Investment Banking

• Capital issuance
• Corporate financial services
• Valuations
• Structured financial products
• Due diligence procedures
• Restructuring
• IPO’s and placement of papers

1
 SEBI – Market regulator

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

a regulatory for capital markets.

Functions:

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

capital mkts.

b. Ensuring fair practices by issuers of securities.

c. Promotion of efficient services by brokers, merchant bankers

and other intermediaries.
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 SEBI Guidelines

Influences raising of capital

.Issuers status

.Initial Public Offering

.Composite issues.

.Deployment of issue proceeds.

Lock in period

Preferential offers brought under purview

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Equity capital to be greater than Rs. 10 crores for listing on
BSE / NSE and Rs. 5 crores for other exchanges & conformity
with other listing guidelines

.Atleast 10% to be offered to public by way of a prospectus to be

in conformity with listing guidelines.

.Book building / Private placement allowed.

.Debt : Equity : Normally 2:1, relaxed in

capital intensive projects.

.Underwriting : Not mandatory

.Disclosures in offer document.

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 Norms for issuance of capital

Public issue by Unlisted Companies:

No unlisted company shall make a public issue unless the company

has :

•IPO’s of issue size up to 5 times the pre-issue net worth can be

allowed only if the company has a track record of distributable profits
in terms of section 205 of companies act, for at least three out of the
immediately preceding five years.For issue size greater than 5 times
net worth book building mandatory

•A pre issue Net worth of at least Rupees One crore in at least three
out of the preceding five years with the minimum requirement to5 be
met for the immediately preceding two years.
 • An unlisted company which does not satisfy the above
conditions can make a public issue provided a Public
Financial Institution or a Scheduled commercial bank :
• Has appraised the project and has financed at least 10% of the
cost of the project by way of Equity / Debt.
• Book building made mandatory in respect of IPO’s without
track record including the stipulation that 60% to be alloted to
QIB’s
• The appraising Bank / Institution brings in the money at least
one day before the opening of the public issue.
• Minimum level of public offering has to be at least 10% of post
issue capital.
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 PRICING OF SECURITIES BY COMPANIES

•Companies eligible to make Public Issues can freely price their

securities.

• Differential Pricing : Allotments made to firm category must be

at a price higher than that made to open public category.

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 Public Issue By Listed Companies

A Listed Company shall be eligible to make a public issue if as a

result of the proposed issue Net worth of the Company becomes
more than Five times the Net worth prior to the Issue. And also the
Company satisfies the conditions as applicable to an Unlisted
Company pertaining to track record of distributable dividends as
per sec 205 of companies act.

Free pricing to be determined by lead managers.

The above guidelines are not applicable to :

• Banks / NBFC’s

•Infrastructure Projects 8
 Guidelines for Debt Securities
Creation of a Debenture redemption reserve mandatory in the
event maturity in excess of 18 months.DRR aggregating to 50% of
the issue price to be created before redemption commences.

Creation of charge within 6 months

Conversion of Instruments :

- Conversion at the option of the investor if conversion terms

not specified at issuance time.
- FCD’s with conversion periods greater than 36 months
shall give put and call options to the investors.
- If conversion is between 18 and 36 months conversion at
the option of the investor. 9
 Other regulations

• Credit Rating of Debt Instruments mandatory irrespective of maturity

or conversion terms.For debt securities greater than Rs 100 crs credit
rating from two agencies mandatory.

• All credit ratings obtained in the last 3 years shall be disclosed in the
offer document.

• Outstanding warrants or financial Instruments would get the same

rights / benefits .

• All partly paid up shares shall be made fully paid up / forfeited before a
public issue.
• Interest rates & terms of conversion freely determined
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 Pre Issue Obligations

• Lead Merchant Banker shall exercise due-diligence

• Inter - se allocation of responsibilities
• Appointment of intermediaries
• Underwriter’s ability to discharge obligations
• Offer document to be made public
• Appointment of compliance officer
• Press advertisements
• Agreements with depositories
• Additional disclosures regarding Khoka buy back,security
etc

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 Promoters contribution &Lock in
arrangements
• In a public issue by an unlisted company the promoters contribution
shall be at least 20% of the post issue capital.
• In a public issue by a listed company the promoters shall participate
either to the extent of 20% of the proposed issue or ensure post-
issue holding of 20%.
• In case of any issue to the public promoters equity upto 20% will be
locked in for a period of 3 years from the date of the public issue or
the date of commencement of commercial production which ever is
later..
• In case of public issue by an unlisted company promoters holding in
excess of 20% will be locked in for 1 year.
• Locked in securities can only be pledged with banks & FI’s as
collateral's for loans given to the company.
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 DISCLOSURES IN OFFER DOCUMENT
Minimum Subscription Clause

Issue Schedule

Intermediaries and Auditors

Credit Rating

Underwriting of the issue

Capital Structure of the Company

Details of major shareholders

Terms of Issue

Utilisation of Issue proceeds 13

Project cost & Means of Financing

Company,Management,project details

Plant,Machinery,Process & Technology

Collaborations,Performance guarantees etc.

