FINANCIAL INSTRUMENTS

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REGULATORY & STATUTORY AUTHORITIES

• Department of company affairs

• SEBI
• Department of economic affairs
• Reserve Bank of India
• Stock Exchange Boards
• Central board of Direct Taxes
• Central board of Excise & Customs
• SFIO
• Enforcements Directorate

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 SEBI – MARKET REGULATOR

SEBI was incorporated in April 1988 with an objective to act as

a regulatory for capital markets.

Functions:

a.Investor protection : to ensure steady flow of savings in

the capital markets.
b.Ensuring fair practices by issuers of securities.
c.Promotion of efficient services by brokers, merchant
bankers and other intermediaries.

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 SEBI GUIDELINES

• Influences raising of capital

• Issuer status
• Initial Public Offering : Treasury issue / offer for sale
• Follow up offer / Preferential offers
• Composite issues.
• Deployment of issue proceeds/Disclosures
• Lock in period

• 25% to be offered to Public (listing guidelines)

• Separate raising /listing guidelines
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 CAPITAL RAISING - REGULATORY ISSUES

• The SEBI (Issue of Capital and disclosure requirements)

Regulations 2009 ( The SEBI ICDR guidelines)

• SEBI (Listing obligations and Disclosures requirements)

Regulation 2015

• The Companies Act, 2013

• Stock Exchange listing guidelines.

• RBI Guidelines

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 SEBI ICDR REGULATIONS, 2009
(COVERS ISSUES BY A COMPANY IN PRIMARY MARKET )

Applicability

– All Public issues (including offer for sale)

– Rights issue in excess of Rs. 50 Lacs

– Preferential issue

– Bonus shares by a listed issuer

– Qualified institutional placement by a listed issuer

– Issue of Indian Depository receipts

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COMMON CONDITIONS FOR PUBLIC OR RIGHTS ISSUE

• Promoters should not be debarred from raising capital.

• Approval of a stock exchange to list the shares.
• All existing shares (if any) are fully paid up or forfeited.
• 75%of the project cost excluding the proposed issue is fully
tied up.
• Any warrant attached to the instrument will not have an expiry
beyond 18 months. Also price conversion formula is
determined upfront.
• Issue size exceeding Rs. 500 crores, the issuer has to appoint a
Public Financial Institution or a scheduled commercial bank to
monitor the issue proceeds.
• Appointment of Merchant banker / Demat Depository.
• Concept of Fast track issue. 7
 ELIGIBILITY NORMS (IPO’S)

Entry Norm I (Profitability route):

•Net tangible assets of Rs. 3 crores in 3 preceding years of which

not more than 50% are held in monetary assets (offer for sale
exempted).
•Minimum Rs. 15 crore PBT in at least 3 of the preceding 5 years
•Net worth of at least Rs. 1 crore in 3 preceding years
•Issue size should not exceed 5 times pre-issue net worth.

Entry Norm II (QIB route):

If entry norm : I conditions are not fulfilled issue can be carried

through a book building route, with at least 75% allotted to
QIB’s.
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FPO’s

•For issue sizes where as a result of the issue net worth of the
company exceeds 5 times then QIB’s through Book Building will
have to take up 75% of the issue.

Preferential Issue
•At least 2 alottees with no single entity getting 51%.

Pricing in Public Issue:

Free pricing in consultation with Merchant Banker.

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PROMOTERS CONTRIBUTION:

•In a Public issue by an unlisted issuer, a minimum of 20 percent

of the post issue capital to be contributed by Promoters.
•In a listed entity Promoters to ensure post issue holding of 20
percent.

LOCK IN PERIOD FOR PROMOTERS:

3 years from the date of allotment or from the date of commercial

production which ever is later.

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 SEBI LISTING PROVISIONS, 2015

APPLICABILITY:

•To all listed entities

•Any private placement of securities by a listed entity only to

QIB’s.

•Preferential allotment, Rights issue and Private placements in

accordance with the provisions of sec 62(1) of Companies Act,
2013.

Sweat Equity / ESOP’s

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 OTHER REGULATIONS

• Credit Rating of Debt Instruments mandatory irrespective

of maturity or conversion terms

• All credit ratings obtained in the last 3 years shall be

disclosed in the offer document.

