Financing Operations in India ICICI Bank Madhav Kalyan Feb 2604

Financing Operations in India

Madhav Kalyan Country Manager and Chief Representative ICICI Bank

Sectors from US doing Business in India 

Manufacturing

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Auto / Auto parts  Chemicals  Pharmaceuticals

Agri Commodities  Engg Machinery  Textiles

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Services

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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  

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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.

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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

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Freely allowed in all sectors including services except few restrictions and sectoral caps

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Automatic approvals, only post entry notification to RBI, except few restrictions

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Greater transparency in case approval required

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No restriction on end use (except real estate and stock markets)

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Free repatriation of investment and returns

FDI policy in India (contd.) 

Sectors restricted for FDI  Nuclear Energy  Railway Transport

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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 

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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 

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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)  

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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. 

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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

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

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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

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Liquidity mainly in Govt. securities and highly rated corporate papers (AAA and AA)

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Primarily an OTC Market

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Listed corporate debt market

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Listed market underdeveloped

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Listed debt markets are also regulated by SEBI

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Listing requirements 

Rating must for listing of debt

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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

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Scheduled commercial banks

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Mutual funds

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Foreign institutional investor registered with SEBI

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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

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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.

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Syndication of domestic/international debt

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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     

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Equity

Foreign currency loans Export credits.

Suppliers of equipment Foreign lenders Bond guarantees and confirming guarantees

Mezzanine finance  Equity  Take-out finance 

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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

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

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no collateral or security taken normally

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Loan guarantees and insurance offered

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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 

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Credit guarantee facility (CGF)

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

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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 

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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

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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

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Plain vanilla corporate loans

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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.

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Working Capital Demand Loan (WCDL) Short term loan to finance WC needs and is repayable on demand.

Unlike CC its not a running facility.

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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

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Not to exceed the FOB value of goods, secured or unsecured

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For a period of 180 days, further extendable by 90 days

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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. 

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

Forms of finance 

Negotiation of documents under LC

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Purchase/Discount of bills under export orders

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Advance against bills on collection/consignment basis

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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 

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

Depreciation benefit not available to Lessor

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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

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Use of vendor financing, hiring equipment and premises on lease to convert Capex to Opex

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Entities willing to take assets on their books and lease out the facilities

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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

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Suppliers credit

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Buyers credit

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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

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Automatic approval

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Maturity

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Interest rate ceilings

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End use requirement

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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

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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 

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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 

Thank You