Converting SME to MNC Rahul Sis Project

8/11/2019 Converting SME to MNC Rahul Sis Project

1/23

Converting SME to MNC

Financing Strategy for Internationalization of Small & Medium

Enterprises

Towards partial fulfilment of thesis submission

for post graduate program in

Masters of Business Administration 2013-15 from **College !une"

#ummer $nternship %eport

&ema 'ar !ur(a)astha

Masters of Business Administration

thTrimester

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Acknowledgement

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Project Abstract

#mall and Medium +nterprises ,#M+s are .riti.al for the e.onomi. and so.ial

de/elopment of emerging mar(ets" The) pla) a maor role in .reating obs and

generating in.ome for low in.ome people the) foster e.onomi. growth so.ial

stabilit) and .ontribute to the de/elopment of a d)nami. pri/ate se.tor"

#mall and Medium +nterprises pla) a predominant role in most de/eloped and

de/eloping e.onomies not onl) be.ause of their number and /ariet) but also due to

their in/ol/ement in all segments of the e.onom)"

The new e.onomi. world order has opened up se/eral opportunities for dis.erning

#M+s to epand its business be)ond the national borders" lobaliation is in.reasing

and with the world e.onom) going through an almost te.toni. shift .ompetition is

more /igorous than e/er" lobal .ompetiti/eness is .onsidered b) all e.onomies to be

a prere4uisite for maintaining high le/els of in.ome emplo)ment and sustainable

growth" $n order to enhan.e the global .ompetiti/eness #M+s are meeting the e/er

growing .hallenges in the international trade arena" The latent potential to grow bigger

signifies one thing .learl) the #M+ se.tor .an and will pla) a .ru.ial role in the

e.onomi. growth of $ndia

As su.h a..ess to finan.ial ser/i.es is /ital in de/eloping a /ibrant #M+ se.tor in an)

e.onom)" $n man) emerging mar(ets howe/er a..ess to finan.ial ser/i.es for #M+s

remains se/erel) .onstrained"

This paper fo.uses on anal)sing the finan.ing strategies that ma) be used to .on/ert a

small and medium enterprise to a trul) global multi-national entit) whi.h in-spite of

being a small enterprise .an le/erage the enormous e.onomi. benefits of

globalisation"

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Contents

#"6o" Chapter !age 6o"s

1" $ntrodu.tion

2" The $ndian #M+ 7ands.ape

2"1 o/ernment 8efinitions as M#M+ A.t

2"3 %ole and $mportan.e in the +.onom) of our .ountr)

3" The M6C Ad/antage

3"1 The nature and ad/antages of an M6C entit)

9" Transition from #M+ to M6C

9"1 Ad/antages and moti/es for an #M+ to be.ome M6C

9"2 :a.tors ne.essitating the transition

5" Arranging :inan.ing for #M+;s going global5"1 +4uit) :inan.ing

5"1"1 $nitial !ubli. or(ing Capital

5"2"1"1 Term 7oans

+CB ,+ternal .ommer.ial borrowing route"

:oreign .urren.) loans- :CCB;s et."

5"2"1"2 >or(ing Capital

7etter of Credit and Credit 7inesBu)ers .redit = #uppliers Credit

5"9 :inan.ing $nstitutions

#$8B$ +?$M Ban( +CC"

" Case #tud) 1- :inan.ing through e4uit)

Anisha $mpe 6ew 8elhi

Case #tud) 2- :inan.ing through 8ebt

#enr)sa Te.hnologies 'ol(ata"

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@" Con.lusion

" Bibliograph)

1. Introduction

The new e.onomi. world order has opened up se/eral opportunities for dis.erning

#M+s to epand its business be)ond the national borders" andhii on.e said the poor

of the world .annot be helped b) mass produ.tion it .an be a.hie/ed onl) through

produ.tion b) the masses" $f large number of produ.ers were to eist for wider

mar(ets the entities that produ.e should ne.essaril) be small"

The maor ad/antage of the Mi.ro #mall and Medium +nterprises ,M#M+ se.tor is

its emplo)ment potential at a low .apital .ost the se.tor emplo)s an estimated 5"

million people in 2"1 million enterprises labour intensit) in the M#M+ se.tor is

estimated to be nearl) four times that of large enterprises" >ith this huge potential

ba.(ed up b) strong go/ernment support,$ndian #M+s .ontinue to post their growth

stories" &owe/er despite this strong growth there is still a huge potential amongst

$ndian #M+s that remains untapped

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, dear hema pl s.ribble sum .rap about the wonderful wa)

ahead for $ndian smes goin global rest u dont need to tou.h at

all

2. The Indian SME Landscape

The o/ernment has ta(en se/eral initiati/es and measures for enhan.ing the

.ompetiti/eness of #M+s in the present global en/ironment" The most important

among them is the ena.tment of the DMi.ro #mall and Medium +nterprises

8e/elopment A.t 200; whi.h aims to fa.ilitate the promotion and de/elopment

and enhan.e the .ompetiti/eness of #M+s"

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2"1 Government Definitions as per MSME ct!

