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FINANCING THE NEW VENTURE

The most difficult problem in the new venture creation process is obtaining financing.
Two types of financing: debt financing and equity financing.

Debt financing is a financing method involving an interest-bearing instrument, usually a loan, the payment of
which is only indirectly related to the sales and profits of the venture.
 (also called asset-based financing) requires some asset (such as a car, house, plant, machine, or
land) be used as collateral
 requires the entrepreneur to pay back the amount of funds borrowed as well as a fee in terms of the
interest rate. also an additional fee, for or being able to borrow the money.
 If the financing is short term (less than one year), the money is usually used to provide working
capital to finance inventory, accounts receivable, or the operation of the business.
 Long-term debt is used to purchase some asset such as a piece of machinery, land, or a building.
 To be careful that the debt is not so large that regular interest payments become difficult if not that
will inhibit growth and development and possibly end in bankruptcy.

Equity financing does not require collateral and offers the investor some form of ownership position in the
venture.
 The investor shares in the profits of the venture, as well as any disposition of its assets on a pro
rata basis based on the percentage of the business owned.
 an entrepreneur meets financial needs by employing combination of debt and equity financing.
 equity funding provides the basis for debt Funding, which together make up the capital structure of
the venture.

Internal or External Funds -
Internally generated funds can come from several sources within the company: Profits, sale of assets,
reduction in working capital, extended payment terms, and accounts receivable.
 the start-up years involve putting all the profits back into the venture; even outside equity investors
do not expect any payback in these early years.
 The needed funds can be obtained by selling little-used assets. This helps the entrepreneur
conserve cash, critical during the Start-up phase of the company’s operation.
 A short-term, internal source of funds can be obtained by reducing short-term assets: inventory,
cash, and working-capital items.
 Sometimes an entrepreneur can generate the needed cash for a period of 30 to 60 lays through
extended payment terms from suppliers.
 generating funds by collecting bills (accounts receivable) more quickly.


FAMILYAND FRIENDS
 family and friends are a common source of capital for a new venture. They are most likely to invest
due to their relationship with the entrepreneur..
 Family and friends provide a small amount of equity funding for new ventures, reflecting in part the
small amount of capital needed for most new ventures.
o there are positive and negative aspects.
 the family members or friends have an ownership position in the venture and all rights and privileges
of that position. This may make them feel they have a direct input into the operations of the venture,
which may have a negative effect on employees, facilities, or sales and profits.
 Any loans or investments from family or friends should be treated in the same business like from an
impersonal investor.

PERSONAL FUNDS
Usually New ventures are started with the personal funds of the entrepreneur. Not only are these the least
expensive funds in terms of cost and control, but they are absolutely essential in attracting outside funding,
particularly from banks, private investors, and venture capitalists. The typical sources of personal funds
include savings, life insurance, or mortgage on a house or car.

Commercial banks
Commercial banks are source of short-term funds frequently used by the entrepreneur when collateral is
available. The funds are in the form of debt financing and, require some tangible guaranty or collateral—
some asset with value.
Different types of business loans : Accounts Receivable Loans, Inventory Loans, Equipment Loans
Real Estate Loans

Cash Flow Financing
This type of debt financing is provided by commercial banks and other financial institutions is cash
flow financing. These bank loans include lines of credit, installment loans, straight commercial
loans, long-term loans, and character loans.
 Lines of credit financing the form of cash flow financing is most frequently used by
Entrepreneurs. The company pays a “commitment fee” to ensure that the commercial bank
will make the loan when requested and then pays interest on any outstanding funds
borrowed from the bank. Frequently, the loan must be repaid or reduced to a certain agreed-
upon level on a periodic basis.
 Installment Loans obtained by a venture with a track record of sales and profits. These
loans are usually for 30 to 40 days.
 Straight Commercial Loans A hybrid of the installment loan is the straight commercial
loan, by which funds are advanced to the company for 30 to 90 days. These self-liquidating
loans are frequently used lot , seasonal financing or building up inventories
 Long-term Loans When a longer time period for use of the money is required, long-term
loans are used.
 Character Loans When the business itself does not have the assets to support a loan, the
entrepreneur may need a character (personal) loan. These loans frequently must have the
assets of the entrepreneur or other individual pledged as collateral or the loan cosigned by
another individual. Assets that are frequently pledged include cars, homes, land, and
securities.

PRIVATE PLACEMENT
Another source of funds for the entrepreneur is private investors, who may-be family and friends or
wealthy individuals. Individuals who handle their own sizable investments frequently use advisors
such as accountants, technical experts, financial planners, or lawyers in making their investment
decisions.



What is Venture Capital?
Venture capital is money provided by professionals who invest alongside management in young,
rapidly growing companies that have the potential to develop into significant economic
contributors. Venture capital is an important source of equity for start-up companies. Professionally
managed venture capital firms generally are private partnerships or closely-held corporations
funded by private and public pension funds, endowment funds, foundations, corporations, wealthy
individuals, foreign investors, and the venture capitalists themselves.
Venture capitalists generally:
 Finance new and rapidly growing companies ·
 Purchase equity securities ·
 Assist in the development of new products or services
 Add value to the company through active participation
 Take higher risks with the expectation of higher rewards
 Have a long-term orientation
When considering an investment, venture capitalists carefully screen the technical and business
merits of the proposed company. Venture capitalists only invest in a small percentage of the
businesses they review and have a long-term perspective. They also actively work with the
company‟s management, especially with contacts and strategy formulation.
Features of venture capital
Venture Capital can be distinguished from other forms of finance on the basis of its special
characteristics which are as follows:
1 ) The most distinguishing feature of Venture Capital is that it is provided largely in the form of
equity, when the investee company is unable to float its equity shares independently in the market,
or from other sources in the initial stage. Thus risk capital is provided, which is not available
otherwise due to the high degree of risk involved in the venture.
2) The venture capitalist, though participates in the equity, does not intend to act as the owner of
the enterprise. The venture capitalist does not participate in the day-to-day management, but aids
and guides the management by providing the benefit of his skill, experience and expertise. He
nurtures the new enterprise till it enters the profit-earning stage.
3) The Venture Capitalist does not intend to retain his investment in the investee company for ever.
He intends to divest his shares, as soon as the company becomes a profitable business and the
returns from the business are high as per expectations. At this stage he withdraws himself from the
venture and in turn provides finance for another venture.
4) A Venture Capitalist intends to earn largely by way of capital gains arising out of sale of his
equity holdings, rather than through regular returns in the form of interest on loans.
5) A Venture Capitalist also provides conditional loans which entitles him to earn royalties on sales
depending upon the expected profitability of the business. (Such loan is partly or fully waived if the
business enterprise does not prove to be a success).


