Factors in Plant Location Selection
Factors in Plant Location Selection
Factors in Plant Location Selection
PLANT LOCATION
The provinces of Laguna, Batangas and Pampanga are considered by the researchers as their plant
location. The continuous flow of raw materials is a vital factor in choosing the most suggested
location plant construction. Furthermore, these provinces have industrial parks that are permitted by
government law to construct industrial plants making them most suitable for any industrial
manufacturing operations.
Three alternative plant locations will be discussed in this section which are according to the
following factors: 1) Availability of Raw Materials; 2) Proximity of Market; 3) Availability of Energy
Sources; 4) Climate; 5) Transportation; 6) Water Supply; 7) Labor Supply; 8) Site Characteristics; 9)
Community Factors
PLANT LOCATION
Plant location refers to the choice of region and the selection of a particular site for location of a plant
or factory. It is an important strategic decision which cannot be changed once it is made. An ideal
location is one where the cost of the product is kept to the minimum with the least risk and maximum
market gain.
For manufacturing a commodity or a product, a set of machines are used. These machines are
installed in a building in a systematic manner, called a factory or plant. The selection of place for
manufacturing is important for all the manufacturing and distribution activities of the product.
The performance of a firm is significantly affected by its location. A plant site is located after
consideration various selection criterions. These criterions are based on mainly economics of
manufacturing, ease of manufacturing, skill levels required and environmental conditions. Socio-
political environment also plays a major role in deciding the site of the plant. While selecting plant
location, nature of the product is considered as the base, if the product is non-perishable, then it can
be produced away from the market but if it is perishable then it’s plant location should be very near to
the market. If a product consumes heavy raw materials then it has to be located near the raw material
site.
According to Dr. Visvesvrirya the decision of plant location should be based on nine M’s, namely,
Money, Material, Manpower, Market, Motive, Management, Machinery, Means of communication
and Momentum and one P : Power, to an early start.
In particular the choice of plant location should be based on following considerations:
1. Nature and Availability of Raw Material: An ideal location is the one where the main raw
material needed is sufficiently available. Proximity to the source of the raw materials is also an
important criterion especially when raw material is of perishable nature. Also if a raw material is
heavy, it is difficult to transport and if it is required in large quantities, then the manufacturing plant
has to be located at the site where such material is available. Otherwise the cost of loading and
transportation can be very high. The time consumed and managerial effort inputs due to this will also
increase. As a result, the economics of manufacturing goes out of scale and the product becomes
uncompetitive. This is the reason why Steel Mills are located at Bihar and Sugar Mills near the
sugarcane producing regions like Kolhapur and Sangli in Maharashtra.
2. Type of Workforce Requirement: Some of the manufacturing operations require skilled
workforce in its manufacturing operations. Skilled workforce itself requires well-cultured
surroundings, opportunities of advancement through further studies and experience sharing,
competition and recreational facilities. Normally, such a facilitating environment is there in urban
areas. One can establish such an environment in rural areas also but it is a very costly and time
consuming process. Absence of these factors makes the retaining of skilled workers a very difficult
task. Skilled workforce is already available at urban places. So such plants are located very near to
cities. The software industries are located at Banglore, Hyderabad, and Pune. These cities have good
educational and training institutions along with other promotional factors, which are providing ample
skilled workforce for the software industry. Engineering and Automotive sector which needs skilled
workforce are located in well developed areas.
In some manufacturing operations, unskilled labor force is required in more numbers. Normally, rural
areas have larger unskilled workforce. Hence, labor intensive plants are located away from the city in
rural areas.
3. Proximity to Market: Since perishable products do not last long, the market has to be nearby. For
low cost of transport and distribution, nearness to the markets is necessary. This is the reason for milk
and milk product industries to be near cities while non-perishable products like TV, Fridge, and
Engineering products are in Industrial Areas.
4. Availability of Infrastructure: Basic facilities of land, well connected roads, power and water are
called as infrastructure. Such facilities are not only essential but are the backbone of the industry.
Presence of these facilities makes management of manufacturing easy and less costly, whereas the
absence of infrastructure makes manufacturing very difficult and costly.
a) Availability of Power and Fuel: Industries consume power in large quantities. They depend on
power. An industry will choose a site where there is uninterrupted and cheap power supply available.
This is what was observed in the Industrial Development of Maharashtra, whereas West Bengal is far
behind in industrial development. In place of power, if coal or other materials are used as the fuel
their availability will locate the plants nearby. We find a thermal power station in Chandrapur and
Nagpur where coal is available cheaply.
b) Availability of Water: Chemical industries, food industries dose a lot of water for their
processing. Similarly, waste and bi-products of these industries are hazardous and required to be
discharged in flowing water after treatment. So, one finds that chemical and pharmaceutical industries
are located near to sea or river. At Thal Yaishet in Maharashtra and Bharuch, Ankaleshwar in Gujarat
special chemical industrial zones are created and industries such as dyes, pigments and
pharmaceutical are located there.
c) Transport Facilities: Every industry requires transport of raw materials, finished products as well
as their workforce and support services. Availability of transport network facilities decides the site
selection. Cheaper transport reduces transportation costs. One can observe that well connectivity by
rail and good roads brings in lot of industries. Water transport is the cheapest. Where there is sea and
connecting rivers/ canals then the industries are developed very fast. Well connectivity by sea, rail,
road and air along with other promotional factors has made Mumbai , business capital of India.
d) Land: Locating a plant\ant requires land. The land must be suitable to support the industry. It
should have good natural drainage. It should be free from all encroachments. It should be easily
accessible. Land must be available not only as per present requirements but for future expansion also.
The cost factor should also be paid attention to, as this will lead to, low capital investment.
5. Climatic and Atmospheric Conditions: The climatic conditions of the site wrt. Humidity,
temperature and other atmospheric conditions should be favorable to the plant. Certain manufacturing
processes require special or typical climatic and atmospheric conditions. Such factories are located in
that particular climatic conditional zone. The Tea and Coffee industry needs a cold climate hence they
are situated in cold areas such as Ooty and Assam. The textile industry requires humid atmospheric
conditions. This is why one finds that textile industries are concentrated in Mumbai and Ahmedabad.
6. Presence of Ancillaries/Related Industries: Capital goods manufacturing require number of sub-
assemblies/spares. It is practically, the existence of ancillaries/related industries which help the
selection of the location of the factory site. In and around Pune, Tata Motors has developed number of
ancillary units; this has given boost to other engineering units.
7. Availability of Support Services and Amenities: While selecting a factory location one must also
see availability of recreational facilities, post and telegraph facilities, hospitals etc.If these facilities
are not available, these are made available for ease of the production operation as well as to retain the
workforce.
8. Industrial Policy of State: Governments have the challenging task of industrial development for
employment generation and overall development of a state. State forms industrial policies for
attracting industries and investment in the state. Under industrial policy, land at low cost, cheap and
ample power and water supply, exemption of stamp duty, subsidy on capital investment and other
benefits of Sales tax concession are given. This keeps the initial cost of operation low.
The resources available will include people, time, information, money, equipment, technology,
buildings, facilities and land.
This coordination task is complex and therefore the manager needs to create a formal document called
an Operational Plan. This document collects, organises and communicates a great deal of information
that enables the reader to know and understand what needs to be done, by whom and when to make
progress towards creating the best value for the stakeholders of the organisation.
Generally, it is the task of the manager to create the Operational Plan but it will usually go through an
approval process by the board/committee of the organisation.
Purpose of an Operational Plan
It is important to understand the difference between an
"operational plan" and a "strategic plan". The strategic
plan is about setting a direction for the organisation,
devising goals and objectives and identifying a range
of strategies to pursue so that the organisation might
achieve its goals. The strategic plan is a general guide
for the management of the organisation according to
the priorities and goals ofstakeholders. The strategic
plan DOES NOT stipulate the day-to-day tasks and activities involved in running the organisation.
On the other hand the Operational Plan DOES present highly detailed information specifically to
direct people to perform the day-to-day tasks required in the running the organisation. Organisation
management and staff should frequently refer to the operational plan in carrying out their everyday
work. The Operational Plan provides the what, who, when and how much:
what - the strategies and tasks that must be undertaken
who - the persons who have responsibility of each of the strategies/tasks
when - the timelines in which strategies/tasks must be completed
how much - the amount of financial resources provided to complete each strategy/task
2) Degree of centralisation: implies extent to which planning activities performed by OPC. Two
system there
a) Centralised planning: where the function of production planning is controlled by staff
specialist.
b) Decentralised planning: where the planning is carried out by line executives-foreman-who
direct normal work in their respective department.
2) Function of OPC in Batch process: are more complex than Job & Flow process
a) Material control and tool control functions are important. Scientific stock control system
need to be used to ensure routine replacement.
b) Detailed operational layouts and route sheets are prepared for each part of the product.
c) Loading and scheduling need to be more detailed and more sophisticated since every
machine requires to be individually scheduled.
d) Progressing function is very important to collect information on progress of the work. A
separate progress card need to be maintained to record progress of each component.
e) Expediting is generally necessary since job many a times due to imbalances in work
contents tend to lag behind.
3) OPC function in assemblyprocess:
a) Material control required low, as WIP inventory is low since manufacturing line is
balanced.
b) Tool control relatively low.
c) Scheduling activity is relatively simple & routine.
Means of Finance
o Term loan
o Promoters Contribution
o Subsidy (if applicable)
o Special Capital Assistance (if applicable) (or seed capital)
This is calculated for the repayment period and would include all direct and
indirect annual recurring expenses.
Assets : Total of
The total of liabilities and total Assets should tally for each operating year
individually, for a correct Balance Sheet.>/p>
This is the level of production at which the unit is running at no profit no loss.
Hence , it is essential to calculate the BEP to ascertain the level of production at
which the units starts earning profits. It is calculated as follows:
BEP=( Fixed Cost * Percentage of optimum cap. Utilization) * 100/
contribution
Contribution = Sales - Variable Cost
This is calculated for the year during which the unit reaches optimum capacity
utilization.
After preparation of the project Report the Entrepreneur is required to get the
provisional Registration Certificate from the concerned District Industries
Center, and the Application for the Term loan and Working Capital with the
Financial Institution/ Bank Depending upon the scheme under which he wishes
to apply.
The number of documents shall depend upon product size, nature and location of
project
OR
11. Three quotation in respect of each item of plant and machinery and raw
material, proposed to be purchased.
12. Details of power requirement and tie-up with State Electricity Board.
13. Copy of instructions to your Bankers to give full information about the concern
on request to State Financial Corporation.
14. Permission from Water Pollution Control Board.
15. Approved Building plan from Competent Authority with cost estimates
The DPR is prepared by highly qualified and experienced consultants and the market research and analysis are
supported by a panel of experts and computerised data bank.
Funds
INTRODUCTION
Despite all the differences among companies, there are only a few sources of funds available to all
firms.
1. They make profit by selling a product for more than it costs to produce. This is the most basic
source of funds for any company and hopefully the method that brings in the most money.
2. Like individuals, companies can borrow money. This can be done privately through bank loans, or
it can be done publicly through a debt issue. The drawback of borrowing money is the interest that
must be paid to the lender.
3. A company can generate money by selling part of itself in the form of shares to investors, which is
known as equity funding. The benefit of this is that investors do not require interest payments like
bondholders do. The drawback is that further profits are divided among all shareholders.
In an ideal world, a company would bring in all of its cash simply by selling goods and services for a
profit. But, as the old saying goes, "you have to spend money to make money," and just about every
company has to raise funds at some point to develop products and expand into new markets.
When evaluating companies, it is most important to look at the balance of the major sources of
funding. For example, too much debt can get a company into trouble. On the other hand, a company
might be missing growth prospects if it doesn't use money that it can borrow
SOURCES OF FUNDS
Grants are made to non-profit organizations by development assistance agencies and foundations.
Usually grants do not have to be repaid. Grant money is available to enhance country institutional
capacity, to support governmental and non-governmental institutions and to finance project
formulation, policy reform and sector management and development. Grants are provided by bilateral
donors, multilateral grant aid institutions, United Nations organizations and specialized agencies,
international financing institutions, international non-governmental organizations, the private sector,
foundations and charity organizations.
Loans, unlike grants, have to be repaid. Loans can be obtained from most banks, but development
assistance agencies may provide loans for development priorities at preferential rates of interest, with
an initial interest free period, repayable over the long term. To justify a loan a strong business case
must be made. Loans are made to borrowing countries that are further up the development ladder and
to the private sector and development groups in all countries. Loans are made at near-to-commercial
conditions reflecting the cost of resource mobilization on capital markets plus a small fund
administration margin to cover a donor's operational costs. Interest rates are generally variable. Loans
are generally repayable over 15 to 20 years and often include up to a five-year grace period. There are
some interest-free loans but these carry an annual service charge and a commitment fee is usually
applied. These loans are repayable over 25 to 50 years with a maximum ten-year grace period.
Equity investments enable persons and institutions to invest in shareholding of a company managing
or implementing a sustainable forest management project. The investment may make an enterprise
viable or enable it to expand, while the new shareholder will benefit through shareholder voting rights
and dividends on profits.
Co-funding is provided by some donor agencies to complement existing funding. Depending on the
proposal, it may be possible to find an agency that provides the full cost of a project proposal.
However, it is frequently the case that funding is only available on the basis of shared cost. It may be
necessary, therefore, to identify perhaps as much as 50% of the project cost from other sources of
funding. If an agency requires co-funding, it is important to include a co-funding component in the
project proposal. To secure co-funding it is necessary to identify existing matching funds.
