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1. 30212MG112

2. CONTENT - INDUSTRIAL FINANCE

© Indian Capital market

o Basic problem of Industrial Finance in India
© Equity and Debenture financing

® Guidelines from SEBI

© Advantages and disadvantages and cost of various sources
of finance

® Finance from international sources
© Financing of exports
© Role of EXIM and commercial bank

® Finance for rehabilitation of sick units

3. INDIAN CAPITAL MARKET

© Financial system - complex of institutions and
mechanisms which affects generation of savings
and their transfer to those who invest

o Capital market - subpart of financial system
© Elements of Financial system -

1. Financial Instruments/assets/securities

2. Financial Intermediaries

3. Financial markets

MSM-MBA CF 2019 3

4. FINANCIAL ASSETS

® Claim against which store of value and for
that return is expected

© Types of financial assets:

1. Debt such as bonds, debentures and term
loans

2. Equity shares

3. Hybrid security (preference shares and

convertibles

MSM-MBA CF 2019 4

5. FINANCIA! INTFRMFDIARIFS

© Instit
inves
© Conv

secul

MSM-MBA CF 2019 5

6. FINANCIAL MARKETS

© Performs a crucial function in the financial
system as facilitating organization

© Suppliers of funds and demanders of
loan/investments can transact business directly

Financial Markets

Money Market
(short term)

Capital Market
(Long term)

MSM-MBA CF 2019 6

7. Money market:

® Created by financial relationship between
suppliers and demanders of short term funds
having maturities of one or less

Capital Market/securities market:

o Financial relationship created by an
institutions allows suppliers and demanders
of long term funds with maturities exceeding

one year to make transactions

MSM-MBA CF 2019 7

8. Capital Market

Stock/ Securities New issue/ Primary
market market/ IPO Market

MSM-MBA CF 2019 8

9. FUNCTIONS OF STOCK MARKET/
SECONDARY MARKET

|

Connection between savings and

investment
Market place

Continuous price formation

MSM-MBA CF 2019 9

10. FUNCTIONS OF NEW ISSUE MARKET

® The main function of new issue market is to facilitate
the transfer of resources from savers to
entrepreneurs seeking to establish new enterprise or
to expand/ diversify existing ones
1. Origination: refers to the work of investigation and
analysis and process of new proposals
2. Underwriting: form of guarantee that the new

issue would be sold by eliminating the risk arising

from uncertainty of public response

MSM-MBA CF 2019 10

11. 3. Distribution: is the sale of securities to the

ultimate investors
4. Issue Mechanism:
i. Public issue through prospectus
1. Tender/book building
ii. Offer for sale
iv. Placement

v. Right Issue

MSM-MBA CF 2019 11

12. ISSUE MECHANISM

ty

Public issue: are securities that are offered to the
general public directly at a stated price

Book building: is a price discovery and investors
response mechanism

Offer for sale: is the sale of existing shares by
promoters to the investing public

Placement method: sale by an issue house or
broker to their own clients of securities which have
been previously purchased/ subscribed

Rights issue: is the sale of securities to the existing
shareholders

MSM-MBA CF 2019 12

13. STOCK EXCHANGES IN INDIA

e Stock exchange - important constituent of
capital market

e It is organized market for purchase and sale
of industrial and financial security as per
well defined rules and regulations

© Indian stock market - oldest and robust
market in Asia. (BSE - Bombay Stock
Exchange)

MSM-MBA CF 2019 13

14. BSE - BOMBAY STOCK EXCHANGE

o Established in 1875, 141 years of existence in
securities transaction business

© Facilitated the growth of Indian corporate sector
by providing efficient capital raising platform.

© Host services like risk management, clearing,
settlement, market data services and education

© Vision of BSE - “Emerge as the premier Indian
stock exchange with best in practice in
technology, product innovation and customer
service”

MSM-MBA CF 2019 14

15. NSE - NATIONAL STOCK EXCHANGE

© Located in Mumbai. Fourth largest stock exchange in
the world according to “World Federation of
Exchange” (WFE) in terms of equity trading volume in
2015

© Began operations in 1994, 25 years of existence stood
for reliability, expertise, innovation and trust along
with changing technology and Indian Economy

© Vision of NSE - “to continue to be a leader, establish
global presence, facilitate the financial well-being of
people”

MSM-MBA CF 2019 15

16. MULTI COMMODITY EXCHANGE OF
INDIA (MCX)

© India’ first listed commodity exchange, a state of
art commodity derivative exchange

® Facilitates online trading and clearing and
settlement of commodity derivatives

transactions, thereby providing platform for risk
management

© Operation started in November 2003 in Mumbai

MSM-MBA CF 2019

17. Some of other stock exchanges in India viz.,

1. National Commodity and derivative
exchange (NCDEX)

2. Calcutta stock exchange (CSE)

3. Madras Stock exchange

4. Bangalore stock exchange

5. Cochin stock exchange

And so on....

