Corporate Finance Product and Process

8/10/2019 Corporate Finance Product and Process

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CONTENTS

II. CORPORATE FINANCE PRODUCTS & DELIVERY PROCESS

A. Long Term Finance

1. Project Financing / Term Loan2. Takeover of Existing T.L.

B. Medim Term Finance

1. Liquirent Loan2. Mortgage Loan / Loan Against Propert

C. S!or" Term Finance

1. !as" !re#it / $orking !apita% Loan2. Takeover of Existing !.!./ $.!.L.&. Pre's"ipment Finance

a. Packing !re#it (in )s./F!*

+. Post's"ipment Finance ,a. Purc"ase / -iscounting of Export -ocuments (in )s. /F!*

0. pening of mport L/!

E#TERNAL PROCEDURE TO DELIVER U.M.C. PRODUCTS

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A. LON$ TERM FINANCE

1. Project Financing/ Term Loan ' ntro#uction1.1 App%ication an# Pre%iminar 3crutin

1.2 Appraisa% an# 3anction1.2.1 Market Appraisa%1.2.2 Tec"nica% Appraisa%1.2.& Financia% Appraisa%1.2.+ Manageria% Appraisa%

1.& 3anction1.&.1 Post 3anction 4 -ocumentation

1.+ -is5ursement an# Monitoring1.+.1 Tips to an entrepreneur seeking project 6nancing

1.0 Post mp%ementation )evie7

%. Proec" Financing' Term Loan ( In"rodc"ion

Term %oans refer to instrument of 6nancing 7"ere a %oan is avai%e# 5 a 5orro7er 7it"repament in perio#ic insta%%ments over a pre'speci6e# perio#. 3uc" term %oans cou%#eit"er 5e for a project or for purc"ase of an asset. Project 6nancing %arge% fo%%o7s t"epattern of project %oans from Financia% nstitutions 7it" t"e tenure 5eing 5et7een 8'19ears inc%u#ing a moratorium of upto 2 ears.

:o7ever; 5anks #o not genera%% exten# project %oans in case of 3MEs except in case of%ongstan#ing c%ients 7it" a goo# track recor#. T"e interest rate in case of t"e term %oansfrom 5anks #epen# upon t"e cre#it rating of t"e c%ient 5ut ten# to 5e %o7er t"an t"at oft"e state 6nancia% institutions on account of %o7er cost of fun#s.

Loans for purc"ase of assets (ve"ic%e; equipment* are of a me#ium term nature 7it" %oanperio#s exten#ing from &'0 ears. n case of t"ese %oans; t"e main competition to 5anksarises from t"e non'5anking 6nancia% institutions (


3/19

T"e App%ication an# Pre%iminar 3crutin stage assumes signi6cance in t"at in case ofsma%% projects; 7"ic" are %arge% promoter an# %ocation #epen#ent. -etai%e# ana%sis incase of t"ese projects at 5est provi#es in#icators an# cannot genera%% 5e of as rigorousnature as in case of %arger projects. :ence in case of sma%% projects; projects t"at arefoun# prima facie e%igi5%e for %en#ing a%so 5 an# %arge cross t"e #etai%e# appraisa% stagean# are sanctione# 6nancing. 3u5ject to prima facie suita5i%it of t"e project at t"e stageof pre%iminar scrutin; t"e proposa% is taken up for -etai%e# Appraisa% is taken up.

%., A))rai-a* and Sanc"ion

Term %en#ing institutions "ave a stan#ar#i>e# 7a of appraisa%. Eac" project is appraise#un#er various criteria from #i?erent vie7points %ike marketing; tec"nica%; 6nancia%;economic an# manageria% ang%es. A 5rief #escription of t"ese vie7points an# t"e criteriaemp%oe# are given 5e%o7.

%.,.% Mare" A))rai-a* T"e reasona5%eness of t"e #eman# projections supp%ie# 5 t"e promoters are

veri6e# 5 uti%i>ing t"e 6n#ings of avai%a5%e reports/ surves; in#ustr association/p%anning commission/ -@T- projections; an# in#epen#ent market surves(sometimes commissione# 7it" t"e expense 5orne 5 t"e promoters*.

Assess t"e a#equac of t"e marketing infrastructure p%anne# in terms of

promotiona% e?ort; #istri5ution net7ork; transport faci%ities; stock %eve%s; etc. u#ge t"e kno7%e#ge; experience an# competence of t"e ke marketing personne%.

n case of appraisa% for projects of 3MEs; t"e market appraisa% genera%% ten#s to 5eaccor#e# %o7 importance. T"e %oca%i>e#/regiona% nature of t"ese 5usinesses often makessuccess in marketing more a function of t"e entrepreneurBs attri5utes or contacts rat"ert"an a fun#amenta% #eman#'supp% mismatc" in t"e pro#uct (current% met 5 expensiveimports or near su5stitutes*.

