Capital Raising
Strategies
Tejshree Kapoor
Funding if on the verge of
bankruptcy or liquidation
Asset refinancing Raising finance secured on the value physical
assets owned by the business such as plant or machinery.
Invoice financing Raising finance on the strength of invoices
already raised for work carried out. The finance company pays out
up front and then collects the moneyover time as invoices are
paid.
Trade financing Finance provided to
enable a company to fulfil a confirmed
order. The finance company will typically
pay suppliers directly and in turn invoice
the end customer. Once the customer
has paid, adhering to the typical
payment terms, the finance company
releases any profits back to the business
. Financing a Start Up Business
Sources of Finance: The Long-Term Finance may be Raised by
the Companies from the following Sources:-
Capital Market
The Government controls the issue of shares and debentures
under the Capital Issues (Control) Act, 1947
Special Financial Institutions
There are many all-India institutions like Industrial Finance
Corporation of India (IFCI); Industrial Credit and Investment
Corporation of India (ICICI); Industrial Development Bank of
India(IDBI), etc. At the State level, there are State Financial
Corporations (SFCs) and State Industrial Development
Corporations (SIDCs). These national and state level institutions
are known as 'Development Banks'. Besides the development
banks, there are several other institutions called as 'Investment
Companies' or 'Investment Trusts' which subscribe to the shares
and debentures offered to the public by companies. These include
the Life Insurance Corporation of India (LIC); General Insurance
Corporation of India (GIC; Unit Trust of India (UTI), etc.
Leasing Companies
Foreign Sources
Foreign Collaborators: - The Indian companies may secure
capital from abroad through the subscription of foreign
collaborator to their share capital or by way of supply of technical
knowledge, patents, drawings and designs of plants or supply of
machinery.
International Financial Institutions: - World Bank and
International Finance Corporation (IFC) provide long-term funds
for the industrial development all over the world.
Non-Resident Indians: - persons of Indian origin and
nationality living abroad are also permitted to subscribe to the
shares and debentures issued by the companies in India.
Retained Profits or Reinvestment of Profits
Short-Term Finance may be Raised by the
Companies from the following Sources:-
Trade Credit
Installment Credit
Accounts Receivable Financing
Customer Advance
Bank Credit
Commercial Banks play an important role in financing
the short-term requirements of business concerns.
They provide finance in the following ways: -
Loans
Cash credit
Overdrafts
Discounting of bills
FCCB
FCCB is an instrument that has the features of both equity
and debt. Issued as interest-bearing or zero-coupon
bonds, these bonds are convertible into equity during their
tenure (3-5 years in normal course). For investors, FCCBs
offer the advantage of capital protection as well as an
opportunity to capitalise on an appreciation in the price of
the company’s shares through conversion.
For the issuer, it’s a source of low-cost debt, as coupon
rates on the bond are lower than the average lending
rates.
Essar Shipping Ports & Logistics, India`s
second-largest marine transport company by
market value today said that it has issued USD 280
million foreign currency convertible bonds (FCCBs).
The company has issued a five-year bond for USD
150 million and a seven-year security for USD 130
million at the rate of 5%. These bonds would be
listed on Singapore Exchange Securities Trading.
Project finance
Project finance is different from traditional forms of
finance because the financier principally looks to the
assets and revenue of the project in order to secure
and service the loan. In contrast to an ordinary
borrowing situation, in a project financing the
financier usually has little or no recourse to the non-
project assets of the borrower or the sponsors of the
project. In this situation, the credit risk associated
with the borrower is not as important as in an
ordinary loan transaction; what is most important is
the identification, analysis, allocation and
management of every risk associated with the
project.
Risk minimization process
the project not being completed on time,
on budget, or at all;
the project not operating at its full
capacity;
the project failing to generate sufficient
revenue to service the debt;
the project prematurely coming to an
end.
Risk identification and analysis
The financiers will carefully review the study and
may engage independent expert consultants to
assess the feasibility report. The matters of
particular focus will be whether the costs of the
project have been properly assessed and whether
the cash-flow streams from the project are properly
calculated. Some risks are analysed using financial
models to determine the project's cash-flow and
hence the ability of the project to meet repayment
schedules. Different scenarios will be examined by
adjusting economic variables such as inflation,
interest rates, exchange rates and prices for the
inputs and output of the project.
