Financial Strategy Portfolio: All Contents

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Strategic financial Service portfolio

Financial strategy & financial plan

Strategic decisions
Financial strategy includes management of all financial aspects of a company in line with the business strategy. The strategy defines the financial vision of the company and the financial objectives in short-term, mid-term and long-term. It includes understanding the current requirement of funds and also the requirement for future growth initiatives. During the preparation of a financial strategy, the current financial performance of the company is analysed; action is taken on the areas that need improvement. As an important part of the financial strategy, the prevalent capital structure of the company is analysed and its implications for stability, credit rating, market price of shares of the company are analysed. Suitable steps are undertaken to reach the desired state of capital structure. For this, various available modes of funding of the company are analysed for their pros and cons and funds are secured for company’s activities. Financial projections are made in a financial model. Looking at the growth growth rate of the company and life cycle stage of the company the dividend policy is prepared.

Business environment
Various kinds of business risks are mapped and their financial impact is measured. Various mitigation measures are suggested and implemented. A valuation of the business is carried out. The rate of return on the investment is measured vis-a-vis the cost of capital. The financial impact of the strategic decisions of the company such as mergers and acquisitions or joint venture is analysed. If the company is in financial distress or if there is a decline in financial performance, strategies are evolved for the turnaround of the company. Study of imports and exports of the company is made to understand the impact of trends in commodity prices and foreign exchange. If the company has a presence abroad, analysis of international business is carried out.

Cash flow management
The trends in working capital requirement are studied and plans are made to mobilize the increase in working capital. The cash flow of the company is projected and suitable provisions are made to fulfill the deficit. Various business scenarios are taken into account such as conservative case, average case and aggressive case. The impact of pricing on the viability of business as well as on the demand is considered and the impact of competition is studied. Analysis of various product segments and market segments is carried out to understand their relative importance. Various business models are are studied to see where the maximum value lies in the value chain. Tax structure is evolved to reduce the impact of direct and indirect taxes. The insurances required for the company are identified and provisions are made for them. Various tax and other kinds of benefits from various government and causes government bodies are analysed.

Organization of finance function
For the smooth management of the finance function in the company, an organisation chart is prepared for the department. Various corporate policies for the financial decisions are prepared. Delegation of financial powers is prepared. Modern softwares are suggested to capture the business data to understand what is going on correctly and what needs improvement. The financial plan analyses observations made by the statutory auditors and if there are any negative observations, suitable measures are undertaken to rectify them. Measures are undertaken to rectify where there might be a possibility of financial fraud. To prevent this, a suitable vigilance mechanism is put in place. Various applicable compliances for the company are identified and the track record of their compliance is studied. The treatment of relations with the other departments is defined.

Investment
A suitable strategy is evolved to make appropriate investments of the excess funds of the company with due care for liquidity.

A financial strategy can be focused only on a few aspects of the mentioned above as per the requirement of the business.

Apohan’s Role: Apohan provides services for the individual components of the financing strategy or an integrated financial strategy for a business to achieve all the objectives of a good financial strategy that are listed here.

Financial models

Risk of applying thumb rules for critical high value financial decisions

Businesses involve a lot of financial transactions, a very big portfolio of products of complex nature, a lot of permutations and combinations business models, a lot of other options and parameters regarding operational and financial aspects over a very large number of years. The back of the envelope calculations ignore the impacts of many very critical and sensitive issues. Also, modern day businesses have not remained simple. Hence, an elaborate MS Excel based model needs to be prepared. In the Indian small and medium enterprises, it has been observed that very large scale of decisions are taken by rule of thumb. The business environment is so dynamic and every business or project is so different from another that the degree of error in the Thumb Rule and the margin of profit in the decisions are almost comparable. We see that many new growth initiatives of SME companies go wrong only because detailed financial analysis was not done in a MS Excel based model and some movement in some parameters spoiled the show.

Types of financial models
New business corporate finance model
New business project finance model
Budget model
Cost analysis model
Existing business financial model
Working capital model
Financing plan model
Investment financial model
Procurement financial model
Business capex model
Business opex model
Project capex model
Project opex model
EPC cost model
PPP financial model
Project finance model
Bid model
JV financial model
Operations financial model
Annual financial Model
Valuation model
Data Models

User-friendly financial models
Financial model should be prepared in a database format. It helps to make changes in certain assumptions, and to incorporate radical strategic decision changes involvement of a joint venture partner. The users of the model, that is, the clients, are the final owners of the model. They should be able to easily make at least the basic changes without having to depend upon the consultants. The model should incorporate sensitivity analysis for various factors that impact the financial performance, financial viability or valuation. The client should be able to run various scenarios and prepare data tables. The important correlations should be represented to the graphs. The change of a certain assumption should be easy to make in a couple of minutes without having to to arrange one more meeting after 10 to 15 days.

Inputs for financial models
Various strategic decisions such as business model, capital structure et cetera are provided by the top management of the company. Revenue related assumptions and the data is provided by the marketing department. Various cost related data is provided by the purchase department. Other inputs such as employee costs are provided by the respective departments. Preparation of the financial model is not a standalone job at the consultant’s office. It should be carried out with a good interaction and a coordinator should be appointed from the Finance Department of the client to provide various inputs and guidelines.

Composition of a financial model

Financial model has a few independent threads. One of them is the project cost. Along with impact of inflation the for the commissioning of the project and the interest during this period, total project cost is calculated. Based on this overall requirement and requirement of the working capital other than from the internal accruals, capital requirement is calculated. Revenues are projected based on the market survey and the marketing strategy including the pricing strategy and capacity utilisation plan. Gives an idea of the projected revenues. The operating costs calculate are calculated based on the configuration of the manufacturing facility, the human resources required, the raw material required, the marketing costs, manufacturing overheads, the corporate overheads, etc. The components of the total project cost help in preparation of the depreciation schedule for accounting purposes and tax purposes. The debt component in the capital structure provides a way to calculate the future interest payments and repayment of the principal amount. With the help of all these inputs, the financial statements in terms of profit and loss statement, balance sheet and cash flow statements can be prepared. After checking for errors and fine tuning, this financial model will provide the desired answer. The degree of e-tailing would depend upon the size of transaction are the worth of the transaction for the organisation.

Apohan’s role
Apohan has excellence province progress in preparation of financial models. It can help a business in analysing all the financial implications of a strategic decision for a new growth project. Please go through the list of all the types of financial models Apohan prepares.

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Financial contracts

Importance of existence of financial contracts

We are covering the topic importance of existence of financial contract before the topic of importance of financial contract because has not been realised well by many SME businesses. In case of small and medium enterprises, the need for preparation of a financial contract for long-term strategic relationships and transaction is not paid as much serious attention as should be paid. Apohan has observed in its market survey that many companies have simply not prepared even the most critical financial contracts with their key stakeholders. The understanding between the parties is verbal or is written down on a very cursory manner. It has been observed that the requirement of having to prepare a detailed financial contract is seen as a symbol of distrust in many cases between the partner friends in a SME company. Going is good in the beginning, and there is not much to fight for or to fight about, everything sails smooth. But when the business becomes wealthy and complicated, a lot of new assets, liabilities, rights and obligations, decisions, duties arise which the friends were not aware of before. There is no clear framework between the partner on how to share these positives and negatives. In these circumstances, misunderstandings might get developed and may also ultimately lead to a breakup. When these people approach for dispute resolution, in the absence of a contract, exactly what happened in the history is taken as what was contracted. However, when there is a written down contract, any aberration in performance cannot be the contract itself even if it is ignored by the other party. It is treated as a voluntary waiver and not as a contractual right. So, do prepare a contract!

Importance of financial a contract

Many properly organised institutions and organisations dealing with small and medium enterprises will not work without a written down formal contract. The businesses think that the terms and conditions of these contracts are non-negotiable including the clauses on the prices. Their contract are very elaborate as they are prepared by the giant financial institutions who have a wide variety of risks. So the business end up accepting all the standard terms and conditions, completely in the favour of the institutions without a single word of negotiation.
However, when it comes to the relationships between a business (as the legal entity) and the most important stakeholders of the top of the management, or between individuals very close to it or between the other businesses very close to it, elaborate contracts are not prepared even if large value and long-term transactions are being carried out. If we have to capture the essence of a business transaction in just two words, they are: 1. Baat (the context of what has been agreed) 2. Hisaab (for what value). The financial transactions are complex and they have several aspects. The business contracts should capture the obligations of the parties and also should write down what happens if the respective obligations are not honored. If all the foreseeable aspects are captured and also, if the principles of all the the aspects that cannot be foreseen are written down, then parties can work together for many years without any friction. Many Indian Businessmen simply sign the documents written in English (many of the Businessman may not be understanding simple English, and many other businessmen who understand simple English may not be understanding the verbose legal English) without looking at the contents in detail. And that is why they discover the negative aspects or limiting, qualifying, and adverse clauses one by one in the life of the contract. This is why, a contract should be taken very seriously before it is being entered into.

Types of financial contracts

If we classify all the contracts, one variety of them is business contracts. If we further classified all the business contracts, one variety of them is financial contracts. Almost every business transaction except for the Memorandum of Understanding (MoU), term-sheet, Letter of Intent, any application, any query, an agreement to sale, an notice inviting tender (NIT), a tender, a teaser, a certificate, an RFP, etc. has of contractual or financial side to it. There is a wide variety of financial contracts based on the number of parties, the legal nature of parties, the purpose of contract, scope of work, value, term of contract, applicable jurisdiction, etc. Below are some important financial contracts:

Articles of association
Shareholding agreement
Lease contract
Sale purchase contract
Concession contract
EPC contract
Service contract
Work contract
Supply contract
Employment contract
Licence Agreement
Franchise agreement
Royalty contract
Consulting contract
Brokerage contract
International contract
Private contract
Public contract (contract with government, etc)
Verbal contract
Construed contract
Non disclosure agreement
Non-compete agreement
Bank guarantee
Power of attorney
Project management contract
Annual maintenance contract
Service level contract
Death wheel
Bye laws of a club
Gift deed
Trust deed
Share certificate
Currency note
Sale deed
Business transfer agreement
Joint venture agreement
Escrow agreement
Substitution agreement
Investment contract

This is not an exhaustive and orderly list of the possible varieties of contracts. It is just a random sample of important business contracts. Apohan has expert’s understanding in a wide variety of contracts.

Elements of financial contracts

Typical business contract has the following sections
Preamble and recitals (identification and background of parties)
Contract related clauses (validity , tom, condition president)
Operational clauses (who will do what, what happens if they don’t do that)
Payment mechanism related clauses (mode of payment, credit period, invoicing)
Payment value related classes (elements of payment, payability, schedule of payment, values or formulae o parameters, taxes)
Obligations of the parties (how the parties will enable the purpose of the contract, what they will do and not do)
Strategic clauses (Force Majeure, termination, dispute resolution, representations and warranties, etc)
Standard legal clauses (applicable jurisdiction, interpretation, communication, number of copies, modification, etc)

Good contracting practices

Business contract should be written down in plain simple English language or local language. They need not be necessary written in English or in complex legal language. They should be properly stamped and duly registered. It should be ensured that they are legally enforceable and are in line with the laws of land. They should be prepared in as many number of copies as the number of parties to it. It is a good practice to get them vetted by a lawyer. The scope of work should be paid proper attention. Inclusion and exclusion of activities should be clearly mentioned. The contract should be balanced and not learning in favour of any one party. There is a possibility of the judges developing an antagonism for the party which is seen to be having very high bargaining power, in case of a unfortunate litigation in one-sides contracts. Alternative dispute resolution mechanism should be preferred and its award should be made mandatorily binding. Local court should be preferred. Attention should be paid to the amounts other than the main payments such as the penalties and damages or compensations. Attention should also be paid to the levels of deductions for the deficit in service level. Attempt should be made that a contract is exhaustive and covers most of the aspects of the transaction. It should be made into an enabling instrument incorporating all the clauses for reasonable corporate cooperation. All the communication going before the contract should be made a part of contract with lower precedence. It should be made easy to amend the contract as the business circumstances are very dynamic. All the risks that arise from a long-term engagement should be analysed and safety provisions should be made in the document. Circumstances giving the power for exit or termination should be clearly mentioned. Proper references should be made to the corporate documents, industrial standards (matters that are not binding by law but voluntarily chosen by the parties) that will actually govern the contract management and execution of the activity. Mentions of who bears what costs and what risks should be made clear in a joint activity. Even in case of the transactions which are not long-term and not of very high value, and where there is no need felt for a contract, all the details should be communicated through emails etc. These emails are virtually as good as legal contracts. There are many other specific provisions for which Apohan can provide a business and experts advice.

