sushil m project

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UNIVERSITY OF MUMBAI

PROJECT REPORT ON

FINANCIAL INSTRUMENTS AVAILABLE FOR LISTEDCOMPANIES

M/S. EICHER MOTORS LTD

in partial fulfillment for the award of the degree

of

MASTERS IN FINANCIAL MANAGEMENT (MFM)

2007-2010

Submitted by

Project Guide

Institute of Management and Computer Studies

Thane (W) 400 604


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CERTIFICATE

THIS IS TO CERTIFY THAT IS A BONAFIED STUDENT OF MASTER IN

FINANCIAL MANAGEMENT - (MFM) OF THIS INSTITUTE FOR THE

ACADEMIC YEAR 2009-10.

HE HAS SUCESSFULLY COMPLETED THE PROJECT WORK TOWARDS

PARTIAL FULFILLMENT OF MASTER IN FINANCIAL MANAGEMENT (MFM)

ON THE TOPIC- FINANCIAL INSTRUMENTS AVAILABLE FOR LISTED

COMPANIES M/S.EICHER MOTORS LTD.

Project Guide Course Co-ordinator External Examiner Director(IMCOST)

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DECLARATION

I, , Student of Institute of Management and Computer Studies declare

that I have completed the Project FINANCIAL INSTRUMENTS

AVAILABLE FOR LISTED COMPANIES, M/S EICHER MOTORS LTD in the

Academic year 2009-10. The information submitted is true and

Original to the best of my knowledge.

Signature

()

Dated:

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Acknowledgement

It gives me great pleasure in presenting this report for my project titledFINANCIAL INSTRUMENTS AVAILABLE FOR LISTED COMPANIES, M/SEICHER MOTORS LTD. Here I have tried to briefly explain the conceptof my project, which gives a proper understanding to an individual onthe different financing options which are available in the market andfor what purpose. Reports covers long term, short term, medium terminstruments and a broad view of these instruments and knowledgeacquire for credit rating given by Banks to there clients. Thereafter fora hypothetical mid size company EICHER MOTORS LTD. Report explainswhich is the best method for raising a loan for long term requirements

i.e. more then 5 years, and corporate rated bond was used and therequirements for the same have been explained in the report.

I have also given a brief account of why the need of Financial Analysis.For being able to accomplish this task, I am firstly grateful to ourcoordinator who has not only guided me but also given his unwaveringsupport at every stage of development. He has given his valuablecontribution in the form of comments, corrections and suggestions, towhich I am very thankful.

I further express my gratitude to all staff & library members for their

valuable help and co-operation in bringing out the completion of thisproject.Lastly I would like to express my appreciation and gratitude to all myfriends and colleagues who helped and inspired me throughout theprocess.

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FINANCIAL INSTRUMENT AVAILABLE FOR LISTEDCOMPANIES

M/S. EICHER MOTORS LIMITED

INDEX

Sr. No.

Particulars Page No

1 Executive Summary 7

2 Instruments for Financing

Requirements

(a) Equity Instruments

Equity Shares

Preference Shares

GDRs/ADRs

Warrants

(b) Debt Instruments

Long Term Debt

Medium Term Debt

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1. Executive Summary

There are various long, short and medium term options which areavailable for raising funds. The first part of the report mentions

explanation on most of these instruments available in the market. Itexplains the different types of instruments under each category, theirpurpose and how they and what are the require guidelines to befollowed for using these instruments. The report gives a very broadview.Eg.In case of equity the appropriate SEBI guidelines.

Thereafter a detailed questionnaire was also prepared to interview thebankers on how they do their credit appraisal of a company applyingfor loan so as to get a better understanding of the topic. This containsquestions that try to find out how bankers do credit appraisal for a new

company or an existing client. As a part of the project I had to suggestan instrument which would be appropriate for a mid size companyEicher Motors Ltd.To raise a long term Loan for expansion purposesand this questionnaire helped me in choosing that instrument.

In my opinion in the present condition after looking at the financialsand a discussion with the bankers, 5 year Non Convertible debenturecould be used for this purpose and hence the requirements andguidelines for the same have been given in the report. The debenture

issue has many advantages and disadvantages and this instrumentwas selected after a detailed discussion with the bankers and alsolooking at the financials of the company.

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2.INSTRUMENTS FOR FINANCING REQUIREMENTS

Equity Instruments

Equity shares

Preference Shares

GDRs/ADRs

Warrants

Debt Instruments

Long Term Debto Project Financeo Debenture

o Bond

Medium Term Debto Term loan

o Public Deposit

o Vehicle Financing

Short Term Debto Commercial Paper

o ICD (Inter Corporate Deposit)

Working Capitalo Cash Credit

o WC term loans

o Bills financing

o Export Financing

Non fund financingo Letter of Guarantee

o DG

o Letter of Credit

All the available instruments can be classified into either equity ordebt. There are also certain quasi-equity/ debt instruments, which havethe characteristics of debt initially but are converted to equity at alater date.

For example: Warrants, Partially Convertible Debentures (PCDs) andFully Convertible Debentures (FCDs) etc.

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1. Equity shares (at par/ premium)

Shares are floated at face value or at a premium

Only companies with a track record or companies floated byother firms/companies with a track record are allowed to chargepremium

Premium is normally arrived at after detailed discussions withthe lead managers

Premium can be any amount but has to be justified as perMalegam Committee recommendations

Malegam committee recommends price justification on the basisof

The earnings per share (EPS) for the last three years and comparisonof pre- issue price to earnings (P/E) ratio to the P/E ratio of theIndustry. Latest Net Asset Value. Minimum return on increased net worth to maintain pre-issue EPS.

Face value of a share can be of any denomination not less thanone rupee or a decimal of a rupee (w.e.f from June 11, 1999), itused to be Rs.10 or Rs. 100 earlier

Subscription can be solicited either through private placement ora public issue

Rights Issue of equity:

When a company wants to raise capital by issuing additional securities,it may give current shareholders the opportunity, ahead of the generalpublic, to buy the new issue in proportion to the number of sharesalready owned. The piece of paper evidencing this privilege is called aright. These additional shares are usually offered below the current

market price and have to be exercised within a relatively short period.

This method of raising finance is similar to a private placement withthe existing shareholders being the counter parties in the exchange.This method reduces the cost of financing substantially.

When a company issues additional equity capital it has to be offered inthe first instance to the existing shareholders on a pro-rata basis as

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per Section 81 of the Companies Act, 1956. The shareholders may by aspecial resolution forfeit this right, partially or fully by a specialresolution to enable the company to issue additional capital to thepublic or alternatively by passing a simple resolution and taking thepermission of the Central Government.

Types of Equity Instruments

Equity instruments can be further classified into the followingcategories based on the different characteristics with which they arefloated in the market:

1. Equity shares (at par/ premium)2. Preference shares3. Depositary receipts (American and Global)4. Warrants

Requirements with respect to the listing of securities on arecognised stock exchange

1. It should be a public company as defined under the Companies Act,

1956

2. It should apply to the stock exchange where it wants to be listedalong with the requisite fees and the following documents:

a. Memorandum and articles of association in case of a debentureissue, a copy of the trust deed.

b. Copies of all prospectuses or statements in lieu of prospectusesissued by the company at any time.

c. Copies of offers for sale and circulars or advertisements offering

any securities for subscription or sale during the last five years.

d. Copies of balance sheets and audited accounts for the last five

years, or in the case of new companies, for such shorter period forwhich accounts have been made up.

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e. A statement showing-

Dividends & cash bonuses, if any, paid during the last ten years(or such shorter period as the company has been in existence,whether as a private or public company).

Dividends or interest in arrears, if any.

f. Certified copies of agreements or other documents relating toarrangements with or between:-

vendors and/or promoters,

underwriters and sub-underwriters,

Brokers and sub-brokers.

g. Certified copies of agreements with-

Managing agents and secretaries and treasurers.

Selling agents.

Managing directors and technical directors.