:o7ever; over t"e past fe7 ears most 6nancia% institutions; 5ase# on t"eir experience ofpast %en#ing #ra7n up categories of in#ustries 7"ere ne7 projects 7ou%# 5e restricte# /pro"i5ite#. T"ese are c%ear% state# in t"e %en#ing po%icies of t"e 6nancia% institutions.

$"en t"e %en#ing po%ic of an F categorises an in#ustr in t"e pro"i5ite# categor; itactua%% means t"at t"e risk of 6nancing suc" projects (in its opinion* is "ig" making suc"projects an unaccepta5%e risk from t"e point of a %en#er. n t"e event of our project 5eingc%assi6e# un#er t"e Pro"i5ite# !ategor; it 7ou%# 5e pru#ent to revie7 its via5i%it 5eforetaking it up for imp%ementation. A%so suc" projects mig"t "ave to 5e comp%ete% se%f'6nance#.

%.,., Tec!nica* A))rai-a*

T"e tec"nica% appraisa% is #one 5 qua%i6e# C experience# personne% (interna% or externa%*an# focuses is main% on t"e fo%%o7ing aspects,

Pro#uct mix

!apacit

Process of manufacture

Engineering kno7'"o7 an# tec"nica% co%%a5oration

)a7 materia%s an# consuma5%es

Location; site an# 5ui%#ing

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P%ant an# equipment

Manpo7er requirements

=reak'even point

ation is given T"e cost projections are #istinguis"e# 5et7een 6xe# an# varia5%e costs

appropriate%

c. Ra"e o0 re"rn3 T!e norm- 0or "!e 4nancia* 5ia1i*i"+ are genera**+ in "!erange o0 3 nterna% )ate of )eturn ())* 10'29

)eturn on nvestment ()* 29'20

-e5t'service coverage ratio (-3!)* 1.0 to 2

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T"e a5ove mentione# 6gures are not man#ator an# a certain #egree of Dexi5i%it iss"o7n on t"e 5asis of t"e nature of t"e project; risks in"erent in t"e project; an# t"estatus of t"e promoter.

d. Financing )a""ern 3

A genera% #e5t'equit ratio norm of 1.0,1

Minimum Promoters contri5ution 29'20 of t"e project cost

3tock'exc"ange %isting requirements in cases part of t"e equit is propose# to 5e

raise# from t"e pu5%ic T"e 6nancia% capa5i%it of t"e promoter

n case of sectors invo%ving stan#ar# tec"no%ogies an# "aving seen numerous projects;norms are rea#i% avai%a5%e for most of t"e parameters suc" as t"e gestation perio#;5ui%#'up of capacit uti%i>ation; t"e unit project cost; cost structure etc. :o7ever; in caseof ot"er projects; suc" 6nancia% ana%sis often ten#s to 5e 5ase# on an aggregation of

reasona5%e assumptions Fs re7ork t"ese projections 5ase# on t"e 2'& parameters7"ere t"e "ave stan#ar#i>e# assumptions. T"ese cou%# 5e 5ui%#'up in capacituti%i>ation; po7er tari? per unit; etc.

T"e 5eaut of Financia% Ana%sis is t"at t"e via5i%it of projects can 5e esta5%is"e# 5e?ecting minor c"anges in assumptions suc" as gro7t" rates; cost structure; resi#ua%va%ue; etc (often at t"e secon# or t"ir# #ecima%*. 3o; ac"ieving t"e cut'o? )) orcoverage ma not prove #iGcu%t to a person 7e%% verse# 7it" t"e various faci%itiesavai%a5%e on sprea#s"eets :o7ever; Financia% Ana%sis remains an extreme% importantstep; as it is t"e stan#ar# t"at inDuences #ecision of t"e 6nanciers. (especia%% of t"epu5%ic sector*. 3econ#%; t"e sensitivit ana%sis con#ucte# as part of suc" stu#ies formst"e 5asis for i#entifing t"e crucia% parameters for t"e success of t"e project. Financiersten# to monitor t"e project progress t"roug" t"ese mi%estones an# parameters. n #a'to'#a practice t"e 6nancia% institutions "ave t"eir o7n in#epen#ent criteria an# cre#itrating met"o#o%og for arriving at t"e cre#it rating of eac" project. Financia% institutionsca%cu%ate t"e In"erna* Ra"e o0 Re"rn 6IRR7. T"e nterna% )ate of )eturn refers to t"erate of return t"at t"e project is expecte# to generate 5ase# on its projecte# cas" Do7saccruing over its expecte# %ifespan. nstitutions "ave a t"res"o%# )) t"at t"e projectnee#s to surpass to assess its via5i%it. Harious 6nancia% ratios are ca%cu%ate# for t"e pastan# future #ata provi#e# to t"em 5 t"e promoters after c"ecking t"e veracit of t"esame. T"e various ratios; 7"ic" are frequent% ca%cu%ate# inc%u#e ,