MSM-MBA CF 2019 17

18. SEBI (SECURITIES AND EXCHANGE
BOARD OF INDIA)

© SEBI was established in April 12, 1992 with
the provision of SEBI act 1992.
Pre-amble:

“To protect the interests of investors in
securities and to promote the development
of, and to regulate the securities market and
for matters concerned therewith or
incidental thereto”.

MSM-MBA CF 2019 18

19. POWERS AND FUNCTIONS OF THE
BOARD

Functions of SEBI:

1.

Regulating the business in stock exchanges and any other
securities market.

Registering and regulating the working of stock brokers, share
transfer, agents, bankers to issue, trustees to trust deeds,
registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisers, and such other intermediaries
who may be associated with securities market in any manner.
Registering and regulating the working of the depositories,
custodians, intermediaries as the board, may, by notification,

specify in this behalf.
Contd..

MSM-MBA CF 2019 19

20. Promoting and regulating self regulatory organizations

Prohibiting fraudulent and unfair trade practices relating to
securities markets

Promoting investors’ education and training of intermediaries of
securities markets

Prohibiting insider trading in securities

Regulating substantial acquisition of shares and take over of
companies

Calling for information, undertaking inspection and audit

Performing such functions and exercising such power under the
provisions of SEBI act.

Levying fee or other charges for carrying out the purposes

Conduct research for the above process.

MSM-MBA CF 2019 20

21. POWERS OF SEBI

1. Suspend the trading of any security in a recognized stock
exchange

2. Restrain any persons from accessing the securities market and
prohibit any person with securities market to buy, sell or deal in
securities

3. Suspend any office bearer of any stock exchange or self
regulatory organization from holding such position.

4. Impound and retain the proceeds or securities in respect of any
transaction which is under inspection

5. Direct any intermediary or any person associated with the
securities market in any manner not to dispose of or alienate an
asset forming part of any transaction, which is under
investigation

MSM-MBA CF 2019 21

22. AN OVERVIEW OF CORPORATE
FINANCE

© Corporations invest in long term assets (property,
plant and equipment) and in working capital
(short term).

® Many research data shows that Indian
corporations use the cash generated internally
rather than equity or debt financing

© Cash flow (internal source) -> depreciation and

retained earnings(not paid to shareholders)
Contd...

MSM-MBA CF 2019 22

23. © Not only Indian companies relying on
internally generated cash, 2/3 of the
corporate financing in U.S, German, Japan
and U.K come from internally generated
cash.

© So any corporations need strong payout policy
and a debt policy for corporate financing
needs.

® Shareholders -ready to put back fund into
business -> to maximize shareholders’ value

MSM-MBA CF 2019 23

24. EQUITY FINANCING

® Long term finance represents ownership over
capital securities and its owners equity
shareholders

o The first issue of equity shares to the public
by an unlisted company is called IPO (Initial
Public Offering)

© Subsequent offerings are called further

issues/ offerings

MSM-MBA CF 2019 24

25. TYPES OF EQUITY SHARES

® Maximum amount which a company can raise from
the ordinary share holders and can be changed in the
prescribed manner called Authorized equity/share
capital

© The portion of authorized capital issued by the
company to the investors are called Issued Capital

© The part of the issued capital which has been
accepted/subscribed by the investors Subscribed
capital

© The actual amount paid by the investor called Paid up

capital
Contd...

MSM-MBA CF 2019 25

26. o The issued, subscribed and paid up capital

are same in most of the cases

Par value - value arbitrarily placed on the

shares

Book value - Paid up capital plus surplus or
reserve
Market value - the price at which equity shares

are traded in the stock market

MSM-MBA CF 2019 26

27. ADVANTAGES OF EQUITY FINANCING

1. Permanent source of fund without the
repayment liability

2. It does not involve obligatory dividend payment

3. It forms the basis for further long term
financing such as borrowing - credit worthiness
of the firm

4. The shareholders with limited liability exercise
control and share other ownership rights in the

income of firm

MSM-MBA CF 2019 27

28. DISADVANTAGES OF EQUITY FINANCING

1. High cost of funds - high rate of return of investors
as compensation

2. Equity funds are non tax deductible

3. High floatation cost, in terms of underwriting,
brokerage and other expenses

4. Dilution of control of existing shareholders by
issuing new shares

5. There is a wide fluctuation in payment of dividend
due to cash flow and also robust payout policy need
to be framed

MSM-MBA CF 2019 28

29. DEBT FINANCING

® Corporate enterprises raise long term funds from
creditors in the form of term loans, debentures,
bonds and so on...
1. Term loans:
- also termed as project finance
- It is a loan made by a bank/ financial institution to a
business having an initial maturity of more than one
year.
- Financial institutions provide project finance for new
projects also for expansion/diversification and
modernization