STAGES OF VENTURE CAPITAL FINANCING
stages of its life cycle according to requirements. These stages are broadly classified into two, viz.
(i) Early stage financing, and (ii) Later stage financing. Each of them is further sub-divided into a
number of stages. We shall deal with them individually. Early Stage Financing includes: (i) Seed
capital stage, (ii) Start-up stage, and (iii) Second round financing.
i) Seed Capital Stage: This is the primary stage associated with research and development. The
concept, idea, process pertaining to high technology or innovation are tested on a laboratory scale.
Generally, the ideas developed by Research and Development wings of companies or scientific
research institutions are tried. Based on laboratory trial, a prototype product development is carried
out. Subsequently, possibilities of commercial production of the product is explored. The risk
perception of investment at this stage if quite high and only Venture Capital a few venture capital
funds invest in the seed capital stage of product development. Such financing is provided to the
innovator in the form of low interest bearing personal loans.
ii) Start-up Stage: Venture capital finance is made available at the start-up stage of the projects
which have been selected for commercial production. A start-up refers to launching or beginning a
new activity which may be the one taken out from the Research and Development stage of a
company or a laboratory or may be based on transfer of technology from abroad. Such product may
be an import substitute or a new product/service which is yet to be tried. But the product must have
effective demand and command potential market in the country. The entrepreneurs who lack
financial resources for undertaking production, approach the venture capital funds for extending
funds through equity. Before making such investments, venture capital fund companies assess the
managerial ability, capacity and the commitment of entrepreneur to make the project idea as
success. If necessary, the venture capital funds lend managerial skills, experience, competence and
supervise the implementation to achieve successful operation. High degree of risk is involved in
start-up financing.
iii) Second Round Financing: After the product has been launched in the market, further funds are
needed because the business has not yet become profitable and hence new investors are difficult to attract.
Venture capital funds provide finance at such stage, which is comparatively less risky than the first two
stages. At this stage, finance is provided in the form of debt also, on which they earn a regular income.
Later Stage Financing: Even when the business of the entrepreneur is established it requires
additional finance, which cannot be secured by offering shares by way of the public issue. Venture
capital funds prefer later stage financing as they anticipate income at a shorter duration and capital
gains subsequently. Later stage financing may take the following forms:
i) Expansion Finance: Expansion finance may be needed by an enterprise for adding production
capacity once it has successfully gained market share and expects growth in demand for its product.
Expansion of an enterprise may take the form of an organic growth or by way of acquisition or
takeover. In the case of organic growth the entrepreneur retains maximum equity holdings of the
entrepreneur and the venture capitalist could be in much higher proportion depending upon factors
such as the net worth of the acquired business, its purchase price and the amount already raised by
the company from the venture capitalists.
ii) Replacement Finance: In this form of financing, the venture capitalist purchases the shares from
the existing shareholders of the company who are willing to exit from the company. Such a course
is often adopted with the investors who want to exit from the investee company, and the promoters
do not intend to list its shares in the secondary market, the venture capitalist perceives growth of
the company over 3 to 5 years and expects to earn capital gain at a much shorter duration.
iii) Turn Around: When a company is operating at a loss after crossing the early stage and entering
into commercial production, it may plan to bring about a change in its operations by modernising or
expanding its operations, by addition to its existing products or deletion of the loss-making
products, by reorganizing its staff or undertaking aggressive marketing of its products, etc. For
undertaking the above steps for reviving the company, infusion of additional capital is needed.
The funds provided by the venture capitalist for this purpose are called turn around financing. In
most of the cases, the venture capitalist which supported the project at an early stage may provide
turnaround finance, as a new venture capitalist may not be interested to invest his funds at this
stage. Turn around financing is more risky proposition. Hence the venture capitalist has to judge in
greater depths the prospects of the enterprise to become viable and profitable. Generally substantial
investment is required for this form of financing. Besides providing finance, the venture capitalist
also provides management support to the entrepreneur by nominating its own directors on the
Board of the company to effectively monitor the progress of recovery of the company and to
ensure timely‟ implementation of the necessary measures.
iv) Buyout Deals: A venture capitalist may also provide finance for buyout deals. A management
buyout means that the shares (and management) of one set of shareholders, who are passive
shareholders, are purchased by another set of shareholders who are actively involved in the
operations of the organisation. The latter group of shareholders buyout the shares from the inactive
shareholders so that they derive the full benefit from the efforts made by them towards managing
the enterprise. Such shareholders may need funds for buying the shares, venture capitalist provide
them with such funds. This form of financing is called buyout financing.
MODES OF FINANCING
The venture capital funds provide finance to venture capital undertakings through different
modes/instruments which are traditionally divided into: (i) equity, and (ii) debt instruments.
Investment is also made partly by way of equity and partly as debt. The VCFs select the instrument
of finance taking into account the stage of financing, the degree of risk involved and the nature of
finance required. These instruments are detailed below:
a) Equity Instruments: Equity instruments are ownership instruments and bestow the rights of the
owner on the investor/VCFs. They are:
i) Ordinary Shares on which no dividend is assured. Non-voting equity shares may also be issued,
which carry a little higher dividend, but no voting rights are enjoyed by the investors. There may be
different variants of equity shares also, e.g. deferred equity shares on which the ordinary shares
rights are deferred till a certain period or happening of an event. Moreover, preferred ordinary
shares carry an additional fixed income.
ii) Preference Shares carry an assured dividend at a specified rate. Preference shares may be
cumulative/non-cumulative, participating preference shares which provide for an additional dividend, after
payment of dividend to equity shareholders. Convertible preference shares are exchangeable with the equity
shares after a specified period of time. Thus, the venture capital fund can select the instrument with
fIexibility.
b) Debt Instruments: VCFs prefer debt instruments to ensure a return in the earlier years of financing when
the equity shares do not give any return. The debt instruments are of various types, as explained below:
i) Conditional Loans: On conditional loans, no interest rate as lower rate of interest and no payment period
is prescribed. The VC funds, recover their funds, along with the return thereon by way of a share in the sales
of the undertaking for a specified period of time. This percentage is pre-determined by VCFs. The
recovery by the VCFs depends upon the success of the business enterprise. Hence, such loans are termed as
„conditional loans‟ .
ii) Convertible Loans: Sometimes loans are provided with the stipulation that they Venture Capital may be
converted into equity at a later stage at the option of the lender or as agreed upon between the two parties.
iii) Conventional Loans: These loans are the usual term loans carrying a specified rate of interest and are
repayable in instalments over a number of years.