Crren" ra"io3

[(Receivables + material and fnished good inventory)/ (creditors or goods andexpenses)]

Long "erm de1"(e8i"+ ra"io[Long erm !ebt/ "et#orth] In"ere-" co5erage ra"io

[($roft %eore &nterest ' $rovision or ax)]/(&nterest payments de or the year] Fixe# assets coverage ratio

[ixed *ssets/ (erm loan and other long term debt obligations)] De1"(-er5ice co5erage ra"io

[($roft beore interest- $rovision or taxes)+!epreciation,/ &nterest repayments+ ($rinciple Repayments(.-eective tax rate)),]

Pro4" a0"er "a9'-a*e-

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6/19

T"e minimum or maximum va%ues for some of t"e ratios are as fo%%o7s,Long'term #e5t'equit ratio (Maximum a%%o7a5%e* 2!urrent ratio (Minimum* 1.&&nterest cover ratio (Minimum* 2Fixe# asset coverage ratio (Minimum* 1.20

T"e a5ove va%ues are taken as stan#ar# t"oug" a certain amount of Dexi5i%it is exercise##epen#ing on t"e perception an# persona% ju#gment of t"e appraising oGcer. A rating isassigne# to t"e project 5ase# on t"e scores of t"e #i?erent ratios. A cut'o? rating#etermines 6nancing #ecision (7"et"er t"e project 7ou%# 6nance# or not*. A5ove t"erating; t"e projects ma5e categori>e# into exce%%ent; goo# an# average. =ase# on t"isan# t"e project c"aracteristics; t"e 6na% terms an# con#itions of 6nancia% assistance are#eci#e# upon %ike,

Moratorium

)epament perio#

Avai%a5i%it perio#

3ecurit (%ike pari'passu c"arge; 6rst c"arge; persona% guarantee; corporateguarantee etc.*

nterest rate

A%% t"e expenses %ike service fee; processing fee; #ocument fee an# ot"er expenses %ikeinspection of site; factor; etc. are c"arge# to t"e app%icant an# is a source of income fort"e %en#ing institution.

%.,.: Manageria* A))rai-a*Manageria% competence an# integrit is an extreme% important pre'requisite to trans%atea project via5%e on paper into a rea% %ife success. !apita% markets across t"e 7or%# (an#even n#ian investors in recent times* factor in t"e compan management in companva%uations (in ot"er 7or#s s"are prices*.

T"e fo%%o7ing criteria ten# to 5e %ooke# at 5 t"e Fs to form a ju#gement regar#ing t"emanageria% competence an# resourcefu%ness.

Track recor# in ear%ier projects

)esourcefu%ness of t"e promoter

In#erstan#ing of t"e 5usiness

!ommitment to t"e project an#

ntegrit

%./ Sanc"ion

n t"e event of t"e project 5eing assesse# as via5%e; 3anction is accor#e# for 6nancing tot"e proposa%. T"e 3anction is an in'princip%e #ecision for 6nancing t"e project an# isgenera%% su5ject to fu%6%%ment of certain terms an# con#itions. 3ome of t"ese con#itionscou%# 5e stan#ar# ones suc" as, n'princip%e approva% from a 5ank for 7orking capita%


7/19

-is5ursement s"a%% commence on% 7"en t"e First nvestment !%ause "as 5een

satis6e#. First nvestment !%ause requires t"e entrepreneur to invest "is contri5ution5efore approac"ing t"e Financia% nstitutions for #is5ursement.

A##itiona%%; in t"e event of t"e Financia% nstitution 5eing #issatis6e# 7it" an particu%araspect of t"e project; t"en a con#ition stipu%ating t"e fu%6%%ment of t"e #esire# c"angema 5e ma#e for #is5ursement to commence.%./.% Po-" Sanc"ion ; Docmen"a"ion

Post 3anction -ocumentation invo%ves formu%ating %ega%% 5in#ing #ocuments on t"efo%%o7ing,

Loan agreement conveing t"e terms an# con#itions of t"e %oan

-ocuments conveing equita5%e mortgage on t"e primar securit i.e. t"e 6xe#

assets pertaining to t"e project an# on t"e a##itiona% securit (co%%atera%*. Persona% @uarantee of t"e 5orro7er an# guarantor (if an*.

3earc" report from an A#vocate in#icating a c%ear tit%e for t"e %ast 6fteen ears as

per t"e %an# recor#sK an# Approve# 5ui%#ing p%ans in case of constructe# propert.

