Due diligence

The venture capital (VC) industry uses due diligence to describe what the investor does to evaluate a potential investment
opportunity. By definition, investing in early-stage companies is risky. The due diligence process should select the potential
winners, identify the key risks associated with the investment and develop a risk mitigation plan with company management as
part of a potential investment.Due diligence is a rigorous process that determines whether or not the venture capital fund or other
investor will invest in your company. The process involves asking and answering a series of questions to evaluate the business
and legal aspects of the opportunity. Once the process is complete, the investor will use the outcomes of the process to finalize
the internal approval process and complete the investment. If the VC acts as a lead investor in a syndicate, then they may also
share the outcome of their due diligence with other investors.There are three states of due diligence:
1.
2.
3.

Screening due diligence

Business due diligence
Legal due diligence

4.
Break Even analysis

The point at which total of fixed and variable costs of a business

becomes equal to its total revenue is known as break-even point (BEP). At this point, a business neither earns any profit nor
suffers any loss. Break-even point is therefore also known as no-profit, no-loss point or zero profit point. Calculation of breakeven point is important for every business because it tells business owners and managers how much sales are needed to cover all
fixed as well as variable expenses of the business or the sales volume after which the business will start generating profit. The
computation of sales volume required to break-even is known as break-even analysis. The concept explained above can also be

Discounted cash Flow approach (Net Present value) NPV

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses
future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present
value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the
current cost of the investment, the opportunity may be a good one.
Calculated as:

PE approach to stock valuation

'Adjusted Book Value to Corporate valuation'

A measure of a company's valuation after liabilities, including off-balance sheet liabilities, and assets are adjusted to reflect true
fair market value. The potential downside of using an adjusted book value is that a business could be worth more than its stated
assets and/or liabilities because it fails to value intangible assets, account for discounts or factor in contingent liabilities. It is not
often accepted as an accurate picture of a profitable company's operating value, however it can be a way of capturing potential
equity available in a firm. Analysts may use adjusted book value to determine a bottom line price for a company's value when
anticipating bankruptcy or sale due to financial distress.

ADRS and GDRS

AMERICAN DEPOSITORY RECEIPTS ADR is a dollar-denominated negotiable certificate. It represents a non-US companys
publicly traded equity. It was devised in the late 1920s to help Americans invest in overseas securities and to assist non-US
companies wishing to have their stock traded in the American Markets. ADR were introduced as a result of of the complexities
involved in buying shares in foreign countries and the difficulties associated with trading at different prices /and currency values.
Benefits of ADR /GDR
Can be listed on any of the overseas stock exchanges /OTC/Book entry transfer system. Freely transferable by non-resident.
They can be redeemed by ODB. The ODB should request DCB to get the corresponding underlying shares released in favor of
non resident of investors. (Shareholders of issuing companies).:

Investment Banks
Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the
primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt) as
well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions. The
investment banking industry plays an important intermediation function in all market economies.
Investment banking means the business of providing credit facilities, providing consultancy and advisory services relating to
corporate and investment matters of making investments on behalf of customers The main function to provide services to
corporate sectors such advisory and management services, stock broking services, loan syndication, portfolio management and
others. It plays important role to complement banking system by providing avenue for individuals and corporations to source
funding for their business activities as well as diversifying their portfolio investment.

Private Placement of Securities

The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private
placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a
public issue, in which securities are made available for sale on the open market.
Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities
and Exchange Commission. In many cases, detailed financial information is not disclosed and the need for a prospectus is
waived. Finally, since the placements are private rather than public, the average investor is only made aware of the placement
after it has occurred.

Financial Derivatives
A derivative is a financial instrument whose value is derived from the value of another asset, which is known as the Underlying.
When the price of the underlying changes, the value of the derivative also Changes. A Derivative is not a product. It is a contract
that derives its value from changes in the price of the underlying.Example :The value of a gold futures contract is derived from
the value of the underlying asset i.e. Gold.
What is a Forward? to buy and the other party commits to sell a specified quantity of an agreed upon asset for a pre-determined
price at a specific date in the future.
What are Options? the option to buy/sell specified quantity of the underlying assets at a particular price on or before a
specified time period.
What is a Currency Swap? includes exchange of principal and interest rates in one currency for the same in another currency.
A Futures Contract is a legally binding agreement to buy or sell any underlying security at a future date at a pre determined
price.
What are SWAPS? contractual agreement wherein they agree to exchange cash flows at periodic intervals.

