The SEBI Regulations, 1996 stipulate that venture investments shall be only in unlisted companies either privately or through the prospectus when they go for IPO.
Venture capital is meant for young companies that evolve from a start-up stage. The term start-up typically refers to the early stage in the life cycle of a company that has been formed to set up a technology backed business venture with an intent to commercialize the same.
Conceptualizing the business idea.
Validation of business idea.
Forming the core team.
Appointment of outside agencies.
Floating the business entity.
Formulation of the business plan.
Seed Financing/Angel Round Financing
Proof of concept/Product Validation
Making key statutory filings.
Early stage/First round Financing.
Commercial launch and market validation.
First equity fund raised through Institutional investors (VCs) who generally accept high risk
Attributes that a VC look forward before investing:
An Industry that is currently a sunrise sector
An exciting concept that has the potential for uninhibited growth
An idea with significant possibilities in future
A business that could become an attractive proposition for strategic acquisition by a market leader
A business with cutting edge technology
A business with first mover advantage
A business with significant entry & easy exit options
Key Elements in Business structuring of a start-up
Formulation of a business strategy & corporate structure
Key commercial contracts
Composition of board
Management structure
Key employment contracts
IPR protection & Management
Corporate governance
Composition of board
Customary for a start up to have a non executive external chairman such as industry/corporate personality.
Political personalities should not be appointed
Chairman should be a person of good business acumen & sound character
Other members may be drawn from promoters, nominees of VCs or lenders
A board with 6 members is ideal for an start up- 2 promoter Directors, 1 non executive chairman & 3 professional independent Directors
Management structure
Can be either pyramidical or flat
Should be chosen on the basis of the type of prevalent industry work culture & business dynamics
Key executive positions should be identified– CEO, COO, CFO etc
Key employment contracts
Defines the commitment of the core team members
These contracts should take care of employees as well
Contracts should cement a long lasting relationship between the company & the core team
Can be done in 2 ways, issuing either:
Sweat Equity
ESOPs
IPR protection & Management
IPRs – Technological, process know hows, copyrights, licences, brand names, trade marks etc
A start up needs to legally safegaurd these rights through appropriate registrations under the relevant IPR laws
These IPRs should not get diluted in key commercial contracts that the company may enter
IP management should be done for the most knowledge intensive businesses
IPs should remain with the company if it seeks to create value in the long run
Key Elements in the Financial structuring of Start ups
Estimation of fund requirements
First & foremost exercise is the Forecast of the financial requirements, in terms of:
Capital Cost of fixed assets & intangible assets
Deferred revenue expenses to be incurred upfront such as product development costs etc
Pre operative expenses to meet the cash burn till the project starts generating revenues
Working capital requirements etc
Capital structuring for equity financing
For capital intensive companies, equity financing is a must
Such start ups are funded through equity & convertibles or hybrids raised through private resources
Once the company is financed through the equity route later on debt can be taken
Promoters subscribe to the equity at par, while VCs at a premium
Knowledge intensive companies (Like IT, media) are not capital intensive, so they may be financed by debt also at inception
Capital structuring for debt financing
In case of manufacturing companies, About half the total project cost & margin money for working capital is taken through Debt component
The balance project cost is contributed through equity
Companies are also required to raise financing for meeting Working Capital requirements.
Banks usually finance these.
Sunday, December 16, 2007
IB-PS Ch. 11 Private Placement - Debt Securities - PTR
Deal Process and Role of Investment Banker
The Process start with typically with issuer rolling out a plan to raise funds through private placement route.
Issuer appoints investment banker (with a universal banking background or pure IBs with strong institutional broking background) as an arranger to whole placement.
Investment Bankers are short-listed and finalized through talks and invitation of quotes.
The Investment Bankers ascertain that the company has taken the necessary approval from it board, shareholders and existing lender for the proposed debt and has the necessary power under it memorandum and the article of association, Section 293(1)(a) and 293(1)(d) of the Companies Act.
Investment Banker then become familiar with company’ business, industry pace and financial, the information is put together in form of a private placement memorandum.
Next the Investment Bankers arrive at the instrument in offer and the deal structure, uses his conventional wisdom, ingenuity and market intelligence to arrive at the coupon rate and suitable enhancement, if any.
As soon as the structure has evolved, the rating process starts.
Rating is important because it enhance the possibility of closing the deal early.
A listing application is made to be filed as soon as the issue is placed and allotment gets completed. If the issue does not satisfy the requirement of Rule 19(2)(b) of the SCR Rule, suitable exemption needs to be obtained for listing the privately placed debt.
In the placement part of the deal, the private placement memorandum is circulated among the closed set of appropriate potential investors.