EXIT ROUTES
The venture capital company/fund after financing a venture capital undertaking nurtures it to make
it a successful proposition, but it does not intent to retain its investment therein forever. As the
venture capital undertaking starts its commercial operations and reaches the profit-earning stage,
the venture capitalist endeavours to disinvest its investments in the company at the earliest. The
primary aim of the venture capitalist happens to realize appreciation in the value of the shares held
by him and thereafter to finance another venture capital undertaking. This is called the exit route.
There are several alternatives before venture capitalist to exit from an investee company, as stated
below:
i) Initial Public Offering: When the shares of the investee company are listed on the stock
exchange(s) and are quoted at a premium, the venture capitalist offers his holdings for
public sale through public issue.
ii) ii) Buy back of Shares by the Promoters: In terms of the agreement entered into with the
investee company, promoters of the company are given the first opportunity to buy back
the shares held by the venture capitalist, at the prevailing market price. In case they
refuse to do so, other alternatives are resorted to by the venture capitalist.
iii) Sale of Enterprise to another Company: Venture capitalist can recover his investments
in the investee company by selling the holdings to outsider who is interested in buying
the entire enterprise from the entrepreneur.
iv) Sale to New Venture Capitalist: A venture capitalist can sell his equity holdings in the
enterprise to a new venture capital company, who might be interested in buying the
ownership portion of the venture capital. Such sale may be distress sale by the venture
capitalist to realise the investments and exit from the enterprise. Alternatively, such sale
may be for inducting a willing venture capitalist who wishes to take the existing liability
in the company to provide second round of funding.
v) Self-liquidating Process: In case of debt financing by the venture capitalist, the process
is self-liquidating in nature, as the principal amount, along with interest is realised in
instalments over a specified period of time.
vi) Liquidation of the Investee Company: If the investee company does not become
profitable and successful and incurs losses, the venture capitalist resorts to recover his
investment by negotiation or settlement with the entrepreneur. Failing which the
recovery is resorted to by means of winding up of the enterprise through the court