• Outstanding warrants or financial Instruments would get

the same rights / benefits .

• Interest rates & terms of conversion freely determined

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DISCLOSURES IN OFFER DOCUMENT

•Minimum Subscription Clause

•Issue Schedule
•Intermediaries and Auditors
•Credit Rating
•Underwriting of the issue
•Capital Structure of the Company
•Details of major shareholders
•Terms of Issue
•Utilisation of Issue proceeds

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•Project cost & Means of Financing
•Company, Management, project details
•Plant, Machinery, Process & Technology
•Collaborations, Performance guarantees etc.
•Products & Services, Capacity & Future prospects
•Stock market data, Past prices, Bonuses etc.
•Financials of group companies
•Basis of issue pricing
•Past Financial data

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 FOREIGN DIRECT INVESTMENTS
Administrative Ministry or Automotive approval Route (RBI)

Sectoral Caps

Sector FDI Limit

under automotive route

Agriculture 100%
Mining 100%
Petroleum & natural gas exploration 100%
Refining Petroleum Products 49%
Defense 49%
Civil Aviation 49%
Telecom 49%
Multi Brand Retail Only Govt.(51%)
Banking 49%( Govt. up to
74%)

•Negative list for No inward FDI 15

•Outward FDI up to 4 times the net worth
 STRUCTURED FINANCIAL PRODUCTS

• Rupee convertibility

• Cost driven economy

• Economics of scale

• Interest rate volatility

• Buy-back option

• Risk Assignment

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•Transaction costs and phasing out of intermediaries
•Partial convertibility of currency thereby opening accesses to
offshore financing
•Tax asymmetries that can produce tax savings for the issuer,
investors or both
•Opportunities to reduce or reallocate risk
•Volatile inflation indexed interest rates
•Better understanding of risk-return characteristics of existing
•Investor wish list.
•Make debt attractive by offering sweeteners.

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 STRUCTURED FINANCING INSTRUMENTS

• Equity shares with differential voting rights

(limited to 25% of issued capital)
• External commercial borrowings & Depository receipts
• Non Voting shares.
• Multiple option debentures / SPN’s
• Exchangeables
• Deep discount bonds.
• Floating rate notes
• Rupee enhanced structured bonds
• Zero coupon bonds
• NCD with tradable warrant.
•Derivative linked bonds. 18
 OFFSHORE FINANCING

•Rupee convertibility on current account

• Low cost borrowings
• Large avenues of funds with low flotation cost .
• Elimination of licensing has resulted in large size projects
which need low cost means of financing. to ensure project
viability
• In FCCB’s / GDR’s company’s issue rupee denominated
instruments and hence do not carry foreign exchange risk

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• No voting rights thereby does not result in dilution of control
• Flexibility in tax planning
• Lower tax rates on dividends/ interest rates
• Reduces wt. av. cost of capital
• No lock in period for GDR’s
• Improves credibility of the issuer due to international due
diligence
• Risk of foreign exchange fluctuations
• Ideal source for companies with a natural hedge

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 DEPOSITORY RECEIPTS
• Depository receipts are negotiable certificates that represent
company’s publicly traded equity.
• Can be quoted on any international exchange.
• Company’s could directly issues GDR’S or by conversion of FCCB’s.
• Indian company will issue shares to custodian in India who will in
turn instruct foreign depository to issue receipts which can be traded
since Indian stocks cannot be traded on international exchanges.
• Provides international investor with settlement in his local exchange.
• Investor can convert GDR’s into a fixed number of equity shares at
any time.
• Depositary receipts have no voting rights.
• Trading of depositary receipts outside India will not attract tax
liability in India.

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 ECB /FCCB’s

• ‘Put’ option to investor and ‘call’ option to “company”.