General Manager, sales manager, manager or secretary.

h. Certified copy of every letter, report, balance sheet, valuationcontract, court order or other document, part of which is reproduced orreferred to in any prospectus, offer for sale.

i. Circular or advertisement offering securities for subscription orsale, during the last five years.

j. A statement containing particulars of the dates of and parties to allmaterial contracts, agreements (includingagreementsfortechnicaladvice and collaboration), concessions andsimilar other documents (except those entered

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into in the ordinary course of business carried on or intended to becarried on by the company) together with a brief description of theterms, subject-matter and general nature of the documents.

k. A brief history of the company since its incorporation giving detailsof its activities including any re-organization, reconstruction oramalgamation, changes in its capital structure (authorized, issued andsubscribed) and debenture borrowings, if any.

l. Particulars of shares and debentures issued

for consideration other than cash, whether in whole or part,

at a premium or discount, or

in pursuance of an option.

m. A statement containing particulars of any commission, brokerage,discount or other special terms including an option for the issue of anykind of the securities granted to any person.

n. Certified copies of-

Agreements, if any, with the Industrial Finance Corporation,Industrial Credit and Investment Corporation and similar bodies.

O.Particulars of shares forfeited.

p. A list of highest ten holders of each class or kind of securities ofthe company as on the date of application along with particulars as tothe number of shares or debentures held by and the address of eachsuch holder.

q. Particulars of shares or debentures for which permission to deal

is applied for: Provided that a recognized stock exchange may eithergenerally by its bye-laws or in any particular case call for such

further particulars or documents as it deems proper.

A. Initial Public Offer1. First issue by New companies:

SEBI defines a new company as one which has notcompleted 12 months of commercial operations

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and whose audited operative results i.e. Balance Sheet andProfit and Loss Statement are not available, and is set upby entrepreneurs without a track record.

Can issue capital to public only at par

Draft prospectus to be vetted by SEBI before theissue

The shares can be listed on OTCEI or any otherexchange

A public financial institution or a scheduledcommercial bank should appraise the project

The appraising agency should participate in thefinancing of the project to the extent of atleast 10%of the project cost

2. First issue of new companies promoted by existingcompanies

If the existing companies have a five year trackrecord of consistent profitability, and are ready tohold 50% of the equity of the new company, it is freeto price its issue and the price has to be applied to allinvestors uniformly.

In the above case Prospectus and offer documentsshould contain justification for issue price

Draft prospectus to be vetted by SEBI before theissue

The shares can be listed on OTCEI or any otherexchange

3. First issue by existing private/closely held companies

Should have three year track record of consistentprofitability for freely pricing the issue.

Can be listed on any stock exchange

Equity offered should not be less than 20%

Draft prospectus to be vetted by SEBI

Pricing to be determined by the issuer and the leadmanager subject to adequate disclosures as specifiedby SEBI such as

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1. Disclosure of the net asset value of the companyas per the last audited balance sheet.

2. Justification for the issue price.

4. Disinvestment

Free pricing if the company has a three year trackrecord of consistent profitability

Promoters stake after disinvestment should be 25%

Lock in period for Promoters contribution is five years

Minimum subscription of 90% not applicable

Draft prospectus to be vetted by SEBI

SEBI Guidelines for IPOs

1. IPOs of small companies

Public issue of less than five crores has to be through OTCEI andseparate guidelines apply for floating and listing of these issues.

(Public Offer By Small Unlisted Companies)

2. Size of the Public Issue

Issue of shares to general public cannot be less than 25% of the totalissue, incase of information technology, media and telecommunication

sectors this stipulation is reduced subject to the conditions that:

Offer to the public is not less than 10% of the securities issued.

A minimum number of 20 lakh securities is offered to the publicand

Size of the net offer to the public is not less than Rs. 30 crores.

3. Promoter Contribution

Promoters should bring in their contribution including premiumfully before the issue

Minimum Promoters contribution is 20-25% of the public issue.

Minimum Lock in period for promoters contribution is five years

Minimum lock in period for firm allotments is three years.

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4. Collection centers for receiving applications

There should be at least 30 mandatory collection centers, whichshould include invariably the places where stock exchanges havebeen established.

For issues not exceeding Rs.10 crores (including premium, ifany), the collectioncentre shall be situated at:-

o the four metropolitan centre viz. Bombay, Delhi, Calcutta,Madras; and

o at all such centre where stock exchanges are located in theregion in

which the registered office of the company is situated.

5. Regarding allotment of shares Net Offer to the General Public has to be at least 25% of the

Total Issue Size for listing on a Stock exchange.

It is mandatory for a company to get its shares listed at theregional stock exchange where the registered office of the issueris located.

In an Issue of more than Rs. 25 crores the issuer is allowed toplace the whole issue by book-building

Minimum of 50% of the Net offer to the Public has to be reservedfor Investors applying for less than 1000 shares.

There should be at least 5 investors for every 1 lakh of equityoffered (not applicable to infrastructure companies).

Quoting of Permanent Account Number or GIR No. in applicationfor allotment of securities is compulsory where monetary valueof Investment is Rs.50,000/- or above.

Indian development financial institutions and Mutual Fund can beallotted securities up to 75% of the Issue Amount.

A Venture Capital Fund shall not be entitled to get its securitieslisted on any stock exchange till the expiry of 3 years from thedate of issuance of securities.

Allotment to categories of FIIs and NRIs/OCBs is up to amaximum of 24%, which can be further extended to 30% by anapplication to the RBI - supported by a resolution passed in theGeneral Meeting.

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6.Timeframes for the Issue and Post- Issue formalities

The minimum period for which a public issue has to be kept openis 3 working days and the maximum for which it can be keptopen is 10 working days. The minimum period for a rights issueis 15 working days and the maximum is 60 working days.

A public issue is effected if the issue is able to procure 90% ofthe Total issue size within 60 days from the date of earliestclosure of the Public Issue. In case of over-subscription thecompany may have the right to retain the excess applicationmoney and allot shares more than the proposed issue, which isreferred to as the green-shoe option.

A rights issue has to procure 90% subscription in 60 days of theopening of the issue.

Allotment has to be made within 30 days of the closure of thePublic Issue and 42 days in case of a Rights issue.

All the listing formalities for a public Issue has to be completedwithin 70 days from the date of closure of the subscription list.

7. Dispatch of Refund Orders

Refund orders have to be dispatched within 30 days of the

closure of the Public Issue.

Refunds of excess application money i.e. for un-allotted shareshave to be made within 30 days of the closure of the PublicIssue.

8. Other regulations pertaining to IPO

Underwriting is not mandatory but 90% subscription ismandatory for each issue of capital to public unless it isdisinvestment in which case it is not applicable.

If the issue is undersubscribed then the collected amount shouldbe returned back (not valid for disinvestment issues).

If the issue size is more than Rs. 500 crores voluntary disclosuresshould be made regarding the deployment of the funds and anadequate monitoring mechanism to be put in place to ensurecompliance.

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There should not be any outstanding warrants or financialinstruments of any other nature, at the time of initial public offer.

In the event of the initial public offer being at a premium, and ifthe rights under warrants or other instruments have beenexercised within the twelve months prior to such offer, theresultant shares will not be taken into account for reckoning theminimum promoter's contribution and further, the same will alsobe subject to lock-in.

Code of advertisement specified by SEBI should be adhered to.

Draft prospectus submitted to SEBI should also be submittedsimultaneously to all stock exchanges where it is proposed to belisted.

9. Restrictions on other allotments

Firm allotments to mutual funds, FIIs and employees not subjectto any lock-in period.

Within twelve months of the public/rights issue no bonus issueshould be made.

Maximum percentage of shares, which can be distributed toemployees, cannot be more than 5% and maximum shares to beallotted to each employee cannot be more than 200.

10. Relaxations to public issues by infrastructure companies.

These relaxations would be applicable to Infrastructure Companies asdefined under Section 10(23G) of the Income Tax Act, 1961, providedtheir projects are appraised by any Developmental Financial Institution(DFI) or IDFC or IL&FS. The projects must also have a participation of atleast 5% of the project cost (in debtand/orequity) by the appraisinginstitution.

The infrastructure companies will be exempted from the requirement

of making a minimum public offer of 25 per cent of its securities.

The requirement of 5 shareholders per Rs. 1 lakh of offer is alsowaived in case of offerings by infrastructure companies.

For public issues by infrastructure companies, minimumsubscription of 90% would no longer be mandatory provideddisclosure is made about the alternate source of funding which

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the company has considered, in the event of under subscriptionin the public issue.

Infrastructure companies are permitted to freely price theofferings in the domestic market provided that the promotercompanies along with Equipment Suppliers and other strategicinvestors subscribe to 50% of the equity at the same or a higherprice than what is being offered to the public. Adequatedisclosures about the justification for the pricing will be requiredto be made in the offer documents.

The Infrastructure Companies would be allowed to keep theirissues open for 21 days. The relaxation would give infrastructurecompanies sufficient time to mobilize funds for their issues.