The institutional investors process the proposal internally and take approval from their credit rating or investment committee or their BoDs, before issuing the commitment letters.
After receiving the commitment letters from all investors, the issue is treated a closed and issuer puts up the letter of intent for consideration by its BoD.
These letter stipulate the general terms and conditions applicable to the particular sanction.
After the board of the company accepts the letter of intent, the company proceeds with the documentation.
The documentation consists of entering into a subscription agreement, which would be common if there is more than one lender. This is because, the security ha to be created in common and therefore, a common subscription agreement is created with all the lenders and all the issuer.
Next is to make allotments and receive the funds from the investors by complying with the procedure prescribed under the Companies Act.
The listing application if required, is also simultaneously filed with the stock exchanges.
The role of investment banker usually ends with the receipt of commitment letters from the investors and the acceptance thereof by the issuer.
The post-sanction formalities are normally handled by the in-house professionals of the company, their auditor or it practicing company secretaries.
The Process start with typically with issuer rolling out a plan to raise funds through private placement route.
Issuer appoints investment banker (with a universal banking background or pure IBs with strong institutional broking background) as an arranger to whole placement.
Investment Bankers are short-listed and finalized through talks and invitation of quotes.
The Investment Bankers ascertain that the company has taken the necessary approval from it board, shareholders and existing lender for the proposed debt and has the necessary power under it memorandum and the article of association, Section 293(1)(a) and 293(1)(d) of the Companies Act.
Investment Banker then become familiar with company’ business, industry pace and financial, the information is put together in form of a private placement memorandum.
Next the Investment Bankers arrive at the instrument in offer and the deal structure, uses his conventional wisdom, ingenuity and market intelligence to arrive at the coupon rate and suitable enhancement, if any.
As soon as the structure has evolved, the rating process starts.
Rating is important because it enhance the possibility of closing the deal early.
A listing application is made to be filed as soon as the issue is placed and allotment gets completed. If the issue does not satisfy the requirement of Rule 19(2)(b) of the SCR Rule, suitable exemption needs to be obtained for listing the privately placed debt.
In the placement part of the deal, the private placement memorandum is circulated among the closed set of appropriate potential investors.
The institutional investors process the proposal internally and take approval from their credit rating or investment committee or their BoDs, before issuing the commitment letters.
After receiving the commitment letters from all investors, the issue is treated a closed and issuer puts up the letter of intent for consideration by its BoD.
These letter stipulate the general terms and conditions applicable to the particular sanction.
After the board of the company accepts the letter of intent, the company proceeds with the documentation.
The documentation consists of entering into a subscription agreement, which would be common if there is more than one lender. This is because, the security ha to be created in common and therefore, a common subscription agreement is created with all the lenders and all the issuer.
Next is to make allotments and receive the funds from the investors by complying with the procedure prescribed under the Companies Act.
The listing application if required, is also simultaneously filed with the stock exchanges.
The role of investment banker usually ends with the receipt of commitment letters from the investors and the acceptance thereof by the issuer.
The post-sanction formalities are normally handled by the in-house professionals of the company, their auditor or it practicing company secretaries.
IB-PS Ch.12 Business Advisory Services - PTR
The term 'Corporate advisory services' is an umbrella term taht includes specialised advice rendered to corporations by advisers such as investment banks, chartered and cost accountants, lawyers and other such service provider.
Within corporate advisory services, business advisory services (that are connected to investment banking) relate to advising a company on its present and future businesses from a strategic perspective for survival an growth and on orgaisations structures for implementing strategies.
Business Advisory services
Entry strategy plans
Project feasibility studies
Corporate plan preparation
Merger strategy formulation
Foreign collaborations - Finding and evaluating collaborators and finalising agreements
Business alliance opportunities - search and evaluation
Cross border investment opportunities
Corporate structuring and restructuring
Within corporate advisory services, business advisory services (that are connected to investment banking) relate to advising a company on its present and future businesses from a strategic perspective for survival an growth and on orgaisations structures for implementing strategies.
Business Advisory services
Entry strategy plans
Project feasibility studies
Corporate plan preparation
Merger strategy formulation
Foreign collaborations - Finding and evaluating collaborators and finalising agreements
Business alliance opportunities - search and evaluation
Cross border investment opportunities
Corporate structuring and restructuring
IB-PS Ch.13 Project Advisory Services - PTR
Full recourse and limited recourse project financing structures
Full recourse
The existing assets as well as assets to be created in future are providedd as a security for the lenders. In addition personal guarantees by the promoters and/or other corporate concerns is also obtained by the lenders.