Complementary projects being formulated by other groups may provide possible sources of co-
funding.
Large corporations could not have grown to their present size without being able to find innovative
ways to raise capital to finance expansion. Corporations have five primary methods for obtaining that
money.
Issuing Bonds. A bond is a written promise to pay back a specific amount of money at a certain date
or dates in the future. In the interim, bondholders receive interest payments at fixed rates on specified
dates. Holders can sell bonds to someone else before they are due.
Corporations benefit by issuing bonds because the interest rates they must pay investors are generally
lower than rates for most other types of borrowing and because interest paid on bonds is considered to
be a tax-deductible business expense. However, corporations must make interest payments even when
they are not showing profits. If investors doubt a company's ability to meet its interest obligations,
they either will refuse to buy its bonds or will demand a higher rate of interest to compensate them for
their increased risk. For this reason, smaller corporations can seldom raise much capital by issuing
bonds.
Issuing Preferred Stock. A company may choose to issue new "preferred" stock to raise capital.
Buyers of these shares have special status in the event the underlying company encounters financial
trouble. If profits are limited, preferred-stock owners will be paid their dividends after bondholders
receive their guaranteed interest payments but before any common stock dividends are paid.
Selling Common Stock. If a company is in good financial health, it can raise capital by issuing
common stock. Typically, investment banks help companies issue stock, agreeing to buy any new
shares issued at a set price if the public refuses to buy the stock at a certain minimum price. Although
common shareholders have the exclusive right to elect a corporation's board of directors, they rank
behind holders of bonds and preferred stock when it comes to sharing profits.
Investors are attracted to stocks in two ways. Some companies pay large dividends, offering investors
a steady income. But others pay little or no dividends, hoping instead to attract shareholders by
improving corporate profitability -- and hence, the value of the shares themselves. In general, the
value of shares increases as investors come to expect corporate earnings to rise. Companies whose
stock prices rise substantially often "split" the shares, paying each holder, say, one additional share
for each share held. This does not raise any capital for the corporation, but it makes it easier for
stockholders to sell shares on the open market. In a two-for-one split, for instance, the stock's price is
initially cut in half, attracting investors.
Borrowing. Companies can also raise short-term capital -- usually to finance inventories -- by getting
loans from banks or other lenders.
Using profits. As noted, companies also can finance their operations by retaining their earnings.
Strategies concerning retained earnings vary. Some corporations, especially electric, gas, and other
utilities, pay out most of their profits as dividends to their stockholders. Others distribute, say, 50
percent of earnings to shareholders in dividends, keeping the rest to pay for operations and expansion.
Still other corporations, often the smaller ones, prefer to reinvest most or all of their net income in
research and expansion, hoping to reward investors by rapidly increasing the value of their shares.
Funds from operations: Funds from Operations (FFO) is a measure of cash generated by a real
estate investment trust (REIT). It is important to note that FFO is not the same as Cash from
Operations, which is a key component of the indirect-method cash flow statement.
The formula for FFO is:
Funds from Operations = Net Income + Depreciation + Amortization - Gains on Sales of Property
Issue of shares: Shares in Issue amount, is the current number of ordinary shares in issue and it is
expressed in millions.
Issue of debenture: A debenture is an instrument of debt executed by the company acknowledging
its obligation to repay the sum at a specified rate and also carrying an interest. It is only one of the
methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a
loan bond evidencing the fact that the company is liable to pay a specified amount with interest and
although the money raised by the debentures becomes a part of the company's capital structure, it
does not become share capital.
Internal Methods of Improving Cash Flow
If a business faces ongoing cash flow problems, then if the business is in other ways successful, it is
good management to look for internal methods of solving or reducing the problem, some of the more
successful methods are outlined below.
1. Stock management - Often cash flow problems arise because too much capital is tied up in
stock. When we talk about stock we mean raw materials, work-in-progress and finished
goods. Many firms are now implementing practices such as Just-in Time, and Kan Ban, which
are designed to reduce capital tied up in stock and allow it to be used in more effective ways
within the business.
2. Manpower management - Examining manpower costs can reduce outflows of cash. Is it
necessary to have permanent contracts for all workers? Can some work be sub-contracted, or
can some work be transferred to temporarily contracted workers? Doing this can save
expenditure on pensions, National Insurance, holiday pay etc.
3. Budgeting - Why base next years budgets on last year's budgets? Why not start with a clean
slate and opt for Zero Budgeting?
These methods can save on business costs and in larger organizations often prove the best long-term
solution to cash flow and liquidity management problems.
Finance is the science of funds management. The general areas of finance are business finance,
personal finance, and public finance. Finance includes saving money and often includes lending
money. The field of finance deals with the concepts of time, money and risk and how they are
interrelated. It also deals with how money is spent and budgeted.
Finance works most basically through individuals and business organizations depositing money in a
bank. The bank then lends the money out to other individuals or corporations for consumption or
investment, and charges interest on the loans.
Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt)
from a bank or directly from a corporation. Bonds are debt sold directly to investors from
corporations, while that investor can then hold the debt and collect the interest or sell the debt on a
secondary market. Banks are the main facilitators of funding through the provision of credit, although
private equity, mutual funds, hedge funds, and other organizations have become important as they
invest in various forms of debt. Financial assets, known as investments, are financially managed with
careful attention to financial risk management to control financial risk. Financial instruments allow
many forms of securitized assets to be traded on securities exchanges such as stock exchanges,
including debt such as bonds as well as equity in publicly-traded corporations.
Central banks act as lenders of last resort and control the money supply, which affects the interest
rates charged. As money supply increases, interest rates decrease.
Loss from operations
Amount by which the cost of goods sold plus operating expenses exceeds operating revenues. The net
loss from operations applies only to the normal business activities of the entity. Excluded are financial
revenue and expense items and ancillary operations of the firm (i.e., extraordinary items). However,
interest would be an includable expense in calculating Net Operating Loss for carryforward purposes.
Redemption of shares
The company may choose to repurchase if it has cash available, as an alternative to investing it in
expanding the business. Or it may issue bonds to raise the money it needs to repurchase, which
changes the company's debt-to-equity ratio.
Corporate finance
Managerial or corporate finance is the task of providing the funds for a corporation's activities. For
small business, this is referred to as SME finance. It generally involves balancing risk and
profitability, while attempting to maximize an entity's wealth and the value of its stock.
Long term funds are provided by ownership equity and long-term credit, often in the form of bonds.
The balance between these forms the company's capital structure. Short-term funding or working
capital is mostly provided by banks extending a line of credit.
Another business decision concerning finance is investment, or fund management. An investment is
an acquisition of an asset in the hope that it will maintain or increase its value. In investment
management – in choosing a portfolio – one has to decide what, how much and when to invest. To do
this, a company must:
Identify relevant objectives and constraints: institution or individual goals, time horizon, risk
aversion and tax considerations;
Identify the appropriate strategy: active v. passive – hedging strategy
Measure the portfolio performance
Financial management is duplicate with the financial function of the Accounting profession.
However, financial accounting is more concerned with the reporting of historical financial
information, while the financial decision is directed toward the future of the firm.
Capital
Capital, in the financial sense, is the money that gives the business the power to buy goods to be used
in the production of other goods or the offering of a service.
The desirability of budgeting
Budget is a document which documents the plan of the business. This may include the objective of
business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth,
required investment to achieve the planned sales, and financing source for the investment. Also
budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a
vision to the company; short term is an annual budget which is drawn to control and operate in that
particular year.
Capital budget
This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital
budgets are often adjusted annually and should be part of a longer-term Capital Improvements Plan.
Cash budget
Working capital requirements of a business should be monitored at all times to ensure that there are
sufficient funds available to meet short-term expenses.
The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The
cash budget has the following six main sections:
1. Beginning Cash Balance - contains the last period's closing cash balance.
2. Cash collections - includes all expected cash receipts (all sources of cash for the period
considered, mainly sales)
3. Cash disbursements - lists all planned cash outflows for the period, excluding interest
payments on short-term loans, which appear in the financing section. All expenses that do not
affect cash flow are excluded from this list (e.g. depreciation, amortisation, etc)
4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are
determined by the total cash disbursements plus the minimum cash balance required by
company policy. If total cash available is less than cash needs, a deficiency exists.
5. Financing - discloses the planned borrowings and repayments, including interest.
6. Ending Cash balance - simply reveals the planned ending cash balance.
Management of current assets
Credit policy
Credit gives the customer the opportunity to buy goods and services, and pay for them at a later date.
Advantages of credit trade
Usually results in more customers than cash trade.
Can charge more for goods to cover the risk of bad debt.
Gain goodwill and loyalty of customers.
People can buy goods and pay for them at a later date.
Farmers can buy seeds and implements, and pay for them only after the harvest.
Stimulates agricultural and industrial production and commerce.
Can be used as a promotional tool.
Increase the sales.
Modest rates to be filled.
Disadvantages of credit trade
Risk of bad debt.
High administration expenses.
People can buy more than they can afford.
More working capital needed.
Risk of Bankruptcy.
May lose peace of mind.
Forms of credit
Suppliers credit:
Credit on ordinary open account
Installment sales
Bills of exchange
Credit cards
Contractor's credit
Factoring of debtors
Cash credit
Cpf credits
Exchange of product
Factors which influence credit conditions
Nature of the business's activities
Financial position
Product durability
Length of production process
Competition and competitors' credit conditions
Country's economic position
Conditions at financial institutions
Discount for early payment
Debtor's type of business and financial positions
Credit collection
Overdue accounts
Attach a notice of overdue account to statement.
Send a letter asking for settlement of debt.
Send a second or third letter if first is ineffectual.
Threaten legal action.
Effective credit control
Increases sales
Reduces bad debts
Increases profits
Builds customer loyalty
Builds confidence of financial industry
increase company capitlisation
Sources of information on creditworthiness
Business references
Bank references
credit agencies
Chambers of commerce
Employers
Credit application forms
Credit repair companies
Duties of the credit department
Legal action
Taking necessary steps to ensure settlement of account
Knowing the credit policy and procedures for credit control
Setting credit limits
Ensuring that statements of account are sent out
Ensuring that thorough checks are carried out on credit customers
Keeping records of all amounts owing
Ensuring that debts are settled promptly
Timely reporting to the upper level of management for better management.
Stock
Purpose of stock control
Ensures that enough stock is on hand to satisfy demand.
Protects and monitors theft.
Safeguards against having to stockpile.
Allows for control over selling and cost price.
Stockpiling
This refers to the purchase of stock at the right time, at the right price and in the right quantities.
There are several advantages to the stockpiling, the following are some of the examples:
Losses due to price fluctuations and stock loss kept to a minimum
Ensures that goods reach customers timeously; better service
Saves space and storage cost
Investment of working capital kept to minimum
No loss in production due to delays
There are several disadvantages to the stockpiling, the following are some of the examples:
Obsolescence
Danger of fire and theft
Initial working capital investment is very large
Losses due to price fluctuation
Rate of stock turnover
This refers to the number of times per year that the average level of stock is sold. It may be worked
out by dividing the cost price of goods sold by the cost price of the average stock level.
Determining optimum stock levels
Maximum stock level refers to the maximum stock level that may be maintained to ensure
cost effectiveness.
Minimum stock level refers to the point below which the stock level may not go.
Standard order refers to the amount of stock generally ordered.
Order level refers to the stock level which calls for an order to be made.
Cash
Reasons for keeping cash
Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
The transaction motive refers to the money kept available to pay expenses.
The precautionary motive refers to the money kept aside for unforeseen expenses.
The speculative motive refers to the money kept aside to take advantage of suddenly arising
opportunities.
Advantages of sufficient cash
Current liabilties may be catered for.
Cash discounts are given for cash payments.
Production is kept moving
Surplus cash may be invested on a short-term basis.
The business is able to pay its accounts in a timely manner, allowing for easily-obtained
credit.
Liquidity
Management of fixed assets
Depreciation
Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of
purchase. It is calculated yearly to enforce the matching principle.
Insurance
Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a
certain eventuality.
Uninsured risks
Bad debt
Changes in fashion
Time lapses between ordering and delivery
New machinery or technology
Different prices at different places
Requirements of an insurance contract
Insurable interest
The insured must derive a real financial gain from that which he is insuring, or stand
to lose if it is destroyed or lost.
The item must belong to the insured.
One person may take out insurance on the life of another if the second party owes the
first money.
Must be some person or item which can, legally, be insured.
The insured must have a legal claim to that which he is insuring.
Good faith
Uberrimae fidei refers to absolute honesty and must characterise the dealings of both
the insurer and the insured.
Shared Services
There is currently a move towards converging and consolidating Finance provisions into shared
services within an organization. Rather than an organization having a number of separate Finance
departments performing the same tasks from different locations a more centralized version can be
created.
Finance of states
Country, state, county, city or municipality finance is called public finance. It is concerned with
Identification of required expenditure of a public sector entity
Source(s) of that entity's revenue
The budgeting process
Debt issuance (municipal bonds) for public works projects
Financial Economics
Financial economics is the branch of economics studying the interrelation of financial variables, such
as prices, interest rates and shares, as opposed to those concerning the real economy. Financial
economics concentrates on influences of real economic variables on financial ones, in contrast to pure
finance.
It studies:
Valuation - Determination of the fair value of an asset
How risky is the asset? (identification of the asset appropriate discount rate)
What cash flows will it produce? (discounting of relevant cash flows)
How does the market price compare to similar assets? (relative valuation)
Are the cash flows dependent on some other asset or event? (derivatives, contingent
claim valuation)
Financial markets and instruments
Commodities - topics
Stocks - topics
Bonds - topics
Money market instruments- topics
Derivatives - topics
Financial institutions and regulation
Financial Econometrics is the branch of Financial Economics that uses econometric techniques to
parameterise the relationships.
