Investment Banking

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 Nature of Development Banking
- Finances projects on the basis of viability t generate cash flows to
meet the interest and repayment obligation.
- Projects have to fall within the overall national industrial
priorities, located preferably in backward areas and promoted by
entrepreneurs.
- Late forties, the lending approach for industrial projects from
security for the loan to income or cash flow from the project.
- Until the emergence of a vibrant capital market in the nineties,
developmental banks played a vital role in promoting an
industrial structure confronting to national priorities, located in
backward areas and encouraging entrepreneurs.
 Project Identification

A Project is a proposal for capital investment to develop

facilities to provide goods and services.

The investment proposal may be for setting up a new unit,

expansion or improvement of existing facilities.

The project idea can be conceived either from the input or

output side.
Input-based projects are identified on the basis of
information about agricultural raw materials, forest
products, animal husbandry, fishing products, mineral
resources, human skills and new technical processes
evolved in the country or elsewhere.

Out-based projects are identified on the basis of needs

of the population as revealed by family budget studies
or industrial units as found by market studies and
statistics relating to imports and exports.
 Contents of Business plan
• Define business clearly
• Identify target market
• Understand industry in which product compete
• Outline management abilities
• Outline financial frame work
• Do not consider unrealistic market projections
• Consider source of risk
• Length should be 25 to 30 pages
• Use simple clear language
• Aim business plan for non-specialists
 The Stages of Project Selection
1. Acquiring motivation
2. Identification of various project ideas
3. Preliminary screening
4. Evaluation of project idea:
Market analysis:
Financial analysis: Inflow and Outflow;
Technical analysis:
Economic analysis:
Ecological analysis:
Social cost benefit analysis.
5. Project report
 Step 1 : Acquiring Motivation

• Influences
– Culture
– Sub-Culture
– Family / Peers / Education
• Support
– Govt.
– Financial institutions
• Venture Capital/Banks etc.
Step 2 : Identify and Evaluate Opportunity
Opportunity Analysis: It should include A description
of the product or service; an assessment of the
entrepreneur and the team; specification of all the
activities and resources; sources of capital; as well as
its growth.
The assessment of the opportunity requires answering the
following questions:
- What market need does it fill?
- What personal observations have you experienced or
recorded with regard to that market need?
- What social condition underlies this market need?
- What market research data can be marshalled to describe.
Is it a good idea? 5 questions to ask
• Is the number of potential customers, in other words the
market, large and growing?
• Who is your customer and what is his or her problem,
specifically, that you plan to solve?
• How are these people currently solving their problem, that is,
what is your competition?
• How much better or cheaper are you than your potential
customers' current solution, and can you maintain that
advantage?
• And, most importantly: are you and your team suited to this
task - do you have the right knowledge and network in this
industry? Are you passionate about the problem or industry?
Created need Garment
Solving the problem Mixie
Creating the problem Mixie with larger cap
New application Roofing sheets
Modification Mixie with top handle
Special Feature Remote Control
Manipulation of Technology (miniature Roof top Green Houses
version)

Tailor-made Opportunities based on Foolproof Security Systems

Technologies
Waste Utilization Compost from Market Waste

Cooking High Speed Cooker

Criteria
– Market Issues
– Potential
– Profit Margins
– Competitors: Barriers to entry
– Financial Issues
Capital Required
Taxation
ROI
Market analysis: Target customer, size of market,
competition level, product differentiation, durability of
competitive advantage
Financial analysis: Inflow and Outflow; Project evaluation
techniques; Financial analysis-Ratios: Liquidity, Capital;
BEP.
Technical analysis: Capacity of plant; flexibility of plant;
availability of technology; Inputs; Location; layout of
project; cost of production; quality testing and improving
methods.
Economic analysis: Economic effect; and net foreign
exchange effect.
Ecological analysis: Extent of pollution and expected
measures by the firm.
Social cost benefit analysis: Benefits and Costs
 Step 3 : Develop Business Plan

Business plan is the description of the future direction

of the business.
• Provides promoters with logical framework within
which to plan and pursue a business strategy
• Basis for discussion with 3rd parties such as Govt.,
Banks, Investors
• Benchmark against which actual performance can be
measured and reviewed.
Step 4 : Determine the Resources Required

• Men
• Plant & Machines
• Land & Building
• Materials
• Money / Funding
– Debt: Friends, relatives, indigenous banks, banks,
financial institutions, public deposits, debentures, private
equity, venture capital.
– Equity: Equity and own funds
 Step 5 : Manage the Enterprise
• Planning
– Decision Making/ Operational & Strategic
– Budgets, P&L, B/S, Cash flow
• Organising
– Division of Work/ Org. Structure
– Allocating resources
• Leading
– Delegation / Motivation
• Control
– Performance Evaluation / Review
 Promoters contribution
- Promoters contribution fixed at 22.5 per cent of the project cost.
- Concessional Norms: Available in terms of the location of the
project.
‘A’ areas: No industry Districts
‘B’ areas: Districts where industrial activity has started
‘C’ areas: Districts with industries are sufficiently well-developed
- Concession in promoters contribution:
‘A’ areas: 17.5 per cent
‘B’ areas: Projects above Rs. 25 crore in ‘B areas – 17.5 per cent
‘C’ areas: 20 per cent
- Concessional Norms are allowed purely at the discretion of the
financial institutions
- Contribution may vary depending up on the risk of the project.
- Deserved entrepreneurs who are unable to contribute can avail
seed capital assistance from State Financial Corporations (up to
specified limit), Industrial Development Bank of India, Risk
Capital and Technology Corporation of India Ltd., or Small
Industries Development Bank of India (depending up on the size
of the project Rs. 10 to Rs.30lakhs).
- For the purpose of promoter’s contribution, investments made by
mutual funds are considered if they are covered by non-disposal /
buy-back clause.
 Capital Incentives
- Capital incentives are part of equity.
- Viability of the project should be judged independent of the
quantum and availability of incentives.
Eg: Project Cost: Rs. 10 crores; Promoters’ contribution is 22.5 per
cent; Debt-equity ratio 2:1.

