally been the major source of long-term funds for
the economy. These institutions provide a variety of financial products and
services to fulfill the varied needs of the commercial sector. Besides, they
provide assistance to new enterprises, small and medium firms as well as
to the industries established in backward areas. Thus, they have helped in
reducing regional disparities by inducing widespread industrial
development.

 The Government of India, in order to provide adequate supply of credit to

various sectors of the economy, has evolved a well developed structure of
financial institutions in the country.
These financial institutions can be broadly categorized into All India
institutions and State level institutions, depending upon the geographical
coverage of their operations.
At the national level, they provide long and medium term loans at
reasonable rates of interest. They subscribe to the debenture issues of
companies, underwrite public issue of shares, guarantee loans and
deferred payments, etc. Though, the State level institutions are mainly
concerned with the development of medium and small scale enterprises,
but they provide the same type of financial assistance as the national level
institutions.

Other Financial Institutions Include: - NABARD (National Bank for

Agriculture and Rural Development) EXIM (Export Import Bank of India)
IFCI (Industrial Financial Corporation of India).

LOAN DEPOT
The Loan Depot Inc was incorporated in Canada in October 1998 by a group of
Finance and Real Estate professionals with experience in the Domestic and
International Finance Markets and International Real Estate Hedge Markets for
over 10 years.
The main businesses of The Loan Depot are Domestic and International Finance,
Loan Syndication from International Funding Agencies and Major World Banks,
Project Financing, Real Estate Acquisition syndication and hedging.
In 2000 the Corporation moved its head quarters from Ontario, Canada to
Chattanooga, TN. In 2001, the company expanded its operations to include
conventional and government guaranteed lending products. The Surviving
Company is now know as "THE LOAN DEPOT, LLC", and is committed to provide
the highest level of service to our customers, borrowers and brokers.
Their Mission at The Loan Depot is to anticipate and successfully meet the
changing needs of our client and match them with the requirements of the
capital market. The standard of excellence is upheld through our innovative
thinking, our unique competitive advantage, and most importantly, our

dedication to our client.

Their goal is to provide you attractive financing options that will best serve your
individual financing needs. They have successfully laid a firm foundation for
financing a broad range of loans. They look forward to working with people and
helping them in their business.
They pride themselves in being one of the most innovative, diversified group of
financial service companies in the United States and Canada and plan on staying
that way.
Loan Depot offers a number of custom services to helps to achieve financial
goals.
Mortgages
Loan Depot offers a wide variety of options for all mortgage needs offer the best
rates and with over 150 products we specialize in self employed and not so
perfect credit situations(i.e.: bankruptcy, divorce). Their programs include 100%
financing for purchase or re-finance to consolidate debt or for investment
purposes.
Auto Loans
Offer a variety of finance plans for the purchase or re-finance of new and preowned vehicles.
Loans
Loan Depot is a full service loan placement firm. They offer secured
and unsecured loans available to people in every credit situation. Their rates are
competitive and all situations are welcome.
Recreational Vehicles
Loan Depot offers financing on all recreational vehicles they offer competive
rates on boats, R.Vs and ATVs etc.Their programs allows to finance new or used
purchase or to-re-finance the existing vehicle at a lower rate or better terms.
Credit Cards
Loan Depot offers a secure visa to help establish or re-establish credit with all
the convenience and services one can access with a visa card.

CHAPTER NO.5
The Syndicated Loan Market
The syndicated loan market, a hybrid of the commercial banking and
investment banking worlds, is globally one of the largest and most flexible
sources of capital. Syndicated loans have become an important corporate
financing technique, particularly for large firms and increasingly for
midsized firms. The rapid development of the syndicated corporate loan
market took place in the 1990s exploring the historical forces that led to
the development of the contemporary U.S. syndicated loan market, which
is effectively a hybrid of the investment banking and commercial banking
worlds. Syndicated lending aims to increase the risks and benefits involved
in taking part in the syndicated loan market.
There has been a notable change in large corporate lending over the past
decade, as the old bilateral bank-client lending relationships have been
replaced by a world that is much more transaction-oriented and marketoriented. The Canadian syndicated loan market has been strongly
influenced by its U.S. counterpart, but it is not yet at the same level of
development. It also explores potential risk issues for the new corporate
loan market, including implications for the distribution of credit risk in the
system, risks in the underwriting process, the monitoring function, and the
potential for risk arising from asymmetric information.
The development of the market for syndicated loans, and has shown how
this type of lending, which started essentially as a sovereign business in
the 1970s, evolved over the 1990s to become one of the main sources of