Financial mathematics
Financial mathematics is a main branch of applied mathematics concerned with the financial markets.
Financial mathematics is the study of financial data with the tools of mathematics, mainly statistics.
Such data can be movements of securities—stocks and bonds etc.—and their relations. Another large
subfield is insurance mathematics.
Experimental finance
Experimental finance aims to establish different market settings and environments to observe
experimentally and provide a lens through which science can analyze agents' behavior and the
resulting characteristics of trading flows, information diffusion and aggregation, price setting
mechanisms, and returns processes. Researchers in experimental finance can study to what extent
existing financial economics theory makes valid predictions, and attempt to discover new principles
on which such theory can be extended. Research may proceed by conducting trading simulations or
by establishing and studying the behaviour of people in artificial competitive market-like settings.
Behavioral finance
Behavioral Finance studies how the psychology of investors or managers affects financial decisions
and markets. Behavioral finance has grown over the last few decades to become central to finance.
Behavioral finance includes such topics as:
1. Empirical studies that demonstrate significant deviations from classical theories.
2. Models of how psychology affects trading and prices
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of models to forecast experiments.
A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses
mathematical and statistical methodology to understand behavioral biases in conjunction with
valuation. Some of this endeavor has been lead by Gunduz Caginalp (Professor of Mathematics and
Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including Vernon Smith
(2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran,
Huseyin Merdan). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant
behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioral
finance studies behavioral effects together with the non-classical assumption of the finiteness of
assets.
UNIT-3
Financial Institutions
Financial sector plays an indispensable role in the overall development of a country. The most
important constituent of this sector is the financial institutions, which act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than
their earnings to those who spend more than their earnings. The financial institutions have
traditionally been the major source of long-term funds for the economy. These institutions
provide a variety of financial products and services to fulfill the varied needs of the commercial
sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to
the industries established in backward areas. Thus, they have helped in reducing regional
disparities by inducing widespread industrial development.
The Government of India, in order to provide adequate supply of credit to various sectors of the
economy, has evolved a well developed structure of financial institutions in the country. These
financial institutions can be broadly categorised into All India institutions and State level
institutions, depending upon the geographical coverage of their operations. At the national level,
they provide long and medium term loans at reasonable rates of interest. They subscribe to the
debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred
payments, etc. Though, the State level institutions are mainly concerned with the development of
medium and small scale enterprises, but they provide the same type of financial assistance as the
national level institutions.
A wide variety of financial institutions have been set up at the national level. They cater to the
diverse financial requirements of the entrepreneurs. They include all India development banks
like IDBI, SIDBI, IFCI Ltd, IIBI; specialised financial institutions like IVCF, ICICI Venture
Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc.
Industrial Investment Bank of India Ltd (IIBI):- was set up in 1985 under the
Industrial reconstruction Bank of India Act, 1984, as the principal credit and
reconstruction agency for sick industrial units. It was converted into IIBI on March
17, 1997, as a full-fledged development financial institution. It assists industry
mainly in medium and large sector through wide ranging products and services.
Besides project finance, IIBI also provides short duration non-project asset-backed
financing in the form of underwriting/direct subscription, deferred payment
guarantees and working capital/other short-term loans to companies to meet their
fund requirements.
2. Specialised Financial Institutions (SFIs):- are the institutions which have been set up to
serve the increasing financial needs of commerce and trade in the area of venture capital,
credit rating and leasing, etc.
IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital &
Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was
promoted with the objective of broadening entrepreneurial base in the country by
facilitating funding to ventures involving innovative product/process/technology.
Initially, it started providing financial assistance by way of soft loans to promoters
under its 'Risk Capital Scheme' . Since 1988, it also started providing finance
under 'Technology Finance and Development Scheme' to projects for
commercialisation of indigenous technology for new processes, products, market
or services. Over the years, it has acquired great deal of experience in investing in
technology-oriented projects.
ICICI Venture Funds Ltd:- formerly known as Technology Development &
Information Company of India Limited (TDICI), was founded in 1988 as a joint
venture with the Unit Trust of India. Subsequently, it became a fully owned
subsidiary of ICICI. It is a technology venture finance company, set up to sanction
project finance for new technology ventures. The industrial units assisted by it are
in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines,
biotechnology, environmental engineering, etc.
Tourism Finance Corporation of India Ltd. (TFCI):- is a specialised financial
institution set up by the Government of India for promotion and growth of tourist
industry in the country. Apart from conventional tourism projects, it provides
financial assistance for non-conventional tourism projects like amusement parks,
ropeways, car rental services, ferries for inland water transport, etc.
3. Investment Institutions: - are the most popular form of financial intermediaries, which
particularly catering to the needs of small savers and investors. They deploy their assets
largely in marketable securities.
Several financial institutions have been set up at the State level which supplements the financial
assistance provided by the all India institutions. They act as a catalyst for promotion of
investment and industrial development in the respective States. They broadly consist of 'State
financial corporations' and 'State industrial development corporations'.
State Financial Corporations (SFCs):- are the State-level financial institutions which
play a crucial role in the development of small and medium enterprises in the concerned
States. They provide financial assistance in the form of term loans, direct subscription to
equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital,
etc. SFCs have been set up with the objective of catalysing higher investment, generating
greater employment and widening the ownership base of industries. They have also
started providing assistance to newer types of business activities like floriculture, tissue
culture, poultry farming, commercial complexes and services related to engineering,
marketing, etc. There are 18 State Financial Corporations (SFCs) in the country:-
1. Andhra Pradesh State Financial Corporation (APSFC)
2. Himachal Pradesh Financial Corporation (HPFC)
3. Madhya Pradesh Financial Corporation (MPFC)
4. North Eastern Development Finance Corporation (NEDFI)
5. Rajasthan Finance Corporation (RFC)
6. Tamil Nadu Industrial Investment Corporation Limited
7. Uttar Pradesh Financial Corporation (UPFC)
8. Delhi Financial Corporation (DFC)
9. Gujarat State Financial Corporation (GSFC)
10. The Economic Development Corporation of Goa ( EDC)
11. Haryana Financial Corporation ( HFC )
12. Jammu & Kashmir State Financial Corporation ( JKSFC)
13. Karnataka State Financial Corporation (KSFC)
14. Kerala Financial Corporation ( KFC )
15. Maharashtra State Financial Corporation (MSFC )
16. Odisha State Financial Corporation (OSFC)
17. Punjab Financial Corporation (PFC)
18. West Bengal Financial Corporation (WBFC)
State Industrial Development Corporations (SIDCs):- have been established under the
Companies Act, 1956, as wholly-owned undertakings of State Governments. They have
been set up with the aim of promoting industrial development in the respective States and
providing financial assistance to small entrepreneurs. They are also involved in setting up
of medium and large industrial projects in the joint sector/assisted sector in collaboration
with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety
of promotional activities such as preparation of feasibility reports; conducting industrial
potential surveys; entrepreneurship training and development programmes; as well as
developing industrial areas/estates. The State Industrial Development Corporations in the
country are:-
Venture capitalists comprise of professionals of various fields. They provide funds (known as
Venture Capital Fund) to these firms after carefully scrutinizing the projects. Their main aim is to
earn huge returns on their investments, but their concepts are totally different from the traditional
moneylenders. They know very well that if they may suffer losses in some project, the others will
compensate the same due to high returns. They take active participation in the management of the
company as well as provide the expertise and qualities of a good banker, technologist, planner
and managers. Thus, the venture capitalist and the entrepreneur literally act as partners.
Early stage financing - This is the first stage financing when the firm is undertaking
production and need additional funds for selling its products. It involves seed/ initial
finance for supporting a concept or idea of an entrepreneur. The capital is provided for
product development, R&D and initial marketing.
Expansion financing - This is the second stage financing for working capital and
expansion of a business. It involves development financing so as to facilitate the public
issue.
ii. Management buyout financing so as to enable the operating groups/ investors for
acquiring an existing product line or business and
iii. Turnaround financing in order to revitalise and revive the sick enterprises.
In India, the venture capital funds (VCFs) can be categorised into the following groups:-
All these venture capital funds are governed by the Securities and Exchange Board of India
(SEBI) . SEBI is the nodal agency for registration and regulation of both domestic and overseas
venture capital funds. Accordingly, it has made the following regulations, namely, Securities and
Exchange Board of India (Venture Capital Funds) Regulations 1996 and Securities and Exchange
Board of India (Foreign Venture Capital Investors) Regulations 2000. These regulations provide
broad guidelines and procedures for establishment of venture capital funds both within India and
outside it; their management structure and set up; as well as size and investment criteria's of the
funds.
Merchant Banking
A Merchant bank is a financial institution primarily engaged in internal finance and long term
loans for multinational corporations and governments. It can also be used to describe the private
equity activities of banking. Merchant banks tend to advise corporations and wealthy individuals
on how to use their money. The advice varies from counsel on mergers and acquisitions to
recommendation on the type of credit needed. The job of generating loans and initiating other
complex financial transactions has been taken over by investment banks and private equity firms.
Thus, the function of merchant banking which originated, and grew in Europe was enriched by
American patronage, and these services are now being provided throughout the world by both
banking and Non-banking Institutions. The word ―Merchant Banking‖ originated among the
Dutch and the Scottish Traders, and was later on developed and professionalized in Britain.
Securities and Exchange Board of India (Merchant Bankers) Rules, 1992 ― A merchant
banker has been defined as any person who is engaged in the business of issue management either
by making arrangements regarding selling, buying or subscribing to securities or acting as
manager, consultant, adviser or rendering corporate advisory services in relation to such issue
management‖.
(i) Corporate counseling: Corporate counseling covers counseling in the form of project
counseling, capital restructuring, project management, public issue management, loan
syndication, working capital fixed deposit, lease financing, acceptance credit etc., The scope of
corporate counseling is limited to giving suggestions and opinions to the client and help taking
actions to solve their problems. It is provided to a corporate unit with a view to ensure better
performance, maintain steady growth and create better image among investors.
(ii) Project counseling: Project counseling is a part of corporate counseling and relates to project
finance. It broadly covers the study of the project, offering advisory assistance on the viability
and procedural steps for its implementation. a. Identification of potential investment avenues. b.
A general view of the project ideas or project profiles. c. Advising on procedural aspects of
project implementation d. Reviewing the technical feasibility of the project e. Assisting in the
selection of TCO‘s (Technical Consultancy Organizations) for preparing project reports f.
Assisting in the preparation of project report g. Assisting in obtaining approvals , licenses, grants,
foreign collaboration etc., from government h. Capital structuring i. Arranging and negotiating
foreign collaborations, amalgamations, mergers and takeovers. j. Assisting clients in preparing
applications for financial assistance to various national and state level institutions banks etc., k.
providing assistance to entrepreneurs coming to India in seeking approvals from the Government
of India.
(iii) Capital Structure:
Here the Capital Structure is worked out i.e., the capital required, raising of the capital, debt-
equity ratio, issue of shares and debentures, working capital, fixed capital requirements, etc.,
(iv) Portfolio Management: It refers to the effective management of Securities i.e., the merchant
banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are
taken into account while advising on investment in different securities. The merchant banker also
undertakes the function of buying and selling of securities on behalf of their client companies.
Investments are done in such a way that it ensures maximum returns and minimum risks.
(v) Issue Management: Management of issues refers to effective marketing of corporate
securities viz., equity shares, preference shares and debentures or bonds by offering them to
public. Merchant banks act as intermediary whose main job is to transfer capital from those who
own it to those who need it. The issue function may be broadly divided in to pre issue and post
issue management. a. Issue through prospectus, offer for sale and private placement. b. Marketing
and underwriting c. pricing of issues
(vi) Credit Syndication: Credit Syndication refers to obtaining of loans from single development
finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise
syndicated loans from commercials banks. Merchant banks helps in identifying which financial
institution should be approached for term loans. The merchant bankers follow certain steps before
assisting the clients approach the appropriate financial institutions. a. Merchant banker first
makes an appraisal of the project to satisfy that it is viable b. He ensures that the project adheres
to the guidelines for financing industrial projects. c. It helps in designing capital structure,
determining the promoter‘s contribution and arriving at a figure of approximate amount of term
loan to be raised. d. After verifications of the project, the Merchant Banker arranges for a
preliminary meeting with financial institution. e. If the financial institution agrees to consider the
proposal, the application is filled and submitted along with other documents.
(vii) Working Capital: The Companies are given Working Capital finance, depending upon their
earning capacities in relation to the interest rate prevailing in the market.
(viii)Venture Capital: Venture Capital is a kind of capital requirement which carries more risks
and hence only few institutions come forward to finance. The merchant banker looks in to the
technical competency of the entrepreneur for venture capital finance.
(ix)Fixed Deposit: Merchant bankers assist the companies to raise finance by way of fixed
deposits from the public. However such companies should fulfill credit rating requirements.
LEASING
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a
series of contractual, periodic, tax deductible payments.
The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of
the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed
or an indefinite period of time (called the term of the lease). The consideration for the lease is called rent. A
gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges
regularly incurred by the ownership from lawnmowers and washing machines to handbags and jewelry.[1]
Under normal circumstances, a freehold owner of property is at liberty to do what they want with their
property, including destroys it or hand over possession of the property to a tenant. However, if the owner
has surrendered possession to another (the tenant) then any interference with the quiet enjoyment of the
property by the tenant in lawful possession is unlawful.
