'Bank Checks Past Loans Taken By The company And Its Repayment Capacity'

Vandana Tolani, VP, Kansaltancy.com, has been associated with Business Development with the largest Indonesian companies at her 14-year stint in Indonesia. She has major experience in education domain and has worked for top Academic Institutions of Indonesia and India.

In an interview with BW Businessworld, Vandana Tolani talks about the debt funding, repayment of loans and VC/PE Funds

As Vice-President (VP) at Kansaltancy.com, she manages clients looking to raise any kind of Funding.

Tell us the process of Debt Funding?
To raise Debt, firstly you have to be sure which is the kind of Debt you have to raise - WC (Working Capital), Term Loan, LAP (Loan against Property), Personal Loan, CC (Cash Credit) Limits, LC/ BG's (Trade Finance Non-Fund - Letters of Credit/ Bank Guarantees). Each of these products has many sub-products under them, specific to a requirement of the company.

The bank is most interested in the bonafide of the party wanting loans. For individual borrowers, it will assess the CIBIL score, which captures the past credit record. It will then check the repayment capacity of the individual borrower by evaluating his/ her Income Tax return.

For companies, the bank will check the status of servicing of past loans taken by the company and its repayment capacity from audited financials of the company. The Bank will see the potential of the business to service the debt in time from the cash flows generated by it, by a CMA, which is usually prepared by the CA of the borrower and gives future financial projections.

In the International scenario, banks just check above aspects, and the ROI (Rate of interest) is low, in the range of 0.25 per cent to 8 per cent per annum, depending from where you source your loan.

However, Indian banks are risk-averse and ask for collateral i. e. any real estate or some other asset which the company can mortgage with the bank, in case the loan turns bad. The ROI in India ranges from 9 per cent to 12 per cent for secured loans and from 14 per cent to 22 per cent for unsecured loans.

Unsecured Loans are those which are free of collateral, banks make such loans at fewer ticket sizes, usually up to Rs 40 lakh per borrower. The banks usually also cover themselves by taking corporate or personal suarantee of the promoters as well as PDC (Post-dated Cheques) of the interest and Principal repayment.

After the assessment, banks issue the sanction letter, which contains the terms & commercials of the loan being issued. Then, it gets the value of collateral appraised by an empanelled Valuer and signs an agreement, before finally disbursing the monies.

Another kind of funding is from private financial institutions, which have access to foreign currency deposits. Interest rates in dollar, Yen, Euro are at historic lows and hence this lending comes at very low-interest rates compared to Bank Loans in India. The company seeking this kind of Debt should have some kind of Government association, like PPP (Public Private Partnerships), Government Tender and so on. The company can avail this Loan of any amount, at 7.5 per cent ROI for 10 years. The upfront fee is 5 per cent, which if amortized over 10 years, means 0.5 per cent p.a. So the cost of this Funding of 10 years comes to at 8 per cent! The collaterals for this Funding are the assets of the project being executed.

Tell us the process of Equity Funding?
Equity fund-raising can be from many sources. Angels typically invest between Rs 5 lakh to 50 lakh, but there are large Angel Investors today who would write a cheque for even INR 2 crore and beyond, if they are excited with the opportunity. Seed Funds come in early, taking the maximum risk, in anticipation of a large return, should the Startup eventually make it big, and can invest between INR 1 crore to 7 crores. VC (Venture Capital) Funds tend to have bigger ticket sizes, up to INR 2 crores to 10 crores. It is the PE (Private Equity) Funds, which invest only above a certain size and at growth stage, typically between INR 50 crores and beyond.

For raising Equity, the promoter needs to prepare a Teaser, an IM (Information Memorandum) and a Business Model, which gives statistics of how much business the company will do, from where it earns its cash and how it deploys it. Then, once a Fund is convinced of the proposition, it issues a Term sheet detailing the conditions & commercials on which it proposes to invest. Once the company accepts the Term sheet, the Fund conducts due diligence of the company and stitches the SPA (Share Purchase agreement), before making the drawdown of Funds.

What are the timelines in which these funds can be arranged?
In our interactions with clients, we have usually seen that the one line always said is "We need the Funds to be arranged yesterday!".

The timeline for arranging Debt from a Bank or an FI (Financial Institution) is up to 2 months. Getting VC/ PE takes much longer, from 3 months to 6 months, depending on case to case.
 
