Financing operations in india

Financing Operations in India

Madhav KalyanCountry Manager and Chief Representative

ICICI Bank

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Sectors from US doing Business in India

Services Infotech BPO Travel / Hotels

Trading Agri Commodities Engg Machinery Textiles

Manufacturing Auto / Auto parts Chemicals Pharmaceuticals

Infrastructure Power Telecom Roads / Ports

Choice of entry vehicle

determines financial structure

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Financing Operation in India

Equity/Risk Capital

Public Equity Issue

Debt/Borrowed Capital

Foreign direct Investment

Project Finance

Term loans & Working capital finance

External Commercial Borrowings

Corporate Loan Market

Corporate Debt Market

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Equity/Risk Capital

Public Equity Issue


Foreign Direct Investment

Project Finance





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Equity Capital

Various means of raising equity capital Bringing foreign funds

Foreign direct Investment including ADRs/GDRs and FCCBs

Preference share capital (not included in ECBs or FDI sectoral caps)

Raising domestic fundsPrivate placementsPublic issue of equity

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Foreign Direct Investment

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

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

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FDI policy in India

Declared objective: to invite and facilitate foreign

investment in India

Minimal procedural formalities

Freely allowed in all sectors including services

except few restrictions and sectoral caps

Automatic approvals, only post entry notification to

RBI, except few restrictions

Greater transparency in case approval required

No restriction on end use (except real estate and

stock markets)

Free repatriation of investment and returns

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FDI policy in India (contd.) Sectors restricted for FDI

Nuclear Energy Railway Transport

Sectors with compulsory industrial licensing, eg. Distillation & brewing alcoholic drinks Cigars, cigarettes and manufactured tobacco

substitutes Electronic Aerospace and defence equipment, etc. All items reserved for SSI

Sectoral caps for bringing FDI, eg. 49% in Telecom 26% in Insurance 100% in power generation, transmission and

distribution 100% in Hotels & Tourism, etc.

Preference shares (without conversion option) outside sectoral caps or ECB guidelines.

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Equity/Risk Capital

Public Equity Issue



Project Finance





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Raising Domestic equityPrivate Placement Can be used to raise funds and dilute equity in

favor of Indian shareholders (as per FDI sectoral caps) while limiting the no. of shareholders.

Private equity/venture capital investors who provide funding for the project from the ideation stage as well as help nurture the growth.

Public Issue Well developed Equity markets with total market

cap in excess of Rs 13,00,000 Crores (USD 285 Bn) as of Jan’04

Liquidity mainly in large cap and some mid cap companies

Main participants – Mutual funds, Insurance companies, FIIs and retail investors

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Private Equity Can be used to raise funds and dilute equity in

favor of Indian shareholders (as per FDI sectoral caps) while limiting the no. of shareholders.

Private equity/venture capital investors provide funding for BPO operations Many US based funds invest in Indian companies or

US companies with focus on India Funding for startups and small scale BPOs hard to

come by, funding mainly for second stage or later Typically look for the management team, their

speed of execution, ability to scale, managing customer expectation, infrastructure, client relationships and dependence, order book/ pipeline and profitability.

VCs/Private equity invested

USD 300 Mn in 2002 and USD

500 Mn in 2003

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Equity Markets in India

Regulatory Body SEBI (the Securities & Exchange Board of

India)Autonomous and Statutory bodyRegulates & 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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Equity/Risk Capital

Public Equity Issue



Project Finance





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Corporate debt market in India Less deep than Equity markets contrary to world

markets Liquidity mainly in Govt. securities and highly rated

corporate papers (AAA and AA) Primarily an OTC Market Listed corporate debt market

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

Rating must for listing of debt Credit Rating Agencies – Crisil (alliance with S&P), ICRA (alliance

with Moody’s), CARE and Fitch India.