Similar principles apply to real property as well as to personal property, though the terminology would be
different. Similar principles apply to sub-leasing, that is the leasing by a tenant in possession to a sub-
tenant. The right to sub-lease can be expressly prohibited by the main lease.
Finance Lease and Operating Lease: Finance lease, also known as Full Payout Lease, is a type of lease
wherein the lessor transfers substantially all the risks and rewards related to the asset to the lessee.
Generally, the ownership is transferred to the lessee at the end of the economic life of the asset. Lease term
is spread over the major part of the asset life. Here, lessor is only a financier. Example of a finance lease is
big industrial equipment.
On the contrary, in operating lease, risk and rewards are not transferred completely to the lessee. The term
of lease is very small compared to finance lease. The lessor depends on many different lessees for recovering
his cost. Ownership along with its risks and rewards lies with the lessor. Here, lessor is not only acting as a
financier but he also provides additional services required in the course of using the asset or equipment.
Example of an operating lease is music system leased on rent with the respective technicians.
Sale And Lease Back and Direct Lease: In the arrangement of sale and lease back, the lessee sells his
asset or equipment to the lessor (financier) with an advanced agreement of leasing back to the lessee for a
fixed lease rental per period. It is exercised by the entrepreneur when he wants to free his money, invested
in the equipment or asset, to utilize it at whatsoever place for any reason.
On the other hand, direct lease is a simple lease where the asset is either owned by the lessor or he
acquires it. In the former case, the lessor and equipment supplier are one and the same person and this case
is called ‘bipartite lease’. In bipartite lease, there are two parties. Whereas, in the latter case, there are three
different parties viz. equipment supplier, lessor, and lessee and it is called tripartite lease. Here, equipment
supplier and lessor are two different parties.
Single Investor Lease and Leveraged Lease: In single investor lease, there are two parties -
lessor and lessee. The lessor arranges the money to finance the asset or equipment by way of
equity or debt. The lender is entitled to recover money from the lessor only and not from the
lessee in case of default by lessor. Lessee is entitled to pay the lease rentals only to the lessor.
Leveraged lease, on the other hand, has three parties – lessor, lessee and the financier or lender.
Equity is arranged by the lessor and debt is financed by the lender or financier. Here, there is a
direct connection of the lender with the lessee and in case of default by the lessor; the lender is
also entitled to receive money from lessee. Such transactions are generally routed through a
trustee.
Domestic and International Lease: When all the parties of the lease agreement reside in the
same country, it is called domestic lease.
International lease are of two types – Import Lease and Cross Border Lease. When lessor and
lessee reside in same country and equipment supplier stays in different country, the lease
arrangement is called import lease. When the lessor and lessee are residing in two different
countries and no matter where the equipment supplier stays, the lease is called cross border lease.
Marketing of Insurance
Wherever there is uncertainty there is risk. We do not have any control over uncertainties which
involves financial losses. The risks may be certain events like death, pension, retirement or
uncertain events like theft, fire, accident, etc. Insurance is a financial service for collecting the
savings of the public and providing them with risk coverage. The main function of Insurance is to
provide protection against the possible chances of generating losses. It eliminates worries and
miseries of losses by destruction of property and death. It also provides capital to the society as
the funds accumulated are invested in productive heads. Insurance comes under the service sector
and while marketing this service, due care is to be taken in quality product and customer
satisfaction. While marketing the services, it is also pertinent that they think about the innovative
promotional measures. It is not sufficient that you perform well but it is also important that you
let others know about the quality of your positive contributions. The creativity in the promotional
measures is the need of the hour. The advertisement, public relations, word of mouth
communication needs due care and personal selling requires intensive care.
INSURANCE MARKETING:
The term Insurance Marketing refers to the marketing of Insurance services with the aim to create
customer and generate profit through customer satisfaction. The Insurance Marketing focuses on
the formulation of an ideal mix for Insurance business so that the Insurance organisation survives
and thrives in the right perspective.
1. PRODUCT:
A product means what we produce. If we produce goods, it means tangible product and when we
produce or generate services, it means intangible service product. A product is both what a seller
has to sell and a buyer has to buy. Thus, an Insurance company sells services and therefore
services are their product .In India, the Life Insurance Corporation of India (LIC) and the General
Insurance Corporation (GIC) are the two leading companies offering insurance services to the
users. Apart from offering life insurance, they also offer underwriting and consulting services.
When a person or an organisation buys an Insurance policy from the insurance company, he not
only buys a policy, but along with it the assistance and advice of the agent, the prestige of the
insurance company and the facilities of claims and compensation. It is natural that the users
expect a reasonable return for their investment and the insurance companies want to maximize
their profitability. Hence, while deciding the product portfolio or the product-mix, the services or
the schemes should be motivational.
2. PRICING:
In the insurance business the pricing decisions are concerned with, i) The premium charged
against the policies, ii) Interest charged for defaulting the payment of premium and credit facility,
and iii) Commission charged for underwriting and consultancy activities. With a view of
influencing the target market or prospects the formulation of pricing strategy becomes significant.
In a developing country like India where the disposable income in the hands of prospects is low,
the pricing decision also governs the transformation of potential policyholders into actual policy
holders. The strategies may be high or low pricing keeping in view the level or standard of
customers or the policyholders. The pricing in insurance is in the form of premium rates. The
three main factors used for determining the premium rates under a life insurance plan are
mortality, expense and interest.
3. PLACE:
This component of the marketing mix is related to two important facets –i) Managing the
insurance personnel, and ii) Locating a branch. The management of agents and insurance
personnel is found significant with the viewpoint of maintaining the norms for offering the
services. This is also to process the services to the end user in such a way that a gap between the
services- promised and services – offered is bridged over. In a majority of the service generating
organizations, such a gap is found existent which has been instrumental in making worse the
image problem.
4. PROMOTION:
The insurance services depend on effective promotional measures. In a country like India, the rate
of illiteracy is very high and the rural economy has dominance in the national economy. It is
essential to have both personal and impersonal promotion strategies. In promoting insurance
business, the agents and the rural career agents play an important role. Due attention should be
given in selecting the promotional tools for agents and rural career agents and even for the branch
managers and front line staff. They also have to be given proper training in order to create
impulse buying. Advertising and Publicity, organisation of conferences and seminars, incentive to
policyholders are impersonal communication. Arranging Kirtans, exhibitions, participation in
fairs and festivals, rural wall paintings and publicity drive through the mobile publicity van units
would be effective in creating the impulse buying and the rural prospects would be easily
transformed into actual policyholders.
5. PEOPLE:
Understanding the customer better allows designing appropriate products. Being a service
industry which involves a high level of people interaction, it is very important to use this resource
efficiently in order to satisfy customers. Training, development and strong relationships with
intermediaries are the key areas to be kept under consideration. Training the employees, use of IT
for efficiency, both at the staff and agent level, is one of the important areas to look into.
6. PROCESS:
The process should be customer friendly in insurance industry. The speed and accuracy of
payment is of great importance. The processing method should be easy and convenient to the
customers. Installment schemes should be streamlined to cater to the ever growing demands of
the customers. IT & Data Warehousing will smooth the process flow. IT will help in servicing
large no. of customers efficiently and bring down overheads. Technology can either complement
or supplement the channels of distribution cost effectively. It can also help to improve customer
service levels. The use of data warehousing management and mining will help to find out the
profitability and potential of various customers product segments.
7.PHYSICAL DISTRIBUTION:
Distribution is a key determinant of success for all insurance companies. Today, the nationalized
insurers have a large reach and presence in India. Building a distribution network is very
expensive and time consuming. If the insurers are willing to take advantage of India’s large
population and reach a profitable mass of customers, then new distribution avenues and alliances
will be necessary. Initially insurance was looked upon as a complex product with a high advice
and service component. Buyers prefer a face-to-face interaction and they place a high premium
on brand names and reliability. As the awareness increases, the product becomes simpler and they
become off-the-shelf.
Marketing of Not-For-Profit Organization
A non-profit organization (also known as an NPO) is an organization that uses its funding to pursue a specific
purpose, such as a charitable cause, rather than pursuing profits for its own benefit as a for-profit business
does. Some might not believe that investing in marketing strategies is necessary for non-profits, but it is
quite beneficial for an NPO to effectively market itself. Non-profits use marketing tactics to assist with
growth, funding and prosperity. Without these things, the overall mission of the NPO is diminished.
Target Market
Just as a for-profit business targets a certain audience with its marketing, so should a non-profit. NPOs
should develop a picture of the person most likely to support them in their cause or benefit and create
promotion and advertising around that target. Recent television advertising campaigns reflecting a large
religious affiliation reach out to those who have walked away from their faith and those who need the
support and guidance the church can provide. A church group would probably not spend advertising dollars
on those who already regularly attend church services, but rather on attracting new church goers.
Branding
It is crucial for the non-profit to build its brand. The brand is typically a logo, wording, motto or design that
identifies the group. The look and content of all communication, events, service, leadership, alliances and the
organization’s office expresses the brand of the non-profit. The experiences that clients have with the NPO
also lead to the overall brand of the organization. The brand allows donors, supporters and clients to
remember, recognize and trust the organization. It keeps the NPO separate from similar organizations by
building an identity.
Offline Practices
Typical marketing practices by a non-profit organization include large and small-scale events, print materials,
alliances and networking. Print materials are highly important for educational and promotional purposes.
Events offer fundraising opportunities in the non-profit world, whether it is a small silent auction or a five-
course banquet offered to hundreds of potential donors. Creating alliances with other local NPOs builds a
larger mass of people who hear of the group’s goals while building the brand through other philanthropists.
In addition, networking is very effective marketing for non-profits as people spread the word about the goals
of the organization.
Online Practices
A primary focus of an NPO's marketing strategies are dynamic, quality websites that are designed to allure
new donors, share the group’s mission, display images, build awareness of the cause, educate the public,
reduce printing and mailing costs and establish credibility. E-mail communication with current and potential
donors builds relationships and loyalty. Many NPOs are also entering the world of social networking, with the
goal of becoming personal to donors and clients and spreading their message.
Public Relations
Non-profits are beneficial for individual groups of people, but they also benefit the community. For this
reason, public relations are a large part of marketing. The local press should know the story of the non-profit
and be aware of new programs that reach out to the community. NPOs should utilize newspaper stories to
share statistics, provide pictures and advertise fundraising events and community services. The NPO should
include media outlets in events by inviting them directly. Local news outlets should be on NPO mailing lists
for newsletters and other informational mailings.
Branding
Like any business, philanthropies have no choice but to compete for supporters’ money. The best way to do
so is by creating a strong brand. According to ARCH, a national resource for respite and crisis care centers, in
order to best market the business your company must identify its constituents, design programs to suit their
needs, measure the constituents' satisfaction with their programs, and use the results to fine tune their
program. Once your program is clear, you are able to present your service--your brand--to potential
supporters. One way to strengthen your brand is to develop a slogan. For example, “Building community
deep in the hearts of Texans” is the slogan of Texas Nonprofits.
Public Speaking
One great attribute for your non-profit is a spokesperson. According to Reis, “Ideally, the founder is the best
person to take on this role. He or she has a powerful connection to the brand and can sell the story to the
media, donors, volunteers and supporters.” Many supporters question how contributions are used. When you
provide them with a person who actively engages with them, answers questions, shares stories and relates
successes, they become immediately involved in who you are and what you do.
Community Outreach
In the world of community outreach, “consistency is the key to success,” says Reis. Determine the best
programs to suit your mission and work on those until they are stable and you do them every year. People
appreciate being able to see how their time and money are used; and it feels good to see the results of your
donation continue year after year. To figure out what programs help your constituents the best, you must
ask them, otherwise what you plan may not appropriately serve their needs. Once you implement a program,
“innovate constantly,” advises Non Profit Times. Always search for better ways to reach your goals, and to
allow your company to branch out in the future while continuing programs already in place.
An Online Presence
Online accessibility is an important marketing tactic. Create a web page for your non-profit and build a social
media presence. Put your cause out there, writes Network for Good, “optimize your search engine
marketing.” Get as many good links to your company’s web page as possible and “make sure all your online
outreach and presences enable two-way conversation with your supporters, fans and non-fans.”
Tourism Marketing
Tourism involves travelling to relatively undisturbed or uncontaminated natural areas with the
specific objects of studying, admiring and enjoying the scenery and its wild flora and fauna, as
well as other existing cultural and historical aspects. A visit with a motto to know these areas is
nothing but tourism. Places of tourist interest are numerous and of varied nature. These include
places of archeological and historical importance, pilgrimage centres, sanctuaries, national parks,
hill resorts and sea beaches, etc. The number of foreign tourists have been increased to more than
21 lakhs by 2001. India has a minimal share of only 0.39% of the world tourism trade. India
employs nearly 10 million people in this industry making it the second largest employer of the
country. Recent political unrest, fear of violence, terrorism, strikes and epidemics etc. are
detrimental to our tourism business. However, considering the recent development, it is hoped
that India will get her due share in world tourism.
(1) Principal products provided by recreation/tourism businesses are recreational experiences and
hospitality,
(2) Instead of moving product to the customer, the customer must travel to the product
(area/community),
(3) Travel is a significant portion of the time and money spent in association with recreational
and tourism experiences,
(4) Is a major factor in people’s decisions on whether or not to visit your business or community?
Components of Tourism
Tourism has many components comprising
1. Travel experience
2. Accommodations
3. Food
4. Beverage services
5. Shops
6. Entertainment
7. Aesthetics and
8. Special events
Let us look at the 8 Ps in detail.