Products & Services,Capacity & Future prospects

Stock market data,Past prices,Bonuses etc.

Financials of group companies

Basis of issue pricing

Past Financial data 14

 ROLE OF A MERCHANT BANKER
Investors
Promising the investors the
soundness of issue

Promoters Complying with

Promising to Merchant SEBI guidelines/
Entrepreneurs
Tap resource Banker Regulations Co. Act
Companies

Directing and
Co-Coordination activities

Underwriter
Broker
Bankers
Advertising Agency 15
 Foreign Direct Investments

• Inward Investments :
• FIPB & Automatic approval routes
• Exemptions for SEZ’s
• ECB’s upto $100 million under automatic route
• RBI delegated to sanction fresh ECB’s up to$100 million
with interest cap of :
Libor +150 for normal projects
Libor + 200 for infrastructure
• RBI delegated authority to approve pre-payments

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• Outward Investments :

• Investments upto Net worth of the entity permitted every

year under automatic approval route

• For IT companies 100% of receipts from GDR / ADR can

be invested offshore.

• Resident Indian shareholders of an Indian Co can hold

equity in the Foreign co having atleast 10% cross holding.

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 Structured Financial Products

* Rupee convertibi lity

* Cost driven economy

* Economies of scale

* Interest rate volatility

* B u y - b a c k o p t i on
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* WTO P r o t o c o l
•Transaction costs and phasing out of intermediaries

•Partial convertibility of currency thereby opening accesses

to offshore financing
•Tax asymmetries that can produce tax savings for the
issuer, investors or both
•Opportunities to reduce or reallocate risk

•. Volatile inflation indexed interest rates

•Better understanding of risk-return characteristics of

existing
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•Investor preferences
 Structured financing Instruments
* Equity shares with differential rights as to dividend , voting or otherwise
* External commercial borrowings & Depository receipts
 Non Voting shares.
 Multiple option debentures / SPN’s
 Exchangeables
 Deep discount bonds.
 Floating rate notes
 Rupee enhanced structured bonds
 Zero coupon bonds

 NCD with tradable warrant.

* Derivative linked bonds. 20
 Offshore financing

- Rupee convertibility on current account

- Low cost borrowings

- Large avenues of funds with low flotation cost and time

- Elimination of licensing has resulted in large size projects which need low
cost means of financing. to ensure project viability

- In FCCB’s / GDR’s company’s issue rupee denominated instruments and

hence do not carry foreign exchange risk

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- No voting rights thereby does not result in dilution of control

- Flexibility in tax planning

- Lower tax rates on dividends/ interest rates

- Reduces wt. av. cost of capital

- No lock in period for GDR’s

- Improves credibility of the issuer due to international due diligence

- Risk of foreign exchange fluctuations

- Ideal source for companies with a natural hedge 22

 ECB’s
 Swapping of ECB’s with other corporate loans
disallowed.
 Priority to infrastructure projects.

GOI approval for issue size beyond $100 million

Funds to be utilised for financing imports and to be

parked offshore till point of usage.

Remain as debt throughout the life of the instrument.

 Average life to be 7 years.
 Interest rate ceiling of Libor + 200 basis points.
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 Depository receipts
 Depository receipts are negotiable certificates that represent company’s
publicly traded equity.

 Can be quoted on any international exchange.

 Company’s could directly issues GDR’S or by conversion of FCCB’s.

 Indian company will issue shares to custodian in India who will inturn
instruct foreign depository to issue receipts which can be traded since Indian
stocks cannot be traded on international exchanges.

 Provides international investor with settlement in his local exchange.

 Investor can convert GDR’s into a fixed number of equity shares at any
time.

 Depositary receipts have no voting rights.