Infrastructure Companies would not be required to create andmaintain a Debenture Redemption Reserve (DRR) in case of

Debenture Issues.

Public issue by existing listed companies

Can freely price the issue.

The issue price to be determined by the issuer in consultationwith the lead manager(s) to the issue.

The draft prospectus will be vetted by SEBI to ensure adequacy

of disclosures.

The prospectus or offer documents shall contain the net assetvalue of the company and a justification for the price of theissue.

It should also contain high and low price of the shares for the last2 years.

Issues can be priced differentially i.e. issue of shares to thepublic can have a different price from those to be issued toexisting share holders as part of a rights issue

Preference shares:

Preference shares refer to a form of shares which lie in between pureequity and debt.

These are shares which do not carry voting rights

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The amount of dividend, which is to be paid is fixed beforehandbut is paid only in the event of profit subsequent to the paymentof fixed obligations such as interest and tax.

Claims of these shareholders carry higher priority than ordinaryshare holders but lower than debt holders

These can be issued for subscription from the general public onlyafter a public issue of ordinary shares

Subscription can be solicited either through private placement ora public issue

Depository Receipts (GDRs and ADRs)

Global Depositary Receipts mean any instrument in the form of adepositary receipt or certificate (by whatever name it is called) createdby the Overseas Depositary Bank outside India and issued to non-resident investors against the issue of ordinary shares or ForeignCurrency Convertible Bonds of issuing company. A GDR issued inAmerica is an American Depositary Receipt (ADR). Issue of equity in

the form of GDR/ADR is possible only for the few top notch corporate ofthe country.

Among the Indian companies, Reliance Industries Limited was the firstcompany to raise funds through a GDR issue.

Salient Features of a GDR

These are special instruments which are created from ordinaryshares to generate funds abroad

The shares of a company are deposited with a bank which will

issue GDRs and ADRs of equivalent value in a foreign currency(normally dollars)

The holder of a GDR does not have voting rights

The proceeds are collected in foreign currency thus enabling theissuer to utilize the same for meeting the foreign exchange

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component of project cost, repayment of foreign currency loans,meeting overseas commitments and for similar other purposes.

Dividends are paid in Indian rupees due to which the foreignexchange risk or currency risk is placed totally on the investor

It has less exchange risk as compared to foreign currencyborrowings or foreign currency bonds.

The GDRs are usually listed at the Luxembourg Stock Exchangeas also traded at two other places besides the place of listing e.g.on the OTC market in London and on the private placementmarket in USA.

An investor who wants to cancel his GDR may do so by advisingthe depositary to request the custodian to release his underlyingshares and relinquishing his GDRs in lieu of shares held by the

Custodian. The GDR can be canceled only after a cooling-periodof 45 days. The depositary will instruct the custodian aboutcancellation of the GDR and to release the corresponding shares,collect the sales proceeds and remit the same abroad.

Marketing of the GDR issue is done by the investment banks thatmanage the road shows, which are presentations made topotential investors. During the road shows, an indication of the

investor response is obtained. The issuer fixes the range of theissue price and finally decides on the issue price after assessingthe investor response at the road shows.

Cost of floating an ADR or GDR issue is quite high and is onlyjustifiable if the amount of finance to be raised is quite large

Sponsored ADR

Sponsored ADR is an ADR created by a non-US company workingdirectly with a depositary bank. A UN sponsored ADR is usually the onecreated by a bank without the participation or consent of the non-UScompany. UN sponsored ADR can trade only in the over-the-countermarket.

Levels of ADRs

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There are three levels of ADRs depending on their adherence toGenerally Accepted Accounting Principles

For a Level I ADR program the receipts issued in the US areregistered with the SEC, but the underlying shares are held in thedepositary bank are not registered with the SEC. They mustpartially adhere to Generally Accepted Accounting Principles(GAAP) used in the USA.

Level II ADRs are those in which both the ADRs and theunderlying shares (that already trade in the foreign companysdomestic market) are registered with the SEC. They must alsopartially adhere to the Generally Accepted Accounting Principles.

Level III ADRs must adhere fully to the GAAP and the underlyingshares held at the Depositary Bank are typically new shares notthose already trading in the foreign companys domestic

currency.

Warrants

Warrant is a certificate giving the holder the right to purchasesecurities at a stipulated price within a specified time limit orperpetually. Sometimes a warrant is offered with securities as aninducement to buy. The warrant acts as a sweetener because theholder of the warrant has the right but not the obligation of investing inthe equity at the indicated rate.

DEBT FINANCING

LONG-TERM SOURCES

Bonds and Debentures

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Debt instruments can be further classified into the following categoriesbased on the different characteristics with which they are floated in themarket:

Debentures

Bonds

Debentures

Main characteristics

They are fixed interest debt instruments with varying period ofmaturity.

Can either be placed privately or offered for subscription.

May or may not be listed on the stock exchange.

If listed on the stock exchanges, they should be rated prior to thelisting by any of the credit rating agencies designated by SEBI.

When offered for subscription a debenture redemption reservehas to be maintained.

The period of maturity normally varies from 3 to 10 years andmay also be more for projects with a high gestation period.

Bonds may be of many types - they may be regular income,infrastructure, tax saving or deep discount bonds. These are financialinstruments with a fixed coupon rate and a definite period after whichthese are redeemed. The fundamental difference between debenturesand bonds is that the former is normally secured whereas the latter isnot. Hence in general bonds are issued at a higher interest rate thandebentures. This avenue of financing is mainly availed by highlyreputed corporate concerns and financial institutions.

The three main kinds of instruments in this category are as follows:

Fixed rate Floating rate Discount bonds

The bonds may also be regular income with the coupons beingpaid at fixed intervals or cumulative in which the interest is paidon redemption.

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Unlike debentures, bonds can be floated with a fixed interest orfloating interest rate. They can also be floated without interestand are called discount bonds as they are issued at a discount tothe face value and an investor is paid the face value onredemption. and if offered for longer terms are known as deep

discount bonds.

The main advantage with interest bearing bonds is the floatinginterest rate, which is stipulated based on certain mark-up overstock market index or some such index.

From the point of view of the investor bonds are instrumentscarrying higher risk and higher returns as compared todebentures.

This has to be kept in mind while floating bond issues forfinancing purposes. With the current buoyancy in capital markets

for equity instruments the demand for corporate bonds is low.

Types of debentures

There are different kinds of debentures, which can be offered. They areas follows:

Non convertible debentures (NCD)

Partially convertible debentures (PCD)

Fully convertible debentures (FCD)

The difference in the above instruments is regarding the redeem abilityof the instrument:

In case of NCDs, the total amount of the instrument is redeemedby the issuer,

In case of PCDs, part of the instrument is redeemed and part of itis converted into equity,

In case of FCDs, the whole value of the instrument is converted

into equity. The conversion price is stated when the instrument isissued.

The price of each equity share received by way of converting theface value of the convertible security i.e. debenture is called theconversionprice.

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Any conversion in part or whole of the debenture will be optionalat the hands of the debenture holder, if the conversion takesplace at or after 18 months from the date of allotment, butbefore 36 months.

In case of NCDs/ PCDs credit rating is compulsory where maturityexceeds 18 months.

Premium amount at the time of conversion for the PCD,redemption amount, period of maturity, and yield on redemptionfor the PCDs/NCDs shall be indicated in the prospectus.

The discount on the non-convertible portion of the PCD in casethey are traded and procedure for their purchase on spot tradingbasis must be disclosed in the prospectus.

In case, the non-convertible portions of PCD/NCD are to be rolled

over, a compulsory option should be given to those debentureholders who want to withdraw and encash from the debentureprogramme.

Roll over shall be done only in cases where debenture holdershave sent their positive consent and not on the basis of the non-receipt of their negative reply.

Before roll over of any NCDs or non-convertible portion of thePCDs, fresh credit rating shall be obtained within a period of sixmonths prior to the due date of redemption and communicatedto debenture holders before roll over and fresh trust deed shall

be made.

Letter of information regarding roll over shall be vetted by SEBIwith regard to the credit rating, debenture holder resolution,option for conversion and such other items, which SEBI mayprescribe from time to time.

The disclosures relating to raising of debentures will contain,

amongst other things, the existing and future equity and longterm debt ratio, servicing behavior on existing debentures,payment of due interest on due dates on terms loans anddebentures, certificate from a financial institution or bankersabout their no objection for a second or pari-passu charge beingcreated in favour of the trustees to the proposed debentureissues.