MSM-MBA CF 2019 29

30. FEATURE OF TERM LOANS

1. Negotiated - the term loans are negotiated loans between the
borrowers and the lenders

2. Maturity - period term loans typically 6-10 years range provided
by financial institutions

3. Secured loan - loan that has specific assets pledged as collateral

4. Covenants - are contractual clauses in loan agreements that
place certain constraints on borrower’s operating and financial
process

Repayment schedule - the term loans have to be amortized

u

according to pre determined schedule. The payment has 2 terms

1. Interest 2. Repayment of principal

MSM-MBA CF 2019 30

31. DEBENTURES/BONDS/NOTES

@ ゅ It is a debt instrument indicating
that a company has borrowed
certain sum of money and promises
to repay it in future under clearly
defined terms

MSM-MBA CF 2019 31

32. FEATURES OF DEBT FINANCING

© Debentures have some contrasting features compared to equities

te

Trust indenture: when a debenture is sold to investing public, a trustee
is appointed through an indenture or trust deed.

- Acomplex and lengthy legal documents stating the conditions under
which a bond has been issued

Interest: the debentures carry a fixed (coupon) rate of interest, the
payment of which is legally binding/enforceable

- the debenture interest is tax deductible and is payable annually/half
yearly/quartely

Maturity: maturity period or redemption for non convertible
debentures is typically 7-10 yrs

- redemption accomplished in two ways 1. DRR (Debenture redemption

reserve) 2. Call and put provision
Contd...

MSM-MBA CF 2019 32

33. Debenture redemption reserve: DRR - created for the redemption of
all debentures with a maturity period exceeding 18 months to at
least 50% amount of redemption before commencement

Call and put provisions: the call or put provision provides an option
to the issuing company to redeem the debentures at a specified
price before maturity

Security: debentures are generally secured by a charge on the
present and future immovable assets of the company by the way of
equitable mortgage

Convertibility: Apart from non-convertible debentures (NCD),
debentures can be converted into equity shares at the option of the
debenture holders

- the conversion ratio and the period during which conversion can be

affected are specified at the time of issue of the debenture itself.
Contd...

MSM-MBA CF 2019

34. Credit rating: the timely payment of
interest and redemption of principal by a
borrower ensured with help of credit
rating agencies such as CRISIL, ICRA, CARE
and FITCH India

Claim on Assets and Income: the payment
of interest and repayment of principal is a

contractual obligation enforceable by law

MSM-MBA CF 2019 34

35. INNOVATIVE DEBT INSTRUMENTS

1. Zero Interest bonds/debentures (ZIB): also
known as Zero coupon bonds/debentures, ZIB’s
do not carry any explicit or coupon rate of
interest

2. Deep Discount bond (DBB): DDB is a form of
ZIB. It is issued at a deep/steep discount over
its face value
- it implies that the interest (coupon) rate is

far less than that the yield to Maturity (YTM)
Contd...

MSM-MBA CF 2019 35

36. Secured premium notes (SPN’s): the SPN is a
secured debenture redeemable at a premium
over the face value/purchase price. It
resembles a ZIB

Floating rate bonds (FRBs): the interest on
such bonds is not fixed. It is floating and linked
to a benchmark rate such as interest on
treasury bills, bank rate, maximum rate on
term deposits

- It is typically a certain percentage point
higher than the bench mark rate

MSM-MBA CF 2019 36

37. HYBRID FINANCING/INSTRUMENTS

e Hybrid source of financing has characteristics
of straight debt and straight equity falling in

between
Sources of Financing (Hybrid Instruments)
1. Preference share/capital
2. Convertible/exchangeable/bonds
3. Warrants

4. Options

MSM-MBA CF 2019 37

38. o Preference capital - a unique type of long
term financing which it combines some of

the features of equity as well as debentures
1. It carries a fixed/stated rate of dividend

2. It ranks higher than equity as a claimant to

the income/assets
3. It normally does not have voting rights

4. It does not have a share in residual

earnings/assets

MSM-MBA CF 2019 38

39. FEATURES OF PREFERENCE SHARES

Le

Prior claim on income or assets: it has a prior
claim/preference over equity capital both on
income and assets of company

Cumulative dividend: Preference capital is
cumulative in the sense, that all unpaid dividends
are carried forward and paid in full

Redeem ability: preference capital has a limited
life / specified maturity after which it must be
retired

- however there is no serious penalties for breach

fr i i ion
of redemption stipulatio! Cor

MSM-MBA CF 2019 39

40. Fixed dividend: preference dividend is fixed and is
expressed as a percentage of par value.
- Yet it is not a legal obligation and failure to pay will
not force bankruptcy