Role of lawyers in financial contracts

The business lawyers from reputed companies have in-depth understanding of the business and of the legal framework. They can customise the standard templates of contract if the transaction is very typical, prepare an altogether new contract, covering almost all the innovative aspects right from the scratch, for a very novel business arrangement. They can suggest the contract structure or the exact legal relationship to avoid legal issues. Indian companies are relative lucky in comparison with their Western counterparts in that Indian lawyers have very high degree of expertise in their area of professions, much ahead the evolution of the the regulatory framework in the country, and simultaneously their fees are very less compared to the global fees levels. Legal forms as well as legal professionals have a formal and legal relationship with the bar as well as the judicial system in the country. They don’t enjoy (have) the freedom as much the strategic consultants enjoy in formulating beneficial contracts for the businesses. Also lawyers are always wrapped in the the legality and legal implications frame of mind. As against that, typically, strategic consultants are from Engineering and Management background; they have pure business perspective; they treat law only as a guideline and an enabler. Lawyer to have relinquished their practice certificates for practicing business strategic legal advisory are a rare species.

Role of strategic consultants in financial contracts

The lawyers cannot prepare a business contract stand alone. They do not to appreciate the strategic aspects of a business as do the strategic consultants. Following are the legal contract services upon carries out:

Preparation of the stakeholder contracts such as shareholders’ agreement
Preparation of strategic business contracts
Preparation of business transfer agreements
Transaction advisory for the public sector tenders
Advisory for private equity investment agreements
Advisory for institutional, bank loan agreements
Advisory for product sale agreement
Advisory for raw material procurement agreement
Bid advisory for the public sector tenders
Review of long-term agreements
Review of short-term agreements
Contract framework
Contract negotiation
Contract execution
Contract management
Risk analysis of a contract
Financial analysis of a contract
Legal review of company documentation, policies, etc
Regulatory study of the sector
Applicable laws’ analysis
Business laws
Obtaining permits, licences, permission & approvals
Support to the litigating lawyers
Support for insolvency and bankruptcy code cases
Support in defending a business pacing recovery laws

There is a wide variety of legal work that strategic consultants can carry out for the businesses. A few of them have been listed above.

Apohan’s role

The business contracts in which there is significant financial stake as well as the financial contracts which deal with purely financing and investment matters, are very crucial from the perspective of a businessman. Apohan, as a strategic consultant, helps analysing impacts of these contracts on a business, preparation of a risk matrix of a contract, incorporating all the relevant concerns of a business in them, structuring them, negotiated them with the counter parties, getting them vetted from the professional business lawyers.

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Analysis of financial performance

Reasons for undertaking financial performance analysis
Financial performance should be measured for the following reasons:
1. To verify whether the performance expectations are met as per internal norms
2. To see the trend in financial performance
3. To compare with the competitors
4. To find out the ways and means of improving it

Strategic financial performance (the concept of return):

The various types of investors in a company take different levels of risk exposures and expect different levels of financial returns. All the long-term strategic investors in a company including the lenders expect a good strategic financial performance from a company. They have the last rights on the income proceeds of a company. Hence, if a company is able to reasonably honour or fulfill the expectations of these strategic investors, it can be said that the company’s overall financial performance is good. The expectation of the the long-term strategic investors is expressed in terms of post-tax rate of return on capital. The creditors would be happy if the company is able to serve the debt in a timely manner. They have an expectation of fixed, minimum guaranteed and periodic return and they are not interested in the upside of the company performance.
The situation of equity investors is a little different. They expect much more from upside. Even though the financial statements are computed monthly, quarterly or annually, the time horizon of equity investment is much higher. They are interested in the overall performance during this entire period. So, it divides the the return on equity investment in two parts:
1. The return on investment that has been realised so far (rate of return on equity in the nature of dividend yield).
2. The potential for return on investment that has been created and which can be realised in the future. The confidence with which it can be transferred to an interested person in case the equity investor (here, the businessman) wants to exit. It is measures in the form of the projected internal rate of return which is reflected in the form of appreciation in share price.

The problem of illiquidity of a business as a goods:
In case of the small and medium enterprises, if the returns on investment are very high in the beginning, businessman stay invested in those businesses, even though they subsequently become unattractive. Averaging of returns on investments should be strictly avoided in the life cycle of a business. The business which has become unattractive should be relinquished for a new financially attractive business. For a business investment of a businessman, always, the starting point is the current moment! Business should not be continued only because it “was” very attractive in the past and it is still affordable on average. Should be made to improve the performance.

Managerial financial performance
The various managers working for various operational and support functions, should generate wealth by producing more revenues and incurring less costs. But, how will you know which manager has performed how? If not at managerial level, a business can definitely carry out performance analysis at department level. We can compare the cost norms with the industry peers and the levels in the history of our own company. Ability of the company to raise adequate, low cost capital also should be seen other financial achievement.

Operational financial performance
Following are the ways to improve the financial performance by operational means:

INCREASING VOLUME OF SALES/SUPPLIES
The volume of sales can be increased in the following ways:
Increase in production capacity
Adding new production capacity
Acquire new production capacity
Use all existing and new production capacity
Produce what sells
Produce what sells with more margin
Market all the production
Reduce the span (in months/weeks) of cash conversion cycle

INCREASING PRICES OF GOODS/SERVICES
Increase quality for a price
Increased features for a price
Identify unique selling points
Target the niche Market
Identify right buyers
Market properly
Reach the high affordability markets
Carry out product basket rationalization
Provide value added services
Attack the most attractive elements in the value chain
Get rid of something that doesn’t make money
Incorporate indexation clauses in the sales contracts
Clarify what is not scope of work
Compress the margins of wholesalers and retailers
Get marginally lesser money quickly then getting the entire money very late from the client

REDUCING COST OF PRODUCTION/ DELIVERY
Reduce volume of inputs using Technology and management skills
Reduce cost of all inputs using proper recruitment policy
Identify contribution of each project/ product
Work with less but sufficient inventory
Increase quality of inputs to avoid rejection
Increase quality of processes to avoid rejection
Increase efficiencies to avoid rejection and wastage
Identify the effectiveness of each of the marketing avenues
Drop the inefficient marketing expenses
Look to reduce life cycle costs instead of up front costs
Include the internal costs including differential in cost of manpower to achieve the same work
Avoid all kinds of delays
Take benefit of scale of operation

Importance of operational performance

A business is basically a business and not a bank. Whatever financial benefits come to a business on account of some favourable development on financial front can complement the operational profit but cannot in themselves lead/save the company and make a financial sense. Hence, operating profit (meeting marketing costs and operating expenses) should be taken as the very serious performance parameter by a business. Operational surplus is the real wealth of a company. Even if there is marginal operating profit, the company can be revived after financial restructuring. A company should analyse trends in the profitability ratios at various levels and the corrective measures should be undertaken if there is a negative trend.

Importance of cash conversion cycle

For a given fixed setup, for a given fixed working capital, and provided that there is sufficient demand at attractive price, there is a natural limit on the maximum sales a business can make. If we assume, for a moment, that there is no way to increase this capital, are we going to treat this as the limit of our growth? No! We can make it into more virtual capital by rotating it faster, or, you can say, for more number of times in the same period. If we assume that our profit margins are same, the faster we rotate the capital, the more number of times we get the profits on it. There are contributors with fixed expectations (such as the bank loan) of return on the capital. Hence, the excess generated accrues to the equity shareholders. See the example below of cash conversion cycle

Day 0 = you invest rupees 100 for other running expenses
Day 1 = you receive all raw materials of 200
Day 8 = you receive supplier invoice
Day 10 = you start processing raw materials
Day 15 = bank provides rupees 150 for other running expenses
Day 30 = you complete the manufacturing process
Day 40 = your client receives the finished goods
Day 50 = you Raise client invoice
Day 70 = you receive additional 200 rupees to settle the supplier from bank
Day 110 = you received client payment of Rs. 470
Day 120 = you pay the bank 350 rupees and interest
Day 121 = You invest the new balance in the new cycle

Interest = 150*(120-10)/30*1% + 200*(120-70)/30*1% = 8.83
Day 121 = you invest 470-350-8.83 = Rs. 111 for next order.
You can do this = 360/120 = 3 times in a year.
If you presume the same efficiency, the amount at the end of year is = 100* (1.11)^3 = 137
Now the applications of the company to others the long-term lenders annually fixed. Latest assume that this application is rupees 21 per annum for a long-term loan of Rs. 300.
So so you have made = 137-21 = 16.
Latest resume that your own long-term capital investment at the beginning of the Year (equity and Reserves, and not as the market price of the share) is Rs. 350. The amount of rupees 100 that you invested as working capital also is permanently locked. So you have made return of = 16 /(350+100) = 3.33% on all your capital annually.
By Indian standards, this is very poor return and even comparable to the bank loans. Let’s see what happens if we increase the number of cash conversion cycles:
4 cycles, Return = 6.67%
8 Cycles, Return = 19.90%
Now, the speed of the operations cannot be increased without some additional capital investment. But even if we consider the payment for that capital, return off around 3.33% can be in increased to around 16% by working on the cash conversion cycle. What the measurement of cash conversion parameters is not easy as there are hundreds of parameters.

Apohan role:
Apohan carries out insightful study into the financial performance of a company apart from the regular ratio analysis and analysis of the financial performance. Apart from analysing the reasons for poor financial performance, Apohan identifies all the ways and means to improve the performance.

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Financial risk analysis
Apohan also analyses the risk profile of a company on financial front. The financial risk of a company could be in terms of:
1. Not being able to raise capital
2. Laws of growth opportunities in the market
3. Continuation of of trend of declining financial performance
4. Lack of liquidity
5. Possibility of default of the loans
6. Possibility of insolvency
7. Financial loss in settlement of disputes
8. Requirement of damages and penalties in critical contracts
9. Liquidation
10. Laws of investments made by the company
12. Change of credit rating to imperial level
13. Exit of partner along with capital
14. Kinds of payment defaults
15. Lowering financial performance

Apohan role:
Apohan prepares end-to-end risk profile for the financial parameters of a company.

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Business Valuation

Reasons for carrying out valuation

Business valuation is done for the following reasons:
1. To know the amount for share transfer agreements
2. To know the extent of control dilution with infusion of additional envisaged equity capital
3. To improve the eligibility for getting loans from the banks
4. To improve credit rating
5. To invest in new projects, we have to know their valuation
6. To see the trend in valuation of the business and the efficiency of wealth creation
7. To raise the loans by pledging shares with the banks
8. To see whether the share price in the stock market is comparable with the logical price the company thinks is reasonable
9. To sell out the business
10. For the successful succession planning for distribution of the wealth among the heirs.
11. To approach the correct kind of investors as per the ticket size
12. To undertake the activities such as bonus issue, buyback of shares, rights issue, capital withdrawal, etc
13. To be able to bargain the sharing of new potential created with the new investor in the investment negotiations
14. To get visibility by getting a top rank in one or other category among all the businesses
15. To be able to approach and join hands with businesses of certain large sizes for doing business together
16. To know the control premium
17. To know the impact of various provisions in the investment contract or share transfer contract on valuation

The time aspect of valuation

The valuation that is being carried out it is always the valuation of the company as of the current movement and not the valuation of the company at any future point of time. The future potential of a company is also a current asset of a company and taken into account as an existing asset. In any transaction, weather simple or complex, whether corporate or personal, first valuation is carried out, then transaction is concluded and then the product that is purchased is consumed in the future. Nothing of this makes the transaction a future transaction. The is the case of Business valuation.
Evaluations for the future point of time of a company are done only for the purpose of issuing options, warrants, futures, forwards and other types of derivatives.

Three Types of valuation methods

Valuation of business is carried out on three basis:

Assessment of the potential of a company through the future cash flows of the company
Amount required to create similar type of new setup from scratch (including IP, brand, network, etc)
The value of the comparable businesses setups for exactly similar or same activities if available, or adjusted values with suitable assumptions.

The valuation from all these three methods will differ. From the perspective of the businessman who wants to sell the shares of his company, or who wants to to get additional equity, the most relevant valuation is the valuation of the future potential. That is the most predictable course of what is going to happen with his wealth in future. Why should he settle for something less?
All the three valuations should, ideally & technically, be the same. But The valuation by the other two methods may be different because of the imperfections in communications and subjective judgements. Also, there is difference in the valuation, because the market does not know as much about the business as much is known by the business man himself. Businessman should seek highest of these three valuations and should not, generally, settle for a valuation lower than the value of business potential.

What all is valued?

There are various things in the business that don’t have a market in which their price can be asked and can be made known. When the people who come together to transact these business assets, a very wide degree of difference in their perception of the value of the business asset arises. There is no one clear methodology which can be agreeable to all which decides the value of the business asset. Apohan has tried to make a simple list of such aspects of business for which valuation is needed.

Individual strategic assets in a business
Assembly of business assets as a function in business
Business as a legal going entity
Brand
Intellectual property
Real estate
Plant and machinery
Inventory
Goodwill
Corporate Bond
Synergies in mergers and acquisitions
Soft capital
Provisions for liabilities
One time settlement amount for a loan
Option and warrants issued by the company
Value of import or export consignment
Value of of compensation by damages service level deficit
Price of company’s products and the the contribution of various value addition stages

Financial model for valuation

The financial models prepared for or valuation of a business in MS Excel.