$n a..ordan.e with the pro/isions of Mi.ro #mall = Medium +nterprises

8e/elopment ,M#M+8 A.t 200 the Mi.ro #mall and Medium +nterprises are

.lassified

,a Manufacturing Enterprises- The enterprises engaged in the manufa.ture or

produ.tion of goods pertaining to an) industr) spe.ified in the first s.hedule to the

industries ,8e/elopment and regulation A.t 151 or emplo)ing plant and

ma.hiner) in the pro.ess of /alue addition to the final produ.t ha/ing a distin.t

name or .hara.ter or use"

The Manufa.turing +nterprise are defined in terms of in/estment in !lant =

Ma.hiner)"

,b Service Enterprises The enterprises engaged in pro/iding or rendering of

ser/i.es and are defined in terms of in/estment in e4uipment"

The limit for in/estment in plant and ma.hiner) E e4uipment for manufa.turing E

ser/i.e enterprises are as under

Manufacturing Sector

Enterprises Investment in plant & mac"inery

Mi.ro +nterprises

8oes not e.eed twent) fi/e la(h rupees#mall +nterprises

More than twent) fi/e la(h rupees but

does not e.eed fi/e .rore rupees

Medium

+nterprises

More than fi/e .rore rupees but does not

e.eed ten .rore rupees

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Service Sector

Enterprises Investment in e#uipments

Mi.ro +nterprises 8oes not e.eed ten la(h rupees

#mall +nterprises More than ten la(h rupees but does not

e.eed two .rore rupees

Medium

+nterprises

More than two .rore rupees but does not

e.eed fi/e .ore rupees

2"3 $ole and Importance in t"e Economy of our country! #mall = Medium

+nterprises i"e the #M+s pla) a /ital role for the growth of $ndian e.onom) b)

.ontributing 9@ per.ent of industrial output 91 per.ent of eports emplo)ing 5"

million people .reating 2 million obs and produ.e more than @50 4ualit) produ.ts

for the $ndian and international mar(ets"

3. The MN Ad!antage

Multinational .orporations ,M6C or multinational enterprises ,M6+ are

organiations that own or .ontrol produ.tion or ser/i.es fa.ilities in one or

more .ountries other than the home .ountr)" :or eample when a .orporation

is registered in more than one .ountr) or has operations in more than one

.ountr) it ma) be attributed as M6C"

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Fsuall) it is a large .orporation whi.h both produ.es and sells goods or

ser/i.es in /arious .ountries" $t .an also be referred to as an international

.orporation or a Gtransnational .orporationG or perhaps best of all as a

Gstateless .orporationH" M6Cs pla) the most important role in globaliation"

%'( dvantages of an MNC!

i !resen.e a.ross multiple geographies

ii 7arge pool of suppliers sellers and bu)ers"

iii 7e/erage e.onomies of s.ale a.ross national boundaries"

i/ &arbingers of the wa/e of globalisation"

A M6C ,Multi 6ational Corp usuall) has offi.es in different .ountries but .an

still be .lassified as an #M+ depending on its sie and s.ale of operations"

Thus essentiall) a #mall and Medium +nterprise .an be turned into a Multi

6ational +ntit) b) strategi. finan.ial initiati/es"

". Transition #rom SME to MN

)'( dvantages and motives for an SME to *ecome MNC

+arlier most #MBs were .onfined to their lo.al or regional mar(et and the) were

.omfortable that wa)" But with the help of te.hnolog) espe.iall) the >eb and mobile

their growth has trans.ended geographi. barrier and toda) man) are going outside of

their home mar(et to a..elerate growth The .lear thrust of the new wa/e of

globalisation of #M+;s initiati/e has been three fold enhan.e .ompetiti/eness through

en.ouraging an inno/ati/e ethos amongst firms and being 4ualit) .ons.ious in.rease

lin(s with multiple sta(eholders with a /iew to benefit from networ(s both nationall)

and globall)"

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)+( Factors necessitating t"e transition & t"e c"ange drivers!

)+'( ec"nology & Net-or.ing!