Convertibility: Preference share capital may sometimes
be convertible partly/fully into equity shares or
debentures at certain ratio during a specified period

Voting rights: preferential share capital does not carry
voting rights

Participation: may participate in surplus profits after
the payment of interest and other claims

MSM-MBA CF 2019 40

41. ADVANTAGES OF DEBENTURES

For company:

1. lower cost due to lower risk and tax
deductibility for interest payment
2. No dilution of control - debentures do not
carry voting rights

For investors:

1. It offers stable return, have a fixed maturity,
are protected by the debenture deed

2. They enjoy preferential claim on income

MSM-MBA CF 2019 41

42. DISADVANTAGES OF DEBENTURES

e For company:
1. Restrictive covenants in the trust deed

2. legally enforceable schedule in respect of payment
of interests and repayment

3. Increased financial risk
4. Associated high cost of equity

© For Investors:
1. the debenture holders have no voting rights
2. debenture prices are vulnerable to charges in
interest rates

MSM-MBA CF 2019

43. ADVANTAGES OF PREFERENCE SHARES
© For investors:
1. stable dividend
2. the exemption to corporate investors on preference
income
® For Issuing company:
1. No legal obligation to pay preference dividend
2. Redemption can be delayed without significant
penalties
3. It proves the credit worthiness/borrowing capacity

4. No dilution of control

MSM-MBA CF 2019

44. DISADVANTAGES OF PREFERENCE
SHARES

o Vulnerability to arbitrary managerial action
as they cannot enforce their right to dividend
to right to payment in case of redemption

© Modest dividend in the context of the
associated risk

For company:
1. It is expensive source of finance

2. Non tax deductibility of preference shares

MSM-MBA CF 2019 44

45. 1. Convertible debentures/bonds:

- give the holders the right to change the equity
shares into debentures in stated numbers
2. Warrants:

- is an instrument that gives its holders the right
to purchase a certain number of shares at a specified
price over a certain period of time

3. Options:

- is an instrument that provides its holders with
the opportunity to purchase/sell a specified asset at a
stated price on or before set expiration date

MSM-MBA CF 2019 45

46. SEB] GUIDELINES FOR EQUITY AND
DEBENTURES

47. SEB] GUIDELINES FOR EQUITY SHARES

o The provisions of these rules shall apply to -
a) All unlisted public companies
b) All private companies
c) Listed companies
So far as they do not conflict or contradict

with any other provision framed in this
regard by SEBI

MSM-MBA CF 2019 47

48. EQUITY SHARE WITH DIFFERENTIAL RIGHTS

© No company limited by shares shall issue equity shares
with differential rights as to dividend, voting or
otherwise, unless it complies with the following
conditions; namely

1. The articles of association of the company authorizes
the issue of shares with differential rights;

2. The issue of shares is authorized by an ordinary
resolution passed at a general meeting of the
shareholders

3. The shares with differential rights shall not exceed
26% of total post paid up equity shares with
differential rights issue Contd...

MSM-MBA CF 2019 48

49. 4. The company having consistent track record of
distributable profits for last 3 years

5. The company has not defaulted in filing financial
statements and annual returns for 3 years
immediately preceding financial year which it
decided to issue such shares

6. The company having no subsisting default in the
payment of a declared dividend to its shareholders or
repayment of its matured deposits or redemption of
its preference shares or debentures that have
become due for redemption or payment of interest
on such deposits or debentures or payment of

dividend
Contd...

49

MSM-MBA CF 2019

50. 7. The company has not defaulted in payment of the dividend
on preference shares or repayment of any term loan from
a public financial institution or state level financial
institution or scheduled bank that has become repayable
or interest repayable thereon or dues with respect to
statutory payments relating to its employees to any
authority or default in crediting the amount in investor
education and protection fund to the central government

8. The company has not been penalized by court or tribunal
during the last three years of any offence under the RBI
act 1934; the SEBI act 1992; SCRA act 1956; the foreign
exchange management act 1999 or any other special act,
under such companies being regulated by sectoral
regulators Contd...

MSM-MBA CF 2019 50

51. © The Board of directors shall, disclose in the board’s report for
the financial year in which the issue of equity shares with
differential rights was completed, the following details,
namely -

a

. The total number of shares allotted with differential right;

N

. The details of the differential rights relating to voting rights
and dividends;

w

. The percentage of the shares with differential rights to the
total post issue equity capital with differential rights issued at
any point of time and percentage of voting rights which the
equity share capital with differential voting rights shall carry
to the total voting right of the aggregate equity share capital

4. The piece at which such shares have been issued;
Contd...

MSM-MBA CF 2019 51

52. 5. The particulars of promoters, directors or key
managerial personnel to whom such share are
issued.

