Venture Capital _Policies_ Rules _ Options-1 - Banking Related ...-ag

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Venture Capital _Policies_ Rules _ Options-1 - Banking Related ...-ag Powered By Docstoc
					Policies, Options, Strategies and
  Rules for Venture Financing:
Central Bank, Commercial Bank and
          Other Initiatives

         Presented By:
      Mohammad Shafiullah
         Lecturer, BIBM
            Venture Capital
Venture capital is essentially equity investment in
unlisted companies with high growth prospects to
compensate for incremental risk and when venture
capital investor takes an active shareholding role.

 Investment by way of equity/equity linked
instruments in unlisted companies.
 Investment by way of equity in manufacturing
companies including software units.
 High risk- high return.
 Highly selective financing – importance of deal flow.
 Hands on management
 little return in early years.
Project Finance vs Venture Capital
 1.    Focus on Project, Entrepreneur, Growth prospects
       rather than Security.
 2.    Risk perception.
 3.    High risk, high return and high failure scenario.
 4.    Instrument of finance-Debt vs Equity.
 5.    In case of failure, returns negligible.
 6.    Time horizon for returns- patient financing.
 7.    Norms of finance:-
 (i)   Debt Equity ratio.
 (ii)  DSCR.
 (iii) Promoters contribution.
 (iv)  Security margin.
 8.        Asset based financing .
 9.        Initial support – financial and hand holding.
 10.       Repeat financing.
         Venture Capital (VC)
The VC scheme is designed to provide assistance to
   new or existing units for:
1. Encouraging commercial application of indigenously
   development technology.
2. Financing high growth and innovative projects in
   the industrial and services sector.
3. Adapting imported technology to wider domestic
4. Making substantial value addition and enhancing
   margin in exports or domestic production.
5. Exploiting niches within potentially large markets
   and creating processes which are open to
   replication in other areas of development.
     Venture Capital (VC)

Purpose of assistance:
   seed stage
   start-up stage
   secondary stage financing
   expansion/ diversification stage.

      Early stage                                    Leveraged buyouts
     development                Expansion               and buy-ins

                                       MBO           Buy-in        Combined      Institutional
Seedcorn                 Other early                              buy-in / MBO      buyout


       Expansion        Turnaround     Refinancing            Secondary
       financing                        bank debt              purchase
How to prepare a business plan
Project objective
Resume and references of promoters and key
Present status/stage of the project
Specialty of process/technology
Innovative content
Market assessment and strategy
Cost of venture and means of finance
Manufacturing, marketing and distribution plans
Financial projections
Implementation schedule
Manpower requirement
Analysis of risks
        Assessment of Information from Business Plan
Description of Business            Area of Investigation           Results       Strong      Weak
Plan                                                                             Candidate   Candidate

Brief History of Business or        1. Track record of the         Efficient     Yes
Project                             entrepreneur.
                                    2. Nature of business          Technology    yes
Career History of the Key People    1. Proven management           No                        Yes
                                    2. key group of 2-10           Yes           Yes
                                    3. Key group of more than                    Yes         Yes
                                    10 individuals
Description of Business             1. Market size                 Costs conv.   yes
                                    2. Market growth               Static                    Yes
                                    3. Market share                Small                     Yes
                                    4. Price                       Competitive               Yes
                                    5. Product life cycle          Short                     Yes
                                    6. Competition                 High                      Yes
Process of Production               7. Market
                                    1. Technological               New
                                                                   High          Yes         Yes
                                    involvement                    Low                       Yes

Financial Performance               1. Profitability of the last
                                    three years
                                    2. Liquidity
                                    3. Leverage
                                    4. Turnover
Employee                            1.   Skilled                   Yes           Yes
                                    2.   Right workforce           No                        Yes
                                    3.   Large workforce needed    Yes           Yes

Financial Projections               1. Turnover for next 3         Good          Yes
                                    2. Profit for next 3 years     Good          Yes
                                    3. Cash flow                   Good          Yes
     Investment criteria
 Management :        A sound and committed
professional team.

Market : A sufficiently large niche market
with growth potential.

 Technological competitive advantage :
Long term competitive advantage that would
create an edge over potential competitors.