funding for corporate borrowers. The syndicated loan market has

advantages for junior and senior lenders. It provides an opportunity to
senior banks to earn fees from their expertise in risk origination and
manage their balance sheet exposures.
Throughout history, innovation has driven the development of the financial
markets, and over the last 20 years, the syndicated loan market has
provided particularly fertile ground for financial innovation. From a
relatively esoteric field involving commercial banks syndicating lines of
credit, financial innovations have helped it develop into a broad, dynamic
market encompassing both an efficient primary market that originates
syndicated credits and a liquid secondary trading market where prices
adjust to reflect credit quality and market conditions.
The development of an efficient and liquid syndicated loan market in the
U.S. has greatly impacted its capital markets. The syndicated loan market
bridges the private and public fixed-income markets and provides
borrowers with an alternative to high yield bonds and illiquid bilateral
commercial bank loans. It provides much-needed credit to lower-rated
companies and has strengthened the bankruptcy process in the U.S.
through its facilitation of DIP (debtor-in-possession) lending.
Todays syndicated loan market benefits banks also; in times of adversity,
they can sell portions of the syndicated credits into a relatively liquid
secondary market and actively manage the risk in their loan portfolios.
This allows banks to avoid unnecessary lending restrictions when the
economy contracts and thus the impact of an inefficient credit crunch.
The development of the secondary market for syndicated loans has led to
the creation of a new asset class with greater return per unit of risk than
many other fixed-income assets and low correlations with most other
classes of assets. The leveraged portion of the market, the part of the
market where most innovation has occurred, receives special attention.
Syndicated loans are an integral part of capital raising for these markets.
This analysis provides a primer to investors and other parties interested in
a market that has, without great fanfare, been one of the most rapidly
growing and innovating sections of the U.S. capital market in the past 20
years. It explores issues related to the main features of the primary market
using the most recent data available and details the characteristics of the
secondary market. Investment returns, as well as the risks of the asset

class, particularly credit risk, receive special attention.

The syndicated loans market has grown rapidly in recent years, driven
primarily by an increase in corporate takeovers, private equity
transactions and infrastructure deals. Strong liquidity means there is
plenty of cash to invest, and banks are willing lenders.
The leveraged loan market remains small compared with the investmentgrade market and bankers said the investors and their attitudes were
markedly different. The volumes in the Indian offshore syndicated loan
market have grown enough in the past few years.
How the market works

Major corporate clients will almost automatically consider a

syndicated loan for sums above a few hundred million euros.
Syndication splits the lending risk between large number of
investors, at price (margin and fees) determined by the market. It is
an efficient way of raising funds quickly and on best terms. For
borrowers the advantage is that they can raise larger amounts and
expand their group of bankers whilst at the Same time only having
to sign a single contract
For lenders, syndication allows a diversification of the lending
portfolio from both a geographical and sectorial point of view. In
addition, lenders get the benefit of the facility agents expertise in
management of drawdowns and of other events in the lifetime of the
loan after the facility agreement has been signed.
The syndicated loan market was originally developed in the USA
in the 1970s as a means of financing leveraged
buy-outs
(LBOs). It has since gone on to become the
leading vector for all sorts of financing. In Europe the market
expanded rapidly in
the UK and then on the continent,
particularly in France. The
markets rapid growth can be seen
from the fact that in 1993
the total volume of the market
worldwide was USD 1.4. trillion, whereas in 2005 it exceeded USD 3
trillion (dialogic)
The rapid growth in syndicated facilities is certainly due in part
to the trend over the past fifteen years, across
all sectors of the
economy, towards industry consolidation. for a
borrower, the
choice between a syndicated loan and

negotiable debt
first. syndicated
with few
other markets,
placements.

instruments often comes down in favour of the

loans are the only means of raising, rapidly and
formalities, sums greater than are available on
like bonds and equities, or through private

These loans may be used to cover a whole ranges of uses by the

borrower: refinancing, undrawn lines of credit
supporting
commercial paper and treasury note
programmes, acquisitions,
LBO financing, project and other
structured financing. The
arrangement commission paid by the
borrower is determined by
the complexity of the deal: the most
profitable deals for banks
are leveraged acquisitions.
market, some banks
their returns and still
and conditions ever
such as transaction size,
ensure that it continues to
to raise capital from
borrowers and lenders
distribution and management
executing a successful deal
Banks have benefited
market in several ways.
participating institutions to
relative to agent banks.
syndication market has
disintermediation of
between intermediated and

By taking full advantage of the syndicated loan

have managed to make headway in increasing
offering the borrowers some of the finest terms
seen. Features of the syndicated loan market
availability, speed of reaction and flexibility
be one of the primary sources for issuers looking
the markets. It will examine the needs of both
involved in the origination, structuring,
of syndicated loans and link the process of
to the optimal design of a syndications unit.
from this broadening of the syndicated loan
They are a cost-effective method for
diversify and exploit any funding advantages
To a large extent, the development of loan
stemmed, if not reversed, the trend toward
corporate debt by reducing the differences
public debt markets.

CONSORTIUM FINANCING

Consortium is a Latin word, meaning 'partnership, association or society.

A consortium is an association of two or more individuals, companies,

organizations or governments (or any combination of these entities) with

the objective of participating in a common activity or pooling their

resources for achieving a common goal.
What is Consortium Financing?

Under consortium financing, several banks (or financial institutions)

finance a single borrower with common appraisal, common
documentation, joint supervision and follow-up exercises, these banks
have a common agreement between them, the process is somewhat
similar to loan syndication.

CONSORTIUM VS. MULTIPLE BANKING

The borrowers, particularly the big ones, are nowadays a very happy lot as the
bankers run after them offering cheap finance. This has given birth to the
practice of MULTIPLE BANKINGa situation when one borrower is banking with
many banks.
Under consortium financing, several banks (or financial institutions) finance a
single borrower with common appraisal, common documentation, joint
supervision and follow-up exercises, but in multiple banking, different banks
provide finance and different banking facilities to a single borrower without
having a common arrangement and understanding between the lenders. The
practice of multiple banking has increased tremendously during the last years .
This is due to the increasing competition and the bankers desire to grow in a
short span of time.
Why Choose Consortium Approach?