Raising Finance through IPO

If a corporation decides that it is going to perform an IPO, it will first hire an investment bank to facilitate the sale of its shares to
the public. This process is commonly called "underwriting"; the bank's role as the underwriter varies according to the method of
underwriting agreed upon, but its primary function remains the same. In accordance with the Securities Act of 1933, the
corporation will file a registration statement with the SEBI. The registration statement must fully disclose all material
information to the SEBI, including a description of the corporation, detailed financial statements, biographical information on
insiders, and the number of shares owned by each insider. After filing, the corporation must wait for the SEBI to investigate the
registration statement and approve of the full disclosure. During this period while the SEBI investigates the corporation's filings,
the underwriter will try to increase demand for the corporation's stock. Many investment banks will print "tombstone"
advertisements that offer "bare-bones" information to prospective investors. The underwriter will also issue a preliminary
prospectus, or "red herring", to potential investors. These red herrings include much of the information contained in the
registration statement, but are incomplete and subject to change. An official summary of the corporation, or prospectus, must be
issued either before or along with the actual.

How venture capitalist can finance an investment proposal

Causes for Industrial units sickness

Internal causes for sickness
a) Lack of Finance: This including weak equity base, poor utilization of assets, inefficient working capital management, absence
of costing & pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds.
b) Bad Production Policies : The another very important reason for sickness is wrong selection of site which is related to
production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard
research & development and so on.
c) Marketing and Sickness : This is another part which always affects the health of any sector as well as SSI. This including
wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods,
and bad sales promotions.
d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel
management policies which includes bad wages and salary administration, bad labour relations, lack of behavioural approach
causes dissatisfaction among the employees and workers.
e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or bad corporate management which
includes improper corporate planning, lack of integrity in top management, lack of coordination and control etc.
External causes for sickness
a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of
skilled labour or manpower wages disparity in similar industry and general labour invested in the area.

b) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness arrives due to liberal licensing
policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and
market recession.
c) Production Constraints: This is another reason for the sickness which comes under external cause of sickness. This arises due
to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.
d) Finance Constraints: The another external cause for the sickness of SSIs is lack of finance. This arises due to credit restrains
policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization.
e)credit squeeze initiated by the government policies.

REVIVAL STRATEGIES
Revival Strategies
Khandwallas (1992), study of the revival measures lead to four
broad premise under the functional areas that are found across
studies- Human resource strategies, Product/market strategies,
Financial strategies, Production/operations and Technology
strategies.
1. Human Resource Strategies
The human resources have to actively partner with the business
leadership and develop strategies to create capabilities within the
organization to speed up the execution of corporate revival (Prasad,
2006). Organisations experiencing depressing development of
performance generally resort to cutback as the feasible revival
strategies (ONeill 1986, Pant 1991, Smith 1995). Change
in top management is another well identified human resource
strategy. Leaders are frequently a contributing cause of decline
(Arogyaswamy et al., 1995).
2. Financial Strategies
The objective of financial strategy is to use the financial strength
of the business as an asset and to restructure the business such
as reduction in the par value of shares, reduction in rates of
interest, postponement of maturity of debt, conversion of debt into
equity (Kumar, 2003).. Studies identify financial restructuring as
an essential constituent of Revival (Brown et al., 1993, DeAngelo
and DeAngelo, 1990, Franks 1997, Igor 2006).
3. Marketing Strategies
Marketing is a very useful strategy for revival (Hofer 1980,
Goldston,1992). In the organisational revival literature, though a
number of writers laid emphasis on the significance of marketing
in the rescue of ailing organisations (Goldston, 1992, Hofer, 1980).
Sales function is another key process and involves four important
elements which were more apparent in the successful firms such
as : 1) environmental comprehension; 2) market selection; 3)
innovative market offers; and 4) managed relationships.(Bibeault
1982, Finkin 1985, Harker 1998).
4. Production/Operation Strategies
Hofer(1980) in a study of twelve cases of badly performing
organizations, where he found for operating problems the
solution is operating remedies and for strategic problems, strategic
remedies. Thus, organisations that are failing due to operational
causes opt for operational revival strategies and strategic causes
opt for strategic revival strategies and rarely were operational
failure addressed with strategic revival actions (Hambrick and
Schecter, 1983).
5. Corporate Planning Strategy
Contraction and consolidation strategies for revival are implemented
when a corporations predicament are not all-inclusive (Pearce and
Robinson, 1992). Corporate reorganization is a different revival
strategy which frequently engages refocusing or eliminating noncore businesses.

