Financing Operations in India

Madhav Kalyan Country Manager and Chief Representative ICICI Bank

Sectors from US doing Business in India

Manufacturing

Trading

Auto / Auto parts Chemicals Pharmaceuticals

Agri Commodities Engg Machinery Textiles

Services

Infrastructure

Infotech BPO Travel / Hotels

Choice of entry vehicle determines financial structure
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Power Telecom Roads / Ports

Financing Operation in India

Equity/Risk Capital
Foreign direct Investment Public Equity Issue

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

Financing Operation in India

Equity/Risk Capital
Foreign Direct Investment Public Equity Issue

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

Equity Capital

Various means of raising equity capital

Bringing foreign funds

Foreign direct Investment including ADRs/GDRs and FCCBs Preference share capital (not included in ECBs or FDI sectoral caps)
Private placements Public issue of equity

Raising domestic funds

Foreign Direct Investment

FDI: The acquisition of physical assets such as plant and equipment in India, with operating control residing in the parent corporation. Modes of bringing FDI

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

FDI policy in India

Declared objective: to invite and facilitate foreign investment in India

Minimal procedural formalities Freely allowed in all sectors including services except few restrictions and sectoral caps Automatic approvals, only post entry notification to RBI,

except few restrictions

Greater transparency in case approval required No restriction on end use (except real estate and stock markets) Free repatriation of investment and returns

FDI policy in India (contd.)

Sectors restricted for FDI Nuclear Energy Railway Transport Sectors with compulsory industrial licensing, eg. Distillation & brewing alcoholic drinks Cigars, cigarettes and manufactured tobacco substitutes Electronic Aerospace and defence equipment, etc. All items reserved for SSI

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

Financing Operation in India

Equity/Risk Capital
Foreign direct Investment Public Equity Issue

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

Raising Domestic equity

Private Placement

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

Public Issue

Well developed Equity markets with total market cap in excess of Rs 13,00,000 Crores (USD 285 Bn) as of Jan04 Liquidity mainly in large cap and some mid cap companies Main participants Mutual funds, Insurance companies, FIIs and retail investors

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Private Equity

Can be used to raise funds and dilute equity in favor of Indian shareholders (as per FDI sectoral caps) while limiting the no. of shareholders. Private equity/venture capital investors provide funding for BPO operations

Many US based funds invest in Indian companies or US companies with focus on India Funding for startups and small scale BPOs hard to come by, funding mainly for second stage or later Typically look for the management team, their speed of execution, ability to scale, managing customer expectation, infrastructure, client relationships and dependence, order book/ pipeline and profitability.

VCs/Private equity invested USD 300 Mn in 2002 and USD 500 Mn in 2003
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Equity Markets in India

Regulatory Body

SEBI (the Securities & Exchange Board of India)

Autonomous and Statutory body Regulates & controls capital users and all functionaries between users and investors

The Stock Exchanges

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

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Equity Markets in India

The Depositories

NSDL (the National Securities Depository Ltd.) and CDSL (the Central Depository Services (I) Ltd.)

The Depository Act 1996 led to its establishment Efficient, low risk and cost infrastructure for paperless handling of securities.

The Registered Intermediaries

Consist of brokers, sub-brokers, Trading & Clearing members, portfolio managers, Bankers to Issue, merchant bankers, registrars, underwriters and credit rating agencies.

Registered with SEBI and act under its regulation.

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Guidelines for Issue of Equity Capital

Unlisted company can make a public issue of equity shares or instrument convertible into equity subject to:

Pre-issue net worth not less than Rs 10 mn in 3 out of

preceding 5 years including immediately preceding 2 years

Track record of distributable profits under Companies Act 1956, for at least 3 years out of immediately preceding 5 years

Issue to be through book building only, if not complying with the above clauses or issue size more than 5 times pre issue net worth.

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Financing Operation in India

Equity/Risk Capital
Foreign direct Investment Public Equity Issue

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

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Corporate debt market in India

Less deep than Equity markets contrary to world markets Liquidity mainly in Govt. securities and highly rated corporate papers (AAA and AA)

Primarily an OTC Market

Listed corporate debt market

Listed market underdeveloped Listed debt markets are also regulated by SEBI Listing requirements

Rating must for listing of debt Credit Rating Agencies Crisil (alliance with S&P), ICRA (alliance with Moodys), CARE and Fitch India.

Banks investment in unlisted non SLR securities restricted to 10% of the total investments in non SLR securities.

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Corporate debt market in India

Market players

Qualified Institutional Investors (QIB)

Public financial institution

Scheduled commercial banks Mutual funds

Foreign institutional investor registered with SEBI

Multilateral and bilateral development financial institutions

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Financing Operation in India

Equity/Risk Capital
Foreign direct Investment Public Equity Issue

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

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Project finance

Project Finance

Rupee project loans to fund Land & Buildings, Plant & Machinery, pre-operative and preliminary expenses (including interest for the construction and installation period) and margin money for working capital Foreign currency project loans to fund imported capital equipment, services incidental to the equipment such as technology transfer and servicing fees, and domestic project expenditure. Syndication of domestic/international debt Use of EXIM bank US funding for import of capital equipment from US

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Project Finance (contd.)