I ndian venture capital scenario

Venture capital funds are comparatively of recent origin in India. As new technological
developments and growth of entrepreneurship have started in India during the last two/three
decades, a number of venture capital funds have been set up in India. These funds have been
promoted by institutions at the national and state levels, banks and private sector individuals, as
shown in the following chart In 2003 there were 43 domestic venture capital funds and 6 foreign
capital funds registered with SEBI.
Amongst the Commercial Banks, ANZ Grindlays Bank set up the first private sector venture capital
fund, namely; India Investment Fund with an initial capital of Rs. 10 crore subscribed by Non-
Resident Indians. Amongst the Indian banks, the subsidiaries of State Bank of India and Canara
Bank have floated venture capital funds.
Gujarat Venture Capital Finance Ltd., set up by Gujarat Industrial and Investment Corporation Ltd.
in association with the World Bank, is a pioneer venture capital firm in India. Its investors include
the World Bank, Gujarat Industrial and Investment Corporation, Industrial Development Bank of
India, CDC (UK) SIDBI and other private and public sector organisations. Currently, it is managing
four funds.
IL&FS Vcnture Corporation Ltd. is a fund management company. It is a subsidiary of
infrastructure Leasing and Financial Services Ltd. set up jointly with Bank of India and
multilateral development agencies. It was earlier known as Credit Capital Venture Fund (India) Ltd.
At present the company is managing 7 domestic venture capital funds.
IFB Venture Capital Finance Ltd: This company has been promoted by IFB Industries Ltd. jointly
with IDBI and ICICI.
IFCI Venture Capital Funds Ltd. (IVCF): In 1975, the IFCI Ltd. Established „Risk Capital
Foundation‟ as a society to provide risk capital assistance in the form of soft loans to professionals
and technocrats setting up their own industrial ventures. In 1988, this society was converted into a
company named Risk Capital and Technology Finance Corporation Ltd. primarily to provide direct
equity to the companies (instead of providing soft loans to promoters). It introduced Technology
Finance and Development Scheme in 1988 to provide finance for improvement of technology.
Subsequently, it took up the management of a venture fund to provide finance for innovative
projects. The earlier two schemes were discontinued and its entire focus was laid on management
of venture capital. The company is now known as IFCI Venture Capital Funds Ltd.
Venture Capital Fund of IDBI
lDBI has constituted a Venture Capital Fund with the objective to encourage commercial
application of indigenous technologies or adoption of imported technologies, development of
innovative products and services, holding substantial potential for growth and bankable ventures
involving higher risk including those in the Information Technology sector All industrial concerns
are eligible under the scheme. The main criteria for granting Venture Capital assistance is high
growth prospects, potential for capital appreciation and clear-cut exit route within 3 to 5 years.
IDBI excludes mature industries, commodity-type products and highly competitive sectors.
Assistance is provided in the form of equity, term loans and convertible debt with ceiling of 80% of
the project cost. lDBI‟s exposure is restricted to Rs. 20 crore in each venture, though there is no
upper limit on the cost of the venture. Promoter‟s contribution should be 20% of the cost of the
project. Repayment period may be upto 5 years after initial moratorium of one to one and a half
year IDBI charges up-front fee @1.05% of term loan and a front-end fee @2.6% on direct
subscription to equity.
IDBI secures its assistance by first mortgage/charge on the fixed assets and by personal guarantees
from promoters or by way of pledge of shares by promoters. The venture capital fund of lDBI stood
at Rs. 179 crore as on March 31, 2003.
ICICI Venture Funds Management Company Ltd.
This company is a wholly owned subsidiary of ICICI Bank Ltd. It provides assistance to small and
medium industries promoted by technocrat entrepreneurs in the form of: (i) project loans, (ii) direct
subscription to equity, and (iii) conditional loans. The company provides venture capital assistance to a wide
spectrum of industrial
sectors. It extends assistance primarily through the venture funds and Private Equity Funds managed/advised
by it. As on March 31, 2001 the company managed/advised eleven funds with an aggregate corpus of Rs.
9.06 billion with an investment focus both in Indian and global companies. As the manager of these funds,
the co mpany is entitled to annual management fee and a performance fee which depends on the payouts to
the fund investors. The accounts of these funds are maintained separately and do not form part of the
company‟s accounts. In respect of private equity funds advised by the company it is entitled to an advisory
fee. All fees are recognised as revenue of the company on accrual basis. Venture funding does not form part
ofthe company‟s business on its own account, but out ofthe funds managed by it. This company retains its
position as the most significant institution in the Indian Private Equity Industry. It was one of the earliest to
recognise the value of investing in knowledge based sectors like information technology and bio-technology.
As at the end of March 2004 its paid up Capital was Rs. 31.3 million, Reserves Rs. 381 million and total
assets Rs. 530.8 million and total liabilities Rs. 118.5 million.
SIDBI Venture Capital Limited
SIDBI Venture Capital Ltd. is a subsidiary of Small Industries Development Bank of India
(SIDBI), which was established to carryout the business of setting up and managing venture capital
funds in the small scale sector. This company has been acting as the Investment Manager to
National Venture Fund for Software and Information Technology Industry (NFSIT). SIDBI Trustee
Company Ltd., another subsidiary of SIDBI acts as Trustee company for the Fund. NFSIT is a 10
year close-ended venture capital fund with a committed corpus of Rs. 100 crore. This fund has been
contributed by SIDBI, lDBI and Ministry of Communications and Information Technology,
Government of India. Investments by the Fund include Info-tech sector, software industry and
related businesses, such as networking, multimedia, data communication, value-added
telecommunication services and/or any other related sectors. The Fund has raised an amount of Rs.
66.67 crore till 2002-03 from the contributors out of a committed corpus of Rs. 100 crore. Its
cumulative sanctions aggregated Rs. 54.89 crore to 24 companies and cumulative disbursements till
2002-03 aggregated Rs. 30.09 crore to 17 companies. Slow growth in sanctions and disbursements
was due to cautious approach followed by the fund on account of depressed market conditions.
However, to spread risk, the company has created a diversified portfolio to cover a wide area of IT
industries.

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SOURCES OF DEVELOPMENT FINANCE

Types of Industrial Finance
Depending upon the nature of the activity, the entrepreneurs require three types of finances, short-
term, medium-term and long-term finances.
Short-term Finance
Short-term finance usually refers to funds required for a period of less than one year. usually
required to meet variable, seasonal or temporary working capital requirements.
Borrowing from banks is a very important source of short-term finance. Other important sources of
short-term finance are trade credit, installment credit and customer advances.
Medium-term Finance
The period of one year to five years may be regarded as a medium-term. Medium- term finance is
usually required for permanent working capital, small expansions, replacements, modifications, etc.
Medium-term finance may be raised by (i) issue of shares; issue of debentures; borrowing from
banks and other financial institutions; and ploughing back of profits (by existing concerns).
Long-term Finance
The period exceeding 5 years is regarded as long-term. Long-term finance is required for procuring
fixed assets, for the establishment of a new business, for substantial expansion of existing business,
modernization etc.