Debt: Rs.1,00,00,000 x 1/3 = Rs.66,66,667

Equity: Rs.1,00,00,000 x 2/3 = Rs.33,33,333
Promoters contribution (Rs.1,00,00,000 x 0.225 ): Rs.22,50,000
Equity to be raised: Equity capital – Promoters contribution
Rs.33,33,333 – Rs.22,50,000 = Rs. 10,83,333
 Guidelines for Financing
- Priority should be given projects contributing to:
Agriculture & rural development Projects locating in rural
areas
Generation of employment Export oriented
Advanced technology New material modernization
Infrastructural facilities (including rural areas infrastructure)
Export intensive and thrust industries for export development
Imports substitution (including requiring additional capacity)
Commercially proven indigenous technology
Upgradation of technology of existing units
Projects involving Energy conservation and utilisation of non-
conventional sources of energy
Projects by new entrepreneurs
Technocrats and non-resident Indians.
- Projects should not fall under negative list:
Cigarettes Beer and Alcohol
New jute mills Power looms (for mfg of items
reserved for handloom) Fan and V Belts
LP Gas cylinders HDPE woven socks
Bright bars Tin and metal containers
Drums and Barrels Playwood
Calcium carbide Hamilton poles
Tabular poles AAC/CSR conductors
Hand operated sewing machines
Conveyor belting (rubber and PVC based)
Toilet and Cosmetics preparations
Commercial and decorative veneers
Blackboards and flush doors
 Process of Evaluation of Application
- Preliminary meeting should be fixed with the FI
- Submit application for term loan (if DFI agrees to consider
the proposal)
- The loan application would require details of promoters’
background, technical skills, relevant experience and
financial soundness
- The market research study for the project has to establish the
contribution of the project to existing and estimated
demand.
- Aspects of technical, financial, and economic would be
covered.
- Cash flow statements for 7 to 10 year period would be
required
- The land for the project, plans foe building and quotations
for the machinery from two manufacturers.
- The production process has to be depicted.
- Estimated working capital need to be given.
- Submit MoU, AoA, Certificate of incorporation, latest
annual report and statement of accounts in any have to be
filed.
- Documents of guarantor company need to be enclosed.
 Appraising Term Loans
Financial structure of financing emerges after taking into
account:
- Promoters’ contribution
- Debt equity ration (3:1 for small industrial units and 2:1 for
medium and large firms)
Equity: Includes loans from friends, relatives, and capital
incentives
- Debt service coverage ratio (DSCR): 1.6 to 2 times
- Security margin: 25 per cent (Fixed deposits)
 Terms and Conditions for Grant of Loans
- Clean title of land as security
- Insurance of assets, building, and machinery separately
- Scrutiny of AoA (It does not contain covenants of the FIs)
- Lien on all fixed assets
- Personal and corporate guarantees of major shareholders and
associate concerns
- Undertaking from promoters to finance shortfalls in funds (cost
overrun)
- Approval of appointment of managerial personnel by DFI
- Further capital expenditure only on the approval of DFI
- Payment of dividend and issue of bonus shares subject to the
approval period of the FI
- Undertaking for non-disposal of promoters’ shareholding for a
period of 3 years.
 After the loan is sanctioned, the
requirements to be met are:
- Acceptance of terms and conditions of loans
- Deposit of legal charges
- Details for plot or land for project
- Search report and title seeds for the land
- General body resolution for creation of charge over assets
- Pollution clearance
- Legal documents to create a charge in proposed assets
- Personal guarantees and undertakings along with income tax
and wealth tax clearance of the promoters and director
- Architects and auditor’s certificate for civil construction.
 Disbursement of Loan
- Stamp duty and registration fee have to be paid
- Subscribed and paid-up capital is to be brought in by the
promoters as required by DFI
- Creation and registration of charge on the present and
future assets of the company
After the above requirements are complied with,
disbursement made on the basis of assets created at the site.
In case of large projects, disbursement are need –based, and
promoters have to bring in their entire contribution first.
In some case bridge loan is granted against bank guarantee
(when there is no physical inspection is possible).
Disbursement is made after physical verification of assets
created.
 Term Loans From Developmental Banks
- Industrial Finance Corporation of India (IFCI)
- Industrial Development Bank of India (IDBI)
- Industrial Credit and Investment Corporation of India
(ICICI)
- Bank for Industrial and Financial Reconstruction (BIFR)
- Small Industries Development Bank of India (SIDBI)
- State Financial Corporations (SFCs)
- State Industries Development Corporations (SIDC)
Capital Adequacy for Term Lending Institutions
- 8 % by the end of financial year 1998
- If dealing with foreign agencies need 8% by the end of
financial year 1994
 SOURCES OF FUNS OF DFIs

- Equity share capital

- Preference share capital
- Bonds
- Government
- Refinance facility
- Special finance
 Form of Loans
- Rupee loans
- Foreign currency loans
- Rupee plus foreign currency loans

Trends
- DFIs can choose become a bank or NBFC
- Uniform supervisory regime for banks and NBFCs (on-
site and off-site monitoring; and periodic external
auditing.
- Consolidation