Rupee assistance by way of subscription to debentures and shares Assistance by way of underwriting shares and debentures Guarantees for

Foreign currency loans Export credits. Suppliers of equipment Foreign lenders Bond guarantees and confirming guarantees

Equity

Mezzanine finance Equity Take-out finance

Assistance for a project loan would typically be for a longer tenure than for a corporate loan

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US EXIM Bank finance

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

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

flexibility

no collateral or security taken normally Loan guarantees and insurance offered Structured and project finance with limited recourse for setting up projects (repayment from project cash flows)

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US EXIM Bank finance

Medium/Long term guarantee facility

Up to 85% of the contract value Ranges from USD 0.5 mn to 10 mn Repayment up to a period of 14 yrs Personal guarantee if turnover of importer <USD 50 mn

Credit guarantee facility (CGF)

Line of credit more than USD 10 mn in one year Up to 85% of the eligible transaction

Limited recourse (project) and structured Finance

No country or project dollar limits Future cash flows for repayment Appropriate where trapping of hard currency revenue possible Risk sharing and reinsurance to facilitate transactions

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US EXIM Bank finance

Eligibility

All capital goods and services except military/defence and hazardous to environment Capital equipments and services, including

Computer hardware and software Pollution control equipment Equipments for outlets such as Burger King, Pizza hut, etc Refurbished equipment is also eligible

Goods must be shipped from US Financeable equipment value is the lesser of

85% of the value of goods or 100% of the US content in the goods

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Financing Operation in India

Equity/Risk Capital
Foreign direct Investment Public Equity Issue

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

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Term loans and working capital finance

Fund based working capital services
Cash credit facility Working capital demand loan Export packing credit / Preshipment credit Packing credit & foreign currency Short term loan MIBOR linked loans Commercial paper Invoice bill discounting (Clean & LC backed) Foreign currency non resident (bank) loan Buyers & suppliers credit Over draft

Long term loans

Plain vanilla corporate loans

Structured finance

Securitization

Receivables (present and future) Investment monetization Off balance sheet funding

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Working Capital Finance

Cash Credit (CC)

A running account facility extended against stock of inventory. The drawing limit fixed by applying security margin over value of the stock.

Working Capital Demand Loan (WCDL)

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

Bills
Used to finance trade transactions, is in the form of a negotiable instrument but cant be payable on demand and bearer at the same time.

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Working Capital Finance

Commercial Paper(CP)
Corporates

with minimum P2 rating from CRISIL or equivalent

as per RBI. Liquidity only in P1+ paper Usance promissory note negotiable by endorsement and delivery Cheaper source of funds than credit facilities. 15 to 364 days tenor, issued at discount.

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

Drawn

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

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Export Finance
Offered at concessional rates per directions of RBI to encourage exports
Pre

shipment Finance

Extended to exporters on existence of an export order and/or irrevocable LC and liquidated from proceeds of the export bills
Packing

credit

Evidence of export- Irrevocable LC, confirmed order with details from overseas buyer Not to exceed the FOB value of goods, secured or unsecured For a period of 180 days, further extendable by 90 days Can be in INR or foreign currency

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Export Finance
Post

shipment Finance

To enhance exporters ability to offer credit and gain business in global trade markets.

Based on shipping documents evidencing exports or supply to designated agencies in case of deemed exports Negotiation of documents under LC

Forms of finance

Purchase/Discount of bills under export orders

Advance against bills on collection/consignment basis Advances against deemed export supplies

In

INR or foreign currency

Liquidation

from proceeds of exports through inward remittances, can be liquidated through domestic sources but attracts higher rates

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Leasing

Financial Lease not a popular method of financing in India due to taxation issues

Depreciation benefit not available to Lessor Sales tax and service tax payable on lease rentals

However, operating lease can be used to converting Capex to Opex

Companies not comfortable putting capital initially Use of vendor financing, hiring equipment and premises on lease to convert Capex to Opex Entities willing to take assets on their books and lease out the facilities

With growing comfort can put the required capital.

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Financing Operation in India

Equity/Risk Capital
Foreign direct Investment Public Equity Issue

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

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External Commercial Borrowings

Commercial loans Suppliers credit Buyers credit Loans from export credit agencies Borrowings from Multilateral Financial Institutions

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External Commercial Borrowings

Key regulatory guidelines

Eligibility Automatic approval Maturity

Interest rate ceilings

End use requirement

End use restriction

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Withholding tax
What is withholding tax
Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower Tax is paid @ 20% (as per Income Tax Act, 1961) or as per the DTA Agreement between India and the lenders country No withholding tax on loans raised from overseas branch of Indian Banks

Why is it a deterrent

Economic impact

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Case Studies

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Automobile Major

Project Finance Formed a JV with Indian company Equity infusion to the extent of its share in the form of FDI Long term INR loans/NCDs from local financial institutions backed by parent guarantee to get better rates Working capital finance Packing credit in foreign currency Buyers credit-discounting of direct import bills from group cos. Commercial papers

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Agri trading and processing major

Project finance

Equity infusion from parent in the form of FDI Long term debt using global credit lines with global bankers Plant and Machinery import on Buyers credit from suppliers

Working capital finance

FCNR (B) loans Short term MIBOR linked loans Buyers credit on import LCs Indian company opens LCs with local bank in favor of group companies for sourcing of raw materials Buyers credit is availed backed by these LCs from foreign banks (global bankers) Thereby getting very cheap finance

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Thank You

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