Sources of Finance
The sources that usually provide the working capital requirements are commercial banks, special
agencies like SILCOM, GIIC, and cooperative banks. Indigenous bankers, and moneylenders also
advance loans for working capital needs. The fixed capital needs are usually met by State
Governments (under the State Aid to Industries Acts/Rules), SFCs, NSI which machinery on hire-
purchase basis, Corporations (SSICs), (SIDCs), the State Bank of India and subsidiaries, and other
commercial banks.

the various sources from which an entrepreneur can raise funds are enumerated in its balance sheet
I. Internal
A. Paid-up Capital Ordinary shares, Preference shares, Deferred shares, Forfeited shares
B. Reserve Surplus Capital reserve, Development rebate reserves, Others
C. Provisions (i) Taxation (net on advance of income-tax), (ii) Depreciation.
II. External
D. Borrowings - From banks, from term-lending institutions like IDBI, IFCI, ICICI, Industrial
Development Corporations, etc., From government and semi-government agencies, Others
E. Trade Dues and Other Current Liabilities - Sundry creditors, others

To make finance available for a project there is need for prudent financial management. there is
also need for planning the flow of funds for the smooth functioning of a project. A successful
project is one which generates its own finances to a greater extent and finances its diversified
activities. Internal resources will serve as a backbone of a project. The generation of internal
resources not only benefits the enterprise, but also the entrepreneur, shareholders and the society.
A prudent management of internal resources may also assist the natural growth of the capital
market.
Depending upon the nature of the activity to be financed, business requires short-term, medium-
term ad long-term finance. To use an assortment of financial products that both lowers financing
costs and minimizes risks.
With deregulation, entrepreneurs will find it cheaper to access the markets directly. While short-
term working capital needs can be met by the issue of commercial paper, long-term project finance
requirements can be partially serviced through debenture offerings In more developed capital
markets, funds are raised by even scrutinizing the regular cash-flows generated by receivables.
Financial management is an integral part of industry and ranks equally in importance with other key
components like production and marketing. Capital and finance form the bed rock foundation of
industrial development. Provided by a number of financial institutions.
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Project Financing
Finance is the life-blood of any business. Its management is an art and merits special attention.
Credit available on the basis of the creditworthiness of the entrepreneur. In regard to capital
structure and working capital management, there are many differences between large, medium and
small-scale industries.
. The financial function of management is to:
(a) Ensure fair return on investment;
(b) Generate and build up surpluses and reserves for growth and expansion;
(c) Plan, direct and control the utilisation of finances so as to ensure maximum efficiency of
operations and build a proper relationship with suppliers, financiers, workers and members; and
(d) Co-ordinate operations of the various departments through appropriate measures to ensure
discipline in the use of financial resources.




Capital
total investment of money, tangible assets like buildings, and intangible assets like goodwill. The
“net capital” refers to the excess of total assets over total liabilities.
Capitalisation
Capitalisation is the sum-total of all long-term securities issued by a company and the surpluses not
meant for distribution; it includes only term loans and retained profits.
If a company raises more capital than is warranted by the figure of capitalisation or its earning
power, it is said to be over-capitalised, but if its capital is lower than its earning power, it is said to
be under-capitalised.
capital
The capital structure of a company involves a decision regarding the ratio of ownership capital to
credit capital, between short term and long-term capital, and the ratio among different sources of
finance for capital, which includes loans, bonds, share issues and reserves. The maintenance of
proper ratios between the different types of securities is known as “capita/gearing.”
The following factors generally govern the capital gearing of a company
(a) Trading in equity; (b) Retaining control of a company; (c) Nature of enterprise;
(d) Elasticity of the financial plan; (e) Legal requirements; (f) Market sentiment; and (g)
Requirements of investors.





Finance for Large-Scale Industries
Funds needed for block or fixed capital are generally raised:
(I) By the issue of shares of different types and debentures;
(ii) By ploughing back a part of the profits made by an industry;
(iii) By inviting long-term deposits from the public — a practice which has assumed increasing
importance in recent years;
(iv) By raising long-term loans from public financial institutions,.
The usual methods of raising working capital are: loans from commercial banks, loans from
managing agents, short-term deposits from the public, loans from indigenous bankers, and so on.
The different sources of finance for large-scale industries are analysed below.
A)Share and Debentures
Large and well-known industries generally raise a major portion of their funds to meet their capital
demands by selling shares of different types, namely, equity or ordinary shares, cumulative and
non-cumulative preference shares..
Another way of raising funds to meet the needs of block capital is to sell debentures to, and borrow
money from the public. Since commercial banks started giving interest every month on deposits of
61 months and above, middle class people prefer fixed deposits to the purchase of debentures of
large-scale industries.
The Advantages
• Returns surplus cash to the shareholder
• Increases underlying share value
• Supports share price during bearish periods
• Maintains a target debt-equity structure
• Inhibits unwelcome takeover bids
The Disadvantages
• Could enable promoters to use company money to raise their personal stakes
• Opens up possibilities for share price manipulation
 Could divert fnds away from productive investments

Deposits from the Public
The public, too, began to deposit their money with well-known large-scale industries to get higher
rates of interest instead of investing their savings in fixed deposits in commercial banks at
comparatively lower rates of interest..
The investor who wants to maximise returns on his savings now had to deposit them in small
companies at greater risk, or invest them in the Unit Trust of India or deposit them in commercial
banks and accept lower returns. The amendment that deposits cannot be held for more than three
years will also adversely affect the depositors because they have been deprived of the benefits of
cumulative deposit schemes.

Lease Financing
Lease financing is the easiest way of financing capital expenditure without going through the time-
consuming process of obtaining term-loan assistance from financial institutions and banks.
Jn any typical leasing transaction, there are three parties involved:
• the leasing company (lessor) which finances the equipment;
• the manufacturer or seller from whom the lessor purchases the equipment; and
• the party that requires the equipment (lessee).
The Advantages
 Transfers equipment risk to the lessor
• Minimises investment in equipment
• Reduce expenditure on maintenance
• Rentals can be tailored to project profile
The Disadvantages
• Rentals can be high
• Depreciation tax-shield is transferred to the lessor
• Requires specialised knowledge by lessors
• Scope for lessee misuse of asset
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Institutions finance to Entrepreneurs
Institutional agencies grant financial assistance to small-scale industrial units for:
1. participation in equity capital;
2. acquisition of fixed assets by way of term loans; and
3. working capital.