MM APPROACH TO CAPITAL STRUCTURE

(2nd.Point)They theorized that the market value of a firm is determined by its earning power
and by the risk of its underlying assets,

Walters ModelThis model shows clearly the importance of the relationship between the firms internal rate of return (r) and its cost of capital (k)
in determining the dividend policy that will maximise the wealth of shareholders.

Gordens Model
is a method for calculating the intrinsic value of a stock, exclusive of current market conditions. The model equates this value to
the present value of a stock's future dividends.
Assumptions of Walters Model:
Internal Financing
constant Return in Cost of Capital
100% payout or Retention
Constant EPS and DPS
Infinite time
Assumptions of Gordens Model:
All equity firm
No external Financing
Constant Returns
Constant Cost of Capital
Perpetual Earnings
No taxes
Constant Retention
Cost of Capital is greater then growth rate (k>br=g)

Functions of CRISIL/ICRA
The main functions of CRISIL can be classified into following subheads:
1. Ratings
CRISIL Ratings: It is the only ratings agency in India with sectoral specialization It has played a critical role in the development
of the debt markets in India. The agency has developed new ratings methodologies for debt instruments and innovative structures
across sectors. CRISIL Ratings provides technical know-how to clients all over the world and has helped set up ratings agencies
in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.
2. Research
CRISIL Research: It provides research, analysis and forecasts on the Indian economy, industries and companies to over 500
Indian and international clients across financial, corporate, consulting and public sectors.
CRISIL FundServices: It provides fund evaluation services and risk solutions to the mutual fund industry.
The Centre for Economic Research: It applies economic principles to live business applications and provide benchmarks and
analyses for India's policy and business decision makers.
Investment Research Outsourcing: CRISIL added equity research to its wide bouquet of services, by acquiring Irevna, a
leading global equity research and analytics company. Irevna offers investment research services to the world's leading
investment banks and financial institutions.
3. Advisory
CRISIL Infrastructure Advisory: It provides policy, regulatory and transaction level advice to governments and leading
organisations across sectors.
Investment and Risk Management Services: CRISIL Risk Solutions offers integrated risk management solutions and advice to
Banks and Corporates by leveraging the experience and skills of CRISIL in the areas of credit and market risk.

Project Appraisal Techniques

Project appraisal methodologies are methods used to access a proposed project's potential success and viability. These methods
check the appropriateness of a project considering things such as available funds and the economic climate. A good project will
service debt and maximize shareholders' wealth.
Net Present Value
A project's net present value is determined by summing the net annual cash flow, discounted at the project's cost of capital and
deducting the initial outlay. Decision criteria is to accept a project with a positive net present value. Advantages of this method
are that it reflects the time value of money and maximizes shareholder's wealth. Its weakness is that its rankings depend on the
cost of capital; present value will decline as the discount rate increases.
Payback Method
A company chooses the expected number of years required to recover an original investment. Projects will only be selected if
initial outlay can be recovered within a predetermined period. This method is relatively easy since the cash flow doesn't need to
be discounted. Its major weakness is that it ignores the cash inflows after the payback period, and does not consider the timing of
cash flows.
Internal Rate of Return
This method equates the net present value of the project to zero. The project is evaluated by comparing the calculated Internal
rate of return to the predetermined required rate of return. Projects with Internal rate of return that exceed the predetermined rate
are accepted. The major weakness is that when evaluating mutually exclusive projects, use of Internal rate of return may lead to
selecting a project that does not maximize the shareholders' wealth.
Profitability Index
This is the ratio of the present value of project cash inflow to the present value of initial cost. Projects with a Profitability Index
of greater than 1.0 are acceptable. The major disadvantage in this method is that it requires cost of capital to calculate and it
cannot be used when there are unequal cash flows. The advantage of this method is that it considers all cash flows of the project.

Sensitivity Analysis
Sensitivity analysis helps a business estimate what will happen to the project if the assumptions and estimates turn out to be
unreliable. Sensitivity analysis involves changing the assumptions or estimates in a calculation to see the impact on the project's
finances. In this way, it prepares the business's managers in case the project doesn't generate the expected results, so they can
better analyze the project before making an investment.
Role;
Increased understanding of the relationships between input and output variables in a system or model.
Uncertainty reduction: identifying model inputs that cause significant uncertainty in the output and should therefore be the
focus of attention if the robustness is to be increased (perhaps by further research).
Searching for errors in the model (by encountering unexpected relationships between inputs and outputs).
Model simplification fixing model inputs that have no effect on the output, or identifying and removing redundant parts of
the model structure.
Procedure to Identify Feasible projects:
Quantify the uncertainty in each input
Identify the model output to be analysed
Run the model a number of times using some design of experiments,
Using the resulting model outputs, calculate the sensitivity measures of interest.