The Consortium approach to project delivery is chosen because of the

desire to share as evenly as possible the risk inherent in that project.

It is like a establishing a temporary business without the formal structure

or tax liabilities, a business that is governed by the rules laid down in a
consortium agreement.

Emergence of Consortia in India

The accessibility to international journals in Indian universities and

technical institutions has improved many fold with setting-up of a few
Government-funded library consortia.

Prior to setting up of these consortia, the access to e-journals was

restricted to a premier institutions like IISc, IITs, IIMs and a few central
universities who were subscribing to a few bibliographic databases on CD

ROM, a few e-journals accessible free with subscription to their print

versions and a negligible fraction of journals on subscription.

After launch of the Indian National Digital Library in Engineering Sciences

and Technology (INDEST) Consortium in 2003 and UGC-INFONET Digital
Library Consortium in 2004, availability and accessibility of e-resources
increased phenomenally in setting in a new culture of electronic access
and browsing in educational institutions.

A number of library consortia have emerged in India in past five to six

years.

Some of the important consortia and their activities will be discussed now:

INDEST-AICTE Consortium
INDEST-AICTE Consortium was set-up by the Ministry of Human Resource
Development (MHRD) in year 2003 to provide access to selected electronic
journals and databases to 38 centrally-funded technical institutions
including IISc, IITs, NITs, IIMs, IIITs, ISM, SLIT, etc.

Currently, the Ministry provides funds required for subscription to

resources for 42 centrally-funded institutions including IISERs, new NITs
and IITs.

Besides, 60 Government or Government-aided engineering colleges and

technical institutions have joined the Consortium with financial support
from the AICTE.

Moreover, the Consortium also welcomes other institutions to join it under

its self-supported category.

690 engineering colleges and other educational institutions have joined

the Consortium under its self-supported category. The total number of
members in the Consortium has now gone up to 788.

Advantages

Ease of Formation- No formal procedure must be followed. Also no capital

is required to create the consortium.

Flexibility- Members of consortium can change their contractual

agreement at any time to suit changed circumstances.

Ease of termination- Consortia can be set to expire on a given date or on

the occurrence of certain events without the formal requirements needed
in the case of dissolution of the corporation.

Tax transparency- The consortium is not directly subject to taxation

however the individuals are.

Confidentiality- Some of the members may choose to be undisclosed

parties in dealings with third parties.

Costs- The cost of running a contractual joint venture is generally lower

than running a joint venture company.

Disadvantages

Liability- It is difficult for a consortium member to restrict or limit its

liability. Members may even become liable to third parties for the non
performance of other members of the consortium or debts of such
members incurred in undertaking the common project.

External Relationships and Funding- Third parties often find it difficult to

enter into a contract with a non legal entity like consortium. Because it is
non legal entity the funding is also normally available to the individual
members and not the consortium itself.

Lack of permanent structure- The lack of permanent structure makes it

difficult for a consortium to establish a long term business relationship
with third parties.

VENTURE CAPITAL

Startup or growth equity capital or loan capital provided by private investors (the
venture capitalists) or specialized financial institutions (development finance
houses or venture capital firms). Also called risk capital.

Venture capital is a means of equity financing for rapidly-growing private

companies. Finance may be required for the start-up, development/expansion or
purchase of a company. Venture Capital firms invest funds on a professional
basis, often focusing on a limited sector of specialization (eg. IT, infrastructure,
health/life sciences, clean technology, etc.).

The goal of venture capital is to build companies so that the shares become
liquid (through IPO or acquisition) and provide a rate of return to the investors (in
the form of cash or shares) that is consistent with the level of risk taken.
With venture capital financing, the venture capitalist acquires an agreed
proportion of the equity of the company in return for the funding. Equity finance
offers the significant advantage of having no interest charges. It is "patient"
capital that seeks a return through long-term capital gain rather than immediate
and regular interest payments, as in the case of debt financing. Given the nature
of equity financing, venture capital investors are therefore exposed to the risk of
the company failing. As a result the venture capitalist must look to invest in
companies which have the ability to grow very successfully and provide higher
than average returns to compensate for the risk.
Venture capital has a number of advantages over other forms of finance, such
as:

It injects long term equity finance which provides a solid capital base for
future growth.

The venture capitalist is a business partner, sharing both the risks and
rewards. Venture capitalists are rewarded by business success and the
capital gain.

The venture capitalist is able to provide practical advice and assistance to

the company based on past experience with other companies which were
in similar situations.

The venture capitalist also has a network of contacts in many areas that
can add value to the company, such as in recruiting key personnel,
providing contacts in international markets, introductions to strategic
partners, and if needed co-investments with other venture capital firms
when additional rounds of financing are required.

The venture capitalist may be capable of providing additional rounds of

funding should it be required to finance growth.

