INTRODUCTION TO
PROJECT FINANCING
BY CA. PRACHI GOYAL
Sources of
Funds
Debt Equity
DEBT
Bank Financing
Inter-corporate deposits
Debentures
IPOs
Equity
ELIGIBILITY NORMS FOR RAISING FUNDS THROUGH IPOs
AS PRESCRIBED BY SEBI:
a) Net tangible assets of at least Rs. 3 crore in each of the preceding three full years of which not more than 50%
are held in monetary assets. However, the limit of 50% on monetary assets shall not be applicable in case the
public offer is made entirely through offer for sale.
b) Minimum of Rs. 15 crore as average pre-tax operating profit in at least three years of the immediately
preceding five years.
c) Net worth of at least Rs. 1 crore in each of the preceding three full years.
d) If there has been a change in the company’s name, at least 50% of the revenue for preceding one year should
be from the new activity denoted by the new name
e) The issue size should not exceed 5 times the pre-issue net worth
CONDITIONS FOR RAISING FUNDS THROUGH NSE
EMERGE:
NSE Emerge is a platform for the best of emerging corporate to raise
capital from Institutional investors and HNIs.
• Post issue paid up capital (face value) upto Rs.25 crore
• Track record of atleast 3 years
• Positive networth
• Operating profit from operations for at least any 2 out of 3
financial years
IPOs
Angel
Investors
Equity
Venture
Capitalists
VCs v/s. Angel Investors
• VCs generally using money pooled from investment companies, large corporations, and
pension funds. Typically, VCs do not use their own money to invest in companies.
• Angel investors are more likely to invest in businesses that are just starting out. VCs tend to
invest in businesses that are already established to reduce their risk of losing investments.
• Angel investors take more risks than venture capitalists.
• VCs invest more money into businesses than angel investors.
IPOs
Angel
Investors
Equity
Crowd Venture
Funding Capitalists
Corporate
Investors
Crowdfunding v/s. IPOs
• Lower Overhead. As a rule, companies that are equity crowdfunded are not listed on any stock
exchange and are therefore not obligated to comply with perpetual reporting requirements.
• While equity crowdfunding campaigns are not as liquid as IPOs
• Unlike IPOs, almost anybody who believes in a project can invest in an equity crowdfunding campaign,
and the bar of entry is usually lowered down to just the campaigns investment minimum.
• Crowdfunding is done either to start-ups or growth-stage businesses and IPOs are to large established
firms.
IPOs
Seed Angel
Capital Investors
Equity
Crowd Venture
Funding Capitalists
Corporate
Investors
Trade Credit Hire Purchase
Other Sources
Bill Discounting/
Subsidy
Factoring
DEBT FINANCING
• BANKS
• NBFCs
• ARC- ASSET RECONSTRUCTION COMPANY
CLASSIFICATIONS OF BANKS
Public Sector
Banks
CLASSIFICATIONS OF BANKS
Majority stakes are
owned by the
Government
CLASSIFICATIONS OF BANKS
Public Sector
Banks
Private Sector
Banks
CLASSIFICATIONS OF BANKS
Public Sector
Banks
Majority stakes are
owned by a private
organization
CLASSIFICATIONS OF BANKS
Public Sector
Banks
Private Sector
Banks
Foreign Banks
CLASSIFICATIONS OF BANKS
Public Sector
Banks
Private Sector
Banks
Headquarters in foreign
countries and branches in
our country
CLASSIFICATIONS OF BANKS
Public Sector
Banks
Private Sector
Banks
Foreign Banks
Regional Rural
Banks
CLASSIFICATIONS OF BANKS
Public Sector
Banks
Private Sector
Banks
Foreign Banks
Concessional credit to
agriculture and rural
sector
CLASSIFICATIONS OF BANKS
Public Sector Local Area Banks
Banks
Private Sector
Banks
Foreign Banks
Regional Rural
Banks
CLASSIFICATIONS OF BANKS
Public Sector -1996, private sector
-Profit oriented
Banks
Private Sector
Banks
Foreign Banks
Regional Rural
Banks
CLASSIFICATIONS OF BANKS
Public Sector Local Area Banks
Banks
Private Sector Co-operative
Banks Banks
Foreign Banks
Regional Rural
Banks
CLASSIFICATIONS OF BANKS
Public Sector Local Area Banks
Banks
- Cooperative Societies
Private Sector Act, 1912
Banks - no-profit no-loss
Foreign Banks
Regional Rural
Banks
CLASSIFICATIONS OF BANKS
Public Sector Local Area Banks
Banks
Private Sector Co-operative
Banks Banks
Foreign Banks Specialized Banks
Regional Rural
Banks
CLASSIFICATIONS OF BANKS
Public Sector Local Area Banks
Banks
Private Sector Co-operative
Banks Banks
- SIDBI
- EXIM
Foreign Banks
- NABARD
Regional Rural
Banks
CLASSIFICATIONS OF BANKS
Public Sector Local Area Banks
Banks
Private Sector Co-operative
Banks Banks
Foreign Banks Specialized Banks
Regional Rural Small Finance
Banks Banks
CLASSIFICATIONS OF BANKS
Public Sector Local Area Banks
Banks
Private Sector Co-operative Banks
Banks
Specialized Banks
Foreign Banks
Micro industries, small
Regional Rural farmers, and the
Banks unorganized sector
ASSET RECONSTRUCTION COMPANY
• An Asset Reconstruction Company is a specialized financial
institution that buys the NPAs or bad assets from banks and financial
institutions so that the latter can clean up their balance sheets. Or in
other words, ARCs are in the business of buying bad loans from
banks.