• In the event FCCB is used to part finance project cost then

“put” option would normally not be given during the
gestation period.
• Interest : Libor + country +balance sheet risk
• ECB’s will retire as debt

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 DEEP DISCOUNT BONDS
Zero coupon bond
Redeemed at face value

Bond structure :
Deep discount bond has a face value of Rs. 1,00,000/-. It was issued
at a discounted price of Rs. 2,700/- with a maturity period of 25
years.
Withdrawal / redemption Deemed face value
At the end of 5 years Rs. 5,700/-
At the end of 10 years Rs.12,000/-
At the end of 15 years Rs. 25,000/-
At the end of 20 years Rs. 50,000/-

Taxed at 10% under 54 E / Non-availability of indexation benefit

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 BASIS OF EVALUATION

Redemption / Investors Cost to

withdrawal yield the company
----------------------- ----------------- --------------------
After 5 Years 13.56% 16.11%

After 10 Years 14.15% 16.00%

After 15 Years 14.49% 15.99%

After 20 Years 14.51% 15.71%

On Maturity 14.54% 15.54%

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 OPTIONAL CONVERTIBLE DEBENTURES

Issuer : Reliance petroleum Limited

Terms of the TOCD:

- Face value - Rs. 60/-

- Part A - Rs. 20/-
- Part B - Rs. 40/-

Part ‘A’ Convertible into 2 equity shares at par

Part ‘B’ Non convertible portion

- Investor will receive two warrants per debentures to be called

after 48 months.

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CONVERSION TERMS FOR PART – A

•1 Equity share of Rs.10/- at par on allotment

•1 Equity share of Rs. 10/- at par 18 months from the date of

allotment.

•No interest on the part ‘B’ of the TOCD for the first 5 years.

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 REEDEMPTION OF PART ‘B’ OF RS. 40/-

Principal Interest Total

6th Year 10 10 20
7th Year 15 15 30
8th Year 15 15 30
--------
80
--------
Warrants:
Two freely tradable warrants entitling the holder of the warrant
to one equity share per warrant at Rs 20/-.

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OPTIONS AVAILABLE:

OPTION I :
a) Retain the non convertible portion till maturity.
b) Sell warrants in the market.

OPTION II :
a) Surrender the non convertible portion and get two
equity shares.
b) Surrender the warrants and get 2 equity shares
by paying Rs 20/- per warrant.

OPTION III :
a) Retain the non convertible portion till maturity.
b) Surrender warrants receive 2 equity shares at Rs. 20
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ASSUMPTIONS:

• In all options the two initial equity shares that the investor
gets from part ‘A’ are held by him & do not receive
dividend.
• The IRR to the investor & cost of capital to the company will
be affected by the dividend policy.
• If shares received from part ‘A’ are sold in this time period,
the IRR to the investor will be higher depending on the time
& price
• Assumes no servicing cost for premium collected.

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ADVANTAGES OF THE STRUCTURE

Investor:
• Equity portion allows high capital appreciation &
participation in profits.
• Debt part allows returns at a reasonable yield if equity
returns are marginal.
• Warrants allow entitlement to further equity at investors
option.

Company:
• Would reduce interest during construction period for
projects with large gestation periods.
• Warrants add attraction to the instrument.
• Low cost of instrument.
• No servicing cost for 5 years.
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Assumes market price of Rs. 45/- per share for analysis.

Option I :
Cash flow (from Investor’s point of view)

Year 1 2 3 4* 5 6 7

Cash flow -20 -10 -30

50 17 25.5 25.5

** (2x20 = Rs. 40/- cost of warrants)

IRR = 16%
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Assumes market price of Rs. 45/- per share for analysis.

Option I :

Cash flow (from Company point of view)

Year 1 2 3 4 5 6
7
Cash flow 20 10 30
+40 -20 -30 -30

Cost of capital = 3%

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Option II :

Cash flow (from Investor’s point of view)

Year 1 2 3 4 5 6 7

Cash flow -20 -10 -30 -40

100 * - - -
IRR = 26%

* 4 equity shares sold at Rs. 25/- each

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Cash flow (from Company point of view)

Year 0 1 2 3 4 5 6 7
8
Cash flow +20 +10 +30 +40

COC = negative (if one assumes funds collected are reinvested

on short term basis)

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Option III:

Cash flow (from Investor’s point of view)

Year 1 2 3 4 5 6
7
Cash flow -20 -10 -30 -40
50 17 25.5 25.5

IRR = 17%

Cash flow (from Company point of view)

(same as option I)