T"is 7ou%# invo%ve su5mission of t"e re%evant #ocuments 5 t"e enterprise. T"e %ega%#epartment in t"e Financia% nstitution 7ou%# scrutini>e t"ese #ocuments for t"eir va%i#itan# comp%eteness. 3u5sequent to t"is t"e #ocumentation forma%ities 7ou%# 5e comp%ete#7it" t"e agreements 5eing 6na%i>e# an# signe#. n comp%etion of t"e post'sanction#ocumentation t"e -is5ursement proce#ure 7ou%# commence su5ject to t"e ot"er pre'#is5ursement con#itions (mentione# a5ove* 5eing fu%6%%e#.

Time "aen a" "!e Docmen"a"ion S"ageT"e time taken at #i?erent stages of t"e !re#it #ecision cou%# 5e on #e%as on t"e part of

t"e promoter an#/or in'eGciencies on t"e part of t"e 6nancia% institution. :o7ever; t"e#e%as #uring t"e Post'3anction -ocumentation are genera%% on account of poor"ome7ork 5 t"e entrepreneur.

n case of 3MEs; quite often t"e #ocumentation process requires +'J mont"s forcomp%etion. T"is is main% 5ecause of #e%a on t"e part of t"e entrepreneur in furnis"ingre%evant #ocuments an# satisfing queries arising #uring scrutin. n case of 6nancingt"roug" t"e state 6nancia% institutions; in certain cases; t"e institution is a%so part%responsi5%e; as t"ese requirements are ma#e kno7n to t"e prospective 5orro7er on%su5sequent to t"e 3anction as part of t"e 3anction con#itions.

Time taken #uring t"e -ocumentation stage is c%ear% unpro#uctive an# if excessive cou%#%ea# to t"e project assumptions un#ergoing a c"ange a?ecting t"e via5i%it of t"e project

(an# requiring a revie7 prior to #is5ursement*.

%.: Di-1r-emen" and Moni"oringAppraisa% %ooks at t"e project at a point in time an# 7"en suc" project is on% on paper.Monitoring on t"e ot"er "an# is a continua% c"eck on t"e project as it materia%i>es from ani#ea on paper into a faci%it capa5%e of meeting its state# purpose. T"us; monitoring actsas a means of a regu%ar c"eck on t"e time% imp%ementation a%ong t"e committe# courseof action.

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8/19

Need 0or Moni"oring@iven t"e rapi# c"anges in regu%ations en"ancing t"e %eve% of competition; Ductuations incommo#it prices an# evo%ving tec"no%og; monitoring a project imp%ementation "as5ecome extreme% important. T"is ena5%es t"e Fs to ju#ge t"e seriousness of t"eimp%ementation e?ort an# stop an/furt"er #is5ursement to a non'serious (or incapa5%e*promoter rat"er t"an t"ro7 goo# mone after 5a#.

Monitoring a%so assumes tremen#ous importance in t"e n#ian context #ue to a num5erof reasons,

Projects especia%% t"ose of a conventiona% nature face a num5er of proce#ures

invo%ving c%earances 5 pu5%ic aut"orities t"at take time. Projects especia%% in t"e sma%% an# me#ium sector a%so get 5ogge# #o7n on

account of poor prior p%anning especia%% in meeting pre'#is5ursement con#itionssuc" as #ocumentation re%ate# to t"e primar assets an# co%%atera%; sanction of7orking capita% an# po7er connection.

Promoters (sma%%; me#ium as 7e%% as %arge* often %ose interest on t"e project an#

#ep%o t"e mone in 6nancia% assets or Davour of t"e mont" projects 7it" an ee ons"ort'term 7ea%t".

T"e importance of monitoring or fo%%o7ing up on t"e projects 7"ic" are 6nance# 5 t"eterm %en#ing institutions after #ue appraisa% "as gaine# importance in recent ears #ue toman unet"ica% practices 7"ic" "ave come to %ig"t regar#ing t"e mis'uti%isation of fun#ssanctione#. t"er t"an t"is monitoring a%so 5ecame important #ue to t"e rising inci#enceof sickness in t"e corporate sector an# t"e amounts t"at "ave 5een 5%ocke# in t"eprocess.

T"is "as %e# to man 6nancia% institutions coming to t"e conc%usion t"at prevention is5etter t"an cure; since man of t"em are no7 raising resources from t"e market an# an%ack of eGcienc on t"eir part 7i%% 5e #etrimenta% to t"eir surviva%.

