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8/7/2019 Venture capital and credit rating
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VENTURE CAPITAL AND CREDITRATING
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Venture Capital
Venture capital (VC) is financial capital
provided to early-stage, high-potential,
growth start up companies.
It is the money provided by professionals
Important source of equity.
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Venture Capitalist
Finance new and rapidly growing companies
Purchase equity securities
Assist in the development of new products orservices
Add value to the company through activeparticipation
Take higher risks with the expectation ofhigher rewards
Have a long-term orientation
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Investment Proposal Factors
Managemen t
Potential for Capital Gain
Realistic Financial Requirement and
Projections:
Owner's Financial Stake
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Venture Capital in India
Introduced in India in mid 80s
Inauguration of Risk Capital Foundation
There are around thirty venture capital funds,which have garnered over Rs.5000 Crores.
0.1 percent of GDP,
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Methods of Venture Financing
Equity
Conditional Loan
Income Note
Other FinancingMethods
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Stages of venture capital
Pr e seed Stage
Seed Stage
Early Stage / First Stage Second Stage
Third Stage
Bridge /Mezzanine Financing or LaterStage Financing
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Venture capital fund
Venture capitalists are very selective in
deciding what to invest in.
They are only interested in ventures with highgrowth potential.
They invest in companies in different
industries and different countries
In good times, the funds that do succeed mayoffer returns of 300 to 1000% to investors.
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Most venture capital funds have a fixed life of
ten years
The investors have a fixed commitment tothe fund that is "called down
Because a fund may run out of capital prior to
the end of its life.
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Assessing Venture Capital
It is only in the past 12 to 18 months, they
have come into the limelight.
The rejection ratio is very high, about 10 in100 get beyond pre evaluation stage, and 1gets funded.
Venture capital funds are broadly of twokinds - generalists or specialists.
it is important to choose the right venture
capitalist.
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THE MANAGEMENT
Venture capitalists will insist on a professional
team coming in, including a CEO to execute
the idea. Integrity and commitment are attributes
sought for.
The venture capitalist can provide the
strategic vision, but the team executes it.
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THE IDEA
The idea and its potential for
commercialization are critical.Venture funds
look for a scalable model, at a country or aregional level.
For example, it is very easy for Hindustan
Lever to double sales of Liril - a soap without
incremental capex, while Gujarat Ambujaneeds to spend at least Rs4bn before it canincrease sales by 1mn ton.
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The Venture Capital Process
Deal origination
Screening
Due diligence Evaluation Deal structuring
Post-investment activity
Exit
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Industry Life Cycle
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Growth of VC in India
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Credit Rating
Credit rating estimates the credit worthiness
of an individual, corporation, or even a
country
An evaluation of a potential borrower's ability
to repay debt
A poor credit rating indicates a high risk of
defaulting on a loan
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Personal Credit Ratings
ability to pay a loan
interest
amount of credit used saving patterns
spending patterns
debt
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The ratings are expressed in code numbers
which can be easily comprehended by the lay
investors. Credit rating, as exists in India, is done for a
specific security and not for a company as a
whole.
A debt rating is not one time evaluation of
credit risk, which can be regarded as valid for
the entire life of the security.
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Benefits of Credit Rating
Quick investment decision
Independent investment decision
Investor protection Superior information
Basis for proper risk, return and Trade off
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Benefits to rated companies
Sources of additional certification
Increase the investor population
Encourages financial Discipline Merchant bankers job made easy
Foreign collaborations made easy
Benefits the industry as a whole Low cost borrowing
Rating as a marketing tool
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Credit Rating of Debentures
What is Debenture?
A debenture is defines as a certificate of
agreement of loans which is given under thecompanys stamp.
A bond issued by a corporation which is
secured by the integrity of the borrowers.
A long term loan usually repayable at a fixeddate with a fixed rate of interest.
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Process
CRAs appraise the financial health, especially
capacity to honor debt obligation of
companies and even govt. People who invest in the debt instruments;
such as bonds, debentures, commercial
papers, etc of these entities rely on the report
of CRAs and decide to invest.
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Indian Scenario
In India SEBI has recognized only four CRAsnamely:
(1) Credit Rating Information Services Limited(CRISIL),
(2) Investment Information and Credit RatingAgency ofIndia (ICRA),
(3) Credit Analysis and research (CARE),
(4) FITCH
There is one more CRA in India name ONICRA.But it doesnt seem to have official recognition.
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CRISIL
The first credit agency floated on January 1,
1988.
It was jointly started by ICICI and UTIwith anequity capital of 4 crores.
CRISIL is Indias leading rating agency, and is
the fourth largest in the world.
With over 60% share of the Indian Ratingsmarket, CRISIL Ratings is the agency of
choice for issuers and investors.
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