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And any other additional disclosure requirement SEBI mayprescribe from time to time.

Most of the listing requirements are common for both equity anddebt instruments in terms of disclosures with some additionalprovisions specified for the debt instruments.

Until recently only infrastructure and municipal corporationscould list debt before equity, subject to certain requirements.SEBI now permits listing of debt before equity subject to thecondition that the debt instrument is rated not below a minimumrating of A or equivalent thereof.

Credit Rating Agencies

Major credit rating agencies that exist in India are Credit Rating

Information Services of India Limited (CRISIL), Investment Informationand Credit Rating Agency (ICRA), Credit Analysis & Research (CARE)and DCR India. The rating accorded by any rating agency is instrumentspecific and relates to debt instruments of any maturity, publicdeposits and preference shares.

International rating agencies like Moodys and S&P also rate differentcountries, which comprise the emerging markets are used by foreignfinancial Institutions for making investments in a particular country.

Project Financing / Long Term Loan Financing

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Procedure to obtain term loan financing include:Application and Preliminary ScrutinyAppraisal and SanctionPost Sanction DocumentationDisbursement and MonitoringPost Implementation Review

Application and Preliminary Scrutiny

During this stage, the entrepreneur seeking financing from the

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financial institution approaches the institution with his project. TheBusiness Development division holds informal discussions with thepromoter to assess the eligibility of the project for financing. In case ofstate financial institutions, there are typically various schemes underwhich these projects could be taken up and financed. The institution

ascertains the applicability of the scheme under one or the other ofthese projects at this stage.

Only the prima facie suitability of the project is ascertained at thisstage without any detailed analysis being taken up. Apart from theeligibility of the project, the capability of the promoter in bringing in hisshare of equity capital and ability to provide suitable collateral of thenature required.

The Application and Preliminary Scrutiny stage assumes significance inthat in case of small projects, which are largely promoter and locationdependent. Detailed analysis in case of these projects at best provides

indicators and cannot generally be of as rigorous nature as in case oflarger projects. Hence in case of small projects, projects that are foundprima facie eligible for lending also by and large cross the detailedappraisal stage and are sanctioned financing.

Project Appraisal and sanction

Term lending institutions have a standardized way of appraisal. Eachproject is appraised under various criteria from different viewpointslike marketing, technical, financial, economic and managerial angles. Abrief description of these viewpoints and the criteria employed aregiven below.

Market Appraisal

The reasonableness of the demand projections supplied bythe promoters are verified by utilizing the findings of availablereports/ surveys, industry association/ planning commission/DGTD projections, and independent market surveys(sometimes commissioned with the expense borne by the

promoters).

Assess the adequacy of the marketing infrastructure plannedin terms of promotional effort, distribution network, transportfacilities, stock levels, etc.

Judge the knowledge, experience and competence of the keymarketing personnel.

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Technical Appraisal

The technical appraisal is done by qualified & experiencedpersonnel (internal or external) and focuses is mainly on the followingaspects:

Product mix

Capacity

Process of manufacture

Engineering know-how and technical collaboration

Raw materials and consumables

Location, site and building

Plant and equipment Manpower requirements

Break-even point

Financial Appraisal

Term lending institutions try to assess the following in theirfinancial appraisal of a project proposal:

Estimate of capital cost Estimate of working results

Rate of return

Financing pattern

Managerial Appraisal

The following criteria tend to be looked at by the FIs to form a judgment regarding the managerial competence andresourcefulness.

Track record in earlier projects

Resourcefulness of the promoter

Understanding of the business

Commitment to the project and

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Integrity

Post Sanction Documentation

Post Sanction Documentation involves formulating legally binding

documents on the following:

Loan agreement conveying the terms and conditions of the loan

Documents conveying equitable mortgage on the primarysecurity i.e. the fixed assets pertaining to the project and on theadditional security (collateral).

Personal Guarantee of the borrower and guarantor (if any).

Search report from an Advocate indicating a clear title for thelast fifteen years as per the land records; and

Approved building plans in case of constructed property.

This would involve submission of the relevant documents by theenterprise. The legal department in the Financial Institution wouldscrutinize these documents for their validity and completeness.

Disbursement and Monitoring

Monitoring is a continual check on the project as it materializes froman idea on paper into a facility capable of meeting its stated purpose.

Thus, monitoring acts as a means of a regular check on the timelyimplementation along the committed course of action.

Periodical Reviews

Post implementation, reviews are normally conducted by FIs to seekinformation for compilation of statistics and internal studies. Only incases where the loan becomes non-performing, efforts are initiated toaddress the problem either by providing adequate breathing time

through formal/ informal reschedulement or by other intensiverecovery measures.

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Short term debt

Short Term debt generally refers to debt raised for a period of lessthan a year. It can be classified into market instruments and financialassistance granted by Term Lending Institutions, Commercial Banksand Non Banking Finance Companies (NBFC) catering to the short termcredit needs of the business entities.

Commercial Papers (CPs)

CPs represent short term unsecured promissory notes issued byfirms with a high credit rating. The maturities of these vary from 15days to a year. They are sold at a discount to the face value andredeemed at the face value. CPs can be issued by companies, whichhave a minimum net worth of Rs.4 crores and needs a mandatorycredit rating of minimum A2 (ICRA), P2 (Crisil), D2 (Duff & Phelps)and PR2 (Credit Analysis & Research). The rating should not bemore than 2 months old. It can be issued for a minimum amount ofRs.25 lakhs and more in multiples of Rs.5lakh.

Inter-corporate Deposits (ICDs)

Inter-Corporate Deposits refers to unsecured short term funding

raised by corporate from other corporate. This is a form of disintermediated financing, where corporate with surplus funding directlylend to those in need of funding of such funds and thereby save onthe spreads that banks would have charged in borrowing from oneto lend to the other. ICDs are usually unsecured lending but,at t imes, may be structured as col lateral ized lending forweaker companies to get the benefit of creditenhancement. The main disadvantage to the lender is thatthe money is locked in for the specified period.

In theory this is an efficient means of channel sing investment.

However, the experience in the Indian context has been quitepoor. The use of ICDs was extremely popular during the earlynineties when a number of companies raised money at heftypremiums from the public without actually identifying projectsfor investments. These sums were then deployed in the ICDsmarket where the borrowers more often than not invested in thebooming financial assets (shares) or real estate. Often monieswere lent to group companies for propping up the shares of

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different companies of the group. The end of the boom infinancial and real assets saw significant amounts of defaults inICDs and a virtual closure of the market.

TypesNormal ly, ICDs are placed at a f ixed rate for a f ixed

tenure. However , ICDs may also have the fol lowingstructures:

Fixed rate ICD with a put/call option

F loat ing rate ICD wi th a Put/Ca ll opt ion,wherein the rates are linked to a benchmark suchas MIBOR.

IssuerCorporate having short term funds lend to corporate inneed of funds .

RatingICD is a non-public instrument. Hence, it is not rated.

Coupon terms

The interest rate is normally f ixed and payable onmaturity. The range of interest varies, depending uponthe quantum, tenor, and the cred it ra ting of theborrower .

Day count convention for interest payments

Interest to be calculated on an actual/365-day yearbasis .

MaturityTypical maturity period for ICDs varies from 90 days to180 days.

Market Participants

The major participants are cash r ich corporate, PublicSector Undertakings, Non Banking Finance Companiesand F inancia l Insti tutions. The market i s betweenparticipants who are known to each other. Brokers playan important role in procuring/placing of funds.

Minimum denomination and transaction size

There is no f ixed denomination or transact ion size.

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However, the overall amount to be placed is guided bysection 372 of the Companies Act, 1956.

MEDIUM TERM SOURCES

Medium Term Loans

Medium term loans refer to loans extended for a period of between 2-5years. The different purposes for which these loans are generallysought include:

o Short gestation projects: The short gestation projects couldbe for purchase of balancing equipment, for incremental

expansion of capacity.

o Refinancing of loans in case of very long projects wherethe repayment of the term loans might occur prior tosufficient cash flows being generated by the project.

o For meeting any other medium term shortfall in fundingarising out of an acquisition or bulleted repayment of alarge loan, etc

The procedures for availing medium term loans, where required forshort gestation projects, is largely similar to those required for project

finance. In case of meeting a medium term mismatches not linked to aproject or equipment, the financing decision would be on the basis of acash flow analysis indicating the need for such medium term fundingand an analysis of overall profitability and financial to the business toprovide lender comfort. Other than these aspects, the procedures foravailing Medium Term loans follows the requirements sought by thelenders in case of Project financing/ Long term lending.