RISK OF APPLYING THUMB RULES FOR CRITICAL HIGH VALUE FINANCIAL DECISIONS

USER-FRIENDLY FINANCIAL MODELS

Financial model should be prepared in a database format. It helps to make changes in certain assumptions, and to incorporate radical strategic decision changes involvement of a joint venture partner. The users of the model, that is, the clients, are the final owners of the model. They should be able to easily make at least the basic changes without having to depend upon the consultants. The model should incorporate sensitivity analysis for various factors that impact the financial performance, financial viability or valuation. The client should be able to run various scenarios and prepare data tables. The important correlations should be represented to the graphs. The change of a certain assumption should be easy to make in a couple of minutes without having to to arrange one more meeting after 10 to 15 days.

Perspective of valuation

It is very important to approach the correct category of buyers of an asset of a company or the equity of company to realise sufficient value. The strategic investors (people in the similar business, related business) will find the highest value in the business. The financial investors will find the value that thing is at par with a businesses of similar risks. Why? Strategic investors can create synergies that financial investors cannot. The valuation when the strategic businesses are interested in buying small businesses is much higher.
Small and medium enterprises are typically financially inefficient. The financial investors bring in this financial efficiency to this companies. They do not achieve as many synergies as the strategic investors, but they do achieve improvement in the financial performance of the company.
The individuals with neither financial nor strategic contributions to be made to the company, bring in the lowest synergies. They will either not invest or invest for very high cost.
It takes a lot of time to find strategic investor. It takes more time to strike a deal with them. They are not in a haste like the financial investors to park huge money somewhere. Hence, the strategic sale of businessman’s equity or dilution of control through issue of additional equity, should be planned in very advance.

Valuation of potential and the mechanism to share it

The lowest current value of a business can be said to be the value which anyone and everyone will be ready to pay almost immediately. This can be equal to the sum total of the market prices of the individual assets of the company sold separately and many parts being sold as useless (or useful?) scrap.
But a business has a much higher value because it is running, operating, creating cash, growing and is likely to keep on operating and growing in the similar fashion for most foreseeable period. Even if we assume disposal of the business after a very distant future like 30 years, it is still going to be sold at a very high value then.
So which one is the exact business value in this wide range? The difference between the the all future potential and the sum total of all the assets (even as a going entity) is very wide. This
gives rise to the difference in perception of the value. Looks at this imaginary dialogue between a business & an equity investor:
Does the potential of my business have a value? Yes, it has. This potential can very much be realised if you bring in required equity in the company.
Can the potential of your business be assigned a value now? No, we can’t. This value is not there in the company as of the moment. Also, it may not come to the company at all because of any internal, external or any random factors.
Is the potential not a current value of your company? No, it is not. It is not because it is not going to be realised unless I make an investment to fulfill all the requirements for further work. Or you it yourself slowly with your internal accruals. So there is no value of your potential unless I am your part.
Has the potential no value if you, as an investor, will not invest? No, it is not like that. If you don’t invest in my company, someone else will invest to explore this potential, maybe at some different terms and conditions. But I can and I shall realise all this future potential.
In the negotiations of valuation of a company, we can see in the above dialogue:
1. Whether there is any good future potential?
2. How much is the value of this future potential?
3. How easy or difficult it is to realise this future potential?
4. And last but not the least, how do we share this future potential among ourselves?
What is the basis of the proportion of the share of the future potential of the company being shared between the existing shareholders and new private investors?
What is the contribution of the original shareholder? Creation of this potential!
What is the contribution of the new investor? Funding realisation of the the potential, funding creation of further new potential & sharing all the risks of this process.
If your business idea is really great, if it has extremely high growth potential, is extremely profitable and there are virtually no risks owing to the capability of the incumbent management, it can be said that the contribution of the new equity investors is as good as providing an unsecured loan. This can be the lowest benchmark of the expectation of a new equity investor. If the project is more risky, and more the probability of not realising the expected Returns, or even more the probability of losing the capital itself, in this case the new equity investors will have higher expectations. So the “certainty” of cash inflows has a lot to do with the valuation of the business in the perception of the eyes of the investor. This makes it important for a business to undertake all the futuristic activities and complete them in advance.

Return on debt and return on equity

Debt is like a rubber ball floating on water. It doesn’t sink. And additionally, it need not swim. As against that, equity investment is like a man swimming in sweet water. He is destined to sink if he doesn’t swim. The Financial Institutions and Bank earn an interest without doing any business activity. They float like that rubber ball. Once the loan is disbursed they are bound to get the interest. They themselves need not bother how this money is going to multiply. A business like is like the swimmer. It will sink if it does not swim. That is why the return on investment in business is very high compared to that of bank or lenders. Even the return for the investors in equity in the stock market is not much on an average, as the law of not doing business actively applies. An an investor in the stock market, you just can’t make much money because you don’t know what is happening in the company. In your own company, not only you know everything, you can also control it and improve it. That is why direct participative equity investment in a business is the most attractive form of investment.

Valuation in financial distress

The circumstances of financial distress of a small and medium entirely different than the the similar circumstances of very large companies. This is basically because the very large and complex setups create new liabilities in a very fast manner if things go wrong and it is very difficult to apply a break to the erosion of capital. This is not the case with small and medium enterprises. Brake can be applied and corrective action can be taken. Hence it makes all the sense in making equity investment in the turnaround of the small and medium scale companies.
Who shall take the liabilities created by the past owners? The new investor refuse to take onus of the past liabilities. Or they say so in the negotiations. In fact, no businessman asks the investors to take the burden of the past liabilities not created by them.
The valuation is done in the following way for financial assets:
Current value of the company’s assets as the going entity + valuation of additional potential of the company if financial turnaround is successful – the financial liabilities that must be settled by the company before activities for turnaround are undertaken – financial liabilities that need to be regularized + exempted (hair cut or written off liabilities).
And now the potential can be negotiated, how it will be shared between the two parties.

Certified valuers:

Private businesses can decide the value of transaction at any value in compliance with the Contract Act. This valuation has a lot of impact on the revenues of the government. And irrespective of the personal / corporate judgement of values of businesses or business asset, the government likes to pay them a minimum tax as per its own assessment of value exactly in the same way as it happens in the real estate sector. The individuals certified to do this valuation are called certified valuers. The theoretical framework for computation of a value provided by the law to the certified valuers is nearly ideal but very standard. It fails to understand the exact reasons, especially the strategic reasons, in which a investor or business is seeing value. So there is typically substantial departure between the value agreed between the private parties and the one derived by the certified valuers. Large scale businesses afford to do and do both of these types of valuations. The Indian small and medium scale Enterprises are typically not aware of this context and also they are not in a mood to pay the valuation fee twice.
There is one more development in the valuation market. All the indirect tax acts are null and void and so are the certified valuers under them. Now, for the purposes of Companies Act, IBC and some SEBI guidelines, IBBI registered valuers can be hired. For Income tax depending on section / rule, a CA or a merchant banker need to be hired. For valuations under FEMA, again a CA or a merchant banker can do the valuation. It is said that ultimately all the types of certified valuations will be carried out by the IBBI certified professionals.

Strategic evaluation experts:

Strategic valuation experts need not be certified by the government authority. They believe in and try to appreciate the valuation expected by the businessman without much regard to the statutory framework for valuation. They are best placed to analyse the potential of a company. They are very creative in generating arguments in the favour of increased value of the company. They can defend the companies valuation. They can identify a strategic investors who can give the highest value. They can insist a specific valuation approach and justify it.

Apohan’s Role:

Apohan gets the best valuation for the business it is working for. Apohan’s ability to generate financial model is unparalleled. Apohan is a strategic business valuer with a very deep understanding of the evaluation concepts.

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Financial Software
The Indian Assembly businesses typically proc your only those business software data required for preparation of the financial statements and business compliances. A wide variety of a large number of transactions take place in a company. The data of these transactions need to be captured to take appropriate strategic decisions.

Provide the following services:
Identification of a business software
Identification of the data parameters that a company needs to capture
Identification of various performance indicators
Training for the staff to operate the software
Training of the top management to take decisions based on the findings
Identification of an IT company to prepare a business software
Defining the scope of work for financial services IT company and negotiation of the contract

Apohan carries out these activities in Association with its expert it Associates.

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Capital structure advisory

Concept of capital structure:

It is important that a business secures all the capital required to make it a viable and profitable proposition. The capital is required at different points of time, in different amounts. Capital can be brought from various sources which have various advantages and disadvantages. There is a limitation on how much capital the promoters themselves can bring in. There is a limitation on how much debt capital a company can raise from banks and other financial institutions.

Importance of debt:
Many small and medium enterprises in India do not take any long term loans, or take very small amount of long term loan. They prefer to be debt free companies. On one hand this reduces the risk of default and liquidation of the company, but this is not efficient. This reduces the return on investment for the shareholders. The shareholders equity capital should be coupled with an appropriate amount of loans from banks and other credit facilities. A business can do larger turnover with the bank funds and generate large cash flows.

Importance of the fixed component of working capital:
Subject to the technical limitations, immediately after the commissioning of a manufacturing facility, the plant should start operating about break even operating capacity. Required working capital for operating beyond break even operating capacity, should be made available as a part of project management and not as a part of operations management. A manufacturing facility can reach hundred percent operating capacity from the break even capacity only if it starts operating beyond break even capacity right from the beginning. If a plant operate below break even capacity for a substantial period of time in the beginning, the company makes losses and subsequently may have to be closed. In the Indian small and medium enterprises, it has been observed that the working capital is misconstrued as short term capital. The banks provide cash credit and overdraft limits based on the existing level of inventory or any other security. A business cannot borrow working capital without providing existing inventory for new security. In the project planning, if provisions are not made for this, the plant starts operating at very low capacity in the initial period; pet me not be able to recover the fixed costs; it may not be able to to generate sufficient cash to serve the date of the banks. Can be termed as infant mortality e of a small and medium Enterprise.
Once the initial long term fixed component of working capital for operations level break even are taken care, the internal accruals of the operations can provide the increase in working capital every year to reach hundred percent operating capacity. If it is impossible for a business to make available all this working capital because it is too huge, then such business should negotiate a Moratorium of 6 months to a couple of years till the company starts operating beyond the break even operating capacity. Initial amount of working capital should be treated as part of the main capital in the process of capital structuring.
The cash credit and overdraft limits available from a bank are supposed to be used frugally
And should not be treated as if they are long term-capital. The rates for these loans are high and if a certain minimum amount is going to be permanently needed, it should be replaced with the long term loan.

Aspects of capital
Whether it is equity capital or state capital, they are not simple in nature and come in a wide variety of of instruments. They have hundreds of features and parameters. These aspects of the capital instruments play a very important role for the financial stability and sustainability of a company. They are also important from the the control perspective of the existing owners.
The important aspects in raising capital are:
1. It should be made available in sufficient quantity
2. The terms and conditions should be acceptable
3. The cost of capital should be low
4. The company should be able to generate required Returns
5. The company should be able to make timely repayments with sufficient safety margin

See:
Important aspect while raising capital

Checklist of Parameters in Raising Business Capital

The key elements of the financing strategy
1. Make available the capital which can predict your resources for efficient and effective operations
2. Reduce the cost of capital
3. Reduce the cost of raising capital

See:
How to increase the the wealth of company who Strategic financing management

Reducing the Cost of Finance for an Indian Small & Medium Enterprise

Options for raising capital
The number of resources and the types of resources today’s business capital come in a wide variety. The selection of the the type of capital, the specific company or refund should be made in line with the financial strategy of the company.

See:
The various resources for a business to raise capital

Options for a Business to Make Available or to Raise Capital

Apohan services:
Apohan provides the services for structuring of the capital of a new project, of a new business are of an existing business.

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Financing Strategy

Concept of Financing:
The work of bringing the money in the company is called financing of funding. Strategy for bringing money in the company is called financing strategy. (the word financial strategy refers to all the strategies in a finance department where is the word financing strategy refers to you only the process of bringing in the money or the funds). Capital can be brought to a company into formats:
1. Cash
2. Anything else that serves as good as cash & meets specific equivalent requirement of the company called fund.
Hence it is also called funding strategy.

Importance of Financing

Financing means bringing money into the company. The word financing can be used from the perspective of the receiver of the money (and exactly the same process is called as an investment by the person who puts in the money from his perspective). It is the most important activity in the finance function of a company. A businessman is supposed to know exactly how much fund is required the company and when these funds are required. It is very risky to to mobilize the funds at the last moment. It is also very costly to procure them in unnecessary advance and keep them idle. What is most important is that a businessman should be able to procure all the requirement of funding to run the business profitable. If adequate funds are not available, a company may lose business opportunities. Also, inadequate funding may result in loss making operations as a business must be provided the minimum required capital to work efficiently. Most of the small and medium enterprises are seen fighting with the problem of inadequacy of the funds. They are eligible to borrow less based on their financial strengths from the banks and other types of institutional lenders and what they need is much more. Also, so they are capable of many new initiatives for growth of the company but there is no money to undertake these initiatives. This small and medium enterprises are played by the problem that there is no correlation between how much money they can borrow from the financial institutions based on the rules and how much money they need which they can deploy profitably. Small and medium enterprises are always eligible for for lesser amounts then they have plans for.