 Trading of depositary receipts outside India will not attract tax liability in
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India.
 FCCB’s

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

 In the event FCCB is used to part finance project cost

then “put” option would normally not be given during
the gestation period.

Interest : Libor based (depending on conversion rate)

with a cap of 150 basis points over Libor
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 Deep discount bonds
* Zero coupon bond
* Redeemed at face value
Bond structure :
Deep discount bond has a face value of Rs. 1,00,000/-. It was issued
at a discounted price of Rs. 2,700/- with a maturity period of 25 years.
withdrawal / redemption Deemed face value
At the end of 5 years Rs. 5,700/-
At the end of 10 years Rs.12,000/-
At the end of 15 years Rs. 25,000/-
At the end of 20 years Rs. 50,000/-
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 Basis of evaluation
Redemption / Investors Cost to
withdrawal yield the company
----------------------- ----------------- -------------

AFTER 5 YEARS 13.56% 16.11%

AFTER 10 YEARS 14.15% 16.00%

AFTER 15 YEARS 14.49% 15.99%

AFTER 20 YEARS 4.51% 15.71%

ON MATURITY 14.54% 15.54%

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 Optional convertible debentures
Issuer : Reliance petroleum Limited.

Terms of the TOCD:

- Face value - Rs. 60/-

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

Part ‘A’ Convertible into 2 equity shares at par

Part ‘B’ Non convertible portion

- Investor will receive two warrants per debentures to be called after

48 months. 28
CONVERSION TERMS FOR PART A

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

- 1 Equity share of Rs. 10/- at par 18 months

from the date of allotment.

- No interest on the part ‘B’ of the TOCD for

the first 5 years.

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 REEDEMPTION OF PART ‘B’ OF RS. 40/-

PRINCIPAL INTEREST
TOTAL

6TH YEAR 10 10 20
7TH YEAR 15 15 30
8TH YEAR 15 15 30

--------

80
--------
Warrants:
Two freely tradable warrants entitling the holder of the warrant
to one equity share per warrant at Rs 20/-.

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

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

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

 In all options the two initial equity shares that

the investor gets from part ‘A’ are held by him &
do not receive dividend.

 The IRR to the investor & cost of capital to the

company will be affected by the dividend policy.

 If shares received from part ‘A’ are sold in this

time period, the IRR to the investor will be higher
depending on the time & price.
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- Assumes no servicing cost for premium collected.
 Advantages of the structure
- Investor
 Equity portion allows high capital appreciation &
participation in profits.
 Debt part allows returns at a reasonable yield if equity
returns are marginal.
Warrants allow entitlement to further equity at investors
option.
- Company
 Would reduce interest during construction period for
projects with large gestation periods.
 Warrants add attraction to the instrument.
 Low cost of instrument.
 No servicing cost for 5 years. 33
Assumes market price of Rs. 45/- per share for analysis.

Option I :

Cash flow (from investor’s point of view)

Year 1 2 3 4* 5 6 7

cash
flow -20 -10 -30
50 17 25.5 25.5
** (2x20 = Rs. 40/- cost of warrants)
IRR = 16%

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Cash flow (from company point of view)

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

Cost of capital = 3%

Option II

Cash flow (investor)

year 1 2 3 4 5 6 7
Cash -20 -10 -30 -40
Flow 100 * - - - -
IRR = 26%
* 4 equity shares sold at rs. 25/- each 35
Cash flows (company)

Year 0 1 2 3 4 5 6 7
8
Cash +20 +10 +30 +40
Flow
COC = negative (if one assumes funds collected are
reinvested on short term basis)
Option III

Cash flow (investor)

Year 1 2 3 4 5 6 7
Cash -20 -10 -30 -40
Flow 50 17 25.5 25.5
IRR = 17%
Cash flow (company)
(same as option I) 36
 Enhanced structure bond

• Local currency agency structured bond to cover imported

Equipments with Rupee financing solution with limited foreign
exposure risk
• Multi laterals / Bilateral provide guarantees for investments
from OECD countries to Emerging markets.
• Credit enhancement by way of partial guarantees with more
underlying flexibility in the structuring of the instrument.
• Key advantage is not tying to any specific country as done by
Export credit agencies like Exam banks etc.
• Rupee credit enhanced structured bond is estimated to be atleast
200 to 250 basis points cheaper than Indian FI debt
37
 Potential Credit Enhancers