Moni"oring Proce-- dring Di-1r-emen" 3

Monitoring is usua%% in5ui%t #uring t"e -is5ursement process in t"e fo%%o7ing 7as,

n case of %arge projects t"e #is5ursa% of fun#s is genera%% t"roug" perio#ic cre#its

to a "o Lien *ccont from 7"ere t"e paments are met as an# 7"en require#.Monitoring "ere is genera%% t"roug" a revie7 of t"e imp%ementation genera%%con#ucte# on comp%etion of ke mi%estones.

n case of sma%% an# me#ium enterprises; t"e #is5ursement is on reim5ursement

5asis 7"ere t"e promoter initiates imp%ementation t"roug" "is o7n fun#s an#perio#ica%% seeks reim5ursement from t"e F. T"e monitoring is e?ecte# eac" time

a request for reim5ursement is initiate# 5 t"e promoter. T"is invo%ves scrutini>ingt"e #ocuments in#icating various expenses on t"e project an# ascertaining t"ereasons for an #eviations. n case of 6rst time promoters; t"is ma a%so invo%vevisits to t"e site an# inspection of ke mac"ineries prior to erection at t"e site.

Pro1*em- dring Di-1r-emen"

Pro5%ems #uring -is5ursement occur on account of t"e fo%%o7ing 5roa# reasons,

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9/19

Signi4can" c!ange in "!e Proec" Parame"er-.T"is inc%u#es c"ange in state

capacit; %ocation (on account of %itigation; environment; %oca% opposition;tec"no%og; etc.*

Non(0*4**men" o0 "!e Pre(Di-1r-emen" Condi"ion- suc" as t"e First

nvestment !%ause; sanction of $orking !apita% from 5ank; non'receipt of po7erconnection an# non'receipt of


10/19

initia% #is5ursements if t"ese con#itions are partia%% met; 5ut require t"at t"ese 5efu%6%%e# 5 t"e time of t"e %ast #is5ursement.

n t"e past fe7 ears; #e%as in #is5ursement are a%so occurring in some cases on

account of #e%as in t"e state 6nancia% institutions #is5ursing t"e fun#s. T"is "asparticu%ar% 5een in case of t"ose 3tate Financia% institutions; 7"ic" are su?ering fromsevere 6nancia% pro5%ems resu%ting in #efau%t on commitments to re6nancing institutions.

T"is "as cause# cessation of fres" re6nance support as a resu%t of 7"ic" t"ese stateinstitutions are 6n#ing pro5%ems of meeting #is5ursement commitments.

%.:.% Ti)- "o an en"re)rener -eeing )roec" 4nancing

Prior )re)ara"ion on "!e )roec"

T"e entrepreneur 7ou%# nee# to 6na%i>e t"e kin# of project an# t"e requirements in

terms of civi% infrastructure; equipment an# uti%ities. A##itiona%%; groun#7ork is a%sorequire# in assessing t"e market potentia% an# marketing c"anne% to 5e a#opte# for

marketing t"e pro#ucts.

n case of me#ium si>e projects; t"e entrepreneur ma #eci#e to engage t"e services ofan expert consu%tant for con#ucting market surves an# for %en#ing a professiona% touc"to t"e report. t is "o7ever essentia% to engage a repute# consu%tant for t"is purpose.

In"erac"ion 2i"! 4nancing agencie-

C!oo-e "!e 4nancing in-"i""ion "!a" +o 2o*d 2an" "o a))roac!.

nstitution 7it" 7"ic" ou (or a c%ose re%ative* "ave a prior #ea%ings (or track recor#*

T"e institution must 5e 6nancia%% soun#

Pricing an# service qua%it of t"e institutions

Under-"and "!e 0orma*i"ie- and )rocedre- 1e0ore!andA num5er of forma%ities an# proce#ures are invo%ve# in avai%ing project 6nance an#7orking capita% 6nance from 5anks an# Financia% nstitutions. t is essentia% to 5e a7are oft"e same 5efore "an#. T"is 7ou%# provi#e t"e entrepreneur 7it" an assessment of t"etime frame for suc" avai%ing 6nance. n t"e event of "is %ike% ina5i%it to fu%6%% an of t"econ#itions suc" as furnis"ing co%%atera% securit; etc. t"is 7ou%# a%so in#icate t"e futi%it ofpersisting 7it" t"e particu%ar 6nancing institution.

=u#get a#equate% for promoter contri5ution

T"e promoter 7ou%# "ave to contri5ute 5ot" for 6nancing t"e project (in t"e form ofequit*. :o7ever t"e project cost as assesse# 5 t"e 6nancing institution an# t"e 7orkingcapita% requirement as assesse# 5 t"e 5ank often ten# to 5e %o7er si#e. T"e excess oversuc" assessment 7ou%# "ave to 5e fu%% incurre# 5 t"e promoter.