The process of bringing money in the business is very complex. There are issues number of parameters that have to be kept in mind. It is not only about eligibility and the amount but also about the terms and conditions and cost of finance. Even more important than cost of finance there are two more implications: 1. Interference in the management and operations of the company. 2. Ability of the company to repay these financial liabilities along with the committed returns on them in timely manner prevent the ramifications if a financial default happens.

Effective Eligibility

It is eligibility for financing based on the viability of the business & ability of the management to find an investor & get investment.
Capital is a very important resource to run a business successfully. Is it possible that a business is viable on all technical accounts but is not viable because of lack of capital? Yes, off course. Inability of the management to raise adequate capital in time is also considered as one of the reasons for unviability of a business.
Here, we must make a distinction between two aspects: first that a business is not financially viable and the second that the management is not able to raise adequate amount of capital. These are two are entirely different problems and they need to be addressed in different ways.
A business is said to be financially unviable when it is not able to generate satisfactory returns through the operations at par with the expectations of the people who provided the capital in different forms. In case of some other businesses, it is possible to make the operations more efficient to turn them financially viable. In case of some other businesses, it is possible to make the business financially viable by renegotiating the terms and conditions of the various stakeholders that have provided capital in one or other form. However, some businesses maybe intrinsically financially unviable irrespective of any financial or operational wizardry. Now, what about those businesses which are not able to raise the adequate capital in first place, forget generating adequate returns as per the expectations of the capital providers? The million-dollar question is can the inability of the management to raise adequate capital be termed as financial unviability?
The answer is no! A vehement no!!
Then what this situation can be called? There is nothing wrong with or unviable about the business or its idea but there is something wrong with the actions if not competencies or philosophy of the management. When everything else is alright, shortfall of capital is a very easy to solve problem for a company.

Disadvantages of Debt funding:
The biggest disadvantage of a bank loan is the fixed guaranteed periodic interest payment and repayment of the principal amount. Don’t understand circumstances of the business and any non payment is considered as default. They don’t look at the merit of the business, quality of the management or potential of the business sufficient criteria to lend. They must be provided some or other type of security on margin money which becomes a serious limitation on the amount of fund that can be raised. As an institutional lender, bank officers have very less flexibility in processing the loan applications and they made turn down and application even for frivolous reasons. They will not provide loans to new businesses for businesses with poor credit history. Technically, a business is a client of the bank but there is hardly any tendency to sell more. In India, there is good degree of corruption in the sanction process. The corporate form of business is to basically segregate the the owners from the management of a company in terms of any rights and liabilities. But the bank requires the promoters and the directors are the shareholders to provide personal guarantees putting their personal properties at risk. We can see a number of cases in the market, where the banks are auctioning the personal assets of many businessmen. The plight of such honest businessmen is the last thing one would like to see. The phenomenon of these options discourages a layman from undertaking any business venture. Another aspect of bank loan is that it becomes more difficult to avail any money in difficult times. So banks are only good weather friends. In the history of long existence of a business, they do suffer a once in a lifetime misfortune due to circumstances beyond control of management. The business is still very much viable if certain relaxations or or additional credit is provided. The worse the situation of a business, the worse the behaviour of a bank! Payment to bank takes the first priority, and if a good opportunity is is passing by, the business cannot use its money to pursue that opportunity. Occasionally, this does cause a very serious opportunity loss to a business. Bank loan repayment in most of the cases must start almost immediately. For businesses with a long gestation period, this becomes as good as borrowing from the bank to pay the bank. Banks are very rigid when it comes to provision of enhanced credit or credit with second charge even if the value of the security has increased. The financial expertise is of the banks is of absolutely no use to a business. The rules of the banks are very stringent when it comes to to providing better terms on request of a borrower.
See more
Disadvantages of bank loans in the financing strategy

Disadvantages of Debt Funding

Importance of equity funding:
The biggest advantage of equity capital is that it could be available even in the worst circumstances of a business. Equity funding is provided based on the the intrinsic potential of the business and merit of the offer. Request for equity funding may not be rejected only because a certain rule book doesn’t permit to do so. There is no fixed guaranteed, permanent, periodic return on equity funding. Hence, the business has no tension of of monthly repayment of any interest amount. More importantly, the capital provided need not be returned at any point of time in the future to the investor. There is no requirement of any guarantee or any security. Practically there is no limit on what is the the maximum amount that can be availed. There is no risk to the corporate assets or personal assets of the original promoters even if the business fails. This is because the equity investors joins on profit sharing and ownership sharing basis. If the investor joins in management of the company, his experience in financial management it and corporate management may come handy and the business may become very professional. Equity funding is very useful in preparing the growth projects when sufficient amount of fund is not provided by a bank. Equity funding is also very useful when a business suffers a one time misfortune and has potential to turnaround and excel again. The organic growth of business through internal accruals is very slow and equity funding provides avenues for rapid growth of a business. There is no specific term of equity funding and hence even if the growth initiatives are delayed, even if the projects take longer than usual, there is no question mark on the existence of the company.

See:
Advantages of equity funding in the financing strategy
https://www.apohanconsultants.com/advantages-of-equity-funding/

See:
The misconceptions about equity funding

Reasons why Equity Funding or M&A is not Common among Indian SMEs

Key Consideration in financing

Following are the key consideration in financing strategy:
Cost of finance should take second seat with respect to…
Capital structure: (capital ratios, long-term implications, liabilities)
Ability to repay: (Schedule, moratorium, DSCR, cash flow projections, etc)
Terms & conditions: (drawdown, convertibility, voting power, etc)
Cost of finance: (interest, cost of equity, processing fees, etc)

Process of Financing:

Following is the process of Financing
Logical process of preparation of Financing Strategy
Assessment of appropriate investment amount to be mobilized and its phasing
Assessment of possible internal sources (accruals, promotors, shareholders, ESOPs, rights, etc)
Selection of external source type (debt, equity, grant, mix, their types, etc)
Selection of the specific instrument/contract (DVR, preference equity, bond, ECB, etc.)
Selection of funding entity type (Private individual, PE, VC, Bank, FDI, etc)
Approaching of a specific funding entity that meets the criteria

See:
List of parameters in raising business capital

Checklist of Parameters in Raising Business Capital

Sources of funds:
The various resources for a business to raise capital
There is a wide variety of internal and external resources of capital. Any savings on the output of a business is tantamount to infusion of New Capital apart from the the completely external new capital. Also there is conceptual difference between cost cutting and raising capital through operational measures. Cost cutting results in a direct reduction in the Assets of the company. Raising capital through operational means need not! The number of resources and the types of resources today’s business capital come in a wide variety. The selection of the the type of capital, the specific company or refund should be made in line with the financial strategy of the company.

See:
The various resources for a business to raise capital

Options for a Business to Make Available or to Raise Capital

Important cost aspects aspect while raising capital

The key cost reduction elements of the financing strategy
1. Make available the capital which can predict your resources for efficient and effective operations
2. Reduce the cost of capital
3. Reduce the cost of raising capital
See:
How to reduce the cost of finance

Reducing the Cost of Finance for an Indian Small & Medium Enterprise

Apohan services:
Apohan provides the consulting services strategic financing of the capital of a new project, of a new business or of an existing business.

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Working capital management advisory
To minimize requirement & cost of working capital

In many businesses working capital forms a large chunk of initial funds required. Apohan has observed in its market survey that many small and medium enterprises of the first generation businessman are not aware of the concept of working capital. Rather, they are not aware of the seriousness the concept of working capital provisioning. Small and medium enterprises live under the misconception that working capital is a short-term finance and it is at a constant level for every year. They also use 100% CC and OD limits with the bank which should be actually reserved for seasonal fluctuations and occasional credit crunch. SMEs run a business with the lower working capital at operating capacities much below the break even capacity and are not able to meet all the liabilities of the business.
A break-even operating capacity is the capacity at which a business generates sufficient cash to exhaustively meet its all operational, financial and any other kind of liabilities. Operating the plant below break even capacity leads to liquidation of the company in the long-term. A company always must operate much beyond its break even working capital city. But, this requires ample amount of working capital. Companies requiring very high level of working capital can finance the same through equity funding through mergers and acquisitions.

Apohan working capital related services:
1. Estimation of Working Capital planning phase
2. Estimation of Working Capital for different operating levels for an operational plant
3. Estimation of upfront working Capital at the commissioning
4. Equity funding of fixed, long-term working capital

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Bank or NBFC loan advisory

Various Indian small and medium enterprises are eligible for availing bank loans and NBC loans.

Typical SME errors in bank loan management

Following are the errors that in experienced assemblies make in availing bank loans.
1. Not working for lower number of personal guarantees
2. Not working for lower value of security required
3. Not carefully reading all the terms and conditions
4. Not paying careful attention to the penalties and damages
5. Not bargaining for the moratorium.
6. Not negotiating for lower interest rate
7. Not exploring a few number of banks for better terms
8. Preference for Cooperative Bank then the nationalised bank
9. Not negotiate in the terms and conditions are the loan contract
10. Borrowing incorrect amount
11. Incorrect timing of getting loan and repayment
12. Not maintaining good relationships with the bank

Types of bank loans
There are a lot of types of bank loans based on various criteria
1. Secured Loan and unsecured loan
2. Long term loan and short term loan
3. Project loan and working capital loan
4. Cash credit and overdraft
5. Concessional loans such as from SIDBI

Debt instruments

Following are the various date instruments a company can raise debt capital
• Non-Convertible Debentures
• Partly-Convertible Debentures/Fully-Convertible Debentures (convertible into Equity Shares)
• Secured Premium Notes
• Debentures with Warrants
• Deep Discount Bonds
• PSU Bonds/Tax-Free Bonds
Interest Rate Derivatives

Apohan services
1. Advisory for enhancing credit profile of a company to be eligible for the required amount of loan
2. Identification of the lending Institute which can lend with the current profile of the business
3. Representation of a small and medium Enterprise to the bank for application of a loan
4. Advisory to the small and medium business management of non-performance asset (NPA)
5. Coordination with the channel partner and direct selling agent of the bank
6. Restructuring of a bank loan
7. Refinancing a bank loan
8. Transfer of a bank loan to a new bank for better terms
9. Preparation of bank loan strategy
10. Cash flow management for the timely repayment
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Dividend policy

Importance of dividend policy:
Dividend is the real (in the sense ordinary) means of a company to compensate its shareholders for their equity investment. From the profits made in a year, a fraction is retained for the provision of increased working capital and any growth initiatives or any other liability; and the rest should of the amount be distributed to the shareholders. The ratio of dividend to the current market price of the company share is called dividend yield. Dividend could be in the form of cash, stock, property, products, promissory note, scrip, etc. Payment of dividend is highly regulated by the law and dividend strategy is a key corporate strategy.
Went to prepare a dividend policy? Distribution of dividend is minimal in the growth phase of a company and it increases as the company reaches the state of stable, profitable operations.

Why dividend is needed?
An investment in a company might be the only major source of earning of certain individuals. They need liquidity for personal expenses or for other Investments. They have two ways of getting money from the company:
1. Dividend
2. Selling the shares
The process of selling the shares is as good as disposing of the source of income. It also makes them lose the control over the company. If a company never pays dividend, or does not pay it reliable, or page very less dividend after many years without corresponding substantial increase in in the valuation of the company, then the investors lose interest in the company. That is why a company should pay dividend from time to time. The ability of the company to pay dividend is seen as its strength.

Errors in Dividend policy in Indian SMEs:
Many companies belonging to the small and medium enterprises in India commit a lot of errors with respect to the Dividend policy.
1. They don’t have a written down Dividend policy
2. The difference in liquidity requirement by various shareholders leads to disputes in management.
3. The company’s capital is is irretrievably lost to the shareholders and company finds difficult to raise new capital
4. The dividend payments are made independent of the growth phase of the company
5. The directors of the company receive salaries in place of receiving dividend; this results in substantial reduction in profit or also, sometimes accounting loss of the company. This makes it very difficult for a company to raise equity capital.
6. Many small and medium enterprises adopt root of salaries than root of dividend forwarding the investors. No objection is taken as the company is held in the family are very closely held. However, it becomes very difficult to restructure the salaries if a new investor wants to come in and desire that the salary should be at par with the market levels.

Apohan services:
Apohan prepares the dividend policy of the company in line with the applicable laws, in line with the business strategy of the company & and in line with the growth phase of the company.

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Product pricing advisory

Errors in pricing strategies:
Following are the errors that Indian small and medium enterprises make in deciding the prices of their products:
1. In the long term supply contracts, they don’t provide for annual indexation
2. They borrowed price from competition without adjustments for the quality differential
3. They initiate price war against their own interest in an attempt to be more economical than the market
4. The lowest bid in the tender is lower bi a very wider margin then the second lowest bid
5. They do not carry out product basket rationalization and do not understand which product , project, service has higher margin or contribution
6. They do not escalate the prices in the new financial year
7. The product offers for proposal sent by them no validity (in terms of number of months) of prices
8. They do not properly calculate the net impact on cash flow of the credit period extended to the customer. This impact is much more than the interest rate. The difference between cash deliveries and credit deliveries incorrect price differential.