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 ENHANCED STRUCTURE BOND

• Local currency agency structured bond to cover imported

Equipments with Rupee financing solution with limited
foreign exposure risk
• Multi laterals / Bilateral provide guarantees for investments
from OECD countries to Emerging markets.
• Credit enhancement by way of partial guarantees with more
underlying flexibility in the structuring of the instrument.
• Key advantage is not tying to any specific country as done
by Export credit agencies like Exam banks etc.
• Rupee credit enhanced structured bond is estimated to be
atleast 200 to 250 basis points cheaper than Indian FI debt

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 POTENTIAL CREDIT ENHANCERS

• ECAs provide term funding linked to import of capital

goods as well as equity investments from OECD countries
to emerging markets. Attractive financing can be achieved
by utilising guarantees and / or subsidies.
• Local bond / Debenture issuance denominated in local
currency backed by credit enhancement by an ECA /
Agency.
• Borrower has a rupee currency obligation for the door to
door tenure, except in the event of default.
• Investor base includes local banks, mutual funds and
insurance companies.
• Credit enhancement leads to an improved rating
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LOCAL CURRENCY AGENCY ENHANCED BONDS

• Diversification of funding and credit base

• Long tenor upto 10 year door to door
• Matches project periods with debt maturities
• Stable capital structure and forex risk is a contingent risk
• Increased visibility / profile in local bond market
• Various categories of investors may offer “tenor buckets”, the
issue could be structured with tranches of varying maturities.
( “STRIPS” )
• Secured by charge on fixed assets and colaterals such as
Pledge of shares etc.

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 FACTORS TO BE CONSIDERED

• Macro economic stability: interest, inflation and exchange

rate
• Capital markets liquidity and distribution of securities
• Pricing bench marks: Deep and liquid Govt. bonds can act
as fundamentals for corporate bonds as they provide low
risk pricing bench marks.
• Legal and infrastructural frame work such as securities
law, bankruptcy process, settlement process.
• Size of government local bond issuance and availability of
local credit rating agencies

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 TRANSACTION COST CALCULATION

Transcation size Rs 300 crs Based on current

Indian bond market
condition
Maximum door to 7 Years Longer tenor
door tenor possible due to
ECA cover
Up front cost 1.75%-2.0% flat Annualised based
(0.4 – 0.45 % pa.) on 5 years average
life

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Interest rate GOI +1.7% Based on 5 year GOI
per annum yeild
Interest margin depends
upon rating achieved and
timming of the issue
Average spread of
corporate paper over
Govt paper has been 90-
170 basis points

ECA premium 3.6-6.7% flat Average 5 years life

(0.7-1.2% pa) Finnvera / US exim as ECA

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Agency fees per 0.05% Estimated fees for
annum the ECA agency
&debenture trustee
function

All-in-Cost 10.65%-11.2%

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 SECURED PREMIUM NOTES

Instrument Details:
• Face value -Rs. 300/- to be fully called in 12 to 18 months
from allotment.
• An attached warrant which will entitle the holder of the
warrant to get one equity share of Rs. 10/- at a premium of Rs.
70/-.
• An SPN holder is not entitled to interest for the first
three years.
• The face value of each SPN will be redeemed over 4
instalments of Rs. 150 each ( Rs. 75/- as principal repayment
and Rs. 75/- as additional sum towards interest &
redemption premium).
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 Analysis
OPTION I :
SPN holder does not exercise the warrant
Year 1 2 3 4 5
6 7
Outflow (150) (150)
Inflow
Cap. repayment 75 75 75
75
Redemption premium 18.75 18.75
18.75 18.75
Cap. gains tax @ 20% (3.75) (3.75)
(3.75) (3.75)
Interest 56.25 56.25
56.25 56.25
Tax on int @30% (16.875) (16.875) 44
(16.875) (16.875)
OPTION II :

SPN holder exercises the warrant and sells the shares or sells off
the warrant

year 1 2 3 4 5
6

outflow 150 35.5

inflow(pretax) 150 150 150 150

(post tax) 129 129 129 129

IRR = 24.41% pretax

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21.81% post tax
Company Cash Flows

Year 1 2 3 4 5 6
7
Inflow 150 150
Outflow
Cap repayment 75 75 75 75
Redn. premium 18.75 18.75 18.75 18.75
Interest 56.25 56.25 56.25 56.25
Tax shield 37.5 37.5 37.5 37.5
Net flow 150 150 (112.5) (112.5) (112.5) (112.5)