$ndian #M+s are in.reasingl) wa(ing up to the realiation that te.hnolog) is going to

pla) a .ru.ial role in the sustainable de/elopment - a (e) fa.tor in sta)ing .ompetiti/e

in a fast pa.ed global s.enario" $n/esting in new te.hnologies should be a top strategi.

priorit) as #M+s rema(e their businesses for the global mar(etpla.e" B) in/esting in

emerging te.hnologies su.h as business management software data anal)ti.s mobile

so.ial media and .loud .omputing these businesses .an .reate strong .ustomer

relationships a.ross the world" Man) business de.ision ma(ers in the #M+s are

in.reasingl) .ollaborating with other firms through online business networ(s and

platforms to help dri/e inno/ation and growth" 7atest re/olutions in .loud .omputing

Io$! and +%! pa.(ages are bound to streamline the fun.tioning of #M+;s enabling

them to mo/e global"

)++( Macro Economic Initiatives/

$nitiati/es ta(en b) >orld trade organisation and $M: towards lifting of trade

barri.ades towards a flat e.onomi. mar(et all throughout the world ha/e moti/ated

the #M+;s to thin( of .rossing the national boundaries" %egional trade unions li(e the

B%$C# et. are tr)ing hard to in.rease a/enues for .ross border trade for better and

stronger e.onomies" The #M+;s are bound to ta(e part in this entire e.onomi. wa/e"

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$. Arranging %inancing #or SME&s going glo'al

0'( E#uity Financing

0''( SME / Initial 1u*lic 2ffer

B#+ 7td has set up the B#+ #M+ !latform as per the rules and regulations laid

down b) #+B$" B#+ #M+ !latform offers an entrepreneur and in/estor friendl)

en/ironment whi.h enables the listing of #M+s from the unorganied se.tor

s.attered throughout $ndia into a regulated and organied se.tor" The (e) benefits

of the B#+ #M+ platform are

Easy access to Capital

B#+ #M+ pro/ides an a/enue to raise .apital through e4uit) infusion for

growth oriented #M+;s"

En"anced 3isi*ility and 1restige

The #M+;s benefit b) greater .redibilit) and enhan.ed finan.ial status leading

to demand in the .ompan);s shares and higher /aluation of the .ompan)"

Encourages Gro-t" of SMEs

+4uit) finan.ing pro/ides growth opportunities li(e epansion mergers and

a.4uisitions thus being a .ost effe.ti/e and ta effi.ient mode"

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Ensures a4 5enefits

$n .ase of listed se.urities #hort Term ains Ta is 15J and there is absolutel)

no 7ong Term Capital ains Ta"

Ena*les 6i#uidity for S"are"olders+4uit) finan.ing enables li4uidit) for shareholders pro/ides growth

opportunities li(e epansion mergers and a.4uisitions thus being a .ost

effe.ti/e and ta effi.ient mode"

E#uity financing t"roug" 3enture Capital

!ro/ides an in.enti/e for Ienture Capital :unds b) .reating an +it %oute and

thus redu.ing their lo.( in period"

Efficient $is. Distri*ution

Capital Mar(ets ensure that the .apital flows to its best uses and that ris(ier

a.ti/ities with higher pa)offs are funded"

"e 6isting 1rocess on 5SE SME

1lanning

The $ssuer Compan) .onsults and appoints the Mer.hant Ban(erEs in an

ad/isor) .apa.it)"

1reparation

The Mer.hant Ban(er prepares the do.umentation for filing after .ondu.ting

due diligen.e regarding the Compan) i"e .he.(ing the do.umentation in.luding

all the finan.ial do.uments material .ontra.ts o/ernment Appro/als

!romoter details et." and planning the $!< stru.ture share issuan.es andfinan.ial re4uirements

1rocess

Appli.ation pro.edure

#ubmission of 8%&!E8raft !rospe.tus - These do.uments are prepared b) the

Mer.hant Ban(er and filed with the +.hange as well as with #+B$ as per

re4uirements"

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Ierifi.ation = #ite Iisit - B#+ /erifies the do.uments and pro.esses the same"

A /isit to the .ompan)Ks site shall be underta(en b) the +.hange offi.ial "The

!romoters are .alled for an inter/iew with the 7isting Ad/isor) Committee"

Appro/al - B#+ issues an $n !rin.iple appro/al on the re.ommendation of the

Committee pro/ided all the re4uirements are .ompiled b) the $ssuer Compan)"

:iling of %&!E!rospe.tus - Mer.hant Ban(er files these do.uments with the

%


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rac. $ecord

8istributable profits in terms of #e.tion 205 of the Companies A.t 15 for at

least two )ears out of immediatel) pre.eding three finan.ial )ears ,ea.h

finan.ial )ear has to be a period of at least 12 months" +traordinar) in.ome

will not be .onsidered for the purpose of .al.ulating distributable profits


15/23

from the pri/ate se.tor window of multilateral finan.ial $nstitutions su.h as

$nternational :inan.e Corporation ,>ashington A8B A:$C C8C et."