 Profitability : Above average profitability,
leading to potential attractive returns over the
investment period.
         Value addition
1.   Use of linkages with other institutions
2.   Arranging strategic alliances
3.   Securing additional finance
4.   Accessing technologies, new markets,
5.   Management support
6.   Formulation of policy/strategic plan
7.   Appointment of nominee directors
8.   Regular meetings
9.   Support in case of sudden problems or
     fast growth.
    What we look for?
Assess the promoters strength as
regards: -
 Business expertise
 Strategic plan
 Quality of past experience

Understanding importance of: -
 Good managerial team
 Technological competence
 Growth orientation and ability to think
            Exit Strategy
 Exit through the stock exchanges/
 Buy back by the promoters.
 Bought out deals.
 Offloading to another VC Company.

Issues in exit:-
 Small equity base of SSI units.
 Minimum equity size for public issue.
 Sluggish primary issue market.
     Equity & Entrepreneurship Fund-summary
             of EEF rules and activities.
1.   In accordance with the agency agreement of December 26, 2000
     executed between the government of Bangladesh and the
     Bangladesh bank bank order, 1972, Bangladesh bank is acting as
     the agent to the government of Bangladesh to administer the
     equity and entrepreneurship fund.
2.   EEF is being utilized for extending equity – support to the eligible
     companies with a view to encouraging the investors to invest in
     the risky but otherwise promising two sectors, viz, software,
     software industry, and food processing and agro-based industry.
3.   EEF is being administered through all the scheduled commercial
     banks and financial institutions.
4.   The sponsor/entrepreneurs corporate set-up will have to be a
     private limited company registered under the companies act,
5.   The project to be sponsored by the non- resident Bangladeshis
     (NRBS’) will be given preference subject to the project being
     viable from all conceivable angles such as technical, financial,
     economic and from the management and organization points of
 Equity & Entrepreneurship Fund-summary
         of EEF rules and activities.
6.      Project having total cost (including the net working capital) of
        less than tk.5.00(five) million will not be eligible for equity –
        support from the EEF.
7.      (A) Equity-support from the EEF to any eligible company will not
        exceed 49% (forty nine percent) of the total project cost of the
         (B) In case of companies having total project cost in excess of
        Tk.100.00 (one hundred) million, the percentage of equity-
        support will not exceed 33.33% of the total cost of the project
        (including the net working capital) and in such cases the
        entrepreneur should have loan facility from bank/financial
        institution to implement the project in addition to having EEF

8   .   Entrepreneurs seeking EEF assistance will submit project profile
        to a bank or financial institution of their choice and in case the
        entrepreneurs are unable to a suitable bank or financial
        institution. The concerned bank will make thorough appraisal of
        the project and if they satisfied about the viability of the project
        they     shall  send   the     project  proposal     with    specific
        recommendation to Bangladesh bank.
Equity & Entrepreneurship Fund-summary
        of EEF rules and activities.
8.1   Project’s viability tests : In appraising a project, The highest
      importance shall be accorded to the appraisal of the sponsors/
      entrepreneurs, which shall include -
a)    Their educational qualifications qualifications in the relevant
b)    Their knowledge in the technology/process involved;
c)    Their skill in marketing of the products/ services in question;
d)    Their proven track record in implementing and operating any
e)    Their track record in financial conduct;
f)    Their track record of relationship with any Bank/FI;
g)    The project shall be technically sound and technologically
      appropriate for Bangladesh and environment friendly;