Cost of capital (post tax) = 8.25% 46

Sale proceeds to investors Rs. 194.50
(value of Tisco share )
Less warrant premium Rs. 80.00
--------------
Net proceeds Rs. 114.00
--------------
Outflow of 2nd call Rs. 150.
--------------
Net flow (35.50)

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Warrants
Warrant - a call option from a company permitting the
debenture holder to buy a certain no. of shares at a specified
price.
Characteristics of warrants
- Exercise price
- Exercise ratio
- Expiration date
- Detachability
•Investor receives fixed interest return and capital gains due to
shares.
•Lower coupon rate could be offered by companies.
•Excersing of a warrant has dilution effect.
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• Cash inflow in future upon excersing of warrants
• Direct relation between coupon rate of debt instrument and
warrant terms.
• Acts as a sweetener for debt.
• Deferred equity financing
• Promoter holding can be improved.
• Khoka buy back options could be provided.

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 EXCHANGEABLES

• Optional convertible debenture gets converted into equity

shares of another company..
• Conversion price will always be higher than current market
price of the other company since investor has a dual stream of
return.
• Reduces cost of borrowing for issuer of exchangeable and tax
efficient in case the equity shares of the other company are
held by him in his portfolio.
• Investor who does not opt for conversion will get exchangeable
redeemed by the issuer .
• Ideal for companies which are highly levered and have high
interest costs.
• Exchangeables are linked to emerging / growth stocks
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 DERIVATIVE LINKED BONDS

• Under lying derivative could be Metal price on LME

• Minimum & Maximum off take guarantee
• Cap & Collar on derived price
• Helps in reducing risk for balance financing if minimum
off take qty at collar price ensures breakeven
• Non recourse balance sheet financing
• Ensures forward sale of commodity

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 DUE DILIGENCE PROCEDURES

BACKGROUND

•Where and when was the Company incorporated and by whom?

Details of its current business locations.
•The current corporate structure of the Company and the changes
it has undergone over the years.
•Brief history of the Company from its incorporation until the
present day including the date of listing of the Company’s shares
and any business landmarks including it’s subsidiaries.

52
 STRATEGIC PLANS
• Description of the planning process in the Company.
• What are the Company’s strategic growth objectives? Details
of any new projects, new businesses or changes in the
Company’s business that is under way or planned (including
the proposed expansion and any proposed acquisitions/
mergers or joint ventures).
• Any recent significant developments including new products,
contracts, customers or transactions.
• Estimates of growth for the Company, including assumptions
used.
• Details of any significant disposals or cessation of business in
recent years. And the Company’s plans for re-organisation of
its business, if any.
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•Details of the proposed uses of capital from this offering. After
the offering, will the Company have adequate capital for its
intended growth? Does the Company have any future financing
plans?
•Any material changes that may occur in the next several years in
its key market(s) and how is the Company positioned to deal with
these changes?
•The major factors affecting the Company’s business over the last
three years (such as wage rises, exchange rate movements, market
changes etc.) How well is the Company positioned to hedge
against the effects of a recession or adverse business conditions –
international and domestic?

54
PRODUCTS:
• Details pertaining to the major products and services of the
Company including information on the following:
• Breakdown of sales and profits by major products/ services for
the last five years.
• Breakdown of sales between outside customers and related
entities
• Principal customers/ customer segment with revenue estimates
• Details of marketing and promotion of products/ services with
estimates of expenditure.
• Details of collaborations, patents, licenses, etc.
• .Breakdown of domestic Vs. export revenues and earnings. Also
the percentage of the revenues and earnings derived from exports.
55
•Analysis of historical and projected breakdown of costs for
major products.
•Analysis of recent reports about the Company, its constituent
entities, or its products, either produced by the Company or a
third party (e.g. market research done by the Company or an
industry association).
•Analysis of recent reports about the Company, its constituent
entities, or its products, either produced by the Company or a
third party (e.g. market research done by the Company or an
industry association).