• Where the borrower get actual money
Fund based • CC, OD, TL
• Nature of promises made by Banks in favour of a third party
to provide monetary compensation
Non-Fund
based • BG, LC
• Working capital limit provided for the day-to-day requirements
• Provided for 1 year and is supposed to be renewed every year
• Against the stocks, work-in-progress, finished goods and the
receivables of the company
• Stock Statement
• WC Limit = 20% of their projected annual turnover
• Margin of 5% of the annual turnover
Maximum Permissible Bank Financing
• Method I
Margin = 25% of Working Capital Gap (CA – CL excluding bank
borrowings)
Minimum Current Ratio – 1.17:1
• Method II
Margin = 25% of Total Current Assets
Minimum Current Ratio – 1.33:1
Maximum Permissible Bank Financing
• Method III
Margin = Core current assets (Fixed Current assets) and 25% of the
balance of the current assets.
The remaining of the working capital gap can be met from bank
borrowings.
Particulars Quantity Rate Value Margin* Eligibility
Stock
- Raw Material XXX
- Work in progress XXX
- Finished Goods XXX
Total value of stock XXX
Less: Creditors XXX
Paid stock XXX 25% 75%
Receivables (90 days-120 XXX 40% 60%
days)
Total Eligibility XXX
*the margins may differ from case to case and bank to bank.
Particulars Quantity Rate Value Margin* Eligibility
Stock
- Raw Material XXX
- Work in XXX
progress
- Finished XXX
Goods
Total value of 50
stock
Less: Creditors 10
Paid stock 40 10 30
Receivables 30 12 18
Total Eligibility 48
• Short-term fund-based limit
• Provided for 1 year and is supposed to be renewed after every year
• Amount = 150-200% of value of immovable property
• No need of Stock Statement
• Assessment of OD limit is simpler than CC limit.
• Long-term fund-based limit
• Fixed amount, Fixed interest rate, Fixed repayment
• Purpose- purchase of assets/ construction
• Fixed EMI
• Moratorium period
TYPES OF TERM LOANS
TYPES OF TERM LOANS
• Quantum
- Based on the discounted value of future rentals
- 60 to 80% of underlying property value
• Longer Tenure
• Repayment Mode
• Security- Rental (primary) and property (collateral)
• Competitive ROI
TYPES OF TERM LOANS
• House Loan
• Education Loans
• Vehicle or Auto Loans
TYPES OF TERM LOANS
• Government Schemes like CGTSME, Mudra loans
• Personal Loans
• Business Loans
TYPES OF BG
• Financial Guarantees
A financial guarantee is a type of promise given by a guarantor to take
responsibility for the borrower in the case of default in payments to the lender
or investor.
• Performance Guarantees
A Performance Guarantee is a contractors promise to complete the project
undertaken. To further elaborate, a Performance Guarantee is a document that
legally confirms that the contractor will complete the contract that is
undertaken.
PROJECT FINANCING-
MANUFACTURING UNIT
REQUISITES OF PROJECT FINANCING
File
Financials
1.33:1
Measure of business liquidity
Gearing Ratio
It is a measure of a company’s
financial leverage, giving an accurate
picture of the business's *reliance on
debt*.
TOL
Low Ratio* = Good levels of
promoter's stake in business
TNW High Ratio = Low levels of promoter's
stake in business - Risky Business
3:1
2:1
1.75
Measures the number of times a company can *make interest
payments* on its debt from its earnings.
High Ratio (>2) is considered comfortable for the lenders.
Low Ratio (<1) implies trouble in honoring interest payments on time.
REQUISITES OF PROJECT FINANCING
File
Financials
CMA
REQUISITES OF PROJECT FINANCING
File
Financials
CMA
Project Report
OTHER REPORTS/ DOCUMENTS REQUIRED
- Primary Security
- Collateral Security
OTHER REPORTS/ DOCUMENTS REQUIRED
- Market Value
- Realizable Value (90%)
- Distress Sale Value (70-75%)
OTHER REPORTS/ DOCUMENTS REQUIRED
- Techno Economic Viability (TEV) study
- evaluating the technical and financial information
- technological feasibility and economic viability
- Normally required for case above Rs.25 crores
OTHER REPORTS/ DOCUMENTS REQUIRED
- Lender’s Independent Engineer’s (LIE) Report
- Technical Due Diligence Report prepared by an
Independent Engineer
- Reviews the technical inputs (i.e. output, efficiency, O&M
expenses, availability, etc.)
- Requirements for big size projects only
OTHER REPORTS/ DOCUMENTS REQUIRED
- Qualitative & Quantitative assessment of the probability of default
on payment of interest and principal on a debt instrument
- Alpha-numeric symbol, for e.g. AAA, AA+, A-, etc.
- Based on a comprehensive evaluation of the strengths and
weaknesses of the company fundamentals including financials along
with an in-depth study of the industry as well as macroeconomic,
regulatory and political environment.
- Of all factors influencing the credit rating, Financial risk carries the
highest weightage. (Others - industry risk, government policy,
market position, operational efficiency & management evaluation)
- Why is it important?
- India ratings, CRISIL, CARE, ICRA etc.
OTHER REPORTS/ DOCUMENTS REQUIRED
- Credit Bureau or Credit Information Company
- Maintains the records of all the credit-related activities
- It provides data to the banks and other lenders to quickly and
efficiently filter the loan applications
- 3 digit number
OTHER REPORTS/ DOCUMENTS REQUIRED
Whole history of the company with respect to
- Basic details
- Charge created/ modified/ satisfied of all the past/ present
loans
- Shareholding pattern of the company
- Directors etc.
• Trading Sector • Warehousing
• Infrastructure projects • Cold Storage
• Tourism Industry • Real Estate
• Road projects • Food Industry
• Contractors • Education Sector
• Hospitals • Agriculture Sector
• Lease Rental Discounting • Professionals
