Project Finance Explained #2 – Analysis of Sources of Funds of Promoters (Case Studies)

Hello, Namaste, Varakkam, Baonara.
This is Ramit and welcome to my presentation Margin in term Loan
part 2 let us continue our discussion from where we left a Googly, now we have
financed a term loan of 85 lakhs with a margin of 25 percent for scarf holding
materials this is mainly used for construction of buildings, the loan was
yet to be released when the promoter made an advance of 2 lakhs to the
vendors through his current account maintained with us this was to be
considered as margin at a later stage he came with the first release request of 3
lakhs we did not collect the margin this time since he has already paid two lakhs
upfront he was so happy next time he came with a second payment request of 7
lakhs where he computed his margin on his own as discussed in the next slide
now this I call it a reverse sweep let us quickly take a look at what the
customer presented before me amount invested so far by the customer is 2
lakhs bank release made so far is 3 lakhs present payment request of 7
lakhs so March till date should be 25 percent of 10 lakhs that is rupees 2.5
lakhs since he has
already paid 2 lakhs we have to collect balance amount of 50000 rupees only now
I asked in my earlier presentation what is your opinion on the above calculation
submitted by the party whether this this seems apparently correct right? but no
there is a catch the right answer will be payment me to vendor started with the
advance payment made by the promoter you remember he made an advance payment of 2
lakhs right? so the earlier realeases where 2 lakhs
where the margin of the promoter was 100 percent and bank – was nil
so the overall margin in the project that the promoter maintained at that time was
100 percent total payment was 2 lakhs in the second release the term loan raised
was 3 lakhs promoters margin was nil release margin
for this particular release was also nil
so the overall margin will be two lakhs that the promoter earlier invested
divided by 2 plus 3 that is a total disbursement made in the project so far
till the second release so this will come to 40% the total payment made was made
was 5 lakhs only now the present position overall release made to the
vendor so far is 5 lakhs present payment request is 7 lakhs margin required from
the promoter is 25% of 7 plus 5 lakhs which is 3 lakhs right margin brought
by the promoter so far is 2 lakhs so friends how much he need to provide the
margin right now it is 3 – 2=1 lakhs and not 50000 only so this is the right
answer I hope you like the case study so let us move on to what are the things
you will learn in this part 2 presentation we have already covered
what is the margin now you will learn the importance of analyzing sources of
fund then you will also learn about differentiating between
your capital and an unsecured loan now we will start our discussion with the
importance of analyzing sources of fund before we start our discussion we have
to first understand what is meant by a sources of fund for that purpose I have
displayed a sample Lilliput balance sheet now you observe carefully
liabilities are the sources they are listed on the left hand side an asset
that is the uses are always listed in the right hand side this is a
standard balance sheet now the sources are used to create the assets that's a
concept here what are the sources in a balance sheet firstly it is a equity or
capital that is promoters own money the reserve and surplus that is mostly
accumulated by the profit earned by the company yes there are other bifurcations
of reserve and surplus but I am NOT going into that details these two club
together will form the net worth of the company there is also something called
long term liabilities under which this unsecured loan and term loan from Bank
will come, since we are discussing only about term loan so this current
liability current asset non-current asset we will not discuss in this
presentation so let them disappear now what are the importance of sources
of fund? it's important on the economic viability of the project is
that the project will be economically viable with the company will be able to
arrange the funds necessary to infuse and make the construction to purchase
the machineries and etc it is important in order to understand whether there
will be any abrupt discontinuation of the project we have to avoid this there
should not be any discontinuation of the project any discontinuation in the
project will mean cost overrun time overrun etc ensuring promoters have
their own skin in the project friends we all are bankers we are not meant to run
the business the businessman or the company has to do that job now if you
think of a situation when promoters have not put in their own money they are
doing the business only in banks money naturally their interest will go lesser
so if you can make them to put their own skin or own money in the project it's
only then they will have interest to make it a success we have to avoid
become the owner of the project of the company we are bankers and we will
happily live as bankers you can't imagine yourself in a situation where
you suddenly become an owner of a dairy farm with 10-15 buffaloes and cows
and you don't know how to handle the business so that was about the sources
of fund and its importance now let's let's move on to the next topic
it is equity or capital versus the unsecured loan this difference is
prominent only in case of private limited companies in case of partnership