56
 BUSINESS & MARKETING STRATEGY
• Analysis of major political, demographic, economic, seasonal and
environmental factors that impact the business prospects
• Relative change in valuation of the rupee Vis-à-Vis the export
currency
• Indian interest rates and availability of financing
• Growth of the Indian economy
• Analysis of operating and financial measures the Company has
adopted or plans to adopt for minimizing the impact of the above
on its business prospects and profitability.
• Quantification of the impact of these factors on the Company’s
profitability.
• Analysis of the recent trends in the Company’s sales and
profitability. Is there any element of seasonality in the revenue of
the Company?
• Analysis of the Company’s marketing strategy for major products,
57
and major markets and customer groups.
•Anticipated changes in the Company’ product mix over the
next several years. What are the factors that will drive these
changes?
•Analysis of the Company’s long term goals with respect to
performance benchmarks such as market share, revenue,
profitability and growth for its major products.
•Analysis of the major vulnerabilities of the Company’s long
term goals and strategies (e.g. capacity constraints, technology
or product constraints, quality control, profit margin etc.)
•Analysis of the current regulatory framework governing the
industry; and anticipated major changes in the same and how
would it impact the Company?

58
 CUSTOMER & DISTRIBUTION NETWORK

• Analysis of the sales and distribution strategies employed by

the Company. For each major product category or group,
analyse the following:
• Total number of Company-owned outlets/ dealers
• Total number of independent outlets/ dealers
• .Nature of contractual arrangements governing the outlets,
dealerships and supporting facilities.
• Effectiveness in terms of size, efficiency, geographical
coverage and other appropriate dimensions of the distribution
strategies employed by the Company relative to those of its
competitors.
• Evaluate the consistency of the Company’s distribution
strategies with its long-term product and business objectives.
59
 COMPETITION:

• Analysis of what the management sees as the major customer

market segments for the products of the Company.
• Evaluate the Company’s competitive position with respect to
major products, including;
• A list of competitors
• Analysis of the Company’s strengths and weaknesses relative
to its competitive (e.g. pricing, product quality, reputation etc.)
• A profile of the market share position attained by the
Company in its major products and also that of its major
competitors.
60
MANUFACTURING:

Details regarding the manufacturing processes employed by the Company

for its major products.
Details of any proprietary technologies or processes used by the Company
and the agreements and licenses governing their use.
Analysis of the condition of the manufacturing facilities and equipment,
including:
•Description of each facility, including plant and equipment, product lines,
total production capacity, current utilisation, number of employees,
operational shifts etc.
•Age of product line and machinery
•Efficiency of manufacturing facilities relative to leading competitors
•Historical schedule of major capital expenditures or expansion
•Details of planned capital expenditure or expansions
•Cost of expansion or reduction
61
RAW MATERIAL & ENERGY SOURCES:

• Details of raw materials used in the Company’s major

manufacturing activities.
• Identification of the primary sources of raw material
• Details of major suppliers of raw materials and describe the
nature of relationships with them.
• Nature of existing purchase agreements.
• Difficulty of replacing or adding new sources of raw materials.
• Volatility of raw material prices and supply.
• How many raw material inventories does the Company keep on
production? How does the Company control raw material
inventory?
62
 MANAGEMENT:

•Details of the names and titles of directors and key senior

executives.
•How seriously will the Company’s operations be impaired if any
individual member of senior management was not available to carry
out his responsibilities?
•Analyse management contracts, if any.
•Details of any profit sharing, bonus, pension or stock purchase
arrangements or plans for management and other employees.

63
FINANCE:

Analyse recent and expected financial results. With specific

reference to the following :

•Sensitivity of profits to prices

•Sensitivity of profits to volumes
•Any anticipated changes in fixed costs
•Financial Projections for the Company and each of its operating
divisions.

Details regarding the company’s share capital:

•Classes of shares and number of shares outstanding for each

class
•Names of major shareholders and their holdings
•Relationship of major shareholders to each other and to the
officers and directors of the Company
•Details of any voting agreements among shareholders 64
• Details of the Company’s outstanding loans and other debts,
including mortgages, lease agreements and lines of credit.
• Company’s policy on its debt to equity ratio? What is the
availability of equity and loan capital? Are there any contractual
restrictions on future secured/ unsecured financing? Does the
Company intend to refinance existing borrowings?
• Are there any loans or other credit arrangements currently under
re-negotiation/ renewal? If so, what are the Company’s
expectations on the outcome of these negotiations?
• How does the level of the Company’s debt compare with
industry norms?