Public Deposits

Corporate can raise funds from the public in the form of Fixed

Deposits. These deposits are unsecured and are mainly used for theworking capital requirements. These unsecured public deposits aregoverned by the Companies (Acceptance of Deposits) AmendmentRules 1978.

Under this rule:

i) Public Deposits cannot exceed 25% of the share capital and freereserves.

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ii) The maximum maturity period is 3 years while the minimum is 6months.

The use of deposits as a major means of financing by corporate hasbeen on the decline in recent times.

This has been due to a number of factors

Deposits are generally received from retail sources and henceonly companies with a long-standing record are able to raisesubstantial sums though these.

The retail nature also results in high costs (on brokerage,processing and printing). In case of well-established companies,the access to funding through CPs, syndication, bank limits atattractive interest rates, medium term loans from FIs hasreduced the attractiveness of the deposits to these entities.

Public deposits as a means of investments has also lostimportance on the part of the public on account of a number ofnewer avenues emerging such as bonds of Financial Institutionsand mutual funds (income schemes) which give them the benefitof a far more diversified portfolio and flexibility of withdrawal (incase of mutual funds).

Vehicle Financing

Vehicle Financing refers to the financing of goods and passenger

automobiles by means of Hire Purchase, leasing or plain loans. Thevehicles usually financed cover trucks, other goods carriers, buses,cars, jeeps and two wheelers.

Given the relatively small size of an average loan, Vehicle Financing isa small ticket financing with the focus clearly on the quick turnaroundof cases to ensure volumes through numbers.

Equipment Financing

Term loans and working capital loans usually relate to projects where

the adequacy of the project cash flows is assessed and the creditdecision is taken by the financing institutions. Equipment financingusually occurs in two distinct situations.

a. Equipment financing in small and medium sized projects,where the usual characteristics are:

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Equipment financing is extended for specific equipment beinginstalled for balancing the production process to enhance itsefficiency and cost effectiveness.

Extended for equipment installed for incremental capacityaddition

For a small/medium sized project linked to the existing projectwhere the major portion of the project cost pertains to adistinguishable equipment or set of equipment.

The equipment generally financed by this includes ConstructionEquipment, DG Sets, Medical Diagnostic Equipment, Injection MouldingMachine, Printing Press, Air Conditioning Equipment, Machine Tools,

Office Equipment & Computers, Other Selected/ Identified GeneralEquipment. In case of all these above instances, the financing isusually small to medium in quantum ranging from a few lakhs to a fewcrores.

b. Equipment financing in large/mega projects

Equipment financing also occurs on a much larger scale in case ofVendor provided/ arranged Equipment Financing for purchase oflarge project equipment like turbines, etc from overseas countries. Incase of Vendor Equipment Financing, the main attraction is theattractive interest rate extended by the vendor or the export

promotion financing agency of the vendors country. This is largelyprevalent in mega projects that often extend up to a few thousandcrores.Equipment financing in case of large projects is generallybilaterally negotiated and on a case-to-case basis. In this section, weshall look at financing of equipment of a small and medium nature.

Working Capital Financing

What is Working Capital?

Apart from financing for investing in fixed assets, every business alsorequires funds on a continual basis for carrying on its operations. These include amounts expenses incurred for purchase of rawmaterial, manufacturing, selling, and administration until such goodsare sold and the monies realized. Business transactions are generallycarried on credit with a number of days elapsing subsequent to thesale being effected for realization of proceeds1. While part of the rawmaterial maybe purchased by credit, the business would still need to

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pay its employees, meet manufacturing & selling expenses (wages,power, supplies, transportation and communication) and the balance ofits raw material purchases. Working capital refers to the source offinancing required to by businesses on a continual basis for meetingthese needs.

Thus the need for working capital arises from the prevalence of creditin business transactions, need to fund manufacturing and support andto account for the variations in the supply of raw material and demandfor finished goods.

Characteristics of working capital

It is continually required for a going concern

However, the quantum of working capital fluctuates dependingon the level of activity

Working Capital is impacted by numerous transactions on acontinual basis

The above characteristics render limit based financing from banks

ideal for working capital financing. This is because the client ischarged interest only on the average outstanding utilized andis saved with the bother of reinvesting short term surplusesarising out of low working capital utilization at a point in time.Further since the transactions of the business are generally routedthrough a current account with a bank, availing a credit limit from thesame bank is really convenient. Thus, working capital requirements aregenerally financed through limit based financing from banks.

Bank Financing for Working Capital

The financing limits are granted based on assessment of the working

capital requirement. The assessment factors include variouscharacteristics such as the nature of industry, industry norms, actuallevel of activity for the previous year and the projected level of activityfor the subsequent year to arrive at the working capital requirement.The bank financing limit is thereafter decided after factoring in marginson the different types of current assets forming part of the workingcapital.

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The Bank Financing Limit is fixed on an annual basis. However, sincesuch limit is provided to meet specific requirements, utilizing the limitsis subjected to the Drawing Power, which is decided on a monthly/quarterly basis.

The effective bank financing is therefore to the extent of the lower of:

Bank Financing Limit: Determined on an annual basis basedon an assessment of the current years projections and theactual for the previous year.

Drawing Power: Linked to the quantum of current assets (andcurrent liabilities) owned by the business with appropriatemargins. Fixed on a monthly/ quarterly basis depending on thesubmission of Monthly/Quarterly Information System returnsindicating the position of the stock statement, receivables, Workin Progress, payables, etc.

Bank Financing (max. permissible) = Bank Financing Limit ORDrawing Power whichever is less

TYPES OF WORKING CAPITAL FINANCING

Cash credit

Cash credit refers to a system of financing where a borrower isprovided a credit limit, which could be utilized by him for the purpose

of his business. The limits are decided based on his overall creditrequirement and the quantum of such requirement met through otherinstruments of financing (bills, short term loans, etc.). In case of SMEswhere the term loan component is not mandatory, the bulk of the bankfinancing to a unit is in the form of cash credit.

Cash credit system is the most convenient from the point of theborrower as this provides him the maximum flexibility by allowingwithdrawal and repayments at his convenience. Interest is chargedonly on the average utilization. However, a commitment charge islevied on the unutilized limits as the bank is committed to providinghim financing when called upon.

Working Capital loan

Working capital loan refers to the part of the working capital limit of aborrower extended to him in the form of a loan. The loan component isintended to cover the permanent part of the working capital need whilecash credit component would cater to the fluctuating part of the limit.

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The key distinction between the loan component of the WorkingCapital limit and the cash credit component is that interest is chargedon the loan component irrespective of utilization when such a termloan is availed.

Working capital loan component was introduced in the mid nineties toensure better credit discipline on the part of the borrowers. However,carving out a loan component is mandatory only in case of mediumand large companies (with working capital limits in excess of Rs. 10crores). Since SMEs do not generally possess expertise in managingloan funds in case of low utilization of limits and also have lowercontrol on their working capital management, carving out a loancomponent is not mandatory in their case.

Bills Financing Bills Discounting, Advance against bills forcollection

Bills are negotiable instruments where the buyer of the goods agreesto pay the drawer/ payee specified in the bill, the consideration for thegoods availed by him after a specified period of time. On effecting saleof his products on credit, an entrepreneur could draw a bill on thepurchaser and on his acceptance avail credit against the bill from hisbanker.

Bank financing against bills is in the form of either discounting orpurchase. In case of discounting, the banker credits the clientsaccount for the bill amount (less discount for meeting interest chargesfor a remaining number of days to maturity) and collects the bill as anagent of the client. In case of purchase, the banker assumes ownershipof the bill and claims it in his own right. In either case, bankers retainthe right of claiming the bill amount and incidental charges from theirclient in the event of dishonor by the drawee (buyer of the goods).

Export financing

Export financing refers to the financing facilities offered in case ofgoods exported from the country. Domestic interest rates havegenerally been higher than the international interest rates. In order tooffset the disadvantage of higher interest rates faced by unitscompeting in export markets, the Central Bank has (through thecommercial banks) extended concessional financing for exports. Theexport financing can be broadly classified into pre-shipment credit andpost-shipment credit.

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Non-fund based facilities from banks

Letter of guarantee

A letter of guarantee is issued by a banker to a third party indicating

that the bank would meet the financial consequences (to a specifiedamount) in the event of failure of its client in adhering to the terms ofthe contract with the third party.