8.2   Financial analysis: The project should have minimum projected
      IRR 15%, ROE 15%, Debt Service Coverage Ratio 1.50, Current
      Ratio 1.50:1, Fixed Asset Coverage Ratio 1.50: 1, SWOT analysis
      should be acceptable. The project shall generally generate a
      minimum of 15% per annum after tax return on its paid up
      capital from the 3rd year of operation.
Equity & Entrepreneurship Fund-summary
        of EEF rules and activities.
9.    Before disbursement of the equity-support to any eligible
      company on behalf of         the Bangladesh Bank (EEF), the
      bank/financial institutions concerned will have to enter into
      an investment agreement in triplicate with such company and
      send one copy thereof to the Bangladesh Bank (EEF) and
      complete all other legal documentations.
10.   Before the actual disbursement of the equity- support to any
      eligible company on behalf of the Bangladesh Bank (EEF), the
      bank/financial institutions concerned will have to ensure that
      the sponsors’ share of equity, and the concerned
      bank’s/financial institutions loans (particularly term-loans), if
      any, have been fully invested in the project and the physical
      progress of the project is satisfactory in the opinion of the
      bank /financial institution concerned.
11.   The share certificates will have to be issued by the assisted
      company in the name of the government of the people’s
      republic of Bangladesh (Govt.) at par representing the EEF’s
      equity –support to that company and collected and held by
      the bank/financial institution concerned on behalf of the
      Bangladesh Bank (EEF) government of Bangladesh and an
      intimation sent in this regard to the Bangladesh Bank (EEF).
Equity & Entrepreneurship Fund-summary
        of EEF rules and activities.
12. The assisted company will pay dividend on the EEF’s
equity-support at such rate as may be declared by the company
in accordance with the rules/procedures of EEF and that of
companies act, 1994 from time to time.

13. The bank/ financial institution concerned holding physically
the assisted company’s share certificates on behalf of the
Bangladesh Bank (EEF)/government of Bangladesh will not sell,
transfer or dispose of in any other manner such shares without
prior approval in writing of the Bangladesh Bank (EEF).

14. The sponsors of the project/company will buy-back the
shares issued in the name of the government of Bangladesh
within a period of 8(eight) years from the date of first
disbursement of EEF assistance, during the first 3(three) years,
and within the next 5(five) years at break-up value of the
shares as shall be determined by the nominated eligible
chartered accountants.
 Equity & Entrepreneurship Fund-summary
         of EEF rules and activities.
15. If the sponsor’s of the company fails to buy-back the shares issued in
the name of government of Bangladesh within the 8 (eight) year period as
mentioned above, Bangladesh Bank shall have the right to sell such shares
to the interested parties of companies. If Bangladesh Bank fails to sell the
shares, these shall be converted into debt of the sponsors and interest rate
of such debt shall be determined by Bangladesh Bank.

16. During the subsistence of the equity support the sponsors of the
company will not sell, transfer or otherwise dispose of their shareholdings
in the company without prior approval in writing of the Bangladesh Bank
(EEF) through the concerned bank/financial institution.

17. During the subsistence of the equity support the bank/financial
institution concerned will represent the Bangladesh Bank (EEF) on the
company’s board of directors and/or at the meetings of the company’s
shareholders and a provision to this effect will have to be made in the
company’s memorandum and articles of association and a certified copy
thereof made available to the Bangladesh Bank (EEF), and the
representative of the bank/financial institution concerned will not be
required to hold any shares of the assisted company in his/her personal
  Equity & Entrepreneurship Fund-summary
          of EEF rules and activities.
18.   A) the bank/financial institution concerned will follow-up/monitor
      the company during the subsistence of the equity-support in
      matters of implementation of the project and its operational
      performance in the following manner.
      B) The assisted company will maintain all books of accounts
      properly which may be inspected by the concerned bank/financial
      institution institution and/or the Bangladesh Bank (EEF) as and
      when considered necessary.
      C) The EEF sanctioned project shall submit quarterly progress
      report on the project regularly to the Bank/DFI/FI on the
      prescribed pro-forma.
      D) The EEF sanctioned project shall submit to the Bank/DFI/FI the
      audited balance sheet, together with the profit and loss accounts
      of the company for every financial year within four months from
      the date of closure of the company’s financial year.
      E) The EEF sanctioned project shall furnish to the Banks/FI’s such
      other information/data on the project as and when required by the
      Banks/FI’s and/or the Bangladesh Bank (EEF unit).
Equity & Entrepreneurship Fund-summary
        of EEF rules and activities.

19. The EEF assisted company or person which contravenes
    with the rules and regulations of EEF. The EEF assisted
    company without the prior approval of Bangladesh Bank
(a) shall not appoint any managing agent
(b) shall not make any change in the memorandum and
    articles of association of the company and
(c) shall not provide any loan to any person/company.

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