The 8+A ,8epartment of +.onomi. Affairs Ministr) of :inan.e o/ernment of

$ndia along with %eser/e Ban( of $ndia monitors and regulates +CB guidelines

and poli.ies" +CB;s .an be obtained b) two routes

1 Automati. route

2 Appro/al route as per %B$ guidelines

The funding re4uirements of an #M+ .an be easil) met /ia the Automati. route

where in no spe.ial appro/al will be re4uired b) the borrowing entit) and ban(

from %B$"

The all in .ost .eiling for an +CB arranged b) a ban( for an #M+ is as per

following slabs

Tenor of 7oan All in Cost Ceiling of +CB pri.ing

%epa)ment Tenor from 3-5 )ears 7$B


16/23

These bonds assume great importan.e for multinational entities and in the .urrent

business s.enario of globalisation where .ompanies are .onstantl) dealing in

foreign .urren.ies"

0++( 7or.ing Capital Financing!

Ban(s offer a /ariet) of wor(ing .apital funding options to enable .ross border

international trade and business" #ome of the most important /ehi.les of wor(ing

.apital finan.ing are as under

Foreign 6etter of Credit 9F6C(! A letter of creditis a do.ument issued b) a

finan.ial institution or a similar part) assuring pa)ment to a seller of goods or

ser/i.es pro/ided .ertain do.uments ha/e been presented to the ban("G7etters of

CreditG are do.uments that pro/e the seller has performed the duties spe.ified b)

an underl)ing .ontra.t ,e"g" the sale of goods .ontra.t and the goodsEser/i.es

ha/e been supplied as agreed" $n return for these do.uments the benefi.iar)

re.ei/es pa)ment from the finan.ial institution that issued the letter" The letter of

.redit ser/es as a guarantee to the seller that it will be paid regardless of whether

the bu)er ultimatel) fails to pa)" $n this wa) the ris( that the bu)er will fail to pa)

is transferred from the seller to the letterKs issuer" The letter .an also be used to

ensure that all agreed standards are met b) the supplier pro/ided that these

re4uirements are refle.ted in the do.uments des.ribed in the letter of .redit"

7etters of .redit are used primaril) in international trade for transa.tions between

a supplier in one .ountr) and a pur.haser in another"

5uyers and Suppliers Credit 5uyer:s creditis short term .redit a/ailed to an

importer ,bu)er from o/erseas lenders su.h as ban(s and other finan.ial

institution for goods the) are importing" The o/erseas ban(s usuall) lend the

importer ,bu)er based on the letter of .omfort ,a ban( guarantee issued b) the

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importerKs ban(" :or this ser/i.e the importerKs ban( or bu)erKs .redit .onsultant

.harges a fee .alled an arrangement fee"

Bu)erKs .redit helps lo.al importers gain a..ess to .heaper foreign funds that ma)

be .loser to 7$B


18/23

the borrowers in $ndian %upees besides meeting their foreign .urren.) .apital

ependiture re4uirements"

ECGC! The E4port Credit Guarantee Corporation of India 6imited

,ECGC has been established with an obe.ti/e to pro/ide insuran.e .o/er in

respe.t of ris(s in eport trade" These ris(s ma) in.lude loss of mone) on

a..ount of foreign bu)er be.oming ban(rupt or sudden import or e.hange

restri.tions resulting in stopping of pa)ments et." The +port Credituarantee Corporation of $ndia 7imited is a .ompan) wholl) owned b) the

o/ernment of $ndia based in Mumbai Maharashtra" $t pro/ides eport .redit

insuran.e support to $ndian eporters and is .ontrolled b) the Ministr) of

Commer.e"

(. ase Studies

Case Study '/ Financing t"roug" raising E#uity

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nis"a Impe4 6imited

Anisha $mpe 7imited is a .ompan) dealing with the import eport business

of tetiles and fabri.s" The .ompan) has been re.entl) listed on the B#+-#M+

platform and is being traded with s.rip name NA6$#&A$M!+?H"

5usiness Model!

The Compan) deals with the business of tetiles and fabri.s" The main

promoter of the .ompan) is #hri #unil 'umar Mali(" The .ompan) is based in

6ew 8elhi and .ondu.ts its business all o/er the world with offi.es in Middle

+ast +urope and #outh Asia"

Need for E4pansion!