Letters of guarantee are primarily of the following nature:

Performance Guarantees: The bank guarantees to make goodthe penalty in the event of failure of its client to meet therequisite performance obligations. This is generally provided onbehalf of clients undertaking execution of contracts, etc

Financial Guarantees: The bank here guarantees to make goodany default by its client in honouring commitments made in afinancial transaction.

Letter of credit

A letter of credit is issued by a bank and signifies its commitment tohonour the payment terms of the underlying transaction if the sellerdelivers the goods as stipulated in the contract.

A letter of credit could be issued either for domestic transaction or forinternational trade. However, its usage is generally in the context oftransactions between parties of different countries. The usage of Letterof Credit in foreign trade has arisen because of the characteristics offoreign trade such as long time gap between dispatch of goods &realization of proceeds and lower level of comfort about thecounterparty. As a result of this, the banker of the exporting partygenerally insists on a letter of credit from the counterpartys banker inorder to verify the authenticity of the transactions and the buyerscredentials. The payment in case of these transactions wouldsubsequently be conducted directly between the banks.

Deferred Payment Guarantee (DPG)

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Very often in case of equipment financing, the manufacturer (byitself/through a financing tie-up) offers credit to the buyers of itsequipment at very attractive terms to generate additional demand forits products. However, the manufacturer may not be willing to assumethe risk of default by the buyer and consequently demand a guarantee

from the buyers bankers that the terms of such financing would bemet.

The Deferred Payment Guarantee (DPG) is a bank facility where thebank does not directly extend a loan to a unit for acquiring equipment.Instead, it extends a guarantee to the equipment manufacturer onbehalf of its client that the financing extended by the manufacturer (byhimself or through its preferred financier would be repaid as per theterms agreed upon.

The advantage to the buyer here is that he benefits to the extent ofsavings in interest charges accruing on account of opting for

equipment financing less the guarantee charges paid to the bank.In the normal course where the guarantee does not devolve ontothe banker, the banker stands to earn fee-based income

(c) Venture Capital

The ventures capital can define as the long-term equity investment inbusinesses which display potential for significant growth andfinancial return.

The term venture capital comprises of two words viz; venture andcapital. The dictionary meaning of venture is a course of proceedingassociated with risk, the outcome of which is uncertain and capital

means resources to start the enterprise. In a narrower sense venturecapital is understood as the capital which is available for financing newventure. Broadly, it can be interpreted as the investment of long-termequity finance where the venture capitalist earns his return fromcapital gain. The nature of financing i.e. long-term equity, implies thatthe investor bears the risk of venture, but would earn a returncommensurate with its success. Thus, the return for the investor is notthrough a steady dividend or interest yield but through capital gain.

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This definition incorporates the three main features that distinguishventure capital investment from other forms of capital investment.They are:

a) Supporting entrepreneurial talent by providing finance.

b) Providing business management skills.c) A return in the form of capital gains.

Venture capital is generally regarded as a risk capital. The venturecapital invests or thus looks for markets with tremendous growthpotential to be exploited with entrepreneur towards a highly rewardingrelationship. To foster the growth of better technology new risky linesof business need support in the form of capital. The venture capitalinvestment is a medium term high risk investment. The concept ofventure capital has gained momentum in high risk oriented industrialwheel of the world economy during five decades and it is of recent

takeoff in the horizon of Indian Financial systems. The practice ofventures capital as an effective financing organ is yet to operate in fullswing in our country. The venture capital scheme is designed topromote technological advancement and innovation throughintroduction of new products, process and ideas. But venture capitaldoes not financing to enterprises which are engaged in trading,investment brokerage or financial services, agency or liaison work. Theschemes offered by most of the venture capital institutions focus onprojects with technological risk and provide support to indigenousefforts in technology development. Basically, professionally and/ ortechnically qualified entrepreneurs venturing into high-tech areas are

eligible for venture capital support.

Activities Eligible for SupportIn general the following activities are eligible for venture capitalsupport.

Evaluation of new process or product on a commercial scale.

Technological up gradation leading to lesser materialconsumption, cost reduction, improved internationalcompetitiveness, and energy conservation and innovationindigenous technology.

Adaption of imported technology appropriate to Indian conditions

with indigenous efforts. Commercial exploitation of laboratory proven technology at

recognized research laboratory and university subsequent tosuccessful implementation of venture on pilot scale.

Risky ventures in technology development and long gestationtechnology development projects.

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Stages in Venture Capital Financing

The object of venture capital is to generate substantial capitalappreciation through investment in early stage companies capable ofachieving rapid growth. Venture capital supports the early stage of a

companys life cycle. However, the timing of investment may be atseed stage, early development stage or turn-around stage. Thus, theinvestment may be during.

a) Product concept to product development stage.b) Commercial scale implementation.c) Post commercialization stage.

There are the stages during which the enterprises risks are very highdue to technology and market uncertainties. During these periodsventure capital support is sought for as it is long-term, patient and risk

reward sharing in nature. However, the stages of financing can broadlybe classified as early stage and expansion stage. Under each of theabove, there are different stages of entry for different venture capitalcompanies.

Early Stage Financing Seed capital financial or start-up capitalrelatively small amount of capital provided to an investor orentrepreneur to prove concept and to qualify for start-up capital. Start-up financial is provided to company at the completion of productdevelopment stage before the commercial exploitation.

Expansion Financing Second stage financing is providing workingcapital support. At this stage, the company has good growth potentialbut needs additional working capital besides the banks fund, toachieve the growth.

Third Stage or Mezzanine Financing It is providing for majorexpansion of a company.

Turn-around Financing It is provided to persons for acquiring aviable non-performing company and strengthening its operation.Types of Venture Capital Financing

Form of Investment Venture capital companies invest their corpus inthe form of equity purchase, conditional loans, income notes andparticipating debentures.

Equity Participation It is the basic avenue of Investment in theassisted firms. Equity holding does not generally exceed 49% of thetotal equity of the assisted firms. As a result, overall control over the

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venture remains in the hands of the entrepreneurs. Equity investmentis a long-term investment philosophy that helps the venture capitalistsearn capital gains when the shares in the assisted firms are ultimatelydisposed of say, after 5 to 8 years since the venture was launched inthe market.

On Conditional Loan If loan is another form of investment, it isrepayable by the assisted firms in the form of royalty after the ventureis able to generate sales. Royalty charges normally range between 2 to15 percent as the cost of financing. Some ventures capital funds offera choice to the ventures of paying a high rate of interest say 20 to 25per cent instead of royalty on sales, once the firm secures itscommercial confidence, strength and viability in the market.

Income Notes It is as a form of investment, it is a compromisebetween conventional loans and conditional loans. The assisted firms

are to pay both interest and royalty on sales but at substantially lowrate.

Participating Debentures It is another form of investment. Venturecapitalists charge interest in three phases under the scheme ofinvestment through participating debentures. No Interest is chargedbefore the assisted firms attain operations on a minimum level, a lowrate of interest is charged after the firms attain operations up to aparticular level and a high rate of interest is charged once the venturesoperate commercially in full swing. The terms and conditions offinancing are decided by mutual agreement between the

entrepreneurs launching the ventures and the venture capital funds.

Important Players

The important players in financing venture capital in India are asfollows:

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Risk Capital Technology Finance Corporation Ltd.(RCTC)(Subsidiary of IFCAI)

Venture Capital Fund (Set up under long-term fiscal policy ofgovernment of India)

Technology Development and Information Company of India(TDICI) (Promoted by ICICI and UTI)

Indus Venture Capital Fund (Private Venture Capital Fund)

Gujarat Venture Finance Ltd. (GVFL) (promoted by GujaratIndustrial Investment corporation.IDBI, World Bank, SFLS andPrivate Bodies)

Credit Capital Venture Fund (promoted by International Financial

Agencies)

State Bank Venture Capital Fund (promoted by SBI MerchantBanking Subsidiary and SBI Capital Market)

Can Bank Venture Capital Fund (promoted by Canara Bank)

Grindlas Bank Venture Capital Fund (promoted by GrindlaysBank)

APIDC Venture Capital Ltd. (promoted by Andhra PradeshIndustrial development Corporation Ltd.)

3.About Eicher Motors

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Eicher Motors was founded in 1982 to manufacture a range of reliable,fuel-efficient commercial vehicles of contemporary technology. Theunit manufactures and markets commercial vehicles with Gross VehicleWeight (GVW) ranging from 5-25 tons.