Risk allocation
Once the risks are identified and analysed, they are
allocated by the parties through negotiation of the
contractual framework. Ideally a risk should be
allocated to the party who is the most appropriate to
bear it (i.e. who is in the best position to manage,
control and insure against it) and who has the
financial capacity to bear it. It has been observed
that financiers attempt to allocate uncontrollable risks
widely and to ensure that each party has an interest
in fixing such risks
Risk management
Financiers need to ensure that the greater the risks
that they bear, the more informed they are and the
greater their control over the project. Since they take
security over the entire project and must be
prepared to step in and take it over if the borrower
defaults. This requires the financiers to be involved
in and monitor the project closely. Such risk
management is facilitated by imposing reporting
obligations on the borrower and controls over
project accounts. Such measures may lead to
tension between the flexibility desired by borrower
and risk management mechanisms required by the
financier.
Types of risk
Construction phase risk - Completion
risk
Operation phase risk - Resource /
reserve risk
Construction phase risk -
Completion risk
Completion risk allocation is a vital part of the risk
allocation of any project. This phase carries the
greatest risk for the financier. Construction carries
the danger that the project will not be completed on
time, on budget or at all because of technical, labour,
and other construction difficulties. Such delays or
cost increases may delay loan repayments and
cause interest and debt to accumulate. They may
also jeopardise contracts for the sale of the project's
output and supply contacts for raw materials.
mechanisms for minimising
completion risk
(a) obtaining completion guarantees requiring the
sponsors to pay all debts and liquidated damages if
completion does not occur by the required date;
(b) ensuring that sponsors have a significant
financial interest in the success of the project
(c) requiring the project to be developed under fixed-
price, fixed-time turnkey contracts by reputable and
financially sound contractors
(d) obtaining independent experts' reports on the
design and construction of the project.
Completion risk is managed during the loan period
by methods such as making pre-completion phase
draw downs of further funds conditional on
certificates being issued by independent experts to
confirm that the construction is progressing as
planned.
Operating risk
These are general risks that may affect
the cash-flow of the project by increasing
the operating costs or affecting the
project's capacity to continue to generate
the quantity and quality of the planned
output over the life of the project.
Market / off-take risk
The loan can only be repaid if the product that is
generated can be turned into cash. Market risk is the
risk that a buyer cannot be found for the product at a
price sufficient to provide adequate cash-flow to
service the debt. The best mechanism for minimising
market risk before lending takes place is an
acceptable forward sales contact entered into with a
financially sound purchaser.
Risks common to both construction and
operational phases
Participant / credit risk
These are the risks associated with the sponsors or
the borrowers themselves. The question is whether
they have sufficient resources to manage the
construction and operation of the project and to
efficiently resolve any problems which may arise. Of
course, credit risk is also important for the sponsors'
completion guarantees.
Technical risk
This is the risk of technical difficulties in the
construction and operation of the project's plant and
equipment, including latent defects. Financiers usually
minimize this risk by preferring tried and tested
technologies to new unproven technologies. Technical
risk is also minimized before lending takes place by
obtaining experts reports as to the proposed
technology. Technical risks are managed during the
loan period by requiring a maintenance retention
account to be maintained to receive a proportion of
cash-flows to cover future maintenance expenditure.
Currency risk
Currency risks include the risks that: (a) a depreciation
in loan currencies may increase the costs of
construction where significant construction items are
sourced offshore; or (b) a depreciation in the revenue
currencies may cause a cash-flow problem in the
operating phase. Mechanisms for minimising resource
include: (a) matching the currencies of the sales
contracts with the currencies of supply contracts as far
as possible; (b) denominating the loan in the most
relevant foreign currency; and (c) requiring suitable
foreign currency hedging contracts to be entered into.
Regulatory / approvals risk
These are risks that government licenses and
approvals required to construct or operate the project
will not be issued (or will only be issued subject to
onerous conditions), or that the project will be
subject to excessive taxation, royalty payments, or
rigid requirements as to local supply or distribution.
Such risks may be reduced by obtaining legal
opinions confirming compliance with applicable laws
and ensuring that any necessary approvals are a
condition precedent to the drawdown of funds.
Political risk
Common mechanisms for minimising political risk include:
(a) requiring host country agreements and assurances that
project will not be interfered with; (b) obtaining legal
opinions as to the applicable laws and the enforceability of
contracts with government entities; (c) requiring political risk
insurance to be obtained from bodies which provide such
insurance (traditionally government agencies); (d) involving
financiers from a number of different countries, national
export credit agencies and multilateral lending institutions
such as a development bank; and (e) establishing accounts
in stable countries for the receipt of sale proceeds from
purchasers.
Force majeure risk
This is the risk of events which render the
construction or operation of the project impossible,
either temporarily (e.g. minor floods) or permanently
(e.g. complete destruction by fire). Mechanisms for
minimising such risks include: (a) conducting due
diligence as to the possibility of the relevant risks; (b)
allocating such risks to other parties as far as
possible (e.g. to the builder under the construction
contract); and (c) requiring adequate insurances
which note the financiers' interests to be put in place.