6. The change in control, if any, in the company,
consequent to the issue shares with differential
voting rights;

7. The diluted EPS(Earnings per share) pursuant to
the issue of each class of shares, calculated in
accordance with the applicable accounting
standards

8. The pre and post issue share holding pattern
along with voting rights in the format specified

MSM-MBA CF 2019 52

53. SEBI GUIDELINES FOR DEBENTURES

® The company shall not issue secured debentures, unless it
complies with the following conditions, namely: -

1. An issue of secured debentures may be made, provided the date

of its redemption shall not exceed 10 years from the date of issue

2. Properties or assets of the company or its subsidiaries or its
holding company or its associates companies having a value which

is sufficient for the due repayment of the amount of the interests

3. The company shall appoint a debenture trustee before the issue
of prospectus or letter of offer for subscription of its debentures
and not later than 60 days after the allotment of the debentures,
execute a debenture trust deed to protect the interest of the

debenture hold
lebenture holders Contd.

MSM-MBA CF 2019 53

54. . The security for the debentures by way of a charge or mortgage

shall be created in favor of the debenture trustee on any

specified movable or immovable property of the company

. The company shall appoint debenture trustees under subsection

(5) of sec 71, after complying the following conditions namely -

The names of debenture trustees shall be stated in letter of
offer inviting subscription for debentures and also in all the
subsequent notices or other communications sent to the
debenture holders

Before the appointment of debenture trustee or trustees, a
written consent shall be, obtained from such debenture trustee
or trustees proposed to be appointed and a statement to that
effect shall appear in the letter of offer issued for inviting

subscription of the debentures Contd...

MSM-MBA CF 2019 54

55. 3. Aperson shall not be appointed as a debenture trustee if he -
a. beneficially holds shares in the company
b. is a promoter, director or key managerial personnel or any other
officer or an employee of the company or its holding, subsidiary or
associate company
c. is beneficially entitled to money which are to be paid by the
company otherwise than as remuneration payable to the debenture
trustee
d. is indebted to company, or its subsidiary or its holding or
associate company or a subsidiary of such holding company

4. The board may fill any casual vacancy in the office of trustee

5. Any debenture trustee may be removed from office before the
expiry of term only if it is approved by debenture holders.

Contd...

MSM-MBA CF 2019 55

56. SOURCES OF FINANCE

® Sources of finance may be classified on the basis of
time as

1. Long term source of finance

2. Medium term source of finance

3. Short term source of finance

® Classification on the basis of ownership and control
1. Own fund

2. Borrowed fund

e Classification on the basis of source of generation
1. Internal source

2. External source

MSM-MBA CF 2019 56

57. |. LONG TERM SOURCES OF FINANCE

Means capital requirements for the period of more than 5 years to 10, 15, 10 or

may be more.
Capital expenditures in fixed assets like plant and machinery, land and building
and etc.,
Long term financing sources can be in the form of
Share capital/equity shares
Preference capital or preference shares
Retained earnings or internal accruals
Debentures/bonds
Term loans from financial institutions, government and commercial banks
Venture funding
Asset securitization

International financing - Euro issue, Foreign currency loans, GDR and ADR and

etc.,
MSM-MBA CF 2019 57

58. Il, MEDIUM TERM SOURCES OF FINANCE
o Financing for a period of 3-5 years and is used
for long term capital or revenue expenditure
Sources of finance can be in the form of

1. Preference capital
2. Debenture/bonds
3. Medium term loans
4. Lease Finance

5. Hire purchase finance

MSM-MBA CF 2019 58

59. Ill. SHORT TERM SOURCES OF FINANCE

© Financing for a period of less than one year

@ Need for short term finances like inventory of raw materials, debtors,

minimum cash requirements and etc.,
© Also called as “Working capital financing”
© Short term finance in the form of:
le Trade credit
2. Working capital loans from commercial banks
3. Fixed deposits less than one year
4. Advances received from customers
5; Creditors
6. Payables
T. Factoring services

8. Bill discounting

MSM-MBA CF 2019 59

60. IV. OWNED CAPITAL

o Also refers to equity

e Sourced from promoters of the company or from

the general public by issuing new equity shares.
1. Equity
2. Preference
3. Retained earnings
4. Convertible debentures

5. Venture funds or private equity

MSM-MBA CF 2019 60

61. V. BORROWED CAPITAL

@ Finance arranged from outside sources
© Sources of debt financing include -

1. Financial Institutions

2. Commercial banks or

3. The general public - debentures

MSM-MBA CF 2019 61

62. VI。 INTERNAL SOURCE OF FINANCE

- same characteristics of owned capital

- Internal source means business by itself

through profit
1. Retained profits
2. Reduction/ Controlling of working capital

3. Sale of Assets

MSM-MBA CF 2019 62

63. Vil EXTERNAL SOURCE OF FINANCE
© capital generated from outside the business
© Deciding the right sources of funds

o Crucial business decision taken up by the top

level finance managers

MSM-MBA CF 2019 63

64. INTERNATIONAL SOURCE OF FINANCE

® Companies may also avail borrowings and investments from
the International lenders and investors