Importance of prices:
The cash flows of the companies are very sensitive to the price levels. If a company produces a complex basket of products, it should have a detailed pricing strategy on financially important item and strategically important items. The companies also should be aware the impact of seasonality, competition, fluctuations in prices of raw materials, imports, etc. Company should be aware of affordability of the customers. The management should know strategic transactions where certain concessions are to be made.

Pricing Management Services:
Apohan provides an integrated pricing strategy to small and medium enterprises for excellent financial performance.

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Allocation of overheads

Concept of overheads:

Overheads are the costs incurred by a company that cannot be directly attributed to any specific product or service or project or work generating revenue for the company. A company manufacturing the headlights of a car can identify the specific quantity of the the input raw materials such as plastic, glass, electric lamps, shining coating material, etc that goes into a specific variety of head lamp. But it cannot identify in the same exact manner the amount of plant rent paid, the expenses on the company vehicles, the salary of the Managing Director, etc that has gone into one head lamp. All such expenses are called overheads.

Types of overheads

There are two types of overheads:
1. Manufacturing overheads: They are the expenses such as the rent of manufacturing facility, electricity paid for manufacturing, vehicles used for transporting raw materials and goods, salary of design staff, etc. All these expenses are incurred for manufacturing only, but still they cannot be attributed to one specific product. For example, it might be very difficult to locate an electricity bill of a manufacturing plant across 5000 metal forgings of 15 types. The companies are organised into various departments by the products. The manufacturing overheads are billed together for the entire organisation. It becomes difficult to identify what was the total manufacturing cost of a specific product if there is no scientific and mutually accepted method of allocating them.
Marketing expenses should be treated as manufacturing overheads people are going to claim relative performance for the different varieties of products.

2. Corporate overheads: These expenses are incurred to run the company and are not so directly related to manufacturing. They are, for example, rent of the corporate office, expenses on corporate office vehicles, salaries of directors, charges paid to the statutory auditors, fees of lawyers of company, functions and ceremonies, travel and lodging expenses for strategic purposes, interest on loan, etc.

Importance of overheads

The proportion of overheads in comparison with the main production costs is very important for any organisation. A company should be knowing the following ratio:
Main manufacturing expenses: Manufacturing overheads: Corporate overheads : Total Running costs (100). Importance of overhead management can be understood by knowing what happens in the absence of it:

In the absence of computation of overheads:

1. It is not possible to get the clarity of profitability of an individual category of product.
2. It becomes difficult to compare the performance of various product lines
3. It creates dispute between the heads (people) of various product lines in terms of who was more cost effective
4. It makes difficult to compute the total cost of production and only the marginal cost of production is available
5. It makes it difficult to rank the products in the order of their financial contribution assign marketing priorities to them
6. It creates difficulties in deciding the performance incentives for the operational staff
7. The company may become unreasonable in cost cutting in in manufacturing and the conduct of Management may be very lavish.
8. The reason for the poor financial performance of the company may be a top heavy management. It becomes difficult to find the exact impact.
9. The company cannot analyse the the data of performance of various projects
10. The company might be carrying out several loss making projects, works and maybe producing many negatively contributing products without realising that
11. Certain products and projects might be drawing and reasonable amount of overhead expenses, but still the company might be continuing with them
12. A company may fail because its overheads are not in line with the industry standards for that category of product and for that size of company

Apohan services:

1. Identification of overheads
2. Suggesting the desirable changes in the accounting system to capture overheads
3. Calculation & classification of overheads
4. Allocation of all overheads two products, projects, departments
5. Computation of the financial contribution & profitability of each item
6. Product basket rationalization to increase the revenues
7. Suggestion of measures for reduction of overheads

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Tax structure

Concept of tax:
If we look at the final price of a product by to a consumer who does not take any input credit, we can make the following observations:
1. The value chain has made a payment of indirect tax at the different rates applicable for the the industries at the their stage of value addition.
2. On the amount of value added in the value chain at each stage, every player has paid and income tax on the amount of the value added.
Thus, when a product is being sold for rupees hundred with a GST of 18%, the government has received:
1. Rupees 18 of the GST
2. Rupees 30 of the income tax
From all the members of the the product value chain.
So the ratio of the money e the entire value chain and the government stands at:
70 (Industry) : 48 (Government)
We can see that the effective rate of taxation for the entire value chain as well as each individual company in the value chain in India in 2020 is around 68.5%.

This underlines the importance of tax management.

Tax management:
The taxation environment is not as uniform and standard as described in the example above.
There are many e differences in applicability and rates of taxes. There are exemptions for many activities. Taxation is is also governed by the transaction structure. There is also an effect of who is conducting the transaction.

Apohan services:
This article has been provided only for knowledge sake. We advise the small and medium enterprises to consult the tax experts for tax planning, tax compliance and reduction in incidence of tax or postpone of payment of tax, etc.
Apohan does NOT deal in tax consultancy.
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Insurance Advisory
The insurances in a company can be divided into two parts:
1. Statutory insurances:
These insurances are mandatory required to be taken by the companies. They are directors liability insurance, labour law related insurances, etc
2. Desirable insurances: They are required by the banks and the related industries stakeholders as a part of contract. For example, a bank may require a company to take insurance of the inventory based on whose value a loan is granted.
3. Strategic insurances: These are special variety of insurances that the companies take to protect their business risks. This decreases the perception of risk in the eyes of the investors. It makes the restructuring of the company e relatively easy in case of unfortunate events. It also protects the company against the force majeure events.

Apohan Role:
Apohan can formulate and integrated insurance strategy for a company and connect it to a insurance broking house for a General Insurance Company for this specific requirements.
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Government schemes
The government provides a lot of assistance to small and medium enterprises. This assistance can be in the following ways:
Easy finance availability from Banks, without collateral requirement
Protection against delay in payment from Buyers and right of interest on delayed payment Preference in procuring Government tenders
Stamp duty and Octroi benefits
Concession in electricity bills
Reservation policies to manufacturing / production sector enterprises
Time-bound resolution of disputes with Buyers through conciliation and arbitration
Reimbursement of ISO Certification Expenses
Credit prescription (Priority sector lending), differential rates of interest etc.
Excise Exemption Scheme
Exemption under Direct Tax Laws.
Financial Assistance for setting up testing facilities through NSIC
Statutory support such as reservation and the Interest on Delayed Payments Act.
Subsidy on ISO Certifications
Subsidy on NSIC Performance and Credit ratings
Participation in Government Purchase registrations
Registration with NSIC
Counter Guarantee from Government of India through CGSTI
Waiver in Earnest Money (Security Deposit ) in Government tenders
Stamp duty and Octroi benefits,
Weightage in price Preference.
Reduction in rate of Interest from banks (Subject to ratings)
Free of Cost Government tenders

Arranging Finance
Need of Finance are of following type:-
• Long and medium term loans
• Short term or working capital requirements
• Risk Capital
• Seed Capital/Marginal Money
• Bridge loans

Financial assistance in India for MSME units is available from a variety of
institutions. The important ones are:-
• Commercial/Regional Rural/Co-operative Banks.
• SIDBI: Small Industries Development Bank of India (refinance and direct lending)
• SFCs/SIDCs: State Financial Corporations (e.g. Delhi Financial Corporation)/ State Industrial Development Corporations.

Process
• Documentation for Loan Application
• Balance Sheet and Profit Loss Statement for last three consecutive years of firms owned by promoters
• Income Tax Assessment Certificates of Partners/Directors
• Proof of Possession of Land/Building
• Architect’s estimate for construction cost
• Partnership deed/Memorandum and Articles of Associations of Company
• Project Report
• Budgetary Quotations of Plant and Machinery

Clearances needed
An entrepreneur has to obtain several clearances or permissions depending
upon the nature of his unit and products manufactured.
Environment Clearance
Regulatory or Taxation Clearances
Product Specific Clearances

Importance definition of small and medium enterprises:
For the purpose of providing its strategic services, Apohan uses the word small and medium enterprises in general sense. Is definition is very different from the different definition used by the Ministry of MSME. Following are the attributes expected by Apohan:

1. A company in manufacturing sector
2. A company with minimum 25 crore rupees of revenue

Apohan’s services for small and medium industries:
1. End to end services for equity funding
2. Business strategy for New projects
3. Mergers and acquisitions
4. Corporate Management Services
5. Financial strategy services
6. Assistance in availing the government schemes

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Public private partnership projects (PPP)
Public private partnership projects are undertaken by the the central government, state Government, urban local body, public sector undertakings (PSUs), pacific authorities created under parliamentary acts (such as NHAI, port authority of India, airport authority of India.), etc for Rapid development of the infrastructure in the country. The eligibility criteria for this project are very strict and hence a small and medium enterprise should join hands with large companies to form a consortium. Projects require around 10 to 30% of margin of the total project cost stop the 70% cost of the project is funded by the banks without any other collateral. The cash flows from the projects themselves serve as the collateral. The contract structure of such projects is very complex. Tendering process is very elaborate. Typical construction period is around 2 to 3 years. Payment is done in a ballooning fashion. There is provision of a substitution agreement and an escrow agreement. Government Grant is available for the projects which cannot sustain on the revenue generated from the customers. The agreement is for a very long period 15 years to 30 years.

Apohan service:
Apohan provides PPP project consulting in the following way:
1. Selection of infrastructure projects
2. Go no go decision
3. Representation in pre bid meetings
4. Preparation of PPP financial model
5. Analysis of the project
6. Formulation of a joint venture to qualify for the tender
7. Assistance in debt syndication
8. Negotiation of the contract with the government
9. Analysis of competition
10. Financial management of a PPP project
11. Assistance in appointment of various agencies such as EPC contractor, PMC/AMC agencies, etc
12. Contract management
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Lease Contract Advisory

Concept of lease:
In this transaction, a movable or non movable asset is not sold but is given for use on a periodic payment basis with the provision of taking the Asset back at the end of lease or compulsorily transferring to the lessee permanently.

Lease strategy:
1. In case of liquidity crunch, selling the Asset and leasing them back
2. Plant and machinery assets instead of buying them
3. Replacing the least least with the purchased assets
4. Converting and operating lease to finance lease and vice versa
5. Identification of the assets for which there is mature lease market
6. Approaching the lease Finance Companies, are the leaves finance divisions of the banks to get finance for leasing assets
7. Can the various subsidies for normal assets be availed for the leased assets as well?

Apohan helps company in in overcoming the project capital problem by providing a suitable lease strategy.

Variants of lease products based on ultimate transfer:
There are basically two categories of lease contracts:

Financial or capital lease:
It is a long-term and non-cancellable contract in which the lessee company purchases it at the end of the lease period.

Operating lease:
It is a short-term and cancellable contract in which the lessee company replaces or returns the equipment at the end of the lease.

Combination lease
It has mixed features.

Classification of lease deals based on the number of parties:

Sale and leaseback:
The lessee first sells his own assets to the lessor (financier) with an agreement of leasing then back. This is done to get additional liquidity in the business. Do the overall cost of a lease may be higher, business gets a lot of capital if there was a shortage. There might be a for the agreement for buyback. The business must negotiate the contract keeping the right of exclusive use and possession; why is the Businessman would have to windup a business.

Direct lease:
In this, the asset is either owned by the lessor or he acquires it first from third party Equipment supplier. Here, there are three parties viz. equipment supplier, lessor, and lessee.
Occasionally, the lesser and Equipment supplier can be the same.

Subleasing:
In it an original lessee leases out the equipment to another company or sub-lessee the provisions of the original lease.

Single investor lease:
In this, the lessor arranges the finance for the asset as equity or debt (taken by lessor). The investor recovers money from the lessor in case of a default by a lessor. The lessee pays the lease rentals to the lessor.

Leveraged lease:
In this, equity is provided by the lessor. Debt is provided by a lender.In a case of default by the lessor, the lender recovers money from the lessee. A trust may manage the relationships & contracts.

Classification of the leases based on the nationality of the parties:
Domestic leases:
When all the parties to the leaves are residents of India, it is called a domestic lease.

Import lease:
It is a lease in which lessor and lessee reside in India and the equipment supplier is a foreigner.

Cross-border lease:
In it either lessor is an Indian or lessee is Indian.

Classification based on what is leased out
Non moving assets: Real estate, MIDC plot, industrial property, plant and machinery
Movable assets: Vehicles, logistics equipment, tools, manpower

Sharing of scope in Lease Agreement:

The risk & cost of insurance, taxes, repair, maintenance, property taxes, wealth taxes, any other taxes, sanitation, expert operator (such as helicopter pilot), utility, and interior maintenance (in case real estate) costs is shared between the lesser and lessee.

Aspects of lease contract:

1. What is the duration of lease? Can it be extended?
2. Whose account the depreciation of the least asset can be shown?
3. How the lease rentals are paid?
4. Can the attack be transferred early?
5. Can the lease be cancelled?
6. Is the Asset transferred at the end of lease period?
7. What is the mode and periodicity of payment?
8. Who bears the cost of insurance?
9. What happens if the plant and machinery is stolen or becomes obsolete or gets damaged?
10. Who pays the Various taxes, levies, charges, related to the position, use, etc
11. Who carries out transport and installation?
12. What is the responsibility of the defect?
13. Who bears the burden of tax of transfer at the end of leaves?