PROBLEMS associated with disinvestment of PSUs in India

The most important criticism levied against public sector undertakings has been that in relation to the
capital employed, the level of profits has been too low. Even the government has crticised the public
sector undertakings on this count. Of the various factors responsible for low profits in the public sector
undertakings, the following are particularly important :i. Price policy of public sector undertakings
ii. Under utilization of capacity
iii. Problem related to planning and construction of projects
iv. Problems of labour, personnel and management
v. Lack of autonomy
The government in order to put an end to these problems, decided to disinvest its stake in the PSUs.
The companies traditionally established as pillars of growth have now become a burden on the
economy. Except few mighty oil and petroleum companies, almost all other PSUs are incurring losses.
The national gross domestic product and gross national savings are also adversely effected by low
returns from PSUs. About 10 to 15 % of the total gross domestic savings are reduced on account of
low savings from PSUs.
Objectives of Disinvestment
The following are the main objectives of disinvestment policy of the government.
i. To reduce the financial burden on government.
ii. To improve public finances.
iii. To introduce, competition and market discipline.
iv. To find growth.
v. To encourage wider share of ownership.
vi. To depoliticise essential services.

Financial intermediaries and its benefits

Financial intermediaries hold a very important role in the flow of money in the financial world. The assistance of a financial
intermediary is needed by companies who want somebody to act as a middle man in raising money from the investors. Meeting
up between these two parties are often very difficult without the help of financial intermediaries.
TYPES OF FINANCIAL INTERMEDIARIES
NON BANKING FINANCE companies,
MUTUAL FUNDS COMPANIES
INSURANCE COMPANY
Public and private PENSION fumds
ESCROW COMPANIES
INVESTMENT BANKERS
INVESTMENT BROKERS COMPANIES
COLLECTIVE INVESTMENT SCHEME
Benefits:
Cost advantage over direct lending/borrowings.
Market failure protection the conflicting needs of lenders and borrowers are reconciled, preventing market failure

Equivalent Annualized value with example:

The Equivalent Annual Cost Method is used when a company needs to purchase an asset with a certain function but has multiple
choices of similar assets to choose from where these choices all have unequal lives.
A manager must decide on which machine to purchase:
Machine A
Investment cost $50,000
Expected lifetime 3 years
Annual maintenance $13,000
Machine B
Investment cost $150,000
Expected lifetime 8 years
Annual maintenance $7,500
The cost of capital is 5%.

The EAC for machine A is: ($50,000/

)+$13,000=$31,360

The EAC for machine B is: ($150,000/

)+$7,500=$30,708
The conclusion is to invest in machine B since it has a lower EAC.

Weighted Average Cost of Capital

A company has different sources of finance, namely common stock, retained earnings, preferred stock and debt. Weighted
average cost of capital (WACC) is the average after tax cost of all the sources. It is calculated by multiplying the cost of each
source of finance by the relevant weight and summing the products up.
Formula
For a company which has two sources of finance, namely equity and debt, WACC is calculated using the following formula:

Role of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development of stock exchange and to
regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
RBI vs SEBI
RBI is the central bank of India whereas SEBI is the Securities and Exchange Board of India. Both of them play vital role in
Indian economy. RBI is the body responsible for maintaining bank notes in the country, to keep currency reserves to maintain
monetary stability and to keep the credit and currency system of the country working efficiently. SEBI on the other hand is an
autonomous body constituted in 1992 to oversee the operations of investment markets in the country. The board performs the
function of a regulator to keep markets stable and efficient markets. There are obvious differences in the roles and responsibilities
of two monetary bodies that will be discussed highlighting their features.

Various financing options for infrastructure projects

Public Private Partnership
Bank Financing
India Infrastructure Finance Company LimiteD
Foreign Direct Investment
Infrastructure Bonds
Infrastructure Debt Funds

CREDIT RATING SIGNIFICANCE

Before you decide whether to invest into a debt security from a company or foreign
country, you must determine whether the prospective entity will be able to meet its
obligations. A ratings company can help you do this. Providing independent, objective
assessments of the credit worthiness of companies and countries, a credit ratings
company helps investors decide how risky it is to invest money in a certain country
and/or security.
A rating procedure generally involves

Rating request
Submission of application, relevant documents and fees
Site visit and management interview
Rating assessment procedure
Rating committee, rating decision
Rating dissemination