1. Product
Product in Tourism is basically the experience and hospitality provided by the service provided.
In general the experience has to be expressed in such a way that the tourists see a value in them.
2. Process
The process in Tourism include, (a) trip planning and anticipation, (b) travel to the site/area,
(c)recollection, (d) trip planning packages. The trip planning packages include, maps, attractions
enroute and on site, information regarding lodging, food, quality souvenirs and mementoes
3. Place and Time – Location and Accessibility
The place and time in tourism is providing directions and maps, providing estimates of travel
time and distances from different market areas, recommending direct and scenic travel routes,
identifying attractions and support facilities along different travel routes, and informing potential
customers of alternative travel methods to the area such as airlines and railroads.
4. Productivity and Quality
This is similar to other service industries. The quality is assessed by time taken for a service, the
promptness of the service, reliability and so on.
5. Promotion and Education
Like other services, the promotion should address, the accurate and timely information helping to
decide whether to visit target audience, the image to be created for the organization, objectives,
budget, timing of campaign, media to be selected, and evaluation methods.
6. People
People is the centre for Tourism. It is more a human intensive sector. For hospitality and guest
relations it is very important to focus on people. It also plays a vital role in quality control,
personal selling, and employee morale.
7. Price and other user costs
The price of the tourism services depend on business and target market objectives, cost of
producing, delivering and promoting the product, willingness of the target, prices charged by
competitors offering similar product/service to the same target markets, availability and prices of
substitute products/services, and economic climate. The possibility of stimulating high profit
products/services by offering related services at or below cost.
8. Physical Evidence
In Tourism the physical evidence is basically depends on travel experience, stay, and comfort.
Here, the core product is bed in case of stay.
The marketing of shipping companies activating in merchant shipping, is the science of Business to Business
Marketing (B2B marketing), which deals with the satisfaction of charterer’s – shipper’s needs for the carriage of
goods by sea, with main aim the profit of the enterprise. This satisfaction presupposes on the one hand correct
diagnosis of the shipping market to better understand and forecast client’s (charterer’s – shipper’s) transport
needs and on the other hand appropriate organization, planning and control of the shipping enterprise’s means.
The more the shipping enterprise tries to discover what its clients need, to adapt the chartering policy to their
requirements, to offer appropriate transport services, to negotiate the freight as a function to what it offers, as well
as to communicate effectively with the market it targets, the more are the possibilities to achieve the most
appropriate, efficient and long-lasting commercial operation of its vessels.
1. All shipping enterprises have limited capabilities concerning the means, the resources and the management
abilities for their ships. This means that it is impossible to exploit all the chances of the shipping market with
equal effectiveness. The matching of the shipping enterprise capabilities with the needs and the desires of its
clients is fundamental for the provision of the desired transport services, the satisfaction and retention of
charterers and thus the commercial success of the enterprise.
2. The shipping company must organize its resources in such a manner as to be able to apply the marketing
process’ stages and to achieve a long-lasting and more effective commercial operation of its ships. The
application of marketing presupposes correct diagnosis, planning, organization, implementation and control of
marketing effort. This process is continuous and it is presented at figure 1. Figure 1: Stages of Marketing
Implementation in Shipping Companies
• The Airline industry came into existence during the 17th centuries.
• Origin of Indian aviation industry can be traced back to the year 1912.
• Air travel remains a large and growing industry. It facilitates economic growth,
world trade, international investment and tourism and is therefore central to the
globalization taking place in many other industries
• One can better understand the workings of airlines by looking at its marketing triangle.
Product Mix
• Consumers are demanding not products, or features of products but the benefits
they will be offered.
2. In-Flight Services.
Price Mix
Premium pricing:- Use a high price where there is a uniqueness about the product or service.
Such high prices are charge for luxuries
Cheap-value pricing:- This approach is used where external factors such as recession or
increased competition force companies to provide 'value' products and services to retain sales
APEX fares:- Apex or advance purchase fares are special fares valid on economy class on
specified sectors. They are much lower than the normal fares.
Place mix
Tour Operator
Travel Agent
Promotion Mix
A loan is a type of debt. All material things can be lent. Like all debt instruments, a loan entails the
redistribution of financial assets over time, between the lender and the borrower. It is also defined as:-
For example: - An act of lending; a grant for temporary use: asked for the loan of a garden.
A temporary transfer to a duty or place away from a regular job: an efficiency expert on loan
from the main office.
Loans represent the majority of a bank’s assets. a bank can typically earn a higher rate of
interest on loans than on securities. Loans however, come with risk. If a bank makes bad loans
to consumers or businesses, the banks may suffer on defaulter of repayments.
-Loan is an advance paid by the bank to the customer either with security or without security is called
as loan. If a loan is given without security it is called as an advance. It is given for a fixed period of
time and aggregate rate of interests. Repayments are spread over from a period of 1-5 years. It is also
known as demand loan and it is repayable on demand.
-The loans are granted to meet long term working capital needs and for expansion and
modernization. Interest is charged on the actual amount sanctioned, whether withdrawn or not. Loans
may be short-term, medium-term or loan term. Long term loans are generally for meeting the working
capital requirements. Such loans are also called as term loans. When a loan is meant for meeting
both fixed and working capital requirement of a borrower, it is called as a “Composite loan”.
Profitability
Meaning of syndication
An association of individuals formed for the purpose of conducting a particular business or a
joint venture.
A syndicate is a general term describing any group that is formed to conduct some type of
business. For example, a syndicate may be formed by a group of investment bankers who
underwrite and distribute new issues of securities or blocks of outstanding issues. Syndicates
can be organized as corporations or partnerships.
A Syndicated loan (or’syndicated bank facility’) is a large loan in which a group of banks
work together to provide funds for a borrower. There is usually one lead bank (the "Arranger"
or "Agent") that takes a percentage of the loan and syndicates the rest to other banks. A
syndicated loan is the opposite of a bilateral loan, which only involves one borrower and one
lender (often a bank or financial institution.
A syndicate only works together temporarily. They are commonly used for large loans or
underwritings to reduce the risk that each individual firm must take on.
The cost of a syndicated loan consists of interest and a number of fees-management fees,
participation fees, agency fees and underwriting fees when the loan is underwritten by a bank
or a group of banks. Spreads over LIBOR depend upon borrower's credit worthiness, size and
term of the loan, state of the market (e.g. the level of LIBOR, supply of non-bank deposits to
the EURO banks,) and the degree of competition for the loan.
The loan syndication work involves identification of sources where from funds would be
arranged, approaching these sources with requisite application and supporting documents and
complying with all the formalities involved in the sanction and disbursal of loan.
In loan syndication there is a leader bank who undertakes all the duties and functions of
finance. The fees charged by merchant banker for undertaking loan syndication varies upto
one percent of the total loan amount.
Syndicated loans provide borrowers with a more complete menu of financing options. In
effect, the syndication market completes a continuum between traditional private bilateral
bank loans and publicly traded bond market.
Loan syndications is responsible for arranging co-financing with commercial banks and other
financial institutions directly or indirectly with export credit agencies (ECA’S).
Loan syndication refers to assistance rendered by merchant banks to get mainly term loans for
projects. Such loans may be obtained from a single financial institution or a syndicate or
consortium.
Merchant bankers provide help to corporate clients to raise syndicated loans from commercial
banks. Merchant bankers help corporate clients to raise syndicated loans from commercial
banks.
Merchant banking is an institution which covers a wide range of activities such as portfolio
management, credit syndication, and corporate advisory services. They help clients approach
financial institutions for term loans.
The Loan Syndications team includes dedicated professionals in Chicago, New York, Toronto
and London who are active in the bank market and have an in-depth knowledge of the current
trends in loan pricing, structure and trading activities.
As the size of the individual loans increased, individual banks found it difficult to take the risk
single handed- regulatory authorities in most countries limit the size of the individual
exposures. Hence the practice of inviting other banks to participate in the loan, to form a
syndicate, came into being; thus the term “Syndicated loans”
A loan syndicate refers to the negotiation where borrowers and lenders sit across the table to
discuss about the terms and conditions of lending. At present Large groups of banks are
forming syndicates to arrange huge amount of loans for corporate borrowers.
The need for syndication arises as the size of the loan is huge and a single bank cannot bear
the whole risk of lending. Also the corporate going for the issue is not aware about the banks
which are willing to lend. Hence syndication assumes significance.
In the case of syndication the risk gets diversified. The process of syndication starts with an
invitation for bids from the borrower. The borrower mentions the funds requirement,
currency, tenor etc. the mandate is given to a particular bank or an institution that will take the
responsibility of syndicating the loan by arranging for financing the banks.
Syndication is done on a best effort basis or on underwriting basis. It is usually the lead
manager who acts a syndicator of loans. The lead manager has dual tasks i.e. formation of
syndicate documentation and loan agreement.
Common documentation is signed by the participating banks on the common terms and
conditions.
The syndicated loan is a financing method evolved from bilateral loan. Under the arrangement of
syndicated loan, one bank or several banks (as the arrangers) organize other banks to grant loans to
the same borrower under one loan agreement according to agreed terms.
As for the borrower, syndicated loans provide large amounts of loans with longer term and
easy operation management (only need to contact with the agent bank).
Fewer restriction on the use of proceeds (compared with government loans and export credit)
Easier management (Compared with loans borrowed separately from different banks)
Syndicated loans can be structured to incorporate various options. As in the case of FRS, a
drop lock feature converts the floating rate loan into a fixed rate loan if the benchmark index
hits a specified floor. A multi-currency option allows the borrower to switch the currency of
denomination on a rollover date.
Security in the form of government guarantee or mortgage on assets is required for borrowers
in developing countries like India.
Syndicated loan is more suitable as compared to a simple loan from single or multiple banks.
The borrower does not have to deal with a large number of lenders.
It has permitted the issuers to achieve more market-oriented and cost-effective financing.
Loan syndications are a cost-effective method for participating institutions to diversify their
banking books and to exploit any funding advantages relative to agent banks.
Syndicated loans have increasingly become the corporate financing choice of large- and mid-
size firms. As a result, syndicated lending has become a major component of today's
financial landscape.
Syndicated lending also allows banks to compete more effectively with public debt markets
for corporate borrowers. To a large extent, the development of the loan syndication market
has stemmed, if not reversed, the trend toward disintermediation of corporate debt by
reducing the differences between intermediated and public debt markets.
STAGES IN SYNDICATION
PRE-MANDATE STAGE
POST-CLOSURE STAGE
Broadly there are three stages in syndication, viz., Pre-
mandate phase, Placing the loan and disbursement and post-closure stage.
1) PRE-MANDATE STAGE: - This is the initiated by the prospective borrower. It may liaise
with a single bank or it may invite competitor’s bids from a number of banks. The borrower
has to mandate the lead bank, and the underwriting bank, if desired. Once the lead bank is
selected and mandated by the borrower, the lead bank has to undertake the appraisal process.
the lead banks needs to identify the needs of the borrower, design an appropriate loan
structure, and develop a persuasive credit proposal.
3) POST-CLOSURE STAGE:- This is monitoring and follow-up phase. It has many times done
through an escrow account. Escrow account is the account in which the borrower has to deposit it’s
revenues and the agent ensures that the loan repayment is given due priority
before payments to any other parties. Hence in this stage, the agent
handles the day-to-day running of the loan facility.
Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain rules, the bank
might believe that it is likely that 5% of all borrowers may go bankrupt. If the bank's cost of funds is a
hypothetical 5%, the bank needs to charge more than 10% interest on the loan to make a profit. In
general, banks and the financial markets use risk-based pricing, charging an interest rate depending on
the risk of the loan product in general or the risk of the specific borrower.
The problem with larger businesses loans, however, is that there are fewer of them. So, if the bank
has the only large business loan and if that business happens to be one of that defaults, then the bank
loses all its money. For this reason, it is in the best interest of all banks to split, or "syndicate" their
large loans with each other, so each get a representative sample in their loan portfolios.
A second, often criticized reason for syndicating loans is that it avoids large or surprising losses and
instead usually provides small and more predictable losses. Smaller and more predictable losses are
favored by many management teams because of the general perception that companies with
"smoother" or more steady earnings are awarded a higher stock price relative to their earnings
(benefiting management who is often paid primarily by stock). Critics, such as Warren Buffett
however, say that many times this practice is irrational.If the bank could still get a representative
sample by not syndicating, and if syndication would reduce their profit margins, then over the long
term a bank should make more money by not syndicating. This same dynamic plays out in the
investment banking and insurance fields, where syndication also takes place.
To avoid that the borrower has to deal with all syndicate banks individually, one of the syndicate
banks usually acts as an Agent for all syndicate members and acts as the focal point between them
and the borrower.
In addition, economists and syndicate executives contend that there are other, less obvious advantages
to going with a syndicated loan.
Syndicated loan facilities can increase competition for your business, prompting other banks
to increase their efforts to put market information in front of you in hopes of being
recognized.
Flexibility in structure and pricing. Borrowers have a variety of options in shaping their
syndicated loan, including multicurrency options, risk management techniques, and
prepayment rights without penalty.
Syndicated facilities bring businesses the best prices in aggregate and spare companies the
time and effort of negotiating individually with each bank.
Syndicate banks sometimes are willing to share perspectives on business issues with the agent
that they would be reluctant to share with the borrowing business.
Syndicated loans bring the borrower greater visibility in the open market. Bunn noted that
"For commercial paper issuers, rating agencies view a multi-year syndicated facility as
stronger support than several bilateral one-year lines of credit."