Apohan services:

1. Formulation of a lease strategy to support an optimum capital structure
2. Economics of lease based on life cycle cost, computing the cost of liquidity
3. Identification of a lease company to procure the capital goods, plant and machinery, tools, etc
4. Formulation of a a full proof lease contract
5. Application of suitable lease formats to change the business model

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Consulting Services for Import Export Strategy & Export Finance

Framework:

Export Import Policy or Exim Policy under the Foreign Trade (Development and Regulation Act), 1992 governs the exports and imports. The latest version is Exim Policy 2015-2020. India gets preferential treatment under various different Preferential Trading Agreements [PTAs], Free Trade Agreements [FTAs], Comprehensive Economic Cooperation Agreements [CECAs] and Comprehensive Economic Partnerships Agreements [CEPAs] in bilateral and multilateral relations. Global norms are governed by World Trade Organisation (WTO) and various enabling institutions.

Special export dedicated areas:
The government and the industry have created special physical areas for promotion of Exports. They are:
EOUs: Export oriented unit
EHTPs: Electronic hardware technology park
STPs: Software technology park
BTPs: Biotechnology Park

In these free trade zones, the value of the goods exported should be not less than 50% from the domestic market. The basic purpose behind them is : Export promotion, creation of a cluster, supply chain, logistics, etc.

Types of payments in Exports:

Type of payment mechanism agreed between the exporter and importer is very crucial in international trade. There are three types of payment mechanisms.

Clean Payments

In clean payment method, all shipping documents, including title documents are handled directly between the trading partners. The role of banks is limited to clearing amounts as required. Clean payment method offers a relatively cheap and uncomplicated method of payment for both importers and exporters.

There are basically two type of clean payments:

Advance Payment
In advance payment method the exporter is trusted to ship the goods after receiving payment from the importer.

Open Account
In open account method the importer is trusted to pay the exporter after receipt of goods.

The main drawback of open account method is that exporter assumes all the risks while the importer get the advantage over the delay use of company’s cash resources and is also not responsible for the risk associated with goods.

Documentary collection:
It is followed by more than 90% of the banks. The exporter entrusts the handling of commercial and financial documents to banks. He gives the banks necessary instructions concerning the release of these documents to the Importer. It is a cost effective method.

There are two methods of collections of bill this way :

Documents Against Payment:
In this case documents are released to the importer only when the payment has been done.

Documents Against Acceptance:
In this case documents are released to the importer only against acceptance of a draft.

Letter of Credit:

Letter of Credit also known as Documentary Credit is a written guarantee by the importer’s bank on behalf of the importer for the payment against trade documents.

Types of Letters of Credit:

Revocable & Irrevocable Letter of Credit:
Revocable Letter of Credit: It can be cancelled without the consent of the exporter.
Irrevocable Letter of Credit: It cannot be cancelled or amended without the consent of the exporter.

Sight & Time Letters of Credit
Sight Letter of Credit: In this, the payment is made at the time of presenting the documents.
Term Letter of Credit: In this, banks are allowed to take an agreed time to check the documents and the payment is to made after that.

Confirmed Letter of Credit:
In this, the confirming bank commits the responsibility of claim under the letter of credit if issuer bank fails.

Different types of export finance are as follows:

1. Pre- shipment finance (Packing Credit):

Pre-shipment finance is provided when the exporter or seller wants the payment even before the shipment of the products or goods. It is provided for the purchase of raw materials/goods, processing them into finished products, storage cost, packing and marking of goods prior to shipment. It is approved when a firm order is placed by the importer. Its period is 180 days (or 270 days).

Post shipment finance (before bill type):
After dispatching the goods to the importer, the exporter has to make a bill, which is to be paid by the importer. It takes about 3 to 6 months before the amount is received by the exporter. This time gap effects the production of the exporter. For this purpose, the exporter will present the bill to the financial institution which provides finance for exports. The bank can purchase the bill or collect the bill or even discount the bill. Post shipment finance is used to pay the wages or other services, to pay for cargo/shipping charges, to pay for advertising in overseas market for promotion.

Post shipment finance (after collection of bills, bill discounting)
The finance or loan can be obtained by the exporter based on the bills of the purchase made by the importer or overseas company. In the case of any default, the finance company will compensate about 80% of the default amount.

Deferred export finance:
Finance is also available for the importers / oversea buyers to facilitate import of goods. There are two types:
Suppliers finance: In this, the finance is provided to the Indian exporter much before the export transaction by his local bank to sell the goods and the repayment is made on the installment basis.

Buyer’s finance: In this, finance is provided to the importer by the Indian exporter’s locla bank. The exporter gets immediate payments. The important page to the Indian Bank in installments. The liquidity with the important by providing loan from India helps in boosting Indian exports.

Types of export credit based on currency
1. Rupee Based Credit
2. Foreign currency credit

Allowances and subsidies:
When there is unexpected rise in expenditure due to national and international changes, the government provides allowances or subsidies for export.
Cash compensatory support: It is a subsidy given to the exporters by the Indian government whenever there is an increase in expenditure such as increase in transport cost or wage of the laborers.
Duty drawback:
In this, imported duty paid on imports for value addition & then export is refunded.
Deemed exports:
In this, the suppliers (in the domestic tariff area) to the exporters (in special economic zones) are given finance.
EPCG (Export Promotion Capital Goods Scheme or Advanced Authorization Scheme):
In this, an importer imports the capital goods at zero rates of customs duty subject to an exports of 6 times of duty saved in around 6 years. To promote local capital goods manufacturers, the imports this Scheme are not be eligible for exemption in case of goods in lists of anti-dumping and safeguard duty protection.
Star status: Reputed international trading houses in India have been given One, Two, Three, Four, Five Star Export House status in recognition of their performance and for ease of their transactions .
Duty Free Tariff Preference (DFTP) Scheme:
It is duty free tariff preference for Least Developed Countries (LDCs) where no duty is paid on imports subject to conditions.
Exim Bank’s Grassroots Initiatives & Development (GRID) program – It provides assistance to small enterprises
Exim Bank’s export marketing assistance: It helps exporters in locating overseas distributors, partners, buyers.
Exim Bank’s Export Marketing Fund (EMF): In this, finance is made available to Indian companies for undertaking marketing activities in foreign countries. The Bank also helps in product adaptation, overseas operations and importer travel to India.
E-Commerce Exports: In this, small value goods exported through courier services on e-commerce platforms are given export incentives.
Merchandise Exports from India Scheme (MEIS – for goods) & Service Exports from India Scheme (SEIS for services):
They provide duty credit scrips for achievement of export performance at a particular percentage off the net export value. This percentage is different for different export destinations, exported goods, etc. They can be used by the importers to pay the import duty. This, in a way, make the exporters important for the importers. The scrips are freely transferable. They can also be used for excise duty and service tax payments.

Financial institutions which offer export finance:

1. EXIM Bank
2. Export Credit Guarantee Corporation of India
3. Development banks (IDBI, ICICI)
4. National Small Industries Corporation
5. Commercial banks
6. State Finance Corporations
7. RBI Departments: Industrial and credit department & exchange control department

Apohan services:
Apohan helps a business in formulation of an export strategy. It provides the Consulting Services for export Finance.

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Consultancy Services For External Commercial Borrowing (ECB):

Framework:
The ECBs are governed by the regulations of RBI and Foreign Exchange Management Act (FEMA).

Lenders eligible to provide ECB:

Members of the Financial Action Task Force (FATF)
Members of International Organization of Securities Commissions (IOSCO)
Multilateral and Regional Financial Institutions
Foreign branches & subsidiaries of Indian banks
Foreign individuals with FDI in India in a prescribed fashion
Subscribers to Indian bonds & debentures listed abroad.

Borrowers eligible to obtain ECB:

Manufacturing companies
Infrastructure companies (except real estate)
Micro-finance activities
Not for Profit companies
Registered societies/trusts/ cooperatives

Routes of ECB

Approval route:

This is available as per regulations relate to amounts, industry, the end-use of the funds, etc.

Automatic route:

This is compulsory for pre-specified sectors in which the borrowing company needs to obtain RBI or the government permission before raising funds.

Forms of lending

Loans including;
Commercial bank loans
Buyer’s credit
Supplier’s credit
Foreign Currency Convertible Bonds (FCCBs)
Foreign Currency Exchangeable Bonds (FCEBs)
Trade credits beyond 3 years
Financial Lease
Plain vanilla Rupee denominated bonds
Privately placement of rupee bonds
Listed rupee bond on foreign exchanges
Floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments)
Preference shares (other than fully and compulsorily convertible instruments);
Private sector window of multilateral financial Institutions such as IFC, ADB, AFIC, CDC, etc.

Benefits of External Commercial Borrowing

Low effective interest rate that is prevalent in developed countries
Larger capital requirements met from international players
No dilution of equity stake
Diversified investor base
Access to global financial markets
Additional resources of capital for SME and infrastructure
Repayment of Rupee loans availed domestically
Financial turnaround of a company if classified as an Special Mention Account (SMA-2) or Non-Performing Assets (NPA)
Debt capital for expansion projects
Conversion of ECB into equity (FDI) can be done in full or in part, at once or gradually.
If you do not choose the external commercial borrowing route, the international borrowing process becomes a special case taking huge time with uncertainties of approval.
ECBs can be raised from foreign equity holders and utilised for working capital purposes for 5 years.

Conditions for external commercial borrowing:

Minimum average maturity period is (MAMP) of 3 years across all forms of ECB. MAMP is the weighted average number of years for which different external commercial borrowing amounts are outstanding with Indian a company. However, manufacturing sector companies can raise ECB with MAMP of 1 year for ECB up to USD 50 million in a financial year.
All inclusive cost (rate of interest, other fees, expenses, charges, guarantee fees, ECA charges but don’t include commitment fees and withholding tax) of fund needs to be lesser than the benchmark rate + 4.5%
The borrowers cannot use the funds for onward lending, repaying existing loans (?), or investing in M&A.
Borrowers cannot use the funds for real estate activities, investment in capital market, equity investment.
Borrowers can raise ECB maximum up to USD 750 million or equivalent rupees per financial year under the automatic route.
For FCY denominated ECB raised from direct foreign equity investor, his ECB -equity ratio under the automatic route cannot exceed 7:1 for amounts more than USD 5 million.
Borrowing entities can not borrow in excess of debt equity ratio guidelines for the sector
There is a hedging requirement 70% for infrastructure companies
LLPs are not eligible to raise ECBs

Types of International banking

Correspondent banks
Correspondent banks involve the relationship between different banks which are in different countries. This type of bank is generally used by the multinational companies for their international banking. This type of banks is in small size and provides service to those clients who are out of their country.

Off-shore banking centre
It is a type of banking sector which allows foreign accounts. Offshore banking is free from the banking regulation of that particular country. It provides all types of products and services.

Subsidiaries of foreign banks
Subsidiaries are the banks which incorporate in one country which is either partially or completely owned by a parent bank in another country.

Affiliate Banks
The affiliates are are related to foreign banks but not owned by them and work independently.

Foreign branch bank
Foreign banks are the banks which are legally tied up with the parent bank but operate in a foreign nation. A foreign bank follows the rules and regulations of both the countries i.e. home country and a host country.

Apohan services:

Apohan helps a business in procurement of foreign currency, low-cost funds through external commercial borrowings. It provides the Consulting Services for export Finance.

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ECB For Startups
ECB for start-ups has better norms on all parameters than regular ECBs by established companies, NBFCs, etc.

ECB facility for Startups:

A select category of banks are permitted to help startups to raise ECB under the automatic route.

Eligibility:

This is any entity recognised as a Startup by the Central Government as on date of raising ECB.

Maturity:

MAMP is 3 years. It means you have to borrow with loan period of more than this in the loan contract. See the MAMP definition in main ECB service description on our site.

Types of loans:

The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares and many other variants.

Currency:

The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination.

Amount: The borrowing per Startup will be limited to USD 3 million or equivalent rupees per year.

Interest rate:

It shall be mutually agreed between the borrower and the lender.

End uses:

For any expenditure in connection with the business of the borrower. Not for real estate, further lending, etc.

Conversion into equity:

Conversion into equity is permitted in full or part, at the end or gradually.

Security:

Movable, immovable assets

Intangible assets (including patents, intellectual property rights), financial securities, etc.

Corporate or personal guarantee (no bank guarantee)

Hedging:

Desirable & not compulsory

Conversion rate:

Market rate as on the date of agreement.

Apohan’s role:

Apohan provides end-to-end ECB procurement services from foreign lenders ( or existing equity investors in the start-up) who can pay the retention fees to Apohan & also have sufficient liquidity to carry out all the processes and expenses

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Consultancy services for Joint Ventures Through Foreign Direct Investment (FDI)

The perspective:

Foreign direct investment with subscription to new equity capital of an existing company:

It is the inflow of the foreign equity capital into Indian company. This investment is in the form of of issue of New Capital by an Indian company. The investor may form a completely owned subsidiary as well without involving any Indian company. In this case, there is acquisition of control in proportion of the new shareholding pattern.