Limited recourse
In limited recourse, the project is implemented as an SPV and a recourse to promoter is insisted for the proper completion of the project and some additional guarantees may be given by some other parties to the project. For example, Government may guarantee minimum revenues for a fixed number of years
Project Financing Process
Project Conceptualization
Sound Concept backed by business opportunity and revenue model
Project should be bankable
Not necessary to be backed by empirical experience
Should satisfy policy requirements of the government and lending institutions
Should not be under negative list of industries
Project Structuring
Concerns regarding location, procurement, production, technology, marketing and promoter usefulness are considered
Mitigation of risk is key responsibility and Important
Normally awarded to consortia
Normally implemented under and SPV to avoid bankruptcy
RBI Guidelines:
Sponsor commits to provide support for cost overruns
SPV has security structure more stringent than normal projects
Cash flow of the SPV are captured by way of TRA arrangement
Types of project Financing
Project Financing through Equity
Project Financing through long term debt
Domestic Rupee Term Loans
ECB
Automatic Route
Approval Route
Debentures
Other Debt Securities
Project Advisory and Related Transaction Services provided by Investment Banks
Bid Advisory Services (in case of projects that require bids - development of oil fields etc.)
Preparation of “Expression of Interest”
Preparation of a detailed “Information memorandum”
Bid Document
Draft License Agreement
The making ready the “Data Room” – Contains all material information for inspection by eligible bidders
Project Advisory Services
Putting the Project Consortium in place
Completion of documentation for some key project contracts
Listing out of all key statutory clearances required for project to proceed
Preparation of financing plan
Should be in line with institutional norms
Permissible debt-equity ratio
Provisions regarding various sources of finance considered
Various debt and equity instruments considered
Financial Advisory and Transaction Services
Financial closure it the term used to denote completion of tying of the funds required for the project.
Issues need to get sorted at policy level to complete financial closure
Final aspects of contractual agreements between various parties need to be sorted out
Financing mix should be a trade-off between optimization of cost of funds and cost of closure
Feasibility of financing mix needs to be considered
Credit enhancements that would de-risk the financing institution and increases bankability helps the financial closure
Full recourse
The existing assets as well as assets to be created in future are providedd as a security for the lenders. In addition personal guarantees by the promoters and/or other corporate concerns is also obtained by the lenders.
Limited recourse
In limited recourse, the project is implemented as an SPV and a recourse to promoter is insisted for the proper completion of the project and some additional guarantees may be given by some other parties to the project. For example, Government may guarantee minimum revenues for a fixed number of years
Project Financing Process
Project Conceptualization
Sound Concept backed by business opportunity and revenue model
Project should be bankable
Not necessary to be backed by empirical experience
Should satisfy policy requirements of the government and lending institutions
Should not be under negative list of industries
Project Structuring
Concerns regarding location, procurement, production, technology, marketing and promoter usefulness are considered
Mitigation of risk is key responsibility and Important
Normally awarded to consortia
Normally implemented under and SPV to avoid bankruptcy
RBI Guidelines:
Sponsor commits to provide support for cost overruns
SPV has security structure more stringent than normal projects
Cash flow of the SPV are captured by way of TRA arrangement
Types of project Financing
Project Financing through Equity
Project Financing through long term debt
Domestic Rupee Term Loans
ECB
Automatic Route
Approval Route
Debentures
Other Debt Securities
Project Advisory and Related Transaction Services provided by Investment Banks
Bid Advisory Services (in case of projects that require bids - development of oil fields etc.)
Preparation of “Expression of Interest”
Preparation of a detailed “Information memorandum”
Bid Document
Draft License Agreement
The making ready the “Data Room” – Contains all material information for inspection by eligible bidders
Project Advisory Services
Putting the Project Consortium in place
Completion of documentation for some key project contracts
Listing out of all key statutory clearances required for project to proceed
Preparation of financing plan
Should be in line with institutional norms
Permissible debt-equity ratio
Provisions regarding various sources of finance considered
Various debt and equity instruments considered
Financial Advisory and Transaction Services
Financial closure it the term used to denote completion of tying of the funds required for the project.
Issues need to get sorted at policy level to complete financial closure
Final aspects of contractual agreements between various parties need to be sorted out
Financing mix should be a trade-off between optimization of cost of funds and cost of closure
Feasibility of financing mix needs to be considered
Credit enhancements that would de-risk the financing institution and increases bankability helps the financial closure
IB-PS-Ch.14. Financial Restructuring Advisory - PTR
Debt Restructuring is part of the restructuring of a balance sheet as it is related to the borrowing obligation of a company
Debt Restructuring is a much more routine process (than Equity restructuring) and can be Triggered off even as a financial management tools to increase the efficiency of borrowing and reduction of financing costs.