(a) National Small Industries Corporation (NSIC), Small Industries Development Organisation
(SIDO), Khadi and Village Industries Commission (KVIC), Handloom Board, Silk Board,
Commodity Boards etc., have schemes to help SSI units in marketing their products. Some of them
also help in promoting exports of goods manufactured by SSI units/Entrepreneurs.
(b) SIDO is one of the important agencies that help SSI units in marketing their products through
consultancy, testing and marketing facilities. The SIDO functions as a model agency for
formulating, coordinating and monitoring policies and programmes for promotion and development
of small-scale industries in the country.
(c)SIDO also promotes ancillary units to public sector enterprises. Besides, many large industrial
houses actively pursue the policy of promoting ancillary units for their purchases of stores. SSI
units can take advantage of this facility and secure a regular market for their products.
(d) District Industries Centres (DICs) provide marketing and other assistance to SSI units under a
single roof.
(e) State-level Small Industries Corporations (SICs) participate in tender programmes of
government purchases and then sub-contract these tenders to SSI units.
(f) The Government of India has established trade centres at various places which disseminate
information on market potentials and conditions. These centres also organise fairs and exhibitions
where SSI units can exhibit and sell their products.
(I) The SIDO has already set up 31 branch Small Industries Service Institutes, 4 Regional Testing
Centres, 3 Process-cum-Product Development Centres and 20 Field Testing Stations to provide a
comprehensive range of facilities to small-scale units.
(J The specialised institutes like Central Institute of Tool Design, Hyderabad, Central Tool Room
and Training Centres at Ludhiana and Calcutta, Central Institute of Hand Tools, Jalandhar, Institute
of Design of Electrical Measuring Instruments (IDEMI), Mumbai, Integrated Trading Centre,
Nilokheri, National Institiif of Small Industry Extension Training (NISIET), Hyderabad, National
Institute for Entrepreneurship and Small Business Development (NIESBUD), New Delhi conduct
specialised courses/programmes/job-oriented training programmes for the benefit of small-scale
industries.
(g) Twenty-seven Small Industry Service Institutes (SISIs) have been set up by SIDO at various
places for disseminating market information. Thirty-eight Exchange Centres have also been set up
within some SISIs to help units in securing sub-contract jobs.
(h) The small-scale industrial sector raises term credit and working capital required by it from
commercial banks, cooperative banks and State financial corporations.

Financial institutions provide financial assistance, undertake promotional and developmental
activities, provide risk capital, venture capital, technology finance, and set up institution to train
entrepreneurs.
Commercial banks provide development finance, venture capital, extension work, working capital
entrepreneurship development and management consultancy.
Mutual Funds provide easy accessibility to the investing public.
Merchant banks provide professional advice and services to industry for raising resources from the
market, acquisition of assets on lease and mergers take-over of existing units.
Finance companies offer the entire range of financial services to individuals and corporates.
Leasing companies operate four types of leases: (I) operating lease, (ii)financial lease, (iii) sale and
leaseback transaction and (iv),the leveraged lease.
Technical Consultancy Organisations (TCOs) cater to the consultancy needs of small and medium
industry and also for the new entrepreneur.
Management institutes sponsored by development financial „institutions are engaged in developing
and upgrading the managerial ability and managerial talents of the practising managers.
STEPS interface between Science & Technology institutes and industry
Entrepreneurial development institutes sponsored by financial institutions are engaged in the crucial
task of entrepreneurship development and research.

The Financia/Deve1opment Institutions extends assistance of

1. Equity participation in joint ventures.
2. Equity participation in private and public limited companies to the extent of shortfall in
promoters‟ contributions.
3. Essential loans to private and public limited companies for promotion of the industry.
4. Setting up units in the public sector for optimum utilisation of the State‟s resources where private
capital is non-existent — a pace-setter for future
private investment.
5. Project identification/technical consultancy for new projects — guidance; investigation;
feasibility and other studies.
6. Plant location: guidance on incentives, raw materials etc., specialised help for NRJs.
7. Industrial escort, free liaison with related government agencies; upgradation of infrastructure.
8. Merchant banking, company formation, and public issues.
9. Equipment finance.
10. Equipment leasing.
11. Priority assistance to NRIs.
12. Seed capital for technocrats.
13. Term lending.

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financial institutions
financial institutions are playing a key role in providing finance and counselling to the
entrepreneurs to start new ventures as well as modernise, diversify and even rehabilitate sick
enterprises. In the scale and scope of operation of various development banks (institutions) which
have been rendering financial assistance, directly or indirectly, to entrepreneurs and their various
ventures.

INDUSTRIAL DEVELOPMENT BANK OF INDIA
INDUSTRIAL FINANCE CORPORATION OF INDIA
ICICI
INDUSTRIAL INVESTMENT BANK OF INDIA
LIFE INSURANCE CORPORATION OF INDIA
UNIT TRUST OF INDIA
GENERAL INSURANCE CORPORATION
STATE FINANCIAL CORPORATIONS
STATE INDUSTRIAL DEVELOPMENT CORPORATION
HDFC
HUDCO
IFC
RISK CAPITAL FOUNDATION
SHIPPING DEVELOPMENT FUND COMMITTEE
EXPORT-IMPORT BANKS OF INDIA
NABARD
FOREIGN COLLABORATORS