Why Venture Capital

The venture capital industry in India is still at a nascent stage. With a view to
promote
innovation, enterprise and conversion of scientific technology and knowledgebased ideas into commercial production, it is very important to promote venture
capital activity in India. Indias recent success story in the area of information
technology has shown that there is a tremendous potential for growth of
knowledge-based industries. This potential is not only confined to information
technology but is equally relevant in several areas such as bio-technology,
pharmaceuticals and drugs, agriculture, food processing, telecommunications,
services, etc. Given the inherent strength by way of its skilled and cost
competitive manpower, technology, research and entrepreneurship, with proper
environment and policy support, India can achieve rapid economic growth and
competitive global strength in a sustainable manner.

A flourishing venture capital industry in India will fill the gap between the capital
requirements of technology and knowledge based startup enterprises and
funding available from traditional institutional lenders such as banks. The gap
exists because such startups are necessarily based on intangible assets such as
human capital and on a technology-enabled mission, often with the hope of
changing the world. Very often, they use technology developed in university and
government research laboratories that would otherwise not be converted to
commercial use. However, from the viewpoint of a traditional banker, they have
neither physical assets nor allow-risk business plan. Not surprisingly, companies
such as Apple, Exodus, Hotmail and Yahoo, to mention a few of the many
successful multinational venture-capital funded companies initially failed to get
capital as startups when they approached traditional lenders.

However, they were able to obtain finance from independently managed venture
capital funds that focus on equity or equity-linked investments in privately held,
high-growth companies. Along with this finance came smart advice, hand-on
management support and other skills that helped the entrepreneurial vision to
be converted to marketable products. Beginning with a consideration of the wide
role of venture capital to encompass not just Information technology, but all
high-growth technology and knowledge-based enterprises, the endeavor of the
Government has been to make recommendations and work on that plan which
will facilitate the growth of a vibrant venture capital industry in India.

The report examines

(1) The vision for venture capital

(2) Strategies for its growth and
(3) How to bridge the gap between traditional means of finance and the
capital needs of high growth startups.

II. Critical factors for success of venture capital industry:

While making the recommendations, I felt that the following factors are critical for the
success of the VC industry in India:

The regulatory, tax and legal environment should play an enabling role. Internationally,
Venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and
operational adaptability.
Resource raising, investment, management and exit should be as simple and flexible as
needed and driven by global trends
Venture capital should become an institutionalized industry that protects investors and
Investee firms, operating in an environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through startup firms in a wide range of high
growth areas.
In view of increasing global integration and mobility of capital it is important that Indian
Venture capital funds as well as venture finance enterprises are able to have global exposure
and investment opportunities.

RECOMMENDATIONS

1. Multiplicity of regulations - Need for harmonization and nodal Regulator

Presently there are three set of Regulations dealing with venture capital activity i.e.
SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital
Investments issued by Department of Economic Affairs in the MOF in the year 1995 and
CBDT Guidelines for Venture Capital Companies in 1995 which was modified in 1999. The
need is to consolidate and substitute all these with one single regulation of SEBI to provide
for uniformity, hassle free single window clearance. There is already a pattern available in

this regard; the mutual funds have only one set of regulations and once a mutual fund is
registered with SEBI, the tax exemption by CBDT and inflow of funds from abroad is available
automatically.

Similarly, in the case of FIIs, tax benefits and foreign inflows/outflows are automatically
available once these entities are registered with SEBI. Therefore, SEBI should be the nodal
regulator for VCFs to provide uniform, hassle free, single window regulatory framework. On
the pattern of FIIs, Foreign Venture Capital Investors (FVCIs) also need to be registered with
SEBI.

2. Tax pass through for Venture Capital Funds

VCF are a dedicated pool of capital and therefore operates in fiscal neutrality and are treated
as pass through vehicles. In any case, the investors of VCFs are subjected to tax. Similarly,
the investee companies pay taxes on their earnings. There is a well-established successful
precedent in the case of Mutual Funds, which once registered with SEBI are automatically
entitled to tax exemption at pool level. It is an established principle that taxation should be
only at one level and therefore taxation at the level of VCFs as well as
investors amount
to double taxation. Since like mutual funds VCF is also a pool of capital of investors, it needs
to be treated as a tax pass through. Once registered with SEBI, it should be entitled to
automatic tax pass through at the pool level while maintaining taxation at the investor level
without any other requirement under Income Tax Act.

3. Mobilization of Global and Domestic resources

(A) Foreign Venture Capital Investors (FVCIs)

Presently, FIIs registered with SEBI can freely invest and disinvest without taking FIPB/RBI
approvals.
This has brought positive investments of more than US $10 billion. At present, foreign
venture capital investors can make direct investment in venture capital undertakings or
through a domestic venture capital fund by taking FIPB / RBI approvals. This investment
being long term and in the nature of risk finance for start-up enterprises, needs to be
encouraged.

Therefore, at least on par with FIIs, FVCIs should be registered with SEBI and having once
registered, they should have the same facility of hassle free investments and disinvestments
without any requirement for approval from FIPB / RBI. This is in line with the present policy of
automatic approvals followed by the Government. Further, generally foreign investors invest
through the Mauritius-route and do not pay tax in India under a tax treaty. FVCIs therefore
should be provided tax exemption. This provision will put all FVCIs, whether investing
through the Mauritius route or not, on the same footing. This will help the development of a
vibrant India-based venture capital industry with the advantage of best international
practices, thus enabling a jump-starting of the process of innovation.