in case of proprietorship not much difference there is not much difference
this equity and unsecured loans are different categories in case of private
limited companies only you must remember that this equity or capital is
company's own source of fund generally contributed by the promoters or the
shareholders providers partners at some cases by other companies as well friends I repeat please remember that a company can get its
equity or capital from other company as well a company is permitted to invest in
other company these are interest-free liabilities and they have to file with
register of companies that is ROC register of companies regarding their
position of equity and capital unsecured loans are long-term loans liabilities in
the balance sheet of the company or promoters from promoters partners
friends and relatives a company can borrow funds from other source from
sources other than banks it could be its own promoters or partners friends and
relatives or other body corporates as well they might be interested bearing
and there is no need to file an ROC for this there is no need to inform the
register of companies regarding unsecured loan that's a main advantage
why the promoters always love unsecured loan which I will discuss in the next
slide the bankers we as a banker always prefer equity the question is why once
the company brings some equity it is always difficult for the company to
withdraw the same from the system you have to conduct a ordinary shareholder
meeting you have to inform the register of company and there are n number of
formalities that you have to perform before you can actually withdraw the
equity from the company I repeat all this discussion are regarding private
limited companies only that's why we bankers always love
Private Limited companies in case of partnership proprietorship there is no
such discipline nothing is available Companies Act 2013 will always give you
that strength that you can actually sue the directors if they do not obey the
Companies Act 2013 it's an act passed in the parliament so these are all
described in that act we can cross-check the amount with the information in
Ministry of Corporate Affairs website that is MCA website
I will give the link in my description of how to check a company's information
in MCA website so you can get a satisfaction that whatever is displayed
in the balance sheet or whatever the company is informing you that they have
actually filed with Ministry of Corporate Affairs and remember if that
gives any wrong declaration in this MCA website they are liable to be punished
under Companies Act 2013 increasing equity in a company will always improve
the debt equity ratio and the TOL TNW ratio now this debt-equity ratio and the
TOL TNW ratio forms the benchmark while assessing your term loan so any
improvement in DE ratio andTOL TNW will always give comfort to the
banker that yes the company is more interested to do the business in his own
money now the question is promoters always prefer unsecured loan the
question is why they can easily withdraw it from the company that is one of the
main reason if they they need not inform the register of the company and they need
not inform they did not update the details in the ROC so they can easily
withdraw the unsecured loans there is no registration cost involved for bringing
the money in order to increase the equity or the capital you have to pay
some amount to the register of companies likewise you friends if you
purchase some land building etc some fixed asset you have to go to the
register office and register it in your name there you have to pay some money to the government right even if you purchase a car of a carrier to go to the
RTO and register the vehicle in your name right likewise in case of a company
which is a body corporate you have to pay to the register of companies to
modify any information already filed which register of companies now what are
the precautions you must take while considering unsecured loan as margin or
unsecured loan in your system you have to take a notarised affidavit from the
company that unsecured loan will not be withdrawn during with the currency of the
loan whosoever is giving unsecured loan to the company it is always better to
take guarantee of that person or the company, I repeat, the guarantee of the
person or the company who is giving unsecured loan if it is available to you
you can save yourself up to great extent it will do a lot of good to you because
on a later date they cannot say that I didn't know unsecured loan if proposed
to be brought from relatives or other company we need to verify their net
worth statement or AFS and ascertain their capacity now for the
purpose of borrowing the promoters of the directors have already submitted
will already submit their own net worth statement their own asset liability
statement the statement of the borrowing company the balance sheet of the
borrowing company will be available to you but if they want to bring the
unsecured loan from a different third party you must tell them to submit the
net worth statement of the third party or the audited balance sheet of the
company from where unsecured loan will come this will help you to assess
whether they will be in a position to bring the unsecured loan whether they in
a position to lend some money to the company which you are financing so
friends with that I conclude my this set of presentation in part 2 very soon we
will be do part 3 thank you goodbye

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