Industrial FINANCE CORPORATION OF INDIA (IFCI)
Incorporation and Purpose
The Industrial Finance Corporation of India (IFCI) was established in 1948 under an Act of
Parliament with the object of providing medium and long-term credit to industrial concerns in
India. IFCI transformed into a corporation from 21st May, 1993 to provide greater flexibility to
respond to the needs of the rapidly changing financial system.
Mana9ement
The Board of Directors consists of a whole-time Chairman and twelve directors.
The Chairman is appointed by the Central Government after consultation with the IDBI.
Two directors are nominated by the Central Government and four by the IDBI. Six
Directors are elected by shareholders other than the IDBI.
Financial assistance provided by the IFCI can be in one or more of the following forms:
— Rupee and foreign currency term loans
— Underwriting of share and debenture issues
— Direct subscription to equity
— Guarantees
— Soft loans
— Equipment financing
Projects costing up to Rs. 300 lakh are financed by the State Financial Corporations, State
Industrial Development Corporations and Commercial banks under the refinance scheme of the
IDBI. Only projects costing in excess of Rs. 300 lakh are considered for assistance
Forms of Assistance
Section 23 of the IFCI Act outlines the types of activities which the Corporation
—is--authorised to undertake. These are indicated below with the year in which it was authorised to
undertake each type of activity shown within the brackets.
(a) Granting loans on subscribing to debentures repayable within a period not
exceeding 25 years. (b) Underwriting the issue of stock, shares, bonds or debentures by industrial
concerns provided that it does not retain any shares, etc., which it may have had to take up in
fulfillment of its underwriting liabilities beyond a period of 7 years except with the permission of
the Central Government (now the IDBI).
(c) Guaranteeing loans —raised by industrial concerns which are repayable within a period not
exceeding 25 years and are floated in the market (ii) raised by industrial concerns from scheduled
banks or state cooperative banks
(d) Guaranteeing deferred payments due from any industrial concern — (1) In connection with the
import of capital goods from outside India (ii) In connection with the purchase of capital goods
within India
(e) Guaranteeing loans (with the prior approval of the Central Government) raised from, or credit
managements made with, any bank or financial institution in any country outside India by Industrial
concerns in foreign
currency
(f) Acting as agent for the Central Government or, with its approval, for the International Bank for
Reconstruction and Development (IBRD) in respect of loans granted or debentures subscribed by
either of them
(g) Subscribing to the stock or shares of any industrial concern

New Promotional Schemes
In 1989, the Corporation‟ framed two new schemes of promotional activities which encourage new
entrepreneurs and technologists to set up their own industries, and which assist in the growth of
indigenous technology and small industries. The scheme for encouraging the development of
ancillary industries was liberalised.
The present positions is that IFCI has fourteen Promotional Schemes, of which
eight are consultancy fee subsidy schemes, four interest subsidy schemes and two
entrepreneurship development schemes, as per details given below:
Consultancy Fee Subsidy Schemes
Scheme of Subsidy to Small Entrepreneurs in the Rural, Cottage, Tiny and
Small Sectors for Meeting Cost of Feasibility Studies, etc.
Scheme of Subsidy for Consultancy to Industries relating to Animal Husbandry, Dairy Farming,
Poultry Farming and Fishing.
— Scheme of Subsidy for Consultancy to Industries based on or related to Agriculture,
Horticulture, Sericulture and Pisciculture.
— Scheme of Subsidy for Promotion of Ancillary and Small Scale Industries.
— Scheme of Subsidy to New Entrepreneurs for Meeting Cost to Market Research/Surveys.
— Scheme of Subsidy for Providing Marketing Assistance to Small Scale Units.
— Scheme of Subsidy for Consultancy on Use of Non-Conventional Sources of Energy and Energy
Conservation Measures.
— Scheme of Subsidy for Control of Pollution in the Village and Small Industries Sector.
Own generation by way of repayment of past borrowings and plough-back of profits.



THE INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
The Industrial Development Bank of India (IDBI) was established on 1st July, 1964 under the
Industrial Development Bank of India Act, as a wholly owned subsidiary of the Reserve Bank of
India. In terms of the Public Financial Institutions Laws (Amendment) Act, 1975, the ownership of
the IDBI has been transferred to the Central Government with effect from 16th February 1976.
Objectives and Functions
(i) To serve as an apex institution for term finance for industry, to co-ordinate the working of
institutions engaged in financing, promoting or developing
industries and to assist in the development of these institutions.
(ii) To plan, promote and develop industries to fill gaps in the industrial structure in the country.
To provide technical and administrative assistance for promotion, management or expansion of
industry.
To undertake market and investment research and surveys as also technical and economics studies
in connection with development of industry. IDBI‟s Schemes
IDBI is having the following schemes for the benefit of enterprises and entrepreneurs in the small
and medium scale sector:
Direct Assistance
Project Finance Scheme (loans, underwriting, direct subscription and guarantees
— Modernization Assistance Scheme for all industries;
— Textile Modernisation Fund Scheme;
— Technical Development Fund Scheme;
— Venture Capital Fund Scheme;
— Energy Audit Subsidy Scheme;
— Equipment Finance for Energy Conservation Scheme;
— Equipment Finance Scheme;
— Foreign Currency Assistance Scheme.
Indirect Assistance
— Refinance Scheme for Industrial Loans for Small and Medium Industries;
— Refinance Schemes for Modernisation and Rehabilitation of Small and
Medium Industries;
Equipment Refinance Scheme;
— Bills Discounting/Rediscounting Scheme;
— Seed Capital Scheme;
— Scheme for Concessional Assistance for Development of No-Industry Districts and Other
Backward Areas;
— Scheme for Concessional Assistance for Manufacture & Industrialisation of Renewable Energy
Systems;
— Scheme for Investment Shares and Bonds of Other Financial Institutions.
Sources of Funds
— Capital Contribution from Government;
— Loan Capital from Government;
— Loan Capital from RBI out of National Industrial Credit (Long Term Operation) Fund created
out of its annual profits;
— Borrowings by way of Government — guaranteed bonds from domestic market;
— Borrowings in foreign currency from international capital market;
— Deposits under Investment Deposit Account Scheme in lieu of investment allowance under
Section 32-AB of Income-tax Act;
— 3-year lDBl Capital Bond Scheme.