Quicker and simpler than other ways of raising capital. E.g. Issue of equity or bonds.
Enables much broader risk diversification without significant additional marketing efforts.
Due to uniform documentation there is a better chance for a subsequent placement on the
secondary market.
Fund arrangement and other fees can be earned without committing capital.
In case the borrower runs into difficulties, participant banks have equal treatment.
CHAPTER NO.3
Working capital finance is done in order to meet the entire range of short-term fund requirements
that arise within a corporate’s day-to-day operational cycle.
The working capital loans can help the company in financing inventories, managing internal cash
flows, supporting supply chains, funding production and marketing operations, providing cash
support to business expansion and carrying current assets.
The working finance products comprise a spectrum of funded and non-funded facilities ranging from
cash credit to structured loans, to meet the different demands from all segments of industry, trade and
the services sector. Funded facilities include cash credit, demand loan and bill discounting. Demand
loans are considered also under the FCNR (B) scheme. Non-funded instruments comprise letters of
credit (inland and overseas) as well as bank guarantees (performance and financial) to cover advance
payments, bid bonds etc.
Project Finance
In general, project finance covers Greenfield industrial projects, capacity expansion at existing
manufacturing units, construction ventures or other infrastructure projects. Capital intensive business
expansion and diversification as well as replacement of equipment may be financed through the
project term loans.
Project finance is quite often channeled through special purpose vehicles and arranged against the
future cash streams to emerge from the project.
The loans are approved on the basis of strong in-house appraisal of the cost and viability of the
ventures as well as the credit standing of promoters.
The corporate term loans can support the company in funding ongoing business expansion, repaying
high cost debt, technology up gradation, leveraging specific cash streams that accrue into the
company, implementing early retirement schemes and supplementing working capital.
Corporate term loans can be structured under the FCNR (B) scheme as well, with the option of
switching the currency denomination at the end of interest periods. This will helps to take advantage
of global interest rate trends vis-à-vis domestic rates to minimize your debt cost.
The bank’s corporate term loans are generally available for tenors from three to five years,
synchronized with your specific needs.
The corporate term loans carry fixed or floating rates, as befits the exact requirement of the client and
the risk context. Again, these rates will be linked to the bank’s prime lending rate.
The corporate term loans can have a bullet or periodic repayment schedule, as required by the client.
The repayment mode may be linked to the cash accruals of the company.
The Bank’s expert credit crew gauges the applicant’s particular fund requirements and evaluates the
company’s credit worthiness, factoring in the cash flows generated by it.
Structured Finance
The structured finance involves assembling unique credit configurations to meet the complex fund
requirements of large industrial and infrastructure projects. Structured finance can be a combination
of funded and non-funded facilities as well as other credit enhancement tools, lease contracts for
instance, to fit the multi-layer financial requirements of large and long-gestation projects.
Channel Financing
Channel financing is an innovative finance mechanism by which the bank meets the various fund
necessities along the supply chain at the supplier’s end itself, thus helping to sustain a seamless
business flow along the arteries of the enterprise.
Channel finance ensures the immediate realization of sales proceeds for the client’s supplier, making
it practically a cash sale. On the other hand, the corporate gets credit for a duration equaling the tenor
of the loan, enabling smoother liquidity management.
PARTIES AND THEIR ROLES WITHIN THE SYNDICATION PROCESS
The lead bank and participating banks are the main parties involved in loan syndication. In large
loan amounts, sometimes there are four parties involved, other than the borrower, in the syndication
process. These are arranger {lead manager/ bank}, underwriting Bank, Participating Banks and the
facility manager {agent. their roles are defined as follows:-
3. Participating banks:- These are the banks that participate in the syndication by lending a
portion of the total amount required. These banks charge participation fees. These banks carry
mostly the normal credit risk i.e. risk of default by the borrower. As like any normal loan.
These banks may also be led into passive approval and complacency risk. It means that these
banks may not carry rigorous appraisal of the borrower and has proposed project as it is done
by the lead manager and many other participating banks. It is this banker’s trust that so many
high profile banks cannot be wrong. This may be seen in the light of reputation risk of the lead
manager.
4. Facility manager/agent:- Facility manager takes care of the administrative arrangements over
the term of the loan (e.g. Disbursements, repayments and compliance). It acts for and on behalf
of the banks. In many cases the arranging/underwriting bank itself may undertake this role. In
larger syndications co-arranger and co-manager may be used.
CHAPTER NO.4
Union Bank of India, has entered into a Memorandum of Understanding [MOU] with IDFC,
one of the leading Infrastructure Financing Institution and Bank of India, another leading
Public Sector Bank for jointly Syndicating & Financing the large Infrastructure & core
industrial projects, which are coming up in the country.
This is the first time when a premier Infrastructure financing Institution and two large Public
Sector Banks are coming together to share the skill sets developed over a period of time, to
Syndicate/Underwrite the Debt and extend total financial solution for large projects coming
up in the Public Private Partnership [PPP] domain as well as in the Private Sector.
This arrangement will facilitate joint identification, marketing and appraisal of Syndicated
Loans with underwriting arrangements.
It is envisaged that the promoters in the PPP would largely benefit from this Tie-up, which
would provide a total financial solution, Term Loan for the project as well as Working
Capital.
In fact, the benefits of Syndication would accrue to all the concerned parties especially the
borrower:
Financial sector plays an indispensable role in the overall development of a country. The most
important constituent of this sector is the financial institutions, which act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than
their earnings to those who spend more than their earnings. The financial institutions have
traditionally been the major source of long-term funds for the economy. These institutions
provide a variety of financial products and services to fulfill the varied needs of the
commercial sector. Besides, they provide assistance to new enterprises, small and medium
firms as well as to the industries established in backward areas. Thus, they have helped in
reducing regional disparities by inducing widespread industrial development.
The Government of India, in order to provide adequate supply of credit to various sectors of
the economy, has evolved a well developed structure of financial institutions in the country.
These financial institutions can be broadly categorized into All India institutions and State
level institutions, depending upon the geographical coverage of their operations.
At the national level, they provide long and medium term loans at reasonable rates of interest.
They subscribe to the debenture issues of companies, underwrite public issue of shares,
guarantee loans and deferred payments, etc. Though, the State level institutions are mainly
concerned with the development of medium and small scale enterprises, but they provide the
same type of financial assistance as the national level institutions.
Other Financial Institutions Include: - NABARD (National Bank for Agriculture and Rural
Development) EXIM (Export Import Bank of India) IFCI (Industrial Financial Corporation
of India).
LOAN DEPOT
The Loan Depot Inc was incorporated in Canada in October 1998 by a group of Finance and Real
Estate professionals with experience in the Domestic and International Finance Markets and
International Real Estate Hedge Markets for over 10 years.
The main businesses of The Loan Depot are Domestic and International Finance, Loan Syndication
from International Funding Agencies and Major World Banks, Project Financing, Real Estate
Acquisition syndication and hedging.
In 2000 the Corporation moved its head quarters from Ontario, Canada to Chattanooga, TN. In 2001,
the company expanded its operations to include conventional and government guaranteed lending
products. The Surviving Company is now know as "THE LOAN DEPOT, LLC", and is committed to
provide the highest level of service to our customers, borrowers and brokers.
Their Mission at The Loan Depot is to anticipate and successfully meet the changing needs of our
client and match them with the requirements of the capital market. The standard of excellence is
upheld through our innovative thinking, our unique competitive advantage, and most importantly, our
dedication to our client.
Their goal is to provide you attractive financing options that will best serve your individual financing
needs. They have successfully laid a firm foundation for financing a broad range of loans. They look
forward to working with people and helping them in their business.
They pride themselves in being one of the most innovative, diversified group of financial service
companies in the United States and Canada and plan on staying that way.
Loan Depot offers a number of custom services to helps to achieve financial goals.
Mortgages
Loan Depot offers a wide variety of options for all mortgage needs offer the best rates and with over
150 products we specialize in self employed and not so perfect credit situations(i.e.: bankruptcy,
divorce). Their programs include 100% financing for purchase or re-finance to consolidate debt or for
investment purposes.
Auto Loans
Offer a variety of finance plans for the purchase or re-finance of new and pre-owned vehicles.
Loans
Loan Depot is a full service loan placement firm. They offer secured and unsecured loans available to
people in every credit situation. Their rates are competitive and all situations are welcome.
Recreational Vehicles
Loan Depot offers financing on all recreational vehicles they offer competive rates on boats, R.Vs and
ATVs etc.Their programs allows to finance new or used purchase or to-re-finance the existing vehicle
at a lower rate or better terms.
Credit Cards
Loan Depot offers a secure visa to help establish or re-establish credit with all the convenience and
services one can access with a visa card.
CHAPTER NO.5
The syndicated loan market, a hybrid of the commercial banking and investment banking
worlds, is globally one of the largest and most flexible sources of capital. Syndicated loans
have become an important corporate financing technique, particularly for large firms and
increasingly for midsized firms. The rapid development of the syndicated corporate loan
market took place in the 1990s exploring the historical forces that led to the development of
the contemporary U.S. syndicated loan market, which is effectively a hybrid of the investment
banking and commercial banking worlds. Syndicated lending aims to increase the risks and
benefits involved in taking part in the syndicated loan market.
There has been a notable change in large corporate lending over the past decade, as the old
bilateral bank-client lending relationships have been replaced by a world that is much more
transaction-oriented and market-oriented. The Canadian syndicated loan market has been
strongly influenced by its U.S. counterpart, but it is not yet at the same level of development.
It also explores potential risk issues for the new corporate loan market, including implications
for the distribution of credit risk in the system, risks in the underwriting process, the
monitoring function, and the potential for risk arising from asymmetric information.
The development of the market for syndicated loans, and has shown how this type of
lending, which started essentially as a sovereign business in the 1970s, evolved over the
1990s to become one of the main sources of funding for corporate borrowers. The syndicated
loan market has advantages for junior and senior lenders. It provides an opportunity to senior
banks to earn fees from their expertise in risk origination and manage their balance sheet
exposures.
Throughout history, innovation has driven the development of the financial markets, and over
the last 20 years, the syndicated loan market has provided particularly fertile ground for
financial innovation. From a relatively esoteric field involving commercial banks syndicating
lines of credit, financial innovations have helped it develop into a broad, dynamic market
encompassing both an efficient primary market that originates syndicated credits and a liquid
secondary trading market where prices adjust to reflect credit quality and market conditions.
The development of an efficient and liquid syndicated loan market in the U.S. has greatly
impacted its capital markets. The syndicated loan market bridges the private and public fixed-
income markets and provides borrowers with an alternative to high yield bonds and illiquid
bilateral commercial bank loans. It provides much-needed credit to lower-rated companies
and has strengthened the bankruptcy process in the U.S. through its facilitation of DIP
(debtor-in-possession) lending.
Today’s syndicated loan market benefits banks also; in times of adversity, they can sell
portions of the syndicated credits into a relatively liquid secondary market and actively
manage the risk in their loan portfolios. This allows banks to avoid unnecessary lending
restrictions when the economy contracts and thus the impact of an inefficient “credit crunch.”
The development of the secondary market for syndicated loans has led to the creation of a
new asset class with greater return per unit of risk than many other fixed-income assets and
low correlations with most other classes of assets. The leveraged portion of the market, the
part of the market where most innovation has occurred, receives special attention. Syndicated
loans are an integral part of capital raising for these markets.
This analysis provides a primer to investors and other parties interested in a market that has,
without great fanfare, been one of the most rapidly growing and innovating sections of the
U.S. capital market in the past 20 years. It explores issues related to the main features of the
primary market using the most recent data available and details the characteristics of the
secondary market. Investment returns, as well as the risks of the asset class, particularly credit
risk, receive special attention.
The syndicated loans market has grown rapidly in recent years, driven primarily by an
increase in corporate takeovers, private equity transactions and infrastructure deals. Strong
liquidity means there is plenty of cash to invest, and banks are willing lenders.
The leveraged loan market remains small compared with the investment-grade market and
bankers said the investors and their attitudes were markedly different. The volumes in the
Indian offshore syndicated loan market have grown enough in the past few years.
Major corporate clients will almost automatically consider a syndicated loan for sums
above a few hundred million euros. Syndication splits the lending risk between large
number of investors, at price (margin and fees) determined by the market. It is an
efficient way of raising funds quickly and on best terms. For borrowers the advantage
is that they can raise larger amounts and expand their group of bankers whilst at the
Same time only having to sign a single contract
For lenders, syndication allows a diversification of the lending portfolio from both a
geographical and sectorial point of view. In addition, lenders get the benefit of the
facility agent’s expertise in management of drawdowns and of other events in the
lifetime of the loan after the facility agreement has been signed.
The syndicated loan market was originally developed in the USA in the 1970’s as
a means of financing leveraged buy-outs (LBOs). It has since gone on to become
the leading vector for all sorts of financing. In Europe the market expanded rapidly
in the UK and then on the continent, particularly in France. The
market’s rapid growth can be seen from the fact that in 1993
the total volume of the market worldwide was USD 1.4.
trillion, whereas in 2005 it exceeded USD 3 trillion (dialogic)
The rapid growth in syndicated facilities is certainly due in part to the trend
over the past fifteen years, across all sectors of the economy, towards industry
consolidation. for a borrower, the choice between a syndicated loan and
negotiable debt instruments often comes down in favour of the first.
syndicated loans are the only means of raising, rapidly and with few
formalities, sums greater than are available on other markets,
like bonds and equities, or through private placements.