Need:
A healthy company wants to restructure its debt portfolio by substituting existing high cost debt with fresh low cost borrowing
A Company without servicing capacity and liquidity problem would want to restructure its debt portfolio to reduce the cost of borrowing and improve working capital position
A company that is insolvent would need a wholesale restructuring of its debt portfolio to Rehabilitate it and make it solvent.
Isssues in Restructuring Various Types of Debt
Broad categories of debt
Secured long term borrowings
Unsecured long term borrowings
Secured working capital borrowings
Other short term borrowings
Restructuring of Secured long term borrowings
Long term secured borrowing can be either in the form of mortgage backed loans provided by commercial bank and financial bank.
Long term borrowing can be both rupee denominated or In foreign currency from Indian lending agencies.
The need for restructuring long term secured borrowing
To Reduce the cost of capital.
TO improve Liquidity and cash flow for a potentially sick company
To Enable rehabilitation of a sick.
Reducing cost of Capital for healthy companies
Restructuring Debt obligations for companies facing bankruptcy or for potential sick units
Recovery laws and restructuring of secured long term borrowings
Restructuring of Unsecured long term borrowings
It can be in the nature of public deposits, private Unsecured loans and privately placed, unsecured debenture bonds or debenture.
For unlisted non-financial companies, the appropriate is the Department of company Affair set up under the ministry of Finance
For listed companies, non-financial companies, the appropriate is the SEBI.
Restructuring of Secured working capital borrowings
Working capital borrowing encompasses credit Limits from Commercial banks in the nature of credit, demand loan, bill discounting, overdraft facilities and commercial paper
These are first charge on inventory and book debts and second charge on other assets.
For other short term borrowing which include inter corporate deposits, clean bills, other acceptance and clean overdraft are generally not restructured. It is rolled over with fresh terms.
Restructuring of other short term borrowings
IB Role
The first step would be to formulate a viability plan for the company
The next step would be to float the “Debt restructuring scheme”.
The next step is to present the DBS to lenders and represent the client in discussion and negotiations with the consortium of lenders..
After the proposal DRS is approved in principle, it is to be ratified by the approving authorities in each lender’s organization.
Debt restructuring services involves a lot of compliance and legal work.
Debt Restructuring is a much more routine process (than Equity restructuring) and can be Triggered off even as a financial management tools to increase the efficiency of borrowing and reduction of financing costs.
Need:
A healthy company wants to restructure its debt portfolio by substituting existing high cost debt with fresh low cost borrowing
A Company without servicing capacity and liquidity problem would want to restructure its debt portfolio to reduce the cost of borrowing and improve working capital position
A company that is insolvent would need a wholesale restructuring of its debt portfolio to Rehabilitate it and make it solvent.
Isssues in Restructuring Various Types of Debt
Broad categories of debt
Secured long term borrowings
Unsecured long term borrowings
Secured working capital borrowings
Other short term borrowings
Restructuring of Secured long term borrowings
Long term secured borrowing can be either in the form of mortgage backed loans provided by commercial bank and financial bank.
Long term borrowing can be both rupee denominated or In foreign currency from Indian lending agencies.
The need for restructuring long term secured borrowing
To Reduce the cost of capital.
TO improve Liquidity and cash flow for a potentially sick company
To Enable rehabilitation of a sick.
Reducing cost of Capital for healthy companies
Restructuring Debt obligations for companies facing bankruptcy or for potential sick units
Recovery laws and restructuring of secured long term borrowings
Restructuring of Unsecured long term borrowings
It can be in the nature of public deposits, private Unsecured loans and privately placed, unsecured debenture bonds or debenture.
For unlisted non-financial companies, the appropriate is the Department of company Affair set up under the ministry of Finance
For listed companies, non-financial companies, the appropriate is the SEBI.
Restructuring of Secured working capital borrowings
Working capital borrowing encompasses credit Limits from Commercial banks in the nature of credit, demand loan, bill discounting, overdraft facilities and commercial paper
These are first charge on inventory and book debts and second charge on other assets.
For other short term borrowing which include inter corporate deposits, clean bills, other acceptance and clean overdraft are generally not restructured. It is rolled over with fresh terms.
Restructuring of other short term borrowings
IB Role
The first step would be to formulate a viability plan for the company
The next step would be to float the “Debt restructuring scheme”.
The next step is to present the DBS to lenders and represent the client in discussion and negotiations with the consortium of lenders..
After the proposal DRS is approved in principle, it is to be ratified by the approving authorities in each lender’s organization.
Debt restructuring services involves a lot of compliance and legal work.
Sunday, December 9, 2007
IPO Manual for Venture backed firms
http://www.blueprintconsulting.fr/docs/IPO_Manual_2006.pdf
European Private Equity and Venture Capital Association paper - October 2006
European Private Equity and Venture Capital Association paper - October 2006
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