65
•What is the sensitivity of the Company’s operations to
changes in inflation, interest rates and tax rates?
•Does the Company possess any easily realizable assets
or unused credit facilities?
•Have any financial guarantees or indemnities been given
to third parties to secure credit?
•Information on capital commitments and contingent
liabilities.
•Analyse the Company’s dividend policy.
•Analysis of share price movements over the last three
years (highs and lows per quarter)
66
ACCOUNTING:

•What is the status of the Company’s relationship with the tax

authorities? Are there any major disputes in relation to tax claims?

•Analyse the audited financial statements and notes thereto for the
last five years. Please include divisional information, if available.

•What are the Company’s revenue recognition policies for its major
revenue categories?

•How do the Company’s accounting policies compare with those of

other companies in the same industry on such matters as revenue
recognition, accounting for stock, valuation of investments,
depreciation, accounting for research and development, allocation of
expenses and overheads as between sectors of activity ?
67
• What is the reason for and effect of past and any intended changes in
accounting policies?
• What is the policy with regard to pricing on intra group transactions?
• Analyse the Company’s accounts receivable position, including
aging of accounts by customer, amount due, time past due, reasons
for non-collection (i.e. bad debt or Company oversight).
• How often does the Company conduct physical inventory checks?
Historically, have there been significant differences between book
records and physical counts?
• What is the Company’s depreciation policy for its principal product
categories?
• Details of the Company’s internal control system. In the Company’s
opinion, are there any particular weaknesses that need to be
addressed?
68
CAPITAL EXPENDITURE:

• Details of plant and equipment proposed to be added and

proposed suppliers.
• Details of the Company’s capital expenditure over the last five
years and the Company’s current capital expenditure projects.
• Details of plans to expand capacity, included expected timetable,
financing etc. by each major division and by major asset category
for the next five years. Have any contracts been entered into
regarding the expansion of plants?
• Are there any new product areas/ major acquisitions or project
envisaged? What projects are currently under way and what
projects have recently been completed for the operational
improvement and technological development of the Company’s
activities? What financing plan is proposed for the capital
expenditure to be incurred on these projects?
69
REGULATORY & LEGAL ISSUES:
• Has any officer, director or major shareholder had any difficulties
of any nature with any securities regulation body in India or in
another country?
• Details on all litigation and pending litigation in which the
Company and any of its divisions are involved or may be
involved in and the potential material impact, if any, on the
Company’s financial position and ability to do business.
• Analyse the Company’s environment policy and discuss the
Company’s compliance with environmental controls imposed by
the Government. Has there been any recent change in policy? Is
the Company aware of any proposed changes?
• What does the Company see as material changes that may occur
in the regulatory environment that can materially impact its
operation.
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STAFF & LABOUR RELATIONS:

• Information on the total number of employees, both full time

and part time, by major category and major operating division.
Please provide details of where the Company’s main employees
are situated. Does the number of employees fluctuate
seasonally? Are there significant reductions or additions
planned?
• Analyse union representation, if any and existing labor
contracts. Are there any employment agreements due for
renewal? Does the Company have any contingent plans
(including reaction time to severance payments) for a recession?
• Details of the Company’s wages scales. How many hours a
week do full time and part time employees typically work? What
is the trend in wages and other benefits for the Company
compared to other companies in the same industry ?
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• Has the Company had major wage increases in the past year? If so,
what is the effect on an annual basis above that shown for the
previous fiscal year? Does the Company foresee any significant wage
increases in the near future, whether dictated by law, union, contracts
or Company policy? Can the Company pass any increases through to
customers?
• Analyse the state of labor relations, including past strikes if any,
handling of grievances, etc. Has the Company experienced
difficulties in hiring qualified personnel? Has the Company
experienced problems with employee turnover?
• Details of the Company’s investment plan in social welfare, medical
assistance, education, sickness and housing benefits. Please specify
the cost of the plan in terms of revenues.
• Details of pension and retirement plans for employees. What is the
policy with regard to pension funding? Are there any unfunded
pension liabilities?
• Does the Company provide training for its employees?
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RISKS & OTHER ISSUES:

•Confirm that the Company has adequate insurance coverage

on key assets and facilities.

•Details of any major risks to which the Company is or may

be exposed in the future that has not been addressed in the
above sections.

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