These loans may be used to cover a whole ranges of uses by the borrower:
refinancing, undrawn lines of credit supporting commercial paper and treasury
note programmes, acquisitions, LBO financing, project and other structured
financing. The arrangement commission paid by the borrower is determined
by the complexity of the deal: the most profitable deals for
banks are leveraged acquisitions.
CONSORTIUM FINANCING
Under consortium financing, several banks (or financial institutions) finance a single
borrower with common appraisal, common documentation, joint supervision and follow-up
exercises, these banks have a common agreement between them, the process is somewhat
similar to loan syndication.
The borrowers, particularly the big ones, are nowadays a very happy lot as the bankers run after them
offering cheap finance. This has given birth to the practice of MULTIPLE BANKING—a situation
when one borrower is banking with many banks.
Under consortium financing, several banks (or financial institutions) finance a single borrower with
common appraisal, common documentation, joint supervision and follow-up exercises, but in
multiple banking, different banks provide finance and different banking facilities to a single borrower
without having a common arrangement and understanding between the lenders. The practice of
multiple banking has increased tremendously during the last years . This is due to the increasing
competition and the bankers desire to grow in a short span of time.
The Consortium approach to project delivery is chosen because of the desire to share as
evenly as possible the risk inherent in that project.
It is like a establishing a temporary business without the formal structure or tax liabilities, a
business that is governed by the rules laid down in a consortium agreement.
The accessibility to international journals in Indian universities and technical institutions has
improved many fold with setting-up of a few Government-funded library consortia.
Prior to setting up of these consortia, the access to e-journals was restricted to a premier
institutions like IISc, IITs, IIMs and a few central universities who were subscribing to a few
bibliographic databases on CD ROM, a few e-journals accessible free with subscription to
their print versions and a negligible fraction of journals on subscription.
After launch of the “Indian National Digital Library in Engineering Sciences and Technology
(INDEST) Consortium” in 2003 and “UGC-INFONET Digital Library Consortium” in 2004,
availability and accessibility of e-resources increased phenomenally in setting in a new
culture of electronic access and browsing in educational institutions.
A number of library consortia have emerged in India in past five to six years.
Some of the important consortia and their activities will be discussed now:
INDEST-AICTE Consortium
Currently, the Ministry provides funds required for subscription to resources for 42 centrally-
funded institutions including IISERs, new NITs and IITs.
Moreover, the Consortium also welcomes other institutions to join it under its self-supported
category.
690 engineering colleges and other educational institutions have joined the Consortium under
its self-supported category. The total number of members in the Consortium has now gone up
to 788.
Advantages
Flexibility- Members of consortium can change their contractual agreement at any time to suit
changed circumstances.
Ease of termination- Consortia can be set to expire on a given date or on the occurrence of
certain events without the formal requirements needed in the case of dissolution of the
corporation.
Tax transparency- The consortium is not directly subject to taxation however the individuals
are.
Confidentiality- Some of the members may choose to be “undisclosed” parties in dealings
with third parties.
Costs- The cost of running a contractual joint venture is generally lower than running a joint
venture company.
Disadvantages
Liability- It is difficult for a consortium member to restrict or limit its liability. Members may
even become liable to third parties for the non performance of other members of the
consortium or debts of such members incurred in undertaking the common project.
External Relationships and Funding- Third parties often find it difficult to enter into a contract
with a non legal entity like consortium. Because it is non legal entity the funding is also
normally available to the individual members and not the consortium itself.
Lack of permanent structure- The lack of permanent structure makes it difficult for a
consortium to establish a long term business relationship with third parties.
VENTURE CAPITAL
Startup or growth equity capital or loan capital provided by private investors (the venture capitalists)
or specialized financial institutions (development finance houses or venture capital firms). Also called
risk capital.
Venture capital is a means of equity financing for rapidly-growing private companies. Finance may
be required for the start-up, development/expansion or purchase of a company. Venture Capital firms
invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT,
infrastructure, health/life sciences, clean technology, etc.).
The goal of venture capital is to build companies so that the shares become liquid (through IPO or
acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is
consistent with the level of risk taken.
With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of
the company in return for the funding. Equity finance offers the significant advantage of having no
interest charges. It is "patient" capital that seeks a return through long-term capital gain rather than
immediate and regular interest payments, as in the case of debt financing. Given the nature of equity
financing, venture capital investors are therefore exposed to the risk of the company failing. As a
result the venture capitalist must look to invest in companies which have the ability to grow very
successfully and provide higher than average returns to compensate for the risk.
Venture capital has a number of advantages over other forms of finance, such as:
It injects long term equity finance which provides a solid capital base for future growth.
The venture capitalist is a business partner, sharing both the risks and rewards. Venture
capitalists are rewarded by business success and the capital gain.
The venture capitalist is able to provide practical advice and assistance to the company based
on past experience with other companies which were in similar situations.
The venture capitalist also has a network of contacts in many areas that can add value to the
company, such as in recruiting key personnel, providing contacts in international markets,
introductions to strategic partners, and if needed co-investments with other venture capital
firms when additional rounds of financing are required.
The venture capitalist may be capable of providing additional rounds of funding should it be
required to finance growth.
The venture capital industry in India is still at a nascent stage. With a view to promote
innovation, enterprise and conversion of scientific technology and knowledge-based ideas into
commercial production, it is very important to promote venture capital activity in India. India’s recent
success story in the area of information technology has shown that there is a tremendous potential for
growth of knowledge-based industries. This potential is not only confined to information technology
but is equally relevant in several areas such as bio-technology, pharmaceuticals and drugs,
agriculture, food processing, telecommunications, services, etc. Given the inherent strength by way of
its skilled and cost competitive manpower, technology, research and entrepreneurship, with proper
environment and policy support, India can achieve rapid economic growth and competitive global
strength in a sustainable manner.
A flourishing venture capital industry in India will fill the gap between the capital requirements of
technology and knowledge based startup enterprises and funding available from traditional
institutional lenders such as banks. The gap exists because such startups are necessarily based on
intangible assets such as human capital and on a technology-enabled mission, often with the hope of
changing the world. Very often, they use technology developed in university and government
research laboratories that would otherwise not be converted to commercial use. However, from the
viewpoint of a traditional banker, they have neither physical assets nor allow-risk business plan. Not
surprisingly, companies such as Apple, Exodus, Hotmail and Yahoo, to mention a few of the many
successful multinational venture-capital funded companies initially failed to get capital as startups
when they approached traditional lenders.
However, they were able to obtain finance from independently managed venture capital funds that
focus on equity or equity-linked investments in privately held, high-growth companies. Along with
this finance came smart advice, hand-on management support and other skills that helped the
entrepreneurial vision to be converted to marketable products. Beginning with a consideration of the
wide role of venture capital to encompass not just Information technology, but all high-growth
technology and knowledge-based enterprises, the endeavor of the Government has been to make
recommendations and work on that plan which will facilitate the growth of a vibrant venture capital
industry in India.
(3) How to bridge the gap between traditional means of finance and the capital needs of high
growth startups.
II. Critical factors for success of venture capital industry:
While making the recommendations, I felt that the following factors are critical for the success of the VC industry in
India:
The regulatory, tax and legal environment should play an enabling role. Internationally, Venture funds have evolved
in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability.
Resource raising, investment, management and exit should be as simple and flexible as needed and driven by global
trends
Venture capital should become an institutionalized industry that protects investors and
Investee firms, operating in an environment suitable for raising the large amounts of risk capital needed and for
spurring innovation through startup firms in a wide range of high growth areas.
In view of increasing global integration and mobility of capital it is important that Indian Venture capital funds as
well as venture finance enterprises are able to have global exposure and investment opportunities.
RECOMMENDATIONS
Presently there are three set of Regulations dealing with venture capital activity i.e.
SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital Investments issued by
Department of Economic Affairs in the MOF in the year 1995 and CBDT Guidelines for Venture Capital Companies
in 1995 which was modified in 1999. The need is to consolidate and substitute all these with one single regulation of
SEBI to provide for uniformity, hassle free single window clearance. There is already a pattern available in this
regard; the mutual funds have only one set of regulations and once a mutual fund is registered with SEBI, the tax
exemption by CBDT and inflow of funds from abroad is available automatically.
Similarly, in the case of FIIs, tax benefits and foreign inflows/outflows are automatically available once these
entities are registered with SEBI. Therefore, SEBI should be the nodal regulator for VCFs to provide uniform, hassle
free, single window regulatory framework. On the pattern of FIIs, Foreign Venture Capital Investors (FVCIs) also
need to be registered with SEBI.
VCF are a dedicated pool of capital and therefore operates in fiscal neutrality and are treated as pass through
vehicles. In any case, the investors of VCFs are subjected to tax. Similarly, the investee companies pay taxes on their
earnings. There is a well-established successful precedent in the case of Mutual Funds, which once registered with
SEBI are automatically entitled to tax exemption at pool level. It is an established principle that taxation should be
only at one level and therefore taxation at the level of VCFs as well as investors amount to double taxation.
Since like mutual funds VCF is also a pool of capital of investors, it needs to be treated as a tax pass through. Once
registered with SEBI, it should be entitled to automatic tax pass through at the pool level while maintaining taxation
at the investor level without any other requirement under Income Tax Act.
Presently, FIIs registered with SEBI can freely invest and disinvest without taking FIPB/RBI approvals.
This has brought positive investments of more than US $10 billion. At present, foreign venture capital investors can
make direct investment in venture capital undertakings or through a domestic venture capital fund by taking FIPB /
RBI approvals. This investment being long term and in the nature of risk finance for start-up enterprises, needs to be
encouraged.
Therefore, at least on par with FIIs, FVCIs should be registered with SEBI and having once registered, they should
have the same facility of hassle free investments and disinvestments without any requirement for approval from
FIPB / RBI. This is in line with the present policy of automatic approvals followed by the Government. Further,
generally foreign investors invest through the Mauritius-route and do not pay tax in India under a tax treaty. FVCIs
therefore should be provided tax exemption. This provision will put all FVCIs, whether investing through the
Mauritius route or not, on the same footing. This will help the development of a vibrant India-based venture capital
industry with the advantage of best international practices, thus enabling a jump-starting of the process of
innovation.
The hassle free entry of such FVCIs on the pattern of FIIs is even more necessary because of the following
factors:
(i) Venture capital is a high-risk area. In out of 10 projects, 8 either fail or yield negligible returns. It is therefore
in the interest of the country that FVCIs bear such a risk.
(ii) For venture capital activity, high capitalization of venture capital companies is essential to withstand the losses in
80% of the projects. In India, we do not have such strong companies.
(iii) The FVCIs are also more experienced in providing the needed managerial expertise and other supports.
70% of a venture capital fund’s investible funds must be invested in unlisted equity or equity-linked instruments,
while the rest may be invested in other instruments. Though sectoral restrictions for investment by VCFs are not
consistent with the very concept of venture funding, specifying a negative list, which could include activities not
legally permitted and any other sectors, which could be notified by SEBI in consultation with the Government?
Investments by VCFs in associated companies should also not be permitted. Further, not more than 25% of a fund’s
corpus may be invested in a single firm. The investment ceiling has been recommended in order to increase focus on
equity or equity-linked instruments of unlisted startup companies. As the venture capital industry matures,
investors in venture capital funds will set their own prudential restrictions.
A venture capital fund incorporated as a company/ venture capital undertaking should be allowed to buyback upto
100% of its paid up capital out of the sale proceeds of investments and assets and not necessarily out of its free
reserves and share premium account or proceeds of fresh issue. Such purchases will be exempt from the SEBI
takeover code. A venture-financed undertaking will be allowed to make an issue of capital within 6 months of
buying back its own shares instead of 24 months as at present. Further, negotiated deals may be permitted in unlisted
securities where one of the parties to the transaction is VCF.
The IPO norms of 3-year track record or the project being funded by the banks or financial institutions should be
relaxed to include the companies funded by the registered VCFs also. The issuer company may float IPO without
having three years track record if the project cost to the extent of 10% is funded by the registered VCF. Venture
capital holding however shall be subject to lock in period of one year. Further, when shares are acquired by VCF in a
preferential allotment after listing or as part of firm allotment in an IPO, the same shall be subject to lock in for a
period of one year. Those companies, which are funded, by Venture capitalists and their securities are listed on the
stock exchanges outside the country, these companies should be permitted to list their shares on the Indian stock
exchanges.
(E) QIB Market for unlisted securities
In the case of transfer of securities by FVCI to any other person, the RBI requirement of obtaining NOC from joint
venture partner or other shareholders should be dispensed with.
At present, investment/disinvestments by FVCI is subject to approval of pricing by RBI, which curtails operational
flexibility and needs to be dispensed with.
(A) Incentives for Shareholders: The shareholders of an Indian company that has venture capital funding and is
desirous of swapping its shares with that of a foreign company should be permitted to do so. Similarly, if an Indian
company having venture funding and is desirous of issuing an ADR/GDR, venture capital shareholders (holding
saleable stock) of the domestic company and desirous of disinvesting their shares through the ADR/GDR should be
permitted to do so. Internationally, 70% of successful startups are acquired through a stock-swap transaction rather
than being purchased for cash or going public through an IPO. Such flexibility should be available for Indian
startups as well. Similarly, shareholders can take advantage of the higher valuations in overseas markets while
divesting their holdings.
(B) Global investment opportunity for Domestic Venture Capital Funds (DVCF): DVCFs should be permitted
to invest higher of 25% of the fund’s corpus or US $10 million or to the extent of foreign contribution in the fund’s
corpus in unlisted equity or equity-linked investments of a foreign company. Such investments will fall within the
overall ceiling of 70% of the fund’s corpus. This will allow DVCFs to invest in synergistic startups offshore and also
provide them with global management exposure.