The hassle free entry of such FVCIs on the pattern of FIIs is even more necessary
because of the following factors:

(i) Venture capital is a high-risk area. In out of 10 projects, 8 either fail or yield negligible
returns. It
is therefore in the interest of the country that FVCIs bear such a risk.
(ii) For venture capital activity, high capitalization of venture capital companies is essential
to withstand the losses in 80% of the projects. In India, we do not have such strong
companies.

(iii) The FVCIs are also more experienced in providing the needed managerial expertise and
other supports.

4. Flexibility in Investment and Exit

(A) Allowing multiple flexible structures

Eligibility for registration as venture capital funds should be neutral to firm structure. The
government should consider creating new structures, such as limited partnerships, limited
liability partnerships and limited liability corporations. At present, venture capital funds
can be structured as trusts or companies in order to be eligible for registration with SEBI
Internationally, limited partnerships, Limited Liability Partnership and limited liability
corporations have provided the necessary flexibility in risk-sharing, compensation
arrangements amongst investors and tax pass through. Therefore, these structures are
commonly used and widely accepted globally specially in USA. Hence, it is necessary to
provide for alternative eligible structures.

(B) Flexibility in the matter of investment ceiling and sectoral restrictions

70% of a venture capital funds investible funds must be invested in unlisted equity or
equity-linked instruments, while the rest may be invested in other instruments. Though
sectoral restrictions for investment by VCFs are not consistent with the very concept of
venture funding, specifying a negative list, which could include activities not legally
permitted and any other sectors, which could be notified by SEBI in consultation with the
Government? Investments by VCFs in associated companies should also not be permitted.
Further, not more than 25% of a funds corpus may be invested in a single firm. The
investment ceiling has been recommended in order to increase focus on equity or equitylinked instruments of unlisted startup companies. As the venture capital industry matures,
investors in venture capital funds will set their own prudential restrictions.

(C) Changes in buy back requirements for unlisted securities

A venture capital fund incorporated as a company/ venture capital undertaking should be
allowed to buyback upto 100% of its paid up capital out of the sale proceeds of investments
and assets and not necessarily out of its free reserves and share premium account or

proceeds of fresh issue. Such purchases will be exempt from the SEBI takeover code.
A
venture-financed undertaking will be allowed to make an issue of capital within 6 months of
buying back its own shares instead of 24 months as at present. Further, negotiated deals
may be permitted in unlisted securities where one of the parties to the transaction is VCF.

(D) Relaxation in IPO norms

The IPO norms of 3-year track record or the project being funded by the banks or financial
institutions should be relaxed to include the companies funded by the registered VCFs also.
The issuer company may float IPO without having three years track record if the project cost
to the extent of 10% is funded by the registered VCF. Venture capital holding however shall
be subject to lock in period of one year. Further, when shares are acquired by VCF in a
preferential allotment after listing or as part of firm allotment in an IPO, the same shall be
subject to lock in for a period of one year. Those companies, which are funded, by Venture
capitalists and their securities are listed on the stock exchanges outside the country, these
companies should be permitted to list their shares on the Indian stock exchanges.

(E) QIB Market for unlisted securities

A market for trading in unlisted securities by QIBs to be developed.

(F) NOC Requirement

In the case of transfer of securities by FVCI to any other person, the RBI requirement of
obtaining NOC from joint venture partner or other shareholders should be dispensed with.

(G) RBI Pricing Norms

At present, investment/disinvestments by FVCI is subject to approval of pricing by RBI,
which curtails operational flexibility and needs to be dispensed with.

5. Global integration and opportunities

(A) Incentives for Shareholders: The shareholders of an Indian company that has
venture capital funding and is desirous of swapping its shares with that of a foreign company
should be permitted to do so. Similarly, if an Indian company having venture funding and is
desirous of issuing an ADR/GDR, venture capital shareholders (holding saleable stock) of the
domestic company and desirous of disinvesting their shares through the ADR/GDR should be
permitted to do so. Internationally, 70% of successful startups are acquired through a stockswap transaction rather than being purchased for cash or going public through an IPO. Such
flexibility should be available for Indian startups as well. Similarly, shareholders can take
advantage of the higher valuations in overseas markets while divesting their holdings.

(B) Global investment opportunity for Domestic Venture Capital Funds (DVCF):
DVCFs should be permitted to invest higher of 25% of the funds corpus or US $10 million or
to the extent of foreign contribution in the funds corpus in unlisted equity or equity-linked
investments of a foreign company. Such investments will fall within the overall ceiling of 70%
of the funds corpus. This will allow DVCFs to invest in synergistic startups offshore and also
provide them with global management exposure.

6. Infrastructure and R&D

Infrastructure development needs to be prioritized using government support and private

management of capital through programmes similar to the Small Business Investment
Companies in the United States, promoting incubators and increasing university and
research laboratory linkages with venture-financed startup firms. This would spur
technological innovation and faster conversion of research into commercial products.