The .ompan) wanted to in.rease its retail footprint a.ross /arious .onsumer

mar(ets in +astern +urope and Middle +ast and re4uired signifi.ant

in/estment to .apture the opportunities in the mar(et"

Financing Model!

The .ompan) went for an $nitial !ubli.


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Term 7oans 0"00 0"00

8eferred Ta

7iabilit)

@"0 @"02

Total 6on Current 7iabilit) @"0 @"02

Total Current 7iabilit) 3 50

Total 7iabilit) 1@2@"0 212"02

6on-Current Assets

,:ied Assets

233 92

Current Assets 155"0 1@0"02

Total Assets 1@2@"0 212"02

+!# - -/e

!+ - -/e#our.e $ssue prospe.tus and unaudited results from www"mone).ontrol".om

Financial nalysis/

As refle.ted in the un-audited results the pro.eeds of the $!< issued has been

infused to e4uit) reser/es whi.h ha/e .orrespondingl) in.reased b) %s"50

7a(hs" The pro.eeds ha/e been utilised to fund .apital epansion of the firm

as e/iden.ed b) the in.rease in fied assets ependiture b) about %s20 la(hs"

Although the .urrent assets position has also slightl) impro/ed howe/er the

bul( of the net wor(ing .apital infusion out of e4uit) pro.eeds has been to

redu.e the .urrent liabilities whi.h redu.ed b) around %s"300 la(hs"

The pri.e earnings and earnings per share are in negati/e region be.ause of

negati/e /alue of !rofit after ta be.ause of high .apital epansion .osts

whi.h .ould not be totall) .apitalised"

Case Study +/ Financing t"roug" raising De*t

Senrysa ec"nologies 1rivate 6imited

#enr)sa Te.hnologies 7imited is a pri/ate limited .ompan) based in 'ol(ata

>est Bengal" The .ompan) was in.orporated in 200@ and the in/estment in

plant and ma.hiner) is about %s"2"00 Crores 4ualif)ing it as an #M+ /enture"

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$t is led b) #hri !"' #aha who is a thoroughl) eperien.ed professional in

field of online pa)ments te.hnolog)"

5usiness Model!

The .ompan) deals with the business of being an ele.troni. pa)ment solution

pro/ider to ban(s and different finan.ial intermediaries" The .ompan)

pro/ides point of sale ma.hines ele.troni. .ards and digital gatewa)s to

pro.ess pa)ment solutions for ban(s in $ndia as well as in M)anmar

$ndonesia and Thailand"

Need for E4pansion!

The firm re.ognised enormous un-tapped opportunities in the #outh Asian

e.onomies li(e M)anmar and $ndonesia" The mar(et for ele.troni. pa)ment

solution pro/ider to ban(s in these #outh Asian e.onomies was targeted b) the

firm for global epansion" &owe/er this re4uired huge in/estments in fied

assets in the domesti. base i"e $ndia as well as li4uidit) in the foreign soil"

Financing Model!

The .ompan) a/ailed term loans from #$8B$ while wor(ing .apital was

finan.ed b) #tate Ban( of $ndia" The term loans were a/ailed to a.4uire fied

assets li(e ser/ers networ( support s)stems et. and wor(ing .apital was

utilised to finan.e trade debtors and re.ei/ables"

The following were the terms of the loans

T)pe of

:a.ilit)

Amount of

7oan

!urpose 8ebt +4uit)

%atio

%epa)ment

Terms

#$8B$-

Term 7oan

F#8 0"2 Mn A.4uisition of

:ied Assets

32 #e/en )ears

in.luding

moratorium"

#B$->or(ing

Capital

$6% 0"5 Mn 7etter of

Credit

7imit

20J margin 1@0 da)s line

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#our.e !ersonal 8is.ussion with the management team" The balan.e sheet

was not shared"

6oan Facility erms!

!rimar) #e.urit) :irst pari pasu .harge o/er the .ompan);s .urrent assets and

promoters; personal guarantee"

Collateral +4uitable mortgage o/er land and building of the .ompan)"

%ate of $nterest 7in(ed to Ban( Base %ate and %is( Based Minimum

7ending rates as per M#M+ rating"

Effect!

After ha/ing a/ailed the finan.ing options #enr)sa has been able to mar( a

ni.he for its own self in $ndonesian mar(et as a distin.t pla)er in the pa)ment

solution pro/ider spa.e" The .ompan) is tr)ing to enhan.e its performan.e in

M)anmar and Thailand mar(ets"

"onclusion

, dear hema pl s.ribble sum .rap about the wonderful wa)

ahead for $ndian smes goin global

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)i'liograph*

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Converting SME to MNC Rahul Sis Project

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