Foreign direct investment by purchase of shares:

It is the inflow of the foreign equity capital into India. This is a corporate transaction of acquisition of existing ownership.

Foreign joint venture:
It is same as the foreign equity inflow in the form of foreign direct investment idhar by subscription of New Capital or by purchase of shares. The process of foreign direct investment gives birth to a foreign joint venture.

Foreign business alliance:
This is same as a joint venture from the perspective of the Indian company in which foreign direct investment is made.

India entry strategy:
India entry strategy means the strategy by a foreign direct equity investor regarding all aspects of making equity investment in India with or without an Indian partner in its areas of his interest. So, it is necessarily an FDI strategy and possibly a joint venture strategy as well.

Unincorporated joint venture:
In this, two companies enter into a contract without incorporating any new company (or any legal entity in the nature of a body corporate). However, they setup a completely separate administrative and management mechanism (possibly at a separate physical place) and share all the work, liabilities, risks and profits. The money directly invested by the foreign company (through a trust, partnership, or maybe even without them, etc) is again called foreign direct investment. The payments under the contract happen as if they are payments under “a very complex transaction” between two different parties.

Strategic alliance:
Unincorporated joint venture and the relationship defined in it is called a strategic alliance from the perspective of both the parties.

Contractual joint venture:
The new administrative, management, accounting set up (without incorporating a new company ) for the execution and operation of a new project and managed in an agreed way is called contractual joint venture.

Cooperative agreement:
The agreement governing the unincorporated joint venture or the strategic alliance is called a cooperative agreement.

Mergers and acquisitions:
Mergers are the corporate transactions are in which the existing companies combine to form new and different entities. They cannot be called as joint ventures. In acquisitions, if the existing management of the acquired company retains a substantial shareholding & continues in the management playing a substantial role, then it is called a joint venture through acquisition of shares. Against this, in those joint ventures where typically a new company is formed, nothing happens to the legal existence of the investing companies. Keeping their own existence intact, they create a new company or sign a cooperative agreement. In the contractual joint ventures, they don’t even form a new company.

Foreign institutional investment:
It is the inflow of foreign capital but not necessarily as equity. The foreign institutional investors can directly make equity investment in Indian companies. However, it has limitations of exposure in single company in terms of maximum equity day can hold in a company. This limitation is extremely low as compared to foreign direct investment. They have absolutely no role in the control and management of a company. An Indian company, also can have only relatively small total Stake of all the foreign foreign institutional investors. They cannot make a group of investors in a company and influence the management.

Foreign owned and controlled Indian company (FOCC):
Even if there is hundred percent foreign ownership through FDI route and even if none of the shareholders or directors or key managerial persons is Indian by citizenship, the company will be called local company, domestic company or Indian company if it is registered in India under the Companies Act. This kind of configuration is important from the perspective of further investment through this company & effective taxation on business proceeds till they are received at the hands of shareholders.

Foreign company:
It is a company registered in a foreign country and operating in India through a liaison office, a project office or a branch office in India or e-commerce portal. None of these three types are any type of body corporate and activities we can carry out our very limited.

Overseas direct investment:
It is the equity investment made by an Indian company outside India.

Legal and regulatory framework for international joint ventures

A Joint Venture is governed primarily by the Companies Act, Indian Contract Act, Foreign Direct Investment (FDI) Policy, the Foreign Exchange Management Act & several financial & business laws. Corporate JVs will also be subject to the India tax laws, labor laws and state-specific shops and establishment legislation acts, Competition Act, and various industry-specific laws.

Eligible investors:

Overseas Corporate Bodies (OCBs incorporated outside India)
Any resident/entity outside India
Foreign companies owned by NRIs
Foreign trusts, etc owned by NRIs
NRIs resident in Bhutan and Nepal
Citizens of Nepal and Bhutan
Citizen/entity of Pakistan & Bangladesh (under Government route)
Condition:
OCB should not be under adverse notice of RBI

Eligible investees:

Indian companies
Indian partnership firm
Indian proprietary concern
Indian trusts for project, business purposes
Indian LLPs
Indian alternative investment investment vehicle.
Business management trusts
Startup Companies

Conditions
Investee should not engaged in agriculture, plantation, real estate),

Types of shares issued under foreign direct investment
Common equity
Fully and compulsorily convertible debentures
Fully and compulsorily convertible preference shares
Optionally convertible with a minimum lock-in period
Partially convertible preference shares
Non-convertible preference shares with a minimum lock-in period

Investment can be made in a lump sum fashion or in phased installments. Where the assets more than 250 crores or a turnover of more than 750 crores is involved, in joint ventures through the foreign direct investment, an approval from the competition Commission of India is required.

Routes of approval of foreign direct investment:

Automatic route:
FDI investor does not require any prior approval from Govt. of India or RBI.

Government approval route:
An approval from the government is required from the Department of Industrial Policy & Promotion (DIPP) of Ministry of Commerce and Industry.

Sector related specific rules:

The treatment of investment in different sectors is different. The extent of foreign direct investment in several sectors is allowed up to hundred percent are restricted to a lower level (requiring involvement of a local partner) with or without government approval.
Sectors where FDI is allowed under 100% Automatic route:
Sectors where up to 100% FDI is allowed under Govt route
Sectors where partial FDI is allowed under either route
Sectors where less fDI is allowed under automatic rule and more under government approval rule
Sectors where FDI is not allowed

Benefits of FDI & Joint Ventures to Indian companies

Getting international financial capital for growth and expansion of the company
Getting skills, processes, management, technology, etc.
For development of Greenfield and brownfield projects with large capital outlay

Benefits of joint ventures to foreign company with FDI in India

Access to the sectors and business activities where hundred percent FDI is not allowed
Access to a very large market
Higher rate of return on equity
Access to knowledge and experience of Indian partner in doing business in India
No risk of errors in a new business environment due to lack of knowledge
Pre-established marketing set up
Access to locally known brand
Synergy of Technical Advancement and operational excellence
Abscess to the large business network in a new place
Speedy project clearances due to local connection
Quick Awareness of the local legal and regulatory environment
Joint venture gives an opportunity to know possibility of a Merger
Agreements for Technology Transfer, Use of Brand Name, Royalty Payment etc. are accorded approval by automatic route.
India allows free of charge repatriation of profits once the entire tax, etc liabilities are met. Exit can be done repatriating all the tax and other liabilities are settled.

Types of joint ventures in India

Equity joint venture
This is an understanding whereby a new, independent, legal corporate entity is created in accordance with the agreement of the two parties. The associated parties provide respective contributions to the capital or assets. This structure is ideal for long-term arrangement. Partnership firms are not permitted for JV by foreign resident in India, however exceptions are made in case of non-resident Indians or persons of Indian origin. Setting up a new company provides the most flexibility as the entity can be structured according to the specifications, intentions, and obligations of the associated parties. In place of a company, a limited liability partnership is also possible.

The key characteristics of equity-based joint ventures are as following:
Agreement to create a new entity or to join into ownership of the other
Shared Ownership
Shared management
Shared responsibilities, liabilities & risks arrangements
Shared profits or losses

Contractual joint venture
This type of joint venture a legal entity is not created. This type of agreement is preferred in situations that involve a temporary task (it still comes to a lot many years) or a limited activity. It is less risky equity joint venture as exit is relatively easier. Tax and commercial factors lead to formation of unincorporated joint ventures. The parties will state the rights, duties, and obligations expected of the parties to the contract and treatment of third parties. The JV contract will also state the period of contract. It will define the legal relationship between the parties, mostly as equal entities to a task.

Types of contractual joint ventures and business alliances

Business alliance through MOU:
Two businesses can associate with each other through a memorandum of understanding. MOU is not legally enforceable but it narrates the intent of future association and paves a way for a definitive final contract.

Business alliance through Contract:
Two businesses can associate with a business contract for any purpose of executing joint projects, joint marketing, long term supply, long term seller buyer relationship, technology transfer, etc.

Hybrid joint ventures
They have features of both equity joint ventures and unincorporated joint venture.

Types of contractual joint ventures by purpose
Technology transfer agreements
Joint product development
Purchasing agreements
Distribution agreements
Marketing and promotional collaboration
Intellectual advice

Checklist of factors before forging a joint venture

Who will bring in what resources in what proportion – capital, assets, manpower, technology?
What business will the new company will be engaged in?
What will be the composition of the board of directors?
What will be the method of passing a board resolution (majority / consensus)?
Who will be the chairman, managing Director of the company?
What will be the powers of the Managing Director and board of directors?
What will be the division of decisions between the board of directors and the joint venture partners?
Who will manage the administration and human resources?
Where from the corporate policies will be derived?
Who will how the banking and financial powers ?
Who will do project development?
Who will manage the manufacturing operations?
Who will be responsible for marketing?
Who will be responsible for technical matters like selection of machinery, choice of technology, production planning etc.?
Who will decide about future expansion projects or major capital expenditure?
What will be the frequency of meetings of the partners?
How will the partners control the board of directors?
What is the records if one of the partners fails to fulfill his duties?
What will be the schedule of activities?
What happens if there are slippages from the Schedule?
What will be the mechanism of resolution of differences in management opinions and decision?
Who will represent the joint venture to the media?
What will be the exit route?
Will there be of first right of refusal?
What will be the methodology of valuation of the shares?

Typical contents of joint venture agreement:

Name of the new company
Objective of agreement
Scope of the joint venture;
Geographical limits
Products to be manufactured and marketed by the new company.
Ratio and amount of equity participation by parties
Arrangement of loans by the parties & from other sources
Capital structure
Chairmanship of the meetings
Appointment of CEO/MD
Management Committee
Structure of board of directors
Structure of Management
Remuneration payable to working partners or directors
Schedule of proposed actions after execution of the JV agreement
Targets / Milestones to be achieved
Procedure for review of operations
Decision making mechanism
Rights and authority is of the parties
Specific obligations of the parties
Treatment of distribution of profit
Transferability of shares
Management of conflict of interest
Dividend policy
Change of control
Exit
Anti-compete clauses
Protection of sensitive information
Assignment of the contract
Alternative Dispute Resolution mechanism;
Applicable law
Venue and seat of arbitration
Exclusivity
Term of contract
Conditions precedent
Treatment of common expenses
Important decisions with the consent of partners
Access to parties to assets of company
Change of control
Non-Compete
Confidentiality
Indemnity
Assignment of contract to third parties
Representations and warranties
Break of deadlock
Applicable law
Force Majeure
Termination
Technical schedule
Schedule of standards
Quality schedule
Service level schedule

Apohan services forgetting foreign direct equity investment:
Preparation of overall FDI strategy of the company in an Inception report
Understanding client objectives
Preparation of client profile
Orientation of client management for the joint venture process
Preparation of the desired profile of the foreign investor
Identification of the foreign investor
Preparation of teaser
Preparation of investor presentation
Preparation of information memorandum
Preparation of project profile in which FDI is sought
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Non disclosure agreement between principals
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Determination of mode of issue of equity
Determination of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of mutual India between principles
Analysis of investment proposals by FDI investors
Basic due diligence of the investor
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Evolution of strategy on sharing of control
Preparation of key strategic terms of joint venture agreement
Analysis of investment proposal by investor
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Preparation of document list for data room
Preparation of cloud based data room documents
Preparation of for data room with all the documents
Answering queries of investors and provision of documents
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in due diligence
Assistance in board meeting and General Meeting as special expert invitee
Preparation of disclosure schedule
Identification of due diligence agency for reverse due diligence
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal

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Key Elements in formulating India Entry strategy

Country scanning of the region
Competitive advantages of India over the other options
Entry time
Form of initial presence
Joint venture or not
Profile of joint venture partner
Market size in India
Target market segment
Profile of buyers
Profile of competitors
Price levels
Product basket
Quantification of financial performance objectives
Potential competition with other business,
Pricing & product mix,
Entry options,
Regulatory of environment,
Selection of a business model,

Options of India entry without incorporation of a company

Liaison Offices or representative office

They need and approval by RBI, the central bank of India. It undertakes liaison activities. It acts as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity. It cannot earn any income in India and survives on inward remittances. It collects information, carries out the business development activities, the Indian business environment, contact the regulatory authorities for feasibility of a certain type of project and the required approvals. It promotes the products of the parent company in Indian market. It can also look for exporters from India to procure goods for its foreign parent. It can enter into memorandum of understanding with the local companies with futuristic intentions. Liars and officers remove the their licence every 3 years. They file an Annual Activity Certificate to RBI every year.

Branch Offices:

Foreign companies can carry out a larger set of activities without incorporation in India by establishing a branch office to manage manufacturing or import export. Reserve Bank provides an approval for branch office. They cannot establish retail sale shops. They cannot acquire land. Applicable tax rate for them is higher. They have to produce certified activity reports to RBI.

They can carry out the following activities:
1. Import and export of goods of foreign company
2. Business services in the name of foreign company
3. Consultancy Services in the name of foreign company
4. Research and development either on standalone basis or in collaboration with local company
5. Formation of business alliances and business development
6. Technology Services to the Indian companies
7. Information Technology Services to Indian companies
8. Post sales support

Project Office:

Project officers are established to complete the contract awarded by Indian companies. RBI provides permission for the same. These are typically large scale infrastructure projects sponsored by the World Bank or the Asian Development Bank in which the foreign companies are EPC contractors. In case the project requires formation of a special purpose vehicle incorporated in India, FDI rules will be applicable.