7. Self-Regulatory Organization (SRO)

A strong SRO should be encouraged for evolution of standard practices, code of conduct,
creating awareness by dissemination of information about the industry. Implementation of
these recommendations would lead to creation of an enabling regulatory and institutional
environment to facilitate faster growth of venture capital industry in the country. Apart from
increasing the domestic pool of venture capital, around US$ 50 billion are expected to be
brought in by offshore investors over 3/5 years on conservative estimates. This would in turn
lead to increase in the value of products and services adding upto US$300 billion to GDP by
2010. Venture supported enterprises would convert into quality IPOs providing over all
benefit and protection to the investors. Additionally, judging from the global experience,
this will result into substantial and sustainable employment generation of around 3 million
jobs in skilled sector alone over next five years. Spin off effect of such activity would create
other Support services and further employment. This can put India on a path of rapid
economic growth and a position of strength in global economy.

CONCEPTUAL DISCUSSIONS

The term venture capital refers to capital investment made in a business or industrial
enterprise which carries elements of risk and insecurity and the probability of business hazards.
Capital investment may assume the form of either equity or debt, or both, or a derivative
instrument. But generally the investment is made in equity form as it enables the investor to
convert the investment into cash when required. Venture Capital financing is an alternative
financing source, particularly when an industry is technology based, the entrepreneur
inexperienced and investment carries high risk of loss. In such circumstances banks and
institutions do not advance money to entrepreneurs; the only succour lies with venture
capitalists who provide risk capital.

Venture capitalists take higher risks by investing in an early-stage company with little or no
history, and they expect a higher return for their high-risk equity investment. Internationally, VCs
look at an Internal Rate of Return (IRR) of 40% plus. However, in India the ideal benchmark is in
the region of an Internal Rate of Return (IRR) of 25% for general funds and more than 30% for ITspecific funds. Most firms require large portions of equity in exchange for start-up financing.

Venture Capital financing, then, is not a passive activity like money lending where the lender is
unconcerned with the performance of the investees business. In venture capital financing the
venture capital firm takes keen interest in the business performance of the investee firm. Thus
the venture capitalist acts as a copartner in the investees business, sharing success and failures,
the gains and losses, proportionate to the equity investment. The vital difference between
venture capital financing and bought-out deals is that the latter does not involve investment on
high-risk and high-reward basis, nor does it provide equity finance at different stages of
development. Although the expectation of capital gains on investment in bought-out deals is
similar to that in venture capital investment, there is a material difference in objectives and
intents.

Difference between Venture Capital and Conventional Financing

Sl.No.

Venture Capitalist

1. He is a risk taker like the entrepreneur.

Conventional Financing
He is a risk avoider as protection of funds
is the prime responsibility of the financier.

2. He acquires equity, a share of ownership His objective is to eliminate risk by

and with it a share of risk. He does not

loaning money against collateral and

eliminate risk but manages it through in- ensuring debt repayment capacity.
Depth monitoring, assisting and directing
his investee companies and through
portfolio diversification. He considers
himself a partner of the entrepreneur.

3. He specializes in management services

He specializes in financial services and

of which finance is a part. He understands the whole scope of business, from

has nothing to do with management or

marketing to clients.

Team-building through to operations.

4. He has extensive operating experience

Such experience is not required at all.

And provides entrepreneurs full

hands-on support.

5. He channels funds into the lowest tier

He avoids such situations of risk.

Of the market ,i.e. the emerging

enterprise.

6. Venture capitalist injects on an element

of vitality and innovation into the business community.

The conventional financier is not

equipped to provide support which
new enterprises demand alongside

investments.

7. He assists the flow of new investment

He only assists in investment.

Opportunities by encouraging entrepreneurs, developing entrepreneurial

infrastructure by establishing different
types of venture funds.

8. Provides promoters capital gap.

Not always so.

9. Provides second stage financing for full

Not always so.

achievement of investee companys

potential/realizing of business opportunities.

Advantages of VC Financing over Other Forms of Finance

It injects long term equity finance which provides a solid capital base for future growth.

The venture capitalist is a business partner, sharing both the risks and rewards. Venture
capitalists are rewarded by business success and the capital gain.

The venture capitalist is able to provide practical advice and assistance to the company
based on past experience with other companies which were in similar situations.

The venture capitalist also has a network of contacts in many areas that can add value to
the company, such as in recruiting key personnel, providing contacts in international
markets, introductions to strategic partners, and if needed co-investments with other
venture capital firms when additional rounds of financing are required.

The venture capitalist may be capable of providing additional rounds of funding should it be
required to finance growth.

Stages of Venture Financing

The most distinct feature of VC financing is its stage-wise financing system which is
discussed below.

Stages in venture

Name of

capital financing

stage

Stage I

Seed

Description of status of
the project

Conceptualization/Planning

Stage II

Start-up

Operational/Production

Stage III

Expansion

Expansion in Production/Marketing

Stage IV

Mezzanine

Last stage before Public Offering

Stage V

Buy-out

Acquisition of a Production Line/

Business

Stage VI

Turnaround

Re-establishment of Business

Seed Capital Stage:

This stage is a pre-start-up stage needing funds for testing the prototype and giving it a
commercial shape. This is the primary stage associated with research and development
(R&D). Financing in this stage involves serious risk as the technology or innovation being
attempted may succeed or fail, after repeated investments. Chances of success in high
technology (hi-tech) projects are meager or we can say that risks are very high and rewards
remote.

