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`Cos unaware of innovations in raising funds'

Our Bureau

Chennai , Nov. 4

A NUMBER of innovations are taking place in the financial market, giving means for cheaper finance to companies.

But the market is perhaps not fully aware of them, said a speaker today at The India Finance Forum 2004, a conference on `Emerging global trends in Corporate Finance', organised here by the Confederation of Indian Industry.

The speaker, Mr Ramraj N. Pai, Head — Structured Finance Ratings, Crisil, said that one innovation, designed to lower borrowing cost, was `third party credit support'. Under this scheme, a third party stood guarantee to a loan, either fully or partially. For example, if a company takes a 10-year loan, the third party may stand guarantee for the loan from the fifth year onwards. This could help reduce the cost of the loan by a couple of percentage points, even after the guarantee fees.

Securitisation (asset-backed securities) is growing in India. The volumes are of the order of Rs 4,000 crore. But the deals are mostly done by banks and corporates have yet to take advantage of this in a bigger way, Mr Pai said.

He said that while the securitised paper is a good investment for many investors, the issuing company also gains because it gets money immediately without having to wait for the receivables to materialise. Besides, it reduces the `debt' of the company and the company is therefore able to report a higher return on capital employed.

Another innovation, also scarcely used, is escrowing of cash flows. Mr Pai said that a few BPO companies had done this recently. Under this, cash flows from specified revenue streams are locked off and the investor is paid out of this. As a result of this backing, the company