Today, Eicher Motors is one of the leading manufactures of commercial

vehicles in India with a 33% market share in the 7T-11T segment. Thesuccess and growth of this unit is a result of various customer-drivenstrategies. The manufacturing facility is situated in Central India Pithampur, Madhya Pradesh. Eicher Motors has stepped into the HeavyCommercial Vehicle segment with its state-of-the-art HCV, the "Eicher20.16", the first commercial vehicle designed and developedindigenously.

In 1986, Eicher Motors entered into a technical and financialcollaboration with Mitsubishi Motor Corporation of Japan tomanufacture the Canter range of vehicles. The technical assistance

agreement with Mitsubishi ended in March 94 after successful transferof technology and on achieving total indigenization with only a fewparts sourced globally.

Eicher Motors has acquired formidable expertise in designing anddeveloping commercial vehicles. It has a world-class R&D centremanned by a team of brilliant engineers and equipped with latestComputer Aided Design (CAD) and Computer Aided Engineeringfacilities like NASTRAN, FEM analysis packages. Leveraging its in-houseexpertise, this unit has successfully developed a wide range ofcommercial vehicles to meet varying customer needs. The product

range includes Trucks : Eicher 10.50, Eicher 10.75, Eicher 10.90, Eicher11.10, Eicher 20.16 & 30.25; Buses: Eicher Skyline, Eicher Cruiser andEicher School Bus range of buses. Besides the basic models, it offersover 85 models of ready-to-use custom-built vehicles for variousspecialized applications. Eicher Motors products have been wellaccepted in the market. This is also demonstrated by significant salesof its commercial vehicles in export markets where the companycompetes with reputed international brands.

Product Range

Leveraging its in-house expertise, Eicher Motors has successfullydeveloped a wide range of commercial vehicles to meet the varyingcustomer needs. These vehicles deliver value by providing low cost ofownership and increased profitability to our customers. The rangeoffered includes fully built up Trucks - ranging from 6T to 25T, Busesand Chassis. All these products can be offered in BS II compatibleoptions. Eicher Motors arguably have the best CNG technology in theworld in our CNG Buses.

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PRODUCT RANGE (BUSES)

EICHER SKYLINE BUS EICHER SCHOOL BUS

EICHER CRUISER EICHER SKYLINE CNG

PRODUCT RANGE (TRUCKS)

EICHER 10.50 EICHER 10.59 EICHER 10.75

EICHER 10.90 EICHER 11.10 EICHER JUMBO 20.16

.

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4.Interview with Bank

An interview was conducted with Operation Manager, ICICICorporate Banking, Mumbai based on the questionnaire. This iswhat I learnt from his explanation

Companies require long-term debt for reasons like:

Removing bottlenecks

Regular capital expenditure

Long term working capital requirements

ICICI while providing loan has to see whether client is NEW orEXISTING

If it is a new client bank looks at the promoters-strategic andfinancial.

Bank also tries to assess how important is the venture for thepromoters.

The bank that the financial promoters are involved with theproject actively or not

Format in which bank arranges the P&L and Balance Sheet items

Enclosed in the annexure is the format which ICICI arrangesitems for their evaluation.

How do you use credit rating for assessing credit risk

Normally ICICI accepts CRISIL credit rating.Besides that a a 50-60 pages credit note is prepared which is sentto the Mumbai office and then they assign their own rating.The bank looks also at how the company is rated in the industryin which it is present.Also the bank looks at how the industry scenario will change ifthe bank funds the project. If the industry is on a decline stageand the bank funds the project it could be a loss.

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Does value of security, market forces, and future businesspotential play a role?

Value of security does not play much of a role if the forecastproject potential is good. Yes future business potential does playa role.

Do you revise risk premium due to changes in rating/ value ofcollateral over a period of time

In case of Working Capital requirements annually the contract isrenewed hence the risk premium is revised in inverse proportionto the rating.In case of long term debt there can be 2 options:

Either the rates FIXED which is normally the case or it is revisedafter every period (every year end) and this revision is linked toa benchmark rate which is the PLR rate.

How do you determine that projections relating to operations andprofitability of the project over repayment period are realistic

To check for the profitability a technique known as SensitivityAnalysis is used.Example if there is a 10% fall in topline or bottom-line what

would be the impact on the project. Can it take that much risk?

Do you look at the loan account of the company maintained withother banks

Yes ICICI does look at the loan accounts maintained with otherbanks in various ways.There is a Defaulters List, which is issued by RBI in which thecompanys name will figure if it has defaulted with any otherbank.

Also the bank maintains references with other banks.Bank-to-bank there is circulation of confidential papers toformally get information which can help the bank in determiningif it is appropriate to give loan.

How do you study the technical feasibility of the project

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If the project limit is 200-300 crores the study can be conductedat the Delhi office but if it involves about above 1000 crores andsome new technology or so there is a PROJECT FINANCE GROUPat Mumbai who study the different aspects of raw materialsinvolved and their availability and salability of the product.

How do you perform market appraisal/demand forecasting whether a project can generate surplus in the future- how do youcalculate the estimated growth of demand for the product.

It is very difficult to study demand forecasting and this isnormally not studied.Topline forecasting is done for market appraisal.

During financial appraisal of statements which costs do you lookat?

The bank has to look at the repaying capacity of the company. A50-60 pages credit note is prepared. Data of at least the past 3years is consolidated.EBITDA vs. Sales levels are very important to be seen.Also how the EBITDA levels are moving over the years isobserved.Also what are the levels the company has forecast and whetherthey can be true.E.g. In the last quarter if the level was 13% it would not be wiseto project 20% in the next quarter.

The cash flows are analyzed. If PAT Depreciation = Cash Flowsare sufficient.

Which ratios do you generally look at

First of all the Total debt / net annual cash accruals (wherepayback period is in no. of years)Secondly the financial leverage = Total Debt/ Net worth = 1:1 isthe acceptable level.Also DSCR (Debt Service Coverage Ratio)

=(PAT+Depreciation+Interest on loans)/(Annual Principalinstallments + Interest on loans)The generally acceptable level of DSCR is not less than 1.5

An increasing level of current ratio indicates that long term fundshave been parked for working capital requirements. Do youcheck for that?

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Infact a lot of long-term funds are put for working capitalpurposes and that has to be checked.Because that indicates thatliquidity position is not in check.

5.ANALYSIS

To raise the present loan a 5 year Non convertible debentureshould be issued.

Attached on the next page are the Balance Sheet and P&L account ofM/S EICHER MOTORS LTD.

In this the ratios, which are important from a bankers point view, are

listed and with the discussion with the bankers, and looking at thefinancials, I suggest that a 5 year debenture should be issued.

Debt/Equity Ratio: The numerator consists of loan funds and the denominator shareholders funds.Generally the lower this ratio, the higher the degree of protectionenjoyed by the creditors.

Interest Coverage Ratio:It equals Profit before interest and taxes/Interest.

Earnings before interest and taxes are used in the numerator of thisratio because ability of the firm to pay interest is not affected taxpayment, as interest on debt funds is a tax deductible expense.A high interest coverage ratio means that the firm can easily meet itsinterest burden even if earnings before interest and taxes suffer aconsiderable decline.

Debt Service Coverage Ratio:It is defined as PAT+Depreciation+Interest on loans (term loans andWC loans)/Interest on term loan + repayment of term loan

Financial institutions calculate the average debt service coverage ratiofor the period during which the loan is payable. Normally a ratio of 1.5to 2 is satisfactory.

EBITDA means Earnings before Interest, Taxes, Depreciation and

Amortization, but after all product / service, sales and overhead

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(SG&A) costs are accounted for. Sometimes referred to as Operational

Cash Flow.

Given below are also some of the advantages of issuing debentures.

6.Balance Sheet And Profit & Loss A/c of M/s EicherMotors Ltd

GIVEN BELOW ARE THE BALANCE SHEET AND THE P&L OF M/S EICHER MOTORS LTD.

Balance Sheet as at March 31,2008

Rs. In Crores

As at Mar 31,2008 As at Mar 31,2007

Sources of Funds

Shareholders Funds

Share Capital 28.09 2Capital Suspense 8.0

Reserves and Surplus 212.86 166.8

240.95 194.9

Loan Funds

Secured 116.46 170.