Start-up Stage:
An entrepreneur may feel the need for finance when the business activity is just starting.
The start-up stage involves the launching of a new business. Although, the start-up stage is
exposed to high risk, more and more venture capitalists, hoping for capital gains through
equity appreciation, are eager to finance such projects. Venture capital companies, however,
assess the managerial ability and capacity of the entrepreneur before making any financial
commitment at this stage.

Second-Round Financing:
The circumstances under which second-round finance is needed by an enterprise after startup may be negative or positive. The negative reasons could be overruns in the project before
completion, a period of loss after start-up, inability to get further equity finance from other
sources. On a positive note, if a start-up is successful and the business is growing apace,
additional funding is required for expansion.

Later-Stage Financing:
This refers to post-early-stage financing when a project has established itself and business is
spreading its wings and is looking for higher growth. Later-stage funding is also called
mezzanine financing. Venture capitalists around the world, particularly in the UK and USA
prefer investing in later-stage projects in order to reap capital gains.
The various sub-divisions of later-stage financing are:

Expansion of developmental finance

Replacement capital

Buy-outs

Turnarounds

Expansion Finance: Expansion of an undertaking or enterprise may be through an organic

growth or by way of acquisition or takeover. For the venture capitalist there is no difference
between the two from the point of investment. In the case of organic development the
entrepreneur retain maximum equity holding. In the case of acquisition equity holdings of
the purchaser and the investor could be in the ratio 50:50 depending upon the bargain, i.e.
the net worth of the acquired business, its purchase price and the amount raised from
investors by the acquiring company.

Replacement Finance: Replacement finance aims at enhancing the equity base in an

enterprise, resulting in a change of owner/ownership pattern of the enterprise. Venture
capitalists make finance available by purchasing existing shares from entrepreneur or their
associates to reduce their holdings in the unlisted company. This sale of shares may be by
persons other than entrepreneurs or their associates. This is known as money-out deal.

Turnaround: Turnaround implies the recovery of the enterprise. A turnaround deal

resembles early-stage financing where the business is not yet profitable. The company may
face mounting debt burden and flowing down of cash inflows and need more funds from all
sources, viz. bankers, financial institutions, and existing investors including venture
capitalists, to reach a recovery point. The venture capitalist plays an active role in such a
situation by providing more equity investments and deploying managerial experts.

Buy-outs: Buy-outs are a recent development in the service areas of merchant bankers and
savings institutions, and a new form of investments in the European venture capital industry.
The success of buy-outs has been so remarkable that they have become one of the principle
activities of merchant bankers/venture capitalists.

Selection Criteria Adopted by a Venture Capitalist

A venture capitalist may decide to invest in an enterprise in either the early or later stage. In
each situation the criteria for decision-making will differ. However, the investigation in both

cases will start from an evaluation of the business plan of the enterprise and assessment of
the management.

Considerations for Early-Stage Investment:

In the early stage of financing the exposure to risk is greater. A venture capitalist would
generally seek information on the following points before deciding to invest in the early
stage of an enterprise:

Commercial viability of the project and product life-cycle

Technical feasibility of the manufacturing process of the product/service

Marketability of the product or service

Long-term potentiality of product to stay in the market and

Management experience, expertise, skills, and resources.

Considerations for Later-Stage Investment:

The later stages of a project or an enterprise involve mezzanine finance, expansion finance,
turnaround finance or buy-out financing. The investment strategy for later stage financing is
different on account of more safety in investment. There is a shift in the expectation profile
of the venture capitalist, from huge capital gains of the early stage to solid income yield on
secured investment in the later. There must be good generation of funds depicting
successful completion of the project to meet its own working capital requirements. These
aspects are important considerations in later-stage financing.
While doing the project appraisal one important aspect is financial analysis and projections.
The norm for financial analysis differs depending upon the stage of venture financing and the
status of the enterprise. An immediate and pertinent concern for an investor in an enterprise
would be to enquire into the ownership pattern of the company and participation of other
investors, institutional and bank financing, and analysis of future projections. These aspects
are explained below:

Investment by the Entrepreneur: As promoter of an enterprise an entrepreneur always

owns maximum share of the capital to maintain continuity of his interest and control over
the enterprise.

Investment by Others: The share of other investors in the total investment would reveal
their involvement in the enterprise. Any further contribution by them would depend upon
their expectations of returns on investment in future for their past investments.

Valuation Methods for Taking Investment Decisions:

A venture capitalist would find it worthwhile to value current outside investments made in an
enterprise so as to take a decision about his share in the equity capital of the company.
Venture capitalists use different valuation methods, some of which are now discussed:

Conventional Valuation Method: This is based on the expected increase in the initial
investment which could be sold out to a third party or through public offering via the exit
route. This method does not take into account the stream of cash flows beginning from the
date of investment till the date of liquidity of investment.

Present Value Based Method: This method takes into account the stream of earnings (or
losses) generated during the entire period of the investment from the date of initial
investment till date of maturity at a presumed discount rate. This method is popularly known
as First Chicago Method. The problem with this method is that it is based more on a
value judgment by the venture capitalist than empirical consideration.

Revenue Multiplier Method: Revenue multiplier is an assumed factor used to estimate

the value of an enterprise. By multiplying the annual estimated sales by such factor, the

valuation figure is derived. This method is based on sales income and not on earnings.
Assuming the absence of profit in the early stages of a project, the method is useful for
valuation at the early stages.