For instance;T"e project cost for a particu%ar project ma "ave 5een pegge# at )s. 199 %ak"comprising t"e fo%%o7ing,

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11/19

Proec" co-" Com)onen"- Financed 1+Lan# an# 5ui%#ing )s. 20 %ak" PromoterBs equit )s.+9 %ak"Mac"iner )s. 09 %ak" Loan from Fs )s. J9 %ak"Margin mone for 7.c. )s. 10 %ak"Pre'operative expenses )s. 0 %ak"!ontingencies for esca%ation )s. 0 %ak"To"a* R-. %== *a! R-. %== *a!

:o7ever; conservative assumptions 5 institutions ma resu%t in t"e fo%%o7ing #eviationsin actua%s,

A##itiona% expen#iture on civi% 7orks, )s. 0 %ak"

A##itiona% expen#iture in pre'operative expenses 5 )s. & %ak" for securing spee#

c%earances A##itiona% expen#iture #ue to esca%ation of equipment costs an# costs incurre# in

insta%%ation of mac"iner an# commissioning, )s. 0 %ak"

Actua% requirement of 7orking capita% )s. 9 %ak"K $orking capita% requirementassesse# as per 5ank norms )s. J9 %ak". Excess contri5ution to7ar#s 7orkingcapita% )s. 29 %ak".

Tota% esca%ation in project costs )s. 1& %ak" ()s. %ak" after uti%i>ing t"e Provision forcontingencies*. ncrease# Promoter !ontri5ution for $orking !apita% )s. 29 %ak".A##itiona% fun#s require# to 5e 5roug"t in, )s. 2 %ak" (assuming $orking !apita% is fu%%require# upfront*. 3uc" situations cou%# %ea# to t"e entrepreneur 5eing require# to investoften even 09 "ig"er amounts t"at "is contri5ution as per t"e assesse# cost of projects.

Evidently, it is better to anticipate these in advance!

%.> Po-" Im)*emen"a"ion Re5ie2

Periodica* Re5ie2-Post imp%ementation; revie7s are norma%% con#ucte# 5 Fs to seek information forcompi%ation of statistics an# interna% stu#ies. T"is is #one %arge% 5 t"e A%% n#ia Financia%nstitutions in case of t"e %arge companies. T"e 3tate Financia% nstitutions; 7"ic" cater tot"e sma%% an# me#ium 5usinesses genera%%; #o not revie7 cases t"at are regu%ar. n% incases 7"ere t"e %oan 5ecomes non'performing; e?orts are initiate# to a##ress t"epro5%em eit"er 5 provi#ing a#equate N5reat"ing timeB t"roug" forma%/ informa%resc"e#u%ement or 5 ot"er intensive recover measures.

Cor)ora"e $o5ernancen case of me#ium an# %arge 5usinesses t"e Financia% nstitutions "ave nominees on t"e

=oar# of -irectors. Ear%ier t"ese nominees use# to invo%ve t"emse%ves on% in matterspertaining to t"e #ea%ings 7it" Financia% nstitutions. T"e nee# to protect t"e interests oft"e institutions an# ot"er stake"o%#ers; suc" as sma%% s"are"o%#ers in ensuring t"at t"epromoters manage t"e 5usiness in a responsi5%e manner; "as %e# to t"ese #irectorsp%aing a more e?ective ro%e on t"e aspect of !orporate @overnance.

T"ese 5usinesses 7ou%# a%so nee# to a#"ere to t"e co#e of corporate governance set 5t"ese institutions.


12/19

prevent a 7i#e range of practices. 3ome of t"ese practices 7"i%e 5eing %ega% un#er t"e%a7 "ave not a%7as serve# investor interests.

$ide*ine- on Cor)ora"e $o5ernance

T"e institutions "ave #e6ne# corporate governance as a p"i%osop" 5 7"ic" o7ners an#managers are expecte# to 5e perennia%% responsi5%e to ot"er stake"o%#ers suc" asminorit s"are"o%#ers; promoters; institutiona% s"are"o%#ers; #eposit'"o%#ers; cre#itors;consumers an# t"e institutiona% %en#ers. T"e areas 7"ere t"e nominee #irectors areexpecte# to p%a an e?ective ro%e inc%u#e crucia% pre'#e6ne# areas suc" as investmentsin su5si#iaries an# %oans; a7ar#s of contracts; mergers an# acquisitions; expansion an##iversi6cation; #ivi#en#; accounting po%ic; su5si#iarisation an# #esu5si#iarisation.

ing t"e uniqueness of 5ran#'#riven companies; t"egui#e%ines sa t"at in transfer of #ivisions re%ating to consumer #ura5%es; properva%ue oug"t to 5e assigne# to 5ran# name an# #istri5ution net7orks. $"en acorporate merges into anot"er or fo%%o7s t"e acquisition route; institutions 7i%% "aveto examine t"e impact of merger on t"e equit s"are"o%#ing pattern as 7e%% as t"e

impact on promoter "o%#ings. Di*igence in e9)endi"re-

For t"e 6rst time; per"aps; !Es 7i%% "ave to account for t"eir %uxur expen#iture.!ompanies s"ou%# not in#u%ge in avoi#a5%e an# extravagant; 7"ic" is #etrimenta% tos"are"o%#ers.