Unsecured 21.82 25.1

138.28 195.6

Deferred Tax Liability(net) 67.06 66.3

Total 446.29 456.9

Application of funds Fixed Assets

gross block 632.88 572.

(-)depreciation 252.93 212.1

net block 379.95 360.2

cap work-in-prog 8.67 4.4

388.62 364.7

Investments 2.67 2.6

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Current assets, loans and advances

Inventories 161.25 126.2

Sundry debtors 158.08 154.9

cash and bank balances 31.04 33.1

loans and advances 154.71 101.

505.08 415.7

Less:

Current liabilities and provisions

current liabilities 366.64 268.9

Provisions 89.31 65.2

455.95 334.2

Net current assets 49.13 81.4

Miscellaneous Exp 5.87 8.0

(to the extent not written off or adjusted)

Total 446.29 456.9

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31,2008

For the year ended Mar 31,2008

For the year ended Mar 31,2007

Income

Sales 2211.58 1564.7

(-) Excise Duty 229.02 200.0

Net Sales 1982.56 1364.

Other Income 18.31 11.

2000.87 1376.

Expenditure

Manu. And other expenses 1850.01 1244.

Misc. Exp. Written off 6.66 7.5

1856.67 1252.2

Operating Profit 144.2 123.8

Interest 22.33 23.9

Depreciation 48.37 42.2

Profit for the year before taxation 73.5 57.5

Provision for taxation

current tax 13.97 4.3

Deferred tax 0.68 19.5

Profit for the year after taxation 58.85 33.6

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Balance brought forward from the previous yr. 101.12 71.

Transfer from DRR account 12.03 14.9

Amount available for appropriation 172 119.7

APPROPRIATIONS

Transfer to DRR account 0.2 2.8

Proposed Dividend 11.24 9.8

Corporate Dividend Tax 1.58 1.2

General Reserve Account 7.07 4.5

Balance carried to BS 151.91 101.1

Basic and diluted earning/(loss) per share(in Rs.) 20.95 11.9

RATIOS

Year ending '08 Year ending '07

LEVERAGE RATIOS

Debt/Equity 0.573894999 1.00379642

Interest coverage ratio 6.457680251 5.16520650

DCSR 1.046868687 1.9938111

EBITDA 0.065202254 0.07912446

Characteristics of debt instruments

The main characteristic of a debt instrument is as follows:

Ease of IssueAny company with or without prior track record can issue debtinstruments.

Fixed or floating rate of interest

These instruments can be floated with fixed or floating rate ofinterest and for any tenure.

Impose fixed commitments on servicingWhile being flexible in the nature of interest and tenure at thetime of issue, these instruments impose fixed commitments onthe business. In other words, irrespective of the performance ofthe business, servicing of such instruments in the form of

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interest and principal repayments would have to be made.Failure to do so would be termed as default with severelyadverse impact on the companys standing in the financialcommunity.

Low risk, return characteristicsInvestors in such instruments being creditors of the companyhave priority over equity and preference shareholders inreceiving return (in the form of interest) in such instruments.Carries priority claim on the assets of the firm (if secured) in theevent of bankruptcy.

7. Terms of a debenture issue

Face value of the debenture is stated in Rupees as the par value. In the case ofpublic issues, the face value is generally Rs.100.In privately placed debentures,it is now the practice to issue debentures with high face value, since investorsare also large institutions, investing and trading large lots.

Price is price per debenture in rupees. This can also vary from Rs.100 in thecase of publicly placed issued debentures, to higher amounts in the case ofprivately placed debentures.

Credit RatingThe rating obtained from a SEBI registered credit rating agency is stated. Rating

symbols of the credit rating agency are used for the purpose.

Deemed date of allotmentEach debenture issue has a deemed date of allotment, which is stated in theoffer document. Interest is due on the debentures from the date on which thedebenture is deemed to have been allotted.

Applicable Interest RateIn the case of fixed rate instruments, the coupon is stated as a percentage ofthe face value. In the case of floating rate instruments, the benchmark, theperiodicity of reset, mark-up to benchmark, and the floor and the cap if any, are

stated. Interest for a floating rate instrument is determined at the beginning ofa rest period, and is paid at the end of the reset period.

Interest on application moneyCompanies are required to pay investors, interest on the application money thatis received, from the date of realization of these amounts, to the dateimmediately preceding the deemed date of allotment, at the applicable couponrate of the debenture. In case of applications that have been rejected or allotted

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in part, interest determined in the aforesaid manner will be payable within 3weeks of issue closure, on the refundable application money.

Interest PaymentThe company states in the offer document the periodicity of interest payment,

and the actual dates on which interest on the debenture will be due. For each ofthe interest payments, record dates to determine eligible registered debentureholders, will be notified to the stock exchanges where the debentures are listedThe market practice is to set the record date as 30 business days preceding theinterest/principal repayment date. Interest is payable to such registereddebenture holders. Interest payments are subject to deduction of tax at source,according to applicable provisions of the Income Tax Act, 1961.

RedemptionThe actual date of redemption of the debenture is stated in the offer document.The tenor of the debenture is the period between the deemed date of allotment

and the date of redemption. The companys liability to the debenture holders isextinguished on redemption of the debenture. Payment is made to theregistered debenture holder as on the record date notified for the purpose ofredemption. Debentures in the physical form will have to be redeemed by thedebenture holder, by surrendering the same, duly discharged, to the companyDebentures in demat form are discharged on payment of redemption amountsto the registered debenture holders, as intimated by the depository.

Put/call option

In case the debentures provide a put option to investors and/ or a call option to the company, the

details of these options should be provided. The dates on which these options may be exercised, and

the terms of exercise have to be stated.

Letter of Allotment and Debenture certificate

The company will send to the allottees, letter of allotment or debenturecertificate evidencing the title of the debenture in favour of the allottees, withina stipulated period, not exceeding 3 months days from the deemed date ofallotment , in case the debenture is issued in demat form. The depositoryaccount of the investor will be credited within the period stipulated in the offerdocument. The company will normally issue a consolidated letter ofallotment/debenture certificate to an investor. The investor can request forallotment at market lot (1 debenture) in the application. Consolidated

debentures can be split at the request of debenture holder, when the originalcertificate is surrendered, and replaced by split certificates, as required by theinvestor.

SecurityThe replacement of debentures, together with interest thereon is secured by acharge on assets of the company, the details of which are stated in the terms ofthe offer. Whether the charge is a first or second charge, whether it would rank

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pari-passu with claims of existing lenders, and whether any credit enhancementin the form of guarantees/counter-guarantees have been provided, are alstipulated by the company.

OTHER BROAD TERMS AND CONDITIONS

The issue of debenture with a maturity period exceeding 18 months shalbe routed through a trustee to the debenture holders .The broker shall assist inthis manner. In case of FCDs one third of the total amount of the issue, and in case ofPCDs one third of the convertible portion of the amount of the issue must bebrought in by the promoter group as their contribution before the issue is madeand this contribution cannot be subjected to trading before maturity.

Clearance of the FI, which funds the project, and bank which provides the

working capital are necessary. Compulsory credit rating by CRISIL or any other credit rating agency isnecessary for all new issues with maturity period exceeding 18 months and alroll over issues should be less than 6 months old. Where the total borrowing exceeds the net worth of the undertaking, theissue has to be approved by shareholders. The overall debt-equity ratio must be maintained for long term funds afterthe issue. Where it has to be exceeded for a capital intensive project, specificapproval should be sought. Short term funds shall be related to current assetsand loans and advances.

Before the issue of the debentures the equity share of the undertaking

should have been commanding a price above its par value on the market sharefor six months or more.

Issue of FCDs with redemption period exceeding 36 months is notpermitted ordinarily. The issuing undertaking can buy back its own debentures unlike its ownshares (A company cannot buy its own shares).

Interest rates payable on debentures are linked with the period ofredemption and they have to be approved by the FI concerned.

FIs, and particularly investment institutions, usually underwritedebentures on attractive terms and conditions. One company cannot raise funds through an issue of debentures tofinance the operation of another company of the same group. Debenture are secured by a charge on the issuer enterprises assetseither on pari passu with other FIs and banks, or, if they have objection asecond charge created in favour of the debenture trustees (DT). The DT should look after the security interests of the investors, which wilinclude:

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supervision of the management of the debenture programimplementation of the conditions regarding security, and DRR Organizing the meetings of debenture holders to discussmatters like option and making available their resolutions to the SEBI.

Appointment of a nominee director

Monitoring the utilization of the funds.

The enterprise must create Deb