• ECAs provide term funding linked to import of capital goods as

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

• Diversification of funding and credit base

• Long tenor upto 10 year door to door
• Matches project periods with debt maturities
• Stable capital structure and forex risk is a contingent risk
• Increased visibility / profile in local bond market
• Various categories of investors may offer “tenor buckets”,
the issue could be structured with tranches of varying
maturities.( “STRIPS” )
• Secured by charge on fixed assets and colaterals such as
Pledge of shares etc.
39
 Factors to be considered

• Macro economic stability: interest,inflation and exchange

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

Transcation size Rs 300 crs Based on current

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

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

ECA premium 3.6-6.7% flat Average 5 years life

(0.7-1.2% pa) Finnvera / US exim as ECA
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Agency fees per 0.05% Estimated fees for
annum the ECA agency
&debenture trustee
function

All-in-Cost 10.65%-11.2%

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 Secured premium notes

Instrument details

 Face value -Rs. 300/- to be fully called in 12 to 18

months from allotment.

 An attached warrant which will entitle the holder of the

warrant to get one equity share of Rs. 10/- at a premium of
Rs. 70/-.

 An SPN holder is not entitled to interest for the first

three years.

 The face value of each SPN will be redeemed over 4

instalments of Rs. 150 each ( Rs. 75/- as principal
repayment and Rs.75/- as additional sum towards interest
44
& redemption premium).
 Analysis
OPTION I :
SPN holder does not exercise the warrant
Year 1 2 3 4 5 6 7
Outflow (150) (150)
Inflow
Cap. repayment 75 75 75 75
Redemption premium 18.75 18.75 18.75 18.75
Cap. gains tax (3.75) (3.75) (3.75) (3.75)
@20%
Interest 56.25 56.25 56.25 56.25
Tax on int @30% (16.875)(16.875)(16.875)(16.875)
Net flow (150) (150) 129.375 129.875 129.875 129.875
IRR = 15.10% (pretax) / 11.66 % (post tax 45
)
OPTION II :

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

year 1 2 3 4 5 6

outflow 150 35.5

inflow(pretax) 150 150 150 150

(post tax) 129 129 129 129

IRR = 24.41% pretax
21.81% post tax

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Company cash flows

Year 1 2 3 4 5 6 7

Inflow 150 150

Outflow

Cap repayment 75 75 75 75

Redn. premium 18.75 18.75 18.75 18.75

Interest 56.25 56.25 56.25 56.25

Tax shield 37.5 37.5 37.5 37.5

Net flow 150 150 (112.5)(112.5)(112.5) (112.5)

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Cost of capital (post tax) = 8.25%
Sale proceeds to investors Rs. 194.50
(value of Tisco share )
Less warrant premium Rs. 80.00

--------------
Net proceeds Rs. 114.00

--------------
Outflow of 2nd call Rs. 150.
--------------
Net flow (35.50)

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 Warrants

Warrant - a call option from a company permitting the debenture

holder to buy a certain no. of shares at a specified price.

Characteristics of warrants

- Exercise price
- Exercise ratio
- Expiration date
- Detachability

* Investor receives fixed interest return and capital gains due

to shares

 Lower coupon rate could be offered by companies.

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 Excersing of a warrant has dilution effect
 Cash inflow in future upon excersing of warrants

 Direct relation between coupon rate of debt instrument

and warrant terms.

 Acts as a sweetener for debt.

 Deferred equity financing

 Promoter holding can be improved.

 Khoka buy back options could be provided.

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

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 Derivative linked Bonds
• Under lying derivative could be Metal price on
LME
• Minimum & Maximum off take gurantee
• Cap & Collar on derived price
• Helps in reducing risk for balance financing if
minimum off take qty at collar price ensures
breakeven
• Non recourse balance sheet financing
• Ensures forward sale of commodity
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 Due diligence procedures

.BACKGROUND

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

Details of its current business locations.

•.The current corporate structure of the Company and the changes it

has undergone over the years.

•Brief history of the Company from its incorporation until the present
day including the date of listing of the Company’s shares and any
business landmarks including it’s subsidiaries.
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 .STRATEGIC PLANS

•.Description of the planning process in the Company.

•.What are the Company’s strategic growth objectives? Details of any

new projects, new businesses or changes in the Company’s business
that is under way or planned (including the proposed expansion and
any proposed acquisitions/ mergers or joint ventures).

•.Any recent significant developments including new products,

contracts, customers or transactions.

•.Estimates of growth for the Company, including assumptions used.