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

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Corporate debt market in India

Market players

Qualified Institutional Investors (QIB) Public financial institution

Scheduled commercial banks

Mutual funds

Foreign institutional investor registered with SEBI

Multilateral and bilateral development financial institutions

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Equity/Risk Capital

Public Equity Issue



Project Finance


Corporate Bond Market



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Project finance

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

& Machinery, pre-operative and preliminary expenses (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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Equity/Risk Capital

Public Equity Issue



Project Finance





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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 /

Pre-shipment credit Packing credit & foreign

currency Short term loan MIBOR linked loans Commercial paper Invoice bill discounting

(Clean & LC backed) Foreign currency non

resident (bank) loan Buyers & suppliers credit Over draft

Securitization

Receivables (present and future)

Investment monetization Off balance sheet funding

Plain vanilla corporate loans

Structured finance

Long term loans

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Working Capital Finance Cash Credit (CC)

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

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

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Working Capital Finance

Commercial Paper(CP)Corporates with minimum P2 rating from CRISIL or

equivalent as per RBI.Liquidity only in P1+ paperUsance promissory note negotiable by endorsement and

deliveryCheaper 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 FinanceTo enhance exporters’ ability to offer credit and gain business in global trade markets.

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

Forms of finance Negotiation of documents under LC Purchase/Discount of bills under export orders Advance against bills on collection/consignment basis Advances against deemed export supplies

In INR or foreign currencyLiquidation from proceeds of exports through inward remittances, can be liquidated through domestic sources but attracts higher rates

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Leasing

Financial Lease not a popular method of financing in India due to taxation issues Depreciation benefit not available to Lessor Sales tax and service tax payable on lease rentals

However, operating lease can be used to converting Capex to Opex Companies not comfortable putting capital initially Use of vendor financing, hiring equipment and

premises on lease to convert Capex to Opex Entities willing to take assets on their books and

lease out the facilities With growing comfort can put the required capital.

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Equity/Risk Capital

Public Equity Issue



Project Finance





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External Commercial Borrowings Commercial loans

Loans taken from banks /

financial institutions

Credit extended by supplier to the Indian importer

Financing arranged by

Indian importer

from offshore banks (LC

discounting)

Loans extended by

exports promotion

organizations in different countries

Loans from institutions such as IFC, ADB, World bank, etc.

Suppliers credit

Buyers credit

Loans from export credit agencies

Borrowings from Multilateral Financial Institutions

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Maturity

Automatic approval

Eligibility

Interest rate ceilings

End use requirement

End use restriction

Key regulatory guidelines

All corporates registered

under Companies Act except financial

intermediaries

Automatic approval for raising ECBs upto US$ 500 million or for refinancing

existing ECBs

Minimum maturity of 3

years for loans < US$ 20 million

and 5 years for loans in

excess

‘All-in-cost’ ceiling of 6

mth LIBOR+200

bps for 3 to 5 yrs and

L+350 bps for >5 yrs.

For investment

in real-industrial

sector, SME, infrastructur

e and participation

in Divestment

process

Prohibition on on-

lending, investments

in stock market and real estate

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• Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them

• Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them

What is withholdin

g tax

What is withholdin

g tax

• Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower

• Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower

Why is it a deterrentWhy is it a deterrent

• Tax is paid @ 20% (as per Income Tax Act, 1961) or as per the DTA Agreement between India and the lender’s country

• No withholding tax on loans raised from overseas branch of Indian Banks

• Tax is paid @ 20% (as per Income Tax Act, 1961) or as per the DTA Agreement between India and the lender’s country

• No withholding tax on loans raised from overseas branch of Indian Banks

Economic impact

Economic impact

Withholding tax

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Case Studies

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Automobile Major

Project Finance Formed a JV with Indian company Equity infusion to the extent of its share in the

form of FDI Long term INR loans/NCDs from local financial

institutions backed by parent guarantee to get better rates

Working capital finance Packing credit in foreign currency Buyer’s credit-discounting of direct import bills

from group cos. Commercial papers

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Agri trading and processing major Project finance

Equity infusion from parent in the form of FDI Long term debt using global credit lines with global

bankers Plant and Machinery import on Buyers credit from

suppliers Working capital finance

FCNR (B) loans Short term MIBOR linked loans Buyer’s credit on import LCs

Indian company opens LCs with local bank in favor of group companies for sourcing of raw materials

Buyer’s credit is availed backed by these LCs from foreign banks (global bankers)

Thereby getting very cheap finance

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Thank You

Financing operations in india

Economy & Finance

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