The Business Plan

Venture capitalists view hundreds of business plans every year. The business plan must
therefore convince the venture capitalist that the company and the management team have
the ability to achieve the goals of the company within the specified time.
The business plan should explain the nature of the companys business, what it wants to
achieve and how it is going to do it. The companys management should prepare the plan
and they should set challenging but achievable goals.
The length of the business plan depends on the particular circumstances but, as a general
rule, it should be no longer than 25-30 pages. It is important to use plain English, especially
if you are explaining technical details. Aim the business plan at non-specialists, emphasising
its financial viability.
Avoid jargon and general position statements. Essential areas to cover in your business
plan Executive Summary This is the most important section and is often best written last. It
summarises your business plan and is placed at the front of the document. It is vital to give
this summary significant thought and time, as it may well determine the amount of
consideration the venture capital investor will give to your detailed proposal.
It should be clearly written and powerfully persuasive, yet balance "sales talk" with realism
in order to be convincing. It should be limited to no more than two pages and include the key
elements of the business plan.

1. Background on the company Provide a summary of the fundamental nature of the

company and its activities, a brief history of the company and an outline of the companys
objectives.

2. The product or service Explain the company's product or service. This is especially
important if the product or service is technically orientated. A non-specialist must be able to
understand the plan.

Emphasise the product or service's competitive edge or unique selling point.

Describe the stage of development of the product or service (seed, early stage,
expansion). Is there an opportunity to develop a second-generation product in due
course? Is the product or service vulnerable to technological redundancy?

If relevant, explain what legal protection you have on the product, such as patents
attained, pending or required. Assess the impact of legal protection on the
marketability of the product.

3. Market analysis The entrepreneur needs to convince the venture capital firm that there
is a real commercial opportunity for the business and its products and services. Provide the
reader a combination of clear description and analysis, including a realistic "SWOT"
(strengths, weaknesses, opportunities and threats) analysis.

Define your market and explain in what industry sector your company operates. What
is the size of the whole market? What are the prospects for this market? How
developed is the market as a whole, i.e. developing, growing, mature, declining?

How does your company fit within this market? Who are your competitors? For what
proportion of the market do they account? What is their strategic positioning? What
are their strengths and weaknesses? What are the barriers to new entrants?

Describe the distribution channels. Who are your customers? How many are there?
What is their value to the company now? Comment on the price sensitivity of the
market.

Explain the historic problems faced by the business and its products or services in the
market. Have these problems been overcome, and if so, how? Address the current
issues, concerns and risks affecting your business and the industry in which it
operates. What are your projections for the company and the market? Assess future
potential problems and how they will be tackled, minimised or avoided.

4. Marketing Having defined the relevant market and its opportunities, it is necessary to
address how the prospective business will exploit these opportunities.

Outline your sales and distribution strategy. What is your planned sales force? What
are your strategies for different markets? What distribution channels are you planning
to use and how do these compare with your competitors? Identify overseas market
access issues and how these will be resolved.

What is your pricing strategy? How does this compare with your competitors?

What are your advertising, public relations and promotion plans?

5. The management team

Demonstrate that the company has the quality of management to be able to turn the
business plan into reality.

The senior management team ideally should be experienced in complementary areas,

such as management strategy, finance and marketing, and their roles should be
specified. The special abilities each member brings to the venture should be
explained. A concise curriculum vitae should be included for each team member,
highlighting the individuals previous track record in running, or being involved with,
successful businesses.

Identify the current and potential skills gaps and explain how you aim to fill them.
Venture capital firms will sometimes assist in locating experienced managers where an
important post is unfilled - provided they are convinced about the other aspects of
your plan.

List your advisers and board members.

Include an organisation chart.

6. Financial projections
The following should be considered in the financial aspect to your business plan:

Realistically assess sales, costs (both fixed and variable), cash flow and working
capital. Produce a profit and loss statement and balance sheet. Ensure these are easy
to update and adjust. Assess your present and prospective future margins in detail,
bearing in mind the potential impact of competition.

Explain the research undertaken to support these assumptions.

Demonstrate the company's growth prospects over, for example, a three to five year
period. What are the costs associated with the business? What are the sale prices or
fee charging structures?

What are your budgets for each area of your company's activities?

Present different scenarios for the financial projections of sales, costs and cash flow for
both the short and long term. Ask "what if?" questions to ensure that key factors and
their impact on the financings required are carefully and realistically assessed. For
example, what if sales decline by 20%, or supplier costs increase by 30%, or both?
How does this impact on the profit and cash flow projections?

If it is envisioned that more than one round of financing will be required (often the
case with technology based businesses in particular), identify the likely timing and any
associated progress "milestones" or goals which need to be achieved.

Keep the plan feasible. Avoid being overly optimistic. Highlight challenges and show
how they will be met.

Relevant historical financial performance should also be presented. The companys historical
achievements can help give meaning, context and credibility to future projections.
7. Amount and use of finance required and exit opportunities State how much
finance is required by your business and from what sources (i.e. management, venture
capital, banks and others) and explain the purpose for which it will be applied.
Consider how the venture capital investors will exit the investment and make a return.
Possible exit strategies for the investors may include floating the company on a stock
exchange or selling the company to a trade buyer.