The National Small Industries Corporation provides a complete package of financial assistance and
support in the following areas:
• Supply of both indigenous and imported machines on easy hire-purchase terms. Special
concessional terms have been introduced for units promoted
by entrepreneurs from weaker sections of the society, women entrepreneurs, ex-servicemen and
those units located in the backward areas.
• Marketing of Small Industries products within the country.
• Export of Small Industries products and developing export worthiness of Small-Scale Units.
• Enlisting competent units and facilitating their participation in Government Stores Purchase
Programme.
• Developing prototypes of machines, equipment and tools which are then passed on to Small-Scale
Units for commercial production:
• Technical training in several industrial trades, with a view to create technical culture in the young
entrepreneurs.
• Development and upgradation of technology and implementation of modernisation programmes.
• Supply and distribution of indigenous and improved raw materials.
• Supply of both indigenous and imported machines on easy lease terms to existing units for
diversification and modernisation.
• Providing of Common Facilities through Prototype Development & Training Centres.
• Setting-up Small-Scale Industries in other developing countries on turnkey basis.


SFCs extend financial assistance to industrial units by way of term loans, direct subscription to
equity/debentures, guarantees and discounting of bills of exchange. SFCs operate a number of
schemes of refinance and equity type of assistance formulated by IDBI/SIDBI which include
schemes for artisans, social target groups like SC/ST, women, ex-servicemen, physically
handicapped, etc. and for transport operators, setting up hotels, tourism-related activities, hospitals
and nursing homes, etc.
Objectives and Functions
• The main function is to provide term loans for the acquisition of land, building, plant and
machinery, pre-ops and other assets.
• Promotion of self-employment.
• To encourage new and technically/professionally qualified women entrepreneurs in setting up
industrial projects.
• To finance expansion, modemisation and upgradation of technology in the existing units.
• To provide financial assistance for the rehabilitation of sick units financed by the Delhi Financial
Corporation
• To assist for the promotion or expansion of industry by the rural and urban artisans.
• To provide financial assistance for transport vehicles strictly for captive use, depending on the
requirement of the projects.
• Providing seed capital assistance under the scheme of Industrial Development Bank of India.
• Providing soft-term loan to cover the equity gap to help small-scale industrial units.
• Undertaking the various promotional activities, including the organisation of entrepreneurial
development programmes and seminars etc.
• Interest subsidy for self-development, self-employment of young persons, adoption of indigenous
technology in small and medium sector and encouraging quality control measures in small-scale
industry
• To promote development institutions in the state/region which will accelerate the process of
socio-economic growth.

ROLE OF CONSULTANCY ORGANISATIONS

In the competitive post liberalisation environment characterised by rapid technological innovations
on one hand, and the prospect of an increasing number of highly experienced international giants
entering the domestic market, on the other, the very future of organisations seems rather foggy and
endangered. The free market, being ruthless, strictly adheres to the principle of survival of the
fittest.
To ensure this future, our observations and consulting experience indicates that organisations must
meet the following conditions:
— The vision to provide the direction and driving fuel;
— Appropriate business strategy, based on correct environmental scan or distinctive advantage (or
the capacity to develop it soon);
— The appropriate organisational structure (with coordination processes);
The means and ways of synergising the efforts of people to achieve the business goal.

Strategic Plan
Identifying vision, environmental scanning, identifying distinctive apabilities, leading to
determination of business portfolios, thrust areas, business goals
Organisational Structure and Systems
Organisation diagnosis and restructuring, process of coordination, functional systems and structures
People’s Systems and Synergies
Leadership partners, evaluating and developing potential and commitment of people. Synergising
their efforts to achieve corporate goals

Technical Consultancy Organisations (TCOs)
The TCOs were set up to provide under a single roof a package of total consultancy services
covering all stages in the project cycle. TCOs also provided consultancy to State Goverments, state
level development financing institutions and banks. The main thrust of TCOs‟ operations was in the
area of preparation of project reports and feasibility studies. Having gained experience over the
years, TCOs diversified into areas of identification of potential entrepreneurs and their training,
project implementation, rehabilitation, management consultancy, detailed design engineering and
turn-key services, besides energy audit and conservation.
The major activities of TCOs are:
(I) Carrying out industrial potential surveys, identification of project ideas, project formulation;
(ii) Evaluation of projects referred to them;
(iii) Preparation of project profiles, feasibility studies;
(iv) Preparation of project reports and where called upon, to render turn-key services in project
implementation;
(v)Conduct area development and marketing surveys;
(Vi) Assist entrepreneurs in their modernisation, technical upgradation programme, etc.;
(vii) Revival of sick units right from the stage of carrying out diagnostic studies
to the actual implementation of rehabilitation schemes
(viii) Provide technical, management and administrative assistance;
(ix) Conduct special studies as assigned by the entrepreneurs and entrepreneur-
ship;
(x) Conduct entrepreneurship development programmes, entrepreneurship awareness camps,
(xi) Identify the potential entrepreneurs and provide them with technical and management
assistance;
(xii) Offering merchant banking services; Undertaking market research and surveys, for specific
products;
(xiv) Undertaking energy audit and energy conservation assignments;
(xv) Project supervision;
(xvi) Undertaking export consultancy and export oriented projects based on modern technology.