Manageria* Remnera"ion & A2ard o0 Con"rac"-

T"e gui#e%ines require c"anges in manageria% remuneration an# commissionspaa5%e to #irectors to 5e carefu%% examine# an# increases re%ate# to t"e 6nancia%position of t"e compan. Iti%i>ation of properties s"ou%# 5e examine# carefu%%; 7"i%e

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13/19

contracts a7ar#e# to companies in 7"ic" #irectors of t"e compan are intereste#oug"t to 5e examine# in #etai%. n ot"er 7or#s; no more sea'face properties or p%umcontracts to nep"e7s Terms of t"e contracts s"ou%# 5e examine# an# it s"ou%# not5e #etrimenta% to t"e companBs interests. Equit #i%utions to promoters onpreferentia% 5asis s"ou%# 5e 7it"in institutiona% gui#e%ines; 7"i%e at t"e same time;o?erings s"ou%# not 5e ma#e on% for increasing equit of promoters #irect% orin#irect%; un%ess 7arrante#. Au#it revie7 committee reports; ten#er a7ar#committees an# concurrent au#it reports s"ou%# 5e c%ose% scrutini>e# 5institutiona% nominees 7"i%e t"e action taken or comp%iance 7it" reports s"ou%# 5eexamine#.

Ac8i-i"ion- & Sa*e o0 In5e-"men"-

Fina%%; acquisitions of s"ares for t"e purpose of acquiring management contro% ofcompanies are to 5e examine#.


14/19

T"e propert "as 5een rente# out to in#ivi#ua%s; 5anks; M

nstitutions inc%u#ing %an#%or#s of =Os 5ranc"/oGce premises an# oGcersOquarters

T"e Lease agreement for %etting out/%easing of our propert require#

T"e receiva5%e rent "as not 5een c"arge# to an ot"er %oan

T"e app%icant/ 5orro7er an# t"e tenant to 7"om t"e propert is rente# out are

cre#it'7ort"

T"e sai# propert is not un#er #ispute or un#er %ega% action for an 5ui%#ing

vio%ation f t"e receiva5%e rent is part% c"arge#; t"e 5a%ance s"ou%# 5e suGcient tocover t"e repament for t"e propose# %oan.

1. E-"ima"ion ' Com)"a"ion o0 Li8iren"

T"e Loan Amount 7ou%# 5e 80 (maximum* of t"e receiva5%e rent for t"e

unexpire# perio# of %ease or tenanc after #e#uctions for T-3 an# t"e a#vancerent receive#

=ut t"e %oan is su5ject to a maximum of J9 mont"s rent

n exceptiona% cases; t"e %oan amount can 5e arrive# at 5ase# on t"e unexpire#

portion of t"e current %ease an# future rene7a%; 7"ere suc" c%ause is incorporate#in t"e current %ease

n suc" cases t"e maximum num5er of mont"s rent to 5e 6nance# ma 5e

increase# to +; on a case to case 5asis; #epen#ing on t"e %ocation of propert;

va%ue of connection; investment ma#e 5 %essee in t"e %ease# premises suc" asinterior #ecoration; air'con#itioning etc

T"e unexpire# portion of t"e %ease; "o7ever; s"ou%# not 5e %ess t"an &J mont"s

T"e %oan can 5e repai# in equate# mont"% insta%%ments for a maximum perio# of

J9/+ mont"s as t"e case ma 5e 5ut t"e repament perio# s"ou%# not excee# t"enum5er of mont"s taken into account for arriving at t"e %oan amount.

@@@@@@@@@@@@@@@@@@@@@@@@

C. SORT TERM FINANCE

a. Ca-! Credi" '


15/19

2. App%ication for $orking !apita% 2.1 List of -ocuments accompaning t"e app%ication

&. n'Princip%e 3anction for $orking !apita% &.1 Appraisa% an# Fina% 3anction &.2 Post 3anction )equirements

+. Monitoring an# fo%%o7'up

0. Estimation of $orking !apita% )equirement 0.1 ntro#uction 0.2 Main Factors !onsi#ere# in t"e estimation of 7orking capita% requirement 0.& 3teps invo%ve# in arriving at t"e %eve% of $orking !apita% )equirement 0.+ 3tan#ar# Formu%ae for #etermination of $orking !apita% 0.0 $orking !apita% assessment on t"e formu%a prescri5e# 5 t"e Tan#on !ommittee 0.J $orking !apita% C 3ma%% 3ca%e n#ustries 0.8 E%igi5i%it an#


16/19

/. In( Princi)*e Sanc"ion 0or ing mone from t"e securit is time consuming. :ence; 5anks paextreme% "ig" importance to t"e monitoring an# fo%%o7'up of t"e %oan.