•.Details of any significant disposals or cessation of business in recent

years. And the Company’s plans for re-organisation of its business, if
any.
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•Details of the proposed uses of capital from this offering. After the
offering, will the Company have adequate capital for its intended
growth? Does the Company have any future financing plans?

•.Any material changes that may occur in the next several years in its
key market(s) and how is the Company positioned to deal with these
changes?

•The major factors affecting the Company’s business over the last
three years (such as wage rises, exchange rate movements, market
changes etc.) How well is the Company positioned to hedge against the
effects of a recession or adverse business conditions – international
and domestic?
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 PRODUCTS

•Details pertaining to the major products and services of the Company

including information on the following:

•.Breakdown of sales and profits by major products/ services for the

last five years.
•.Breakdown of sales between outside customers and related entities
Principal customers/ customer segment with revenue estimates
•.Details of marketing and promotion of products/ services with
estimates of expenditure.
•.Details of collaborations, patents, licenses, etc.

•.Breakdown of domestic Vs. export revenues and earnings. Also the

percentage of the revenues and earnings derived from exports.
56
•Analysis of historical and projected breakdown of costs for major
products.

•Analysis of recent reports about the Company, its constituent entities,

or its products, either produced by the Company or a third party (e.g.
market research done by the Company or an industry association).

•Analysis of recent reports about the Company, its constituent entities,

or its products, either produced by the Company or a third party (e.g.
market research done by the Company or an industry association).

57
BUSINESS & MARKETING STRATEGY
. Analysis of major political, demographic, economic, seasonal
and environmental factors that impact the business prospects
•.Relative change in valuation of the rupee Vis-à-Vis the export
currency
•.Indian interest rates and availability of financing
•.Growth of the Indian economy
Analysis of operating and financial measures the Company has
adopted or plans to adopt for minimizing the impact of the
above on its business prospects and profitability.
•.Quantification of the impact of these factors on the
Company’s profitability.
•.Analysis of the recent trends in the Company’s sales and
profitability. Is there any element of seasonality in the revenue
of the Company?
•.Analysis of the Company’s marketing strategy for major
products, and major markets and customer groups. 58
•Anticipated changes in the Company’ product mix over the next
several years. What are the factors that will drive these changes?

•.Analysis of the Company’s long term goals with respect to

performance benchmarks such as market share, revenue, profitability
and growth for its major products.

•.Analysis of the major vulnerabilities of the Company’s long term

goals and strategies (e.g. capacity constraints, technology or product
constraints, quality control, profit margin etc.)

•.Analysis of the current regulatory framework governing the industry;

and anticipated major changes in the same and how would it impact
the Company?

59
 .CUSTOMER & DISTRIBUTION NETWORK

.Analysis of the sales and distribution strategies employed by the

Company. For each major product category or group, analyse the
following:
•.Total number of Company-owned outlets/ dealers

•.Total number of independent outlets/ dealers

•.Nature of contractual arrangements governing the outlets, dealerships

and supporting facilities.
•.Effectiveness in terms of size, efficiency, geographical coverage and
other appropriate dimensions of the distribution strategies employed by
the Company relative to those of its competitors.
•.Evaluate the consistency of the Company’s distribution strategies
with its long-term product and business objectives.
60
 .COMPETITION

Analysis of what the management sees as the major customer market

segments for the products of the Company.

.Evaluate the Company’s competitive position with respect to major

products, including;

•.A list of competitors

•.Analysis of the Company’s strengths and weaknesses relative to its

competitive (e.g. pricing, product quality, reputation etc.)

•.A profile of the market share position attained by the Company in its
major products and also that of its major competitors

61
 .MANUFACTURING

Details regarding the manufacturing processes employed by the

Company for its major products.

.Details of any proprietary technologies or processes used by the

Company and the agreements and licenses governing their use.

.Analysis of the condition of the manufacturing facilities and

equipment, including:

•Description of each facility, including plant and equipment, product

lines, total production capacity, current utilisation, number of
employees, operational shifts etc.
•Age of product line and machinery
•Efficiency of manufacturing facilities relative to leading competitors
•.Historical schedule of major capital expenditures or expansion
•.Details of planned capital expenditure or expansions
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•Cost of expansion or reduction
 .RAW MATERIAL & ENERGY SOURCES

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

activities.

•.Identification of the primary sources of raw material

•.Details of major suppliers of raw materials and describe the nature of

relationships with them.

•.Nature of existing purchase agreements.

•.Difficulty of replacing or adding new sources of raw materials.

