Financing Operations in India
Madhav Kalyan Country Manager and Chief Representative ICICI Bank
Sectors from US doing Business in India
Manufacturing
Auto / Auto parts Chemicals Pharmaceuticals
Agri Commodities Engg Machinery Textiles
Services
Infotech BPO Travel / Hotels
Choice of entry vehicle determines financial structure
Trading
Infrastructure 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)
Raising domestic funds
Private placements Public issue of equity
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 Jan’04 Liquidity mainly in large cap and some mid cap companies Main participants – Mutual funds, Insurance companies, FIIs and retail investors
Private Equity
Can be used to raise funds and dilute equity in favor of Indian shareholders (as per FDI sectoral caps) 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
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
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.
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.
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
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.
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
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
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
Project Finance (contd.)
Rupee assistance by way of subscription to debentures and shares Assistance by way of underwriting shares and debentures Guarantees for
Equity
Foreign currency loans Export credits. Suppliers of equipment Foreign lenders Bond guarantees and confirming guarantees
Mezzanine finance Equity Take-out finance
Assistance for a project loan would typically be for a longer tenure than for a corporate loan
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)
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
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
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
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
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 can’t be payable on demand and bearer at the same time.
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
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
Export Finance Post shipment Finance
To enhance exporters’ ability to offer credit and gain business in global trade markets.
Based on shipping documents evidencing exports or supply to designated agencies in case of deemed exports
Forms of finance
Negotiation of documents under LC
Purchase/Discount of bills under export orders
Advance against bills on collection/consignment basis
Advances against deemed export supplies
In INR or foreign currency Liquidation from proceeds of exports through inward
remittances, can be liquidated through domestic sources but attracts higher rates
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.
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
External Commercial Borrowings
Commercial loans
Suppliers credit
Buyers credit
Loans from export credit agencies
Borrowings from Multilateral Financial Institutions
extended Financing Loans Loans from by arranged by exports taken extended Loans Credit institutions / to importer promotion Indian banks supplier by from such as IFC, offshore Indian in organizations from the financial ADB, World (LC different banks importer institutions bank, etc. countries discounting)
External Commercial Borrowings Key regulatory guidelines
Eligibility
Automatic approval
Maturity
Interest rate ceilings
End use requirement
End use restriction
For investment in realAutomatic corporates industrial Minimum All ‘All-in-cost’ on Prohibition approval for 3 6ofmth ofSME, registered maturity sector, ceiling ECBs raising on-lending, bps under for loans infrastructure LIBOR+200 years in investments upto US$ 500 Act 5 yrs to million 20 for US$3and <Companies or for stock millionmarket bps in for financial L+350 years except participation and 5 real estate and refinancing yrs. in excess for >5 intermediaries Divestment loans existing ECBs process
Withholding tax What is withholding tax
•• Tax Taxlevied leviedon onthe theinterest interestpaid paidby bythe theIndian Indian corporates corporatestotooverseas overseaslenders lenderson onthe theloans loanstaken taken from fromthem them
Why is it a deterrent
•• Rates Ratescharged chargedby byoverseas overseaslenders lendersare arenet netof of taxes; taxes;tax taxpaid paidisisthe theadditional additionalcost costthat thatneeds needsto to be beborne borneby bythe theborrower borrower
Economic impact
•• Tax Taxisispaid paid@ @20% 20%(as (asper perIncome IncomeTax TaxAct, Act,1961) 1961) or oras asper perthe theDTA DTAAgreement Agreementbetween betweenIndia Indiaand and the thelender’s lender’scountry country •• No Nowithholding withholdingtax taxon onloans loansraised raisedfrom fromoverseas overseas branch branchofofIndian IndianBanks Banks
Case Studies
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
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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