- 1J '


17/19

T"e sstem of a current account t"roug" 7"ic" a%% t"e transactions are route# acts as anin'5ui%t c"eck on t"e operations of t"e 5orro7er. = stu#ing t"e current accounttransactions in #etai%; t"e 5anker is a5%e to make an assessment of t"e 5usiness. na##ition to t"is; t"e 5anks a%so un#ertake ot"er forms of monitoring.

T"ese inc%u#e ,

3tock 3tatements co%%ecte# on a mont"% 5asis from t"e 5orro7er

uarter% perating 3tatement giving #etai%s of t"e operations for t"e quarter

n a##ition to t"ese c"ecks; 5anks often emp%o met"o#s suc" as ,

3tock Au#it 5 in#epen#ent 6rms of c"artere# accountants

T"is 7ou%# invo%ve a visit to t"e storage areas of t"e 5orro7er; visua% inspection an#scrutinof t"e stock statements at t"e spot. !ross'c"ecking t"ese 7it" t"e statements given 5t"ec%ient 7ou%# provi#e a means of c"eck.

=ranc" nspection con#ucte# 5 t"e interna% au#it/ 5ank sta?

n case of %arger %oans; !onsortium meetings 7"ere t"e operations of t"e unit are joint%revie7e# are a%so un#ertaken.

)evie7; en"ancement of %imits an# a#"oc %imits

)evie7 of %imits is usua%% un#ertaken on an annua% 5asis. n cases 7"ere a request foren"ancement of %imits is ma#e 5 t"e 5orro7er #uring t"e course of t"e ear; suc" arequest is processe# 5ase# on t"e stock statements an# o3 su5mitte#. n case oftemporar nee#; an a#"oc %imit of upto 20 of t"e existing %imits cou%# 5e grante# on

request.

>. E-"ima"ion o0 .% In"rodc"ionLack of a#equate 7orking capita% is often state# as one of t"e major reasons for sicknessin in#ustr (especia%% in case of 3MEs*. T"e counter arguments from t"e 5anks "ave5een t"at most 6rms face pro5%ems of ina#equate 7orking capita% #ue to cre#itin#iscip%ine (#iversion of 7orking capita% to meet %ong term requirements or to acquireot"er assets*. n t"is context it 7ou%# 5e pertinent to un#erstan# t"e met"o# a#opte# 55anks in computing t"e 7orking capita% requirement of t"e 5usiness an# t"e quantum of5ank 6nancing to 5e provi#e# 5 t"e 5ank.

>., Main 0ac"or- con-idered in "!e e-"ima"ion o0 2oring ca)i"a* re8iremen"

T!e na"re o0 1-ine-- and -ec"or(2i-e norm-

Factors suc" as seasona%it of ra7 materia%s or of #eman# ma require a "ig" %eve%of inventor 5eing maintaine# 5 t"e compan. 3imi%ar%; in#ustr norms of cre#ita%%o7e# to 5uers #etermine t"e %eve% of #e5tors of t"e compan in t"e norma%course of 5usiness.

T!e *e5e* o0 ac"i5i"+ o0 "!e 1-ine--

nventories an# receiva5%es are norma%% expresse# as a mu%tip%e of a #aBs

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18/19

pro#uction or sa%e. :ence; "ig"er t"e %eve% of activit; "ig"er t"e quantum ofinventor; receiva5%es an# t"ere5 7orking capita% requirement of t"e 5usiness. 3oin or#er to arrive at t"e 7orking capita% requirement of t"e 5usiness for t"e ear; itis essentia% to #etermine t"e %eve% of pro#uction t"at t"e 5usiness 7ou%# ac"ieve. ncase of 7e%%'esta5%is"e# 5usinesses; t"e previous earBs actua%s an# t"emanagement projections for t"e ear provi#e goo# in#icators. T"e pro5%ems arisemain% in t"e case of #etermining t"e %imit for t"e 6rst time or in t"e initia% fe7 earsof t"e 5usiness. =anks often a#opt in#ustr stan#ar# norms for capacit uti%i>ationin t"e initia% ears.

>./ S"e)- in5o*5ed in arri5ing a" "!e *e5e* o0


19/19

%ea#ing to pro5%ems of receiva5%es an# %o7er cre#it on purc"ases; poor 6nancia% strengt";"ig" %eve% of varia5i%it #ue to #epen#ence on %oca% factors; etc. !onsequent%; it "as 5eenrig"t% argue# t"at t"e in#ustr norms on #i?erent current assets cannot 5e a#opte#.

T"e P)

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