•.Volatility of raw material prices and supply.

•How many raw material inventories does the Company keep on

production? How does the Company control raw material inventory?
63
 .MANAGEMENT

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

•.How seriously will the Company’s operations be impaired if any

individual member of senior management was not avaliable to carry
out his responsibilities?

•.Analyse management contracts, if any.

•.Details of any profit sharing, bonus, pension or stock purchase

arrangements or plans for management and other employees.

64
 .FINANCE

•.Analyse recent and expected financial results. With specific refrence

to the following :

•.Sensitivity of profits to prices

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

•Details regarding the company’s share capital:

.
•Classes of shares and number of shares outstanding for each class
•.Names of major shareholders and their holdings
•.Relationship of major shareholders to each other and to the officers
and directors of the Company
•.Details of any voting agreements among shareholders
65
.
•Details of the Company’s outstanding loans and other debts, including
mortgages, lease agreements and lines of credit.

•.Company’s policy on its debt to equity ratio? What is the availability

of equity and loan capital? Are there any contractual restrictions on
future secured/ unsecured financing? Does the Company intend to
refinance existing borrowings?

•.Are there any loans or other credit arrangements currently under re-
negotiation/ renewal? If so, what are the Company’s expectations on
the outcome of these negotiations?

•.How does the level of the Company’s debt compare with industry
norms?

66
•.What is the sensitivity of the Company’s operations to changes in
inflation, interest rates and tax rates?

•.Does the Company possess any easily realizable assets or unused

credit facilities?

•.Have any financial guarantees or indemnities been given to third

parties to secure credit?

•Information on capital commitments and contingent liabilities.

•.Analyse the Company’s dividend policy.

•Analysis of share price movements over the last three years (highs and
lows per quarter)
67
 .ACCOUNTING

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

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

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

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

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

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

•Details of plant and equipment proposed to be added and proposed

suppliers.

•Details of the Company’s capital expenditure over the last five years
and the Company’s current capital expenditure projects.

•Details of plans to expand capacity, included expected timetable,

financing etc. by each major division and by major asset category for
the next five years. Have any contracts been entered into regarding the
expansion of plants?
•.Are there any new product areas/ major acquisitions or project
envisaged? What projects are currently under way and what projects
have recently been completed for the operational improvement and
technological development of the Company’s activities? What
financing plan is proposed for the capital expenditure to be incurred on
these projects? 70
 .REGULATORY & LEGAL ISSUES

•.Has any officer, director or major shareholder had any difficulties of

any nature with any securities regulation body in India or in another
country?

•Details on all litigation and pending litigation in which the Company

and any of its divisions are involved or may be involved in and the
potential material impact, if any, on the Company’s financial position
and ability to do business.

•Analyse the Company’s environment policy and discuss the

Company’s compliance with environmental controls imposed by the
Government. Has there been any recent change in policy? Is the
Company aware of any proposed changes?

•.What does the Company see as material changes that may occur in
the regulatory environment that can materially impact its operation..
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 .STAFF & LABOUR RELATIONS

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

part time, by major category and major operating division. Please
provide details of where the Company’s main employees are situated.
Does the number of employees fluctuate seasonally? Are there
significant reductions or additions planned?

•.Analyse union representation, if any and existing labor contracts. Are

there any employment agreements due for renewal? Does the
Company have any contingent plans (including reaction time to
severance payments) for a recession?

•Details of the Company’s wages scales. How many hours a week do

full time and part time employees typically work? What is the trend in
wages and other benefits for the Company compared to other
companies in the same industry?
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.
•Has the Company had major wage increases in the past year? If so,
what is the effect on an annual basis above that shown for the
previous fiscal year? Does the Company foresee any significant wage
increases in the near future, whether dictated by law, union, contracts
or Company policy? Can the Company pass any increases through to
customers?
•Analyse the state of labor relations, including past strikes if any,
handling of grievances, etc. Has the Company experienced difficulties
in hiring qualified personnel? Has the Company experienced
problems with employee turnover?
.
•.Details of the Company’s investment plan in social welfare,
medical assistance, education, sickness and housing benefits. Please
specify the cost of the plan in terms of revenues.
•Details of pension and retirement plans for employees. What is the
policy with regard to pension funding? Are there any unfunded
pension liabilities?
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•.Does the Company provide training for its employees?
 .RISKS & OTHER ISSUES

Confirm that the Company has adequate insurance coverage on key

assets and facilities.

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

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

74