CLASSIFICATION OF Joint Ventures BASED ON THE EXTENT OF ACQUISITION OF CONTROL:
When one company invests in the other, or buys the equity stake in the other company, or subscribes to the fresh issue of shares it need not be always 100%. When it comes to small and medium enterprises, Apohan has observed that, it is the personal strength of the founder/ promoter/ director that keeps the enterprise going on. He has the highest quality of relations and network with all the the stakeholders of the business. Hence, it would be kind of unwise to remove off this original promoter and put in place a completely new management. It depends on the circumstances, but the original management should continue at least for couple of years for hand holding, or for integration of the merger, or as independent directors, or on salary basis, or till the demonstration of potential performance promised at the time of the deal even in case a business is completely bought out.
The functioning of the board of directors and the General Body of members (shareholders) requires a specific percentage of the ownership or the control to be able to take a specific type of decisions. On one side, the importance of ability to lead the decisions (or importance of the power and authority to be able to take important company decisions without interference of the other shareholders) is very critical and on the other side, the available cash for purchase of adequate percentage of total holding is a serious limitation.
When it comes to listed companies, the degree of compliance for acquisition of control requires larger compliances including open offer to retail investors according to the takeover code. The companies also have to see that the cross holding of certain shareholders does not result in conflict of interest for tenders. If a company has more than 5% equity in another company and if both of them bid for a tender, both of them may be disqualified for conflict of interest. Increased acquisition of equity stake also results in requirement of compliance of related party transactions, the regulations also called transfer pricing regulations.

Following is the classification of the merger and acquisition activity based on the extent of acquisition of control:

Buyout or sellout deals:
It means the acquirer acquires 100% stake of the original shareholders. The basic objective behind a buyout deal is the complete flexibility in the new management and no interference from the legacy management in key decision making.

Absolute majority deals:
In the deals for absolute majority, the acquirer acquires 90% or more stake in the target company. With 90% stake, the number of corporate process complexities in terms of taking care of the minority shareholder reduce drastically.

Concept of majority stake:

Majority stake means more than 50% shares. Having more than 50% shares is as good as having veto power. Without the consent of the majority, not even a small decision can be taken in a company. However, it is to be noted that majority stake is not sufficient, it gives the shareholder the power to veto out the decisions that disapprove but it doesn’t give them the power to execute all the decisions that they want to undertake. For the special type of decisions, the board must pass special resolution which require minimum 75% holding in case there is friction or difference of opinion in the board.

Control deals:
Control deal are the merger and acquisition deals in which investors’ preference is to acquire more than 50% equity and replace the existing management or board of directors with new one or at least to substantially reconstitute it. Typically, the valuation of shareholding for 49% stake, 50% state, and 51% stake is not in the proportion 49: 50: 51. There is control premium for exercising equal control on the company and there is even more control premium for handing over the control at 51% stake. Control premium is the amount over and above the mathematically proportional valuation.

Minority stake deals:
Any state less than 50% of the total equity is called minority stake. While the financial benefits are proportionately available, the majority shareholders may oppress the minority shareholders as they have the control over the management of the company. There are several statutory provisions for the protection of interest of the minority shareholders.

Representation stake deals:
If a shareholder for a group of shareholders have more than 25% equity in the company, they have the right to nominate one director on the board of directors. The presence on board of directors does not help in leading any decision making, does not help much in avoiding adverse (to the group) corporate decisions. It provides a comfort that they are being treated fairly. Every director has access to critical company information and the shareholder group can rest assured that no siphoning of funds is happening.

Material stake deals:
When the stakeholding of a single shareholder or a single company or a single group of companies exceeds 5%, or exceeds 10% but is lesser than 25%, depending upon the domestic or foreign origin of the company, several reporting, declaration, disclosure, compliance, etc norms shoot in.

Marginal stake deals:
Marginal stake means very small equity shareholding (0 to less than 5%) in a company. It cannot exercise any kind of control but can be part of the financial benefits exactly on the same lines and in the same proportion as any other shareholder. In India, technically, ownership of a single share gives the right the to the shareholder to attend the Annual General Meeting of a company with even having the largest market capitalisation.

Cross-holding deals:
Some mergers and acquisitions take place in which both the companies continue their legal existence but they acquire shareholding in each other. This may be done by the shareholders as well in place of being done by the companies. If the companies have cross holding in each other, subject to compliance of transfer pricing and conflict of interest rules, they would not undertake any commercial decisions that will cause adverse effect on one another.

Differential voting rights (DVR):
Differential voting right is one of the key tools for retention of the financial benefits in proportion of (or more than) the proportion of financial investment. This is achieved by tweaking the control management with differential voting rights for different classes of shareholders. There are examples of 200 votes for one share (in the General Meeting) in some companies and also there are examples of 200 shares for one vote in some other companies. Dilution of control rights in a company results in lower valuation of DVR shares.

Apohan very well understands the various sensitivities around control management in the M&A deals. Apohan helps its clients in the proper management of the control of the merged entity in the right hands so that no destruction of value happens. Apohan carries out professional, end-to-end, customized consultancy services by understanding how to allocate various control functions in the board of directors. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.

Precautions in joint ventures:

Untimely exit of intended partner:
The joint ventures are intended to be with specific partners and the rights of share transfers should be restricted in order to prevent a major shareholder from leaving immediately. Lock in period also can be introduced.

Diversion of business by the partner:
Joint venture partners are in the same or similar businesses, there might be a sense of competition. The joint venture contract must mention how the conflict of interest is avoided.

Difficulties in employee transfer:
Transfer of existing employees to the joint venture company resignation and rehire or transfer or deputation and this could be a sensitive issue.

Sudden depreciation of rupee:
From the perspective of the foreign investors, to the extent it is required for remittances, the trend in exchange rate can destroy excellent performance achieved in Indian market.

Applicability of the related party transaction rules:
Indian transfer-pricing regulations, the Indian joint venture and the foreign shareholders would be considered “associated enterprises” and any transactions between them would be required to be conducted on an arm’s length basis.

Disagreement on the management structure:
The parties should agree on a mutually acceptable management structure.

Incorporation documents at variance with JV contract:
For the equity joint ventures, all the issues agreed between the parties should be reflected in the incorporation documents.

Remittance limits
There may be regulatory upper limits for remittances (both lump sum fees and periodic royalties) in case of technology transfers and license or use of trademark or brand name.

Complexity of tax laws:
The incremental proceeds of sale of shares are taxed as capital gains for foreign investor.
The double tax avoidance agreements (DTAAs) are applicable with many countries.

Biased method of share valuation:
While purchasing the shares of Indian companies, price paid should be more than DCF valuation prepared by a certified valuer. While selling the shares of Indian company, the price should be equal to or less than DCF value computed by a certified valuer.

Misuse of intellectual property:
The intellectual property should be registered in India for enforcement of protection.
The licensing agreement, know-how agreement, technical services agreement, royalty payment, franchise agreement should be made part of the main agreement.

Limited financial capacity of partner:
The financial capacity of the local partner should be checked.

Treatment as foreign entity:
The 50:50 equity joint ventures are treated as foreign owned Indian companies for the purpose of applicability of FDI norms for further Investments.

Place of effective management:
If a foreign equity joint venture has 50% or more foreign equity (making it a foreign owned and controlled company -FOCC), and if the place of effective management (POEM) is outside India, the double tax avoidance Treaty will come in picture. However, even if the place of effective management is outside India but the company is owned and controlled by Indian citizens (making it an IOCC), it will be treated as a 100% Indian company for tax purposes. This is also relevance from the perspective of being able to make for the downstream investment into two other Indian companies without requiring approvals under FDI for making investment, without requiring RBI compliances for running the company.

Apohan consultancy services for India entry strategy:

Understanding client objectives
Preparation of client profile
Secondary market research of the sector and industry
SWOT analysis of possible investment
Appointment of a market search agency
Appointment of a market survey agency
Review of market study report
Study of applicable Indian legal and regulatory framework
Inception report for entry structure
Analysis of broad entry options (presents in the form of a foreign company, wholly owned subsidiary, equity joint venture, contractual joint venture)
Analysis of mode of subscription to equity
Analysis of form of equity
Orientation of client management for the joint venture process
Preparation of the desired target profile of the Indian company
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Identification of the a list target Indian companies
Groundbreaking discussions with target companies
Selection of the target company
Non disclosure agreement between principals
Structuring of the joint venture
Negotiation for sharing of control and scope of work
Formulation of a strategy for a new project (size, location, capacity, etc)
Preparation of project information memorandum
Preparation of project profile
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Negotiation on mode of issue of equity
Determination of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of mutual India between principles
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Preparation of key strategic terms of joint venture agreement
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Identification of due diligence agency
Due diligence (corporate, financial, key contracts, marketing, procurement, key assets, real estate, manufacturing facility, permits & certifications, technology, operations, brand, intellectual property, compliance, associate companies, forensic, human resources, information technology, administration)
Preparation of due diligence report
Preparation of risk profile of the joint venture or WOS project
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in board meeting and General Meeting as special expert invitee
Analysis of disclosure schedule
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal

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Consultancy for overseas direct investment & international business to Indian companies

It is the equity investment made by an Indian company outside India.

Overseas direct investment without incorporation of company there

Liaison Offices or representative office
It undertakes liaison activities. It acts as a channel of communication between Indian Head Office abroad and local parties. It is not allowed to undertake any business activity. It promotes the products of the parent company in Indian market. It can also look for exporters to India to procure goods for its foreign parent. It can enter into memorandum of understanding with the local companies with futuristic intentions.

Branch Offices:

Indian companies can carry out a larger set of activities without incorporation of a company in the destination country establishing a branch office to manage manufacturing or import export.

Project Office:

Project officers are established to complete the contract (doing project work in that country) awarded by foreign companies.

Important Considerations in ODI:

Difficulties in employee transfer:
Transfer of existing employees to the joint venture company resignation and rehire or transfer or deputation and this could be a sensitive issue.

Applicability of the related party transaction rules:
Transfer-pricing regulations, the local joint venture and the Indian shareholders would be considered “associated enterprises” and any transactions between them would be required to be conducted on an arm’s length basis.

Disagreement on the management structure:
The parties should agree on a mutually acceptable management structure.

Incorporation documents at variance with JV contract:
For the equity joint ventures, all the issues agreed between the parties should be reflected in the incorporation documents.

Remittance limits
There may be regulatory upper limits for remittances (both lump sum fees and periodic royalties) in case of technology transfers and license or use of trademark or brand name.

Complexity of tax laws:
The incremental proceeds of sale of shares are taxed as capital gains for foreign investor.
The double tax avoidance agreements (DTAAs) may be applicable or not.

Biased method of share valuation:
While purchasing the shares of local companies, price paid should be more than DCF valuation prepared by a certified valuer. While selling the shares of local company, the price should be equal to or less than DCF value computed by a certified valuer. This kind of bias may exist.

Misuse of intellectual property:
The intellectual property should be registered in India as well as locally for enforcement of protection. The licensing agreement, know-how agreement, technical services agreement, royalty payment, franchise agreement should be made part of the main agreement.

Limited financial capacity of partner:
The financial capacity of the local partner should be checked.

Place of effective management:
It is important from the perspective of being able to make for the downstream investment into two other local companies without requiring approvals under FDI or making investment, without requiring central bank compliances for running the company.

Apohan consultancy services for overseas direct investment (ODI):

Understanding client objectives
Preparation of client profile
Region scanning
Secondary market research of the sector and industry
SWOT analysis of possible investment
Appointment of a market search agency
Appointment of a market survey agency
Review of market study report
Study of applicable local legal and regulatory framework
Inception report for entry structure
Analysis of broad entry options (presents in the form of a foreign company, wholly owned subsidiary, equity joint venture, contractual joint venture)
Analysis of mode of subscription to equity
Analysis of form of equity
Orientation of client management for the joint venture process
Preparation of the desired target profile of the foreign company
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Identification of the a list target foreign companies
Groundbreaking discussions with target companies
Selection of the target company
Non disclosure agreement between principals
Structuring of the joint venture
Negotiation for sharing of control and scope of work
Formulation of a strategy for a new project (size, location, capacity, etc)
Preparation of project information memorandum
Preparation of project profile
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Negotiation on mode of issue of equity
Determination of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of mutual NDA between principles
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Preparation of key strategic terms of joint venture agreement
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Identification of due diligence agency
Due diligence (corporate, financial, key contracts, marketing, procurement, key assets, real estate, manufacturing facility, permits & certifications, technology, operations, brand, intellectual property, compliance, associate companies, forensic, human resources, information technology, administration)
Preparation of due diligence report
Preparation of risk profile of the joint venture or WOS project
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in board meeting and General Meeting as special expert invitee
Analysis of disclosure schedule
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal

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Apohan Corporate Consultants Private Limited

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M&A Process

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M&A Process

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