Infrastructure development needs to be prioritized using government support and private management of capital
through programmes similar to the Small Business Investment Companies in the United States, promoting incubators
and increasing university and research laboratory linkages with venture-financed startup firms. This would spur
technological innovation and faster conversion of research into commercial products.
A strong SRO should be encouraged for evolution of standard practices, code of conduct, creating awareness by
dissemination of information about the industry. Implementation of these recommendations would lead to creation of
an enabling regulatory and institutional environment to facilitate faster growth of venture capital industry in the
country. Apart from increasing the domestic pool of venture capital, around US$ 50 billion are expected to be
brought in by offshore investors over 3/5 years on conservative estimates. This would in turn lead to increase in the
value of products and services adding upto US$300 billion to GDP by 2010. Venture supported enterprises would
convert into quality IPOs providing over all benefit and protection to the investors. Additionally, judging from the
global experience, this will result into substantial and sustainable employment generation of around 3 million jobs in
skilled sector alone over next five years. Spin off effect of such activity would create other Support services and
further employment. This can put India on a path of rapid economic growth and a position of strength in global
economy.
CONCEPTUAL DISCUSSIONS
The term “venture capital” refers to capital investment made in a business or industrial enterprise which carries
elements of risk and insecurity and the probability of business hazards. Capital investment may assume the form of
either equity or debt, or both, or a derivative instrument. But generally the investment is made in equity form as it
enables the investor to convert the investment into cash when required. Venture Capital financing is an alternative
financing source, particularly when an industry is technology based, the entrepreneur inexperienced and investment
carries high risk of loss. In such circumstances banks and institutions do not advance money to entrepreneurs; the only
succour lies with venture capitalists who provide risk capital.
Venture capitalists take higher risks by investing in an early-stage company with little or no history, and they expect a
higher return for their high-risk equity investment. Internationally, VCs look at an Internal Rate of Return (IRR) of 40%
plus. However, in India the ideal benchmark is in the region of an Internal Rate of Return (IRR) of 25% for general funds
and more than 30% for IT-specific funds. Most firms require large portions of equity in exchange for start-up financing.
Venture Capital financing, then, is not a passive activity like money lending where the lender is unconcerned with the
performance of the investee’s business. In venture capital financing the venture capital firm takes keen interest in the
business performance of the investee firm. Thus the venture capitalist acts as a copartner in the investee’s business,
sharing success and failures, the gains and losses, proportionate to the equity investment. The vital difference between
venture capital financing and bought-out deals is that the latter does not involve investment on high-risk and high-
reward basis, nor does it provide equity finance at different stages of development. Although the expectation of capital
gains on investment in bought-out deals is similar to that in venture capital investment, there is a material difference in
objectives and intents.
and with it a share of risk. He does not loaning money against collateral and
eliminate risk but manages it through in- ensuring debt repayment capacity.
hands-on support.
5. He channels funds into the lowest tier He avoids such situations of risk.
enterprise.
of vitality and innovation into the busin- equipped to provide support which
investments.
7. He assists the flow of new investment He only assists in investment.
nities.
It injects long term equity finance which provides a solid capital base for future growth.
The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded
by business success and the capital gain.
The venture capitalist is able to provide practical advice and assistance to the company based on past experience
with other companies which were in similar situations.
The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in
recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if
needed co-investments with other venture capital firms when additional rounds of financing are required.
The venture capitalist may be capable of providing additional rounds of funding should it be required to finance
growth.
The most distinct feature of VC financing is its stage-wise financing system which is discussed below.
Stages in venture Name of Description of status of
Business
This stage is a pre-start-up stage needing funds for testing the prototype and giving it a commercial shape. This is the
primary stage associated with research and development (R&D). Financing in this stage involves serious risk as the
technology or innovation being attempted may succeed or fail, after repeated investments. Chances of success in
high technology (hi-tech) projects are meager or we can say that risks are very high and rewards remote.
Start-up Stage:
An entrepreneur may feel the need for finance when the business activity is just starting. The start-up stage involves
the launching of a new business. Although, the start-up stage is exposed to high risk, more and more venture
capitalists, hoping for capital gains through equity appreciation, are eager to finance such projects. Venture capital
companies, however, assess the managerial ability and capacity of the entrepreneur before making any financial
commitment at this stage.
Second-Round Financing:
The circumstances under which second-round finance is needed by an enterprise after start-up may be negative or
positive. The negative reasons could be overruns in the project before completion, a period of loss after start-up,
inability to get further equity finance from other sources. On a positive note, if a start-up is successful and the
business is growing apace, additional funding is required for expansion.
Later-Stage Financing:
This refers to post-early-stage financing when a project has established itself and business is spreading its wings and
is looking for higher growth. Later-stage funding is also called “mezzanine” financing. Venture capitalists around
the world, particularly in the UK and USA prefer investing in later-stage projects in order to reap capital gains.
Replacement capital
Buy-outs
Turnarounds
Expansion Finance: Expansion of an undertaking or enterprise may be through an organic growth or by way of
acquisition or takeover. For the venture capitalist there is no difference between the two from the point of
investment. In the case of organic development the entrepreneur retain maximum equity holding. In the case of
acquisition equity holdings of the purchaser and the investor could be in the ratio 50:50 depending upon the bargain,
i.e. the net worth of the acquired business, its purchase price and the amount raised from investors by the acquiring
company.
Replacement Finance: Replacement finance aims at enhancing the equity base in an enterprise, resulting in a
change of owner/ownership pattern of the enterprise. Venture capitalists make finance available by purchasing
existing shares from entrepreneur or their associates to reduce their holdings in the unlisted company. This sale of
shares may be by persons other than entrepreneurs or their associates. This is known as “money-out” deal.
Turnaround: Turnaround implies the recovery of the enterprise. A turnaround deal resembles early-stage financing
where the business is not yet profitable. The company may face mounting debt burden and flowing down of cash
inflows and need more funds from all sources, viz. bankers, financial institutions, and existing investors including
venture capitalists, to reach a recovery point. The venture capitalist plays an active role in such a situation by
providing more equity investments and deploying managerial experts.
Buy-outs: Buy-outs are a recent development in the service areas of merchant bankers and savings institutions, and a
new form of investments in the European venture capital industry. The success of buy-outs has been so remarkable
that they have become one of the principle activities of merchant bankers/venture capitalists.
In the early stage of financing the exposure to risk is greater. A venture capitalist would generally seek information
on the following points before deciding to invest in the early stage of an enterprise:
The later stages of a project or an enterprise involve mezzanine finance, expansion finance, turnaround finance or
buy-out financing. The investment strategy for later stage financing is different on account of more safety in
investment. There is a shift in the expectation profile of the venture capitalist, from huge capital gains of the early
stage to solid income yield on secured investment in the later. There must be good generation of funds depicting
successful completion of the project to meet its own working capital requirements. These aspects are important
considerations in later-stage financing.
While doing the project appraisal one important aspect is financial analysis and projections. The norm for financial
analysis differs depending upon the stage of venture financing and the status of the enterprise. An immediate and
pertinent concern for an investor in an enterprise would be to enquire into the ownership pattern of the company and
participation of other investors, institutional and bank financing, and analysis of future projections. These aspects are
explained below:
Investment by the Entrepreneur: As promoter of an enterprise an entrepreneur always owns maximum share of
the capital to maintain continuity of his interest and control over the enterprise.
Investment by Others: The share of other investors in the total investment would reveal their involvement in the
enterprise. Any further contribution by them would depend upon their expectations of returns on investment in future
for their past investments.
Valuation Methods for Taking Investment Decisions:
A venture capitalist would find it worthwhile to value current outside investments made in an enterprise so as to take
a decision about his share in the equity capital of the company. Venture capitalists use different valuation methods,
some of which are now discussed:
Conventional Valuation Method: This is based on the expected increase in the initial investment which could be
sold out to a third party or through public offering via the exit route. This method does not take into account the
stream of cash flows beginning from the date of investment till the date of liquidity of investment.
Present Value Based Method: This method takes into account the stream of earnings (or losses) generated during
the entire period of the investment from the date of initial investment till date of maturity at a presumed discount
rate. This method is popularly known as “First Chicago Method”. The problem with this method is that it is based
more on a value judgment by the venture capitalist than empirical consideration.
Revenue Multiplier Method: Revenue multiplier is an assumed factor used to estimate the value of an enterprise.
By multiplying the annual estimated sales by such factor, the valuation figure is derived. This method is based on
sales income and not on earnings. Assuming the absence of profit in the early stages of a project, the method is
useful for valuation at the early stages.
The Business Plan
Venture capitalists view hundreds of business plans every year. The business plan must therefore convince the
venture capitalist that the company and the management team have the ability to achieve the goals of the company
within the specified time.
The business plan should explain the nature of the company’s business, what it wants to achieve and how it is going
to do it. The company’s management should prepare the plan and they should set challenging but achievable goals.
The length of the business plan depends on the particular circumstances but, as a general rule, it should be no longer
than 25-30 pages. It is important to use plain English, especially if you are explaining technical details. Aim the
business plan at non-specialists, emphasising its financial viability.
Avoid jargon and general position statements. Essential areas to cover in your business plan Executive Summary
This is the most important section and is often best written last. It summarises your business plan and is placed at the
front of the document. It is vital to give this summary significant thought and time, as it may well determine the
amount of consideration the venture capital investor will give to your detailed proposal.
It should be clearly written and powerfully persuasive, yet balance "sales talk" with realism in order to be
convincing. It should be limited to no more than two pages and include the key elements of the business plan.
1. Background on the company Provide a summary of the fundamental nature of the company and its activities, a
brief history of the company and an outline of the company’s objectives.
2. The product or service Explain the company's product or service. This is especially important if the product or
service is technically orientated. A non-specialist must be able to understand the plan.
Describe the stage of development of the product or service (seed, early stage, expansion). Is there an
opportunity to develop a second-generation product in due course? Is the product or service vulnerable to
technological redundancy?
If relevant, explain what legal protection you have on the product, such as patents attained, pending or
required. Assess the impact of legal protection on the marketability of the product.
3. Market analysis The entrepreneur needs to convince the venture capital firm that there is a real commercial
opportunity for the business and its products and services. Provide the reader a combination of clear description and
analysis, including a realistic "SWOT" (strengths, weaknesses, opportunities and threats) analysis.
Define your market and explain in what industry sector your company operates. What is the size of the whole
market? What are the prospects for this market? How developed is the market as a whole, i.e. developing,
growing, mature, declining?
How does your company fit within this market? Who are your competitors? For what proportion of the
market do they account? What is their strategic positioning? What are their strengths and weaknesses? What
are the barriers to new entrants?
Describe the distribution channels. Who are your customers? How many are there? What is their value to the
company now? Comment on the price sensitivity of the market.
Explain the historic problems faced by the business and its products or services in the market. Have these
problems been overcome, and if so, how? Address the current issues, concerns and risks affecting your
business and the industry in which it operates. What are your projections for the company and the market?
Assess future potential problems and how they will be tackled, minimised or avoided.
4. Marketing Having defined the relevant market and its opportunities, it is necessary to address how the
prospective business will exploit these opportunities.
Outline your sales and distribution strategy. What is your planned sales force? What are your strategies for
different markets? What distribution channels are you planning to use and how do these compare with your
competitors? Identify overseas market access issues and how these will be resolved.
What is your pricing strategy? How does this compare with your competitors?
Demonstrate that the company has the quality of management to be able to turn the business plan into reality.
The senior management team ideally should be experienced in complementary areas, such as management
strategy, finance and marketing, and their roles should be specified. The special abilities each member brings
to the venture should be explained. A concise curriculum vitae should be included for each team member,
highlighting the individual’s previous track record in running, or being involved with, successful businesses.
Identify the current and potential skills gaps and explain how you aim to fill them. Venture capital firms will
sometimes assist in locating experienced managers where an important post is unfilled - provided they are
convinced about the other aspects of your plan.
6. Financial projections
The following should be considered in the financial aspect to your business plan:
Realistically assess sales, costs (both fixed and variable), cash flow and working capital. Produce a profit and
loss statement and balance sheet. Ensure these are easy to update and adjust. Assess your present and
prospective future margins in detail, bearing in mind the potential impact of competition.
Demonstrate the company's growth prospects over, for example, a three to five year period. • What are the
costs associated with the business? What are the sale prices or fee charging structures?
What are your budgets for each area of your company's activities?
Present different scenarios for the financial projections of sales, costs and cash flow for both the short and
long term. Ask "what if?" questions to ensure that key factors and their impact on the financings required are
carefully and realistically assessed. For example, what if sales decline by 20%, or supplier costs increase by
30%, or both? How does this impact on the profit and cash flow projections?
If it is envisioned that more than one round of financing will be required (often the case with technology
based businesses in particular), identify the likely timing and any associated progress "milestones" or goals
which need to be achieved.
Keep the plan feasible. Avoid being overly optimistic. Highlight challenges and show how they will be met.
Relevant historical financial performance should also be presented. The company’s historical achievements can help
give meaning, context and credibility to future projections.
7. Amount and use of finance required and exit opportunities State how much finance is required by your
business and from what sources (i.e. management, venture capital, banks and others) and explain the purpose for
which it will be applied.
Consider how the venture capital investors will exit the investment and make a return. Possible exit strategies for the
investors may include floating the company on a stock exchange or selling the company to a trade buyer.