What is the focus of VC/ PE Funds?
VC/ PE Funds are individually differentiated by sector-focus, stage at which their potential investee companies are, range of Ticket sizes and how much stake they usually prefer to take.
The fund websites give their sweet spots - details on their focus sectors, size of the Fund, the range of Tickets they normally do, also at the stage of the company at which they like to enter - Early, Mid, Growth or pre-IPO. Most Funds take minority positions and seats on the BoD (Board of Directors) of investee companies but some Funds take majority stake to ensure they are in driver's seat.

There are Funds which remain invested for long, but given a healthy return opportunity surpassing their IRR (Internal Rate of return) expectation, most Funds like to make an exit.  
Then there are Funds which do PIPE (Private investment in Public Equity) deals, which means invest in listed companies.

How's the Funding ecosystem in India vis-à-vis abroad and how is Indian ecosystem shaping up post-GST and Demonetization?
American Funding ecosystem chases growth over profitability in the short term. Amazon grew under perpetual losses for 15 straight years, each year reinvesting its cash and incurring balance sheet losses, but kept on capturing market share - Investors rewarded the company with increase in its market capitalization, making further access to capital easier for it! US Investors chase equity classes also owing to low returns on fixed income products abroad (with interest rates being near Zero). Equity, therefore, is a favored asset class.

Flood of capital chasing the next potential Unicorn gave the West a patient investor ecosystem since return expectations were always so low. Ergo, the very structure of Funds, wherein one could take as much as 90 per cent leverage by piling on extremely low interest debt from carry-trade currencies like Yen, Euro and USD, boosted availability of easy money.

In India, huge companies on the likes of Apple, Microsoft, Google and Amazon don't exist, while these companies gobble up thousands of companies, especially in the US - in India, the Funds seek exits via an IPO or M&A's (Mergers & Acquisitions). The ticket sizes of Funds abroad is up to 10 times for the same amount of Equity, as compared to India!

The whole fuss with GST is not only increasing Tax compliance in a hugely Price-elastic market, but another step of the Government which effectively settled the question of how long Tax-evading companies will be able to operate. And that was - Demo (Demonetization).

Demo meant that excess cash in the system got reduced from 12 per cent to 9 per cent and it got deposited with the Banks. Hence, Cash Lenders charging usurious ROI, which formed the backbone of Working Capital needs of Tax-evading companies, exited to a large extent. The few available such Lenders started charging ROI of 24-30 per cent. The backbone of the Tax-evading company got truly crushed and therein lies the tale of the hues & cries from crony quarters.
It is GST PLUS Demo, which has affected the system and for the right long-term reason. Critics are damned! It has meant that informal channels of Funding have dried up.

The Government seems to be doing a lot of work to aid Startups, like Standup India, Startup India and various other Government schemes. Your take?
Modi Government has done the maximum for Startups, as compared to any other Government in the past. Startups get favourable treatment for first 3 years of their existence, in terms of accounting norms, tax treatment and so on. Then, Funds have access to startup Funding from Government institutions. This Government has also created the right investment environment by simplifying laws which can be seen from the 30 point jump in India's ranking in World Bank's Ease-of-doing-business rankings.

The Government is also now crunching multitude of Labour laws into 4 compact codes, which will go a long way in lessoning the mammoth burden of statutory compliances for companies.

If this Government had a majority in Rajya Sabha, I am sure it would have been able to clear the new Land Acquisition Bill, which would have aided Infrastructure & Manufacturing companies massively.  

How much fee do you charge?
Our fee is dependent on few factors viz Type of Funding sought, number of man-hours required to arrange the Funds and the stage at which the company is.

For Debt, we charge 1-2 per cent success fee on the amount of Loan required. In case we have to do work on documentation, then we charge separately for it, usually between INR 2-3 lacs, depending on the work.

For VC/ PE, we charge the Upfront fee, usually between INR 3-5 lacs, for creating the Pitch Deck, then a retainer of INR 2 lacs per month, payable upfront quarterly, for 1-2 quarters. Both the Upfront fee and Retainer are adjusted from the Success fee, which ranges from 3-5 per cent, depending on the stage of the company.

OPE (Out of pocket expenses), like travel, hotel, food, is extra and billed on actuals on the Client and are extra.