External Commercial Borrowings (ECB)

- refers to commercial loans in the form of bank loans,
buyer’s credit, securities instruments, such as floating
rate notes and fixed interest bonds availed from non
resident lenders with minimum average maturity of 3
years
The policy for ECB is also applicable to FCCB (Foreign
Currency convertible bond)

The ECB’s under the automatic route do not required
RBI/Government approval

MSM-MBA CF 2019 64

65. ® Eligible borrowers:

| 이

Only corporate other than financial intermediaries
and NGOs engage in microfinance can avail ECB’s

To be eligible, the NGO should have at least a 3
years satisfactory relationship with a bank dealing in
foreign exchange and would require a certificate of
due diligence on ‘fit and proper’ status of the
board/ committee of management of the borrowing
entity from the designated authorized dealer
Individuals/trusts/non profit making organizations
are not eligible

MSM-MBA CF 2019 65

66. © Recognized lenders:
The ECB’s can be raised from internationally recognized sources
such as international banks/capital markets, multi lateral
financial institutions such as IFC, ADB, CDC and so on, Export
credit agencies, supplier of equipment, foreign collaborators and
foreign equity holders

© Amount and Maturity:
The maturity of ECB’s would range between 3years and 5years for
amount up to US dollars/equivalent 20 million and 500 million
respectively
The maximum amount of ECB during a financial year by a
corporate and NGO would be US dollars 500 million and 5 million
respectively
The ECB’s upto US dollars 20 million can have call/put option
provided the minimum average maturity of 3years

MSM-MBA CF 2019 66

67. Il EURO ISSUES

© As a part of globalizing the Indian economy after 1991, Indian
corporate - permitted to float/raise funds from Euro markets

1. FCCB - Foreign currency Convertible bonds

2. ADR/GDR - American Depository receipts/ Global depositary
receipts

FCCB - Foreign currency convertible bonds are subscribed by a
non resident in a foreign currency and convertible into
ordinary shares of the issuing company in India

ADR/GDR - implies an instrument in the form of depository
receipts/ certificate issued to non resident investors against
the issue of ordinary shares of the issuing Indian Company

MSM-MBA CF 2019 67

68. ELIGIBILITY FOR ISSUE OF FCCB OR ADR/GDR

© An issuing company - raising fund through FCCB or ADR/GDR should
get prior permission from department of Economic Affairs, Ministry
of Finance, Government of India.

© Prices determined by lead manager that are 1. listed in India or 2.
not listed in India, but overseas

© An approval intermediary - investment banker registered with
securities and exchange commission in USA or under Financial
services Authority in UK or appropriate regulatory authority in

Germany, France, Singapore or in Japan

© Need to conform to FDI policy and other mandatory statutory

requirements and detailed guidelines issued in this regard

Contd...

MSM-MBA CF 2019 68

69. ©

An Indian company - not eligible to raise fund from Indian capital market
(restrained by SEBI) would not be eligible to issue FCCB or ADR/GDR

Unlisted Indian Companies issuing GDR/FCCB should be simultaneously listed in
Indian Stock exchange

The issuing Company should maintain consistent financial track record
After that finalization of capital structure in consultation with lead manager
The issuing company should obtain from the government finally

A DCB means a banking company that cats as a custodian for ordinary
shares/FCCB’s of an Indian Company, which are issued by it against ADR/GDR
certificates

FCCB should be denominated in any convertible foreign currency and ordinary

shares of issuing company denominated in Indian Currency

The issued ordinary shares or bonds should be delivered to DCB who would ODB tí
issue GDR/ADR certificates to share holders

Contd...

MSM-MBA CF 2019 69

70. ® Transfer and redemption:
Anon resident holder of ADR/GDR may transfer
them or ask the ODB to redeem them
In Case of redemption, the ODB should requires
the DCB to get the corresponding underlying
shares released in favor of the non resident
investor

o Taxation of FCCB or GDR/ADR:
under the provisions of Income Tax act, income

by way of interest on bonds or dividend on shares
would be taxed at 10%

MSM-MBA CF 2019 70

71. BASIC PROBLEMS IN INDUSTRIAL
FINANCE AND ITS REMEDIES

1. Backward financial system:

Industrial finance in India is not fully developed, the
extent of capital market which is a source of long term
finance including equity and debt is quite small

The development of on bank financial intermediaries is
also very poor

The system is very much inadequate in respect of
financial deepening

Very little arrangement is made about venture capital

which makes risky investment for high returns
Contd...

MSM-MBA CF 2019 71

72. 2. Paucity of funds:

- it is grossly inadequate for the continuously growing and large
requirements, especially to meet the needs of large industries

- The security and servicing of foreign funds are becoming
difficult and expensive

- Thus a result of paucity of fund, the expansion of industries is
becoming very difficult

3. Unsatisfactory Interest structure:

The interest rate structure for different type of loans like
short term and long term are more or less satisfactory

Indigenous money lenders also charges high rate of interest
from small and village industries distorting the market interest

of rate structure Contd...

MSM-MBA CF 2019 72

73. 4. Lack of adequate capital formation:
there are inherent difficulties of mobilizing
quantum of incremental rural incomes which could
have been utilized for financing rural industries

5 Difficulties of small industries:
Small industries located both in urban and rural
areas are facing serious problem in realizing
adequate finance
Thus the industrial finance as a system in India has

been suffering from several drawbacks

MSM-MBA CF 2019 73

74. REMEDIAL MEASURES

© There are serious attempts should be made to improve the set up

and to remove its shortcomings

1. Strengthening the domestic source of finance: Reliance on foreign
aid needs to be reduced gradually because of its unreliability
nature

2. Diversity sources: In order to tone up industrial finance, sources
of the finance should be diversified by setting up new institutions
and expanding the existing ones

3. Expanding market finance: the development of capital market
and financial instrument to promote financial deepening of the
system

Promoting market finance- to attract household savings, especially

from the rural untapped areas Contd...

MSM-MBA CF 2019 74

75. ® Improvement of banking institutions: Reforming the
banking structure and its activities improving the
management of banks should be done to strengthen
banking institutions

o Strengthening NBFC’s:

Development of long term finance institutions,
mutual funds industry etc., and establishing proper
monitoring framework can strengthening this sector
of industrial finance

® Encouraging foreign capital: Foreign capital also
facilitate entry of advanced technology and improved
business practices

MSM-MBA CF 2019 75

76. FINANCING OF EXPORTS

e In order to be competitive, exporters are
often expected to offer attractive credit
terms to overseas buyers

e Such credits - affects the liquidity of the
exporting company

© So the companies need external sources of

finances even during the post shipment stage

MSM-MBA CF 2019 76

77. EXPORT CREDIT IN INDIA

© RBI (Reserve bank of India) prescribes a ceiling
rate for the rupee export credit linked to
(BPLRS)Bench mark prime lending rates

o This BPLR available to domestic borrowers
1. pre-shipment credit (from the date of advance)
a. Upto 180 days

b. Against incentives receivables from the
government covered by ECGC - Export credit
guarantee corporation upto 90 days

Contd...

MSM-MBA CF 2019 77

78. 2. Post shipment credit: (from the date of advance)
a. upto 90 days

b. on demand bills for transit period, as specified by FEDAI
(foreign Exchange dealers Association of India)

c. Against retention money (for supplies portion only)
payable within one year from the date of shipment (upto
90 days)

The post shipment can mainly take form of:
1. Export bills purchased, discounted or negotiated
2. Advance against bills for collection

3. Advances against duty drawback receivable from

government
Contd...

MSM-MBA CF 2019 78

79. Post shipment finance can be categorized as:

1;

uo h we

Advances against undrawn balances on
export bills

Advances against retention money
Exports on consignment basis
Exports of goods for exhibition of sale

Post shipment credit on deferred payment
terms

Post shipment credit to be liquidated by
the proceeds of export bills received from
abroad in respect of goods exported

MSM-MBA CF 2019 79

80. EXPORT CREDIT IN FOREIGN CURRENCY

© Export credit available to exporters credit in
foreign currency at LIBOR (London Interbank
offered rates) Euro LIBOR - rates
denominated in EURO LIBOR

© LIBOR is a daily reference rate based on the
interest rates at which banks offer to lend
unsecured funds to other banks on the

London wholesale money market

MSM-MBA CF 2019 80

81. EXPORT CREDIT GUARANTEE
CORPORATION - ECGC

© ECGC - Export credit guarantee corporation
of India established in 1957 by Government
of India

@ Principal organization for promoting exports
by covering the risk of exporting on credit

® EGCG is the world’s fifth largest credit
insurer in terms of coverage of national
exports

MSM-MBA CF 2019 81

82. FUNCTIONS OF ECGC

o Provides a range of credit risk insurance covers
to exporters against loss in export of goods and
services

© Offers guarantee to banks and financial
institutions to enable exporters obtain better
facilities from them

e Provides overseas investment insurance to Indian
companies investing in joint ventures abroad in
form of equity or loan

MSM-MBA CF 2019 82

83. ROLE OF EXIM BANK IN INDUSTRIAL
FINANCE - EXPORTS

© The export-import bank of India (EXIM) was
setup on January 1, 1982 to take over the
operations of the international finance using
wing of IDBI

® Provide financial assistance to exporters and
importers to promote India’s foreign trade

© Also provide refinance to the commercial banks
and financial institutions against their export
import financing activities

MSM-MBA CF 2019 83

84. FUNCTIONS OF EXIM BANK

1:

Financing of export and import of goods and services both
of India and of outside India

Providing finance for joint venture in foreign countries
Undertaking merchant banking functions of companies
engaged in foreign trade

Providing technical and administrative assistance to the

parties engaged in export and import business

Offering buyer’s credit and lines of credit to the foreign
governments and banks

Providing advance information and business advisory
services to Indian exports in respect of multilaterally
funded projects overseas

MSM-MBA CF 2019 84

85. FINANCE FOR REHABILITATION OF SICK
UNITS

What is a sick unit?

© As per the extant guidelines, a micro or small enterprise (as defines
in the MSMED act 2006)

© Sick unit as any of the borrower account of the enterprise remains
NPA (Non performing Assets) for three months or more

© Otherwise there is erosion in the net worth due to accumulated losses
to the extent of 50% of its net worth during the previous accounting
year

® SICA, also known as the Sick Industrial Companies (special provisions)
act 1985, defines a sick industrial unit as one that had existed for at
least five years and had incurred accumulated losses equal to or
exceeding its entire net worth at the end of financial year

MSM-MBA CF 2019 85

86. VIABILITY OF SICK UNITS

© A unit may be regarded as potentially viable - after
implementing a relief package - period of five years from
the commencement of package from banks, financial
institutions or Government

© The repayment for restructured debts should not exceed 7
years from date of implementation of the package

©

Based on the norms specified above, it will be for the
banks/financial institutions to decide whether a sick SSI
unit is potentially viable or not

©

The rehabilitation package should be fully implemented
within 6 months from the date in which unit is declared as
“potentially viable”

MSM-MBA CF 2019 86

87. RELIEFS AND CONCESSIONS FOR
REHABILITATION OF POTENTIALLY VIABLE
UNITS

© The reliefs and concessions specified are not to be given in a routine manner and have

to be decided by concerned bank or financial institutions

© In fact, viability of firm study - sensitivity analysis in respect of risk involved - should
enable firm up of the corrective matrix

The guidelines on various parameters on reliefs and concessions are as follows:

1 Interest dues on cash credit and term loan

2. Unadjusted interest dues

3 Term loans

4 Working capital term loans
5 Cash losses

6. Working capital
7. Contingency loan assistance

8. Funds for startup expenses and margin for working capital

MSM-MBA CF 2019 87

88. ROLE OF SIDBI

© SIDBI was established as a wholly owned
subsidiary of IDBI bank under a special act of
the parliament 1988 and started its
operations on April 2, 1990

© It is managed by a team of 10 boards of
directors

© The authorized capital of the bank is Rs.
1000 Crore and paid up capital is Rs. 450
Crore

MSM-MBA CF 2019 88

89. MODES OF FINANCE

1. Direct Finance:

In the form of term loan assistance, working capital
assistance, support against receivables, foreign currency
loan, equity support and etc.,

2. Indirect Finance:
The indirect assistance in the form of refinance provided
to primary lending institutions (PLI), comprising banks,
state level financial institutions

3. Micro finance:

provides micro finance (i.e.) credit to small
entrepreneurs and business men.

MSM-MBA CF 2019 89

90. FUNCTIONS OF SIDBI

© SIDBI refinances loans extended by the primary
lending institutions to small scale industrial units and
also provides resources support to them

® SIDBI discounts and rediscounts bills - sale of
machinery - in the small scale sector

® To expand the channels for marketing the products
of SSI sector in domestic and international markets

® It provides services like leasing, factoring etc., to
industrial concerns in the small scale sector

Contd...

MSM-MBA CF 2019 90

91. ® To promote employment oriented industries -
semi urban areas

® To initiate steps for technological up
gradation and modernization of existing units

o SIDBI facilitates timely flow of credit for
both term loans and working capital

© SIDBI co-promotes state level venture funds

© Grants direct assistance and refinance loans

extended by primary lending institutions

MSM-MBA CF 2019 91

92. ROLE OF IDBI

© Industrial development bank of Indian (IDBI)
established under IDBI act 1964

o Principal financial institution for providing
credit and other facilities for developing
industries and assisting development
institutions

© Head office -Mumbai

© Regional offices - Kolkata, Gawahati, Chennai

and Mumbai and 21 branch offices

MSM-MBA CF 2019 92

93. FUNCTIONS OF IDBi

1:

To provide financial assistance to industrial
enterprises

To promote institutions engaged in industrial
development

To provide technical and administrative
assistance for promotion management or
expansion of industry

To undertake market and investment research

and survey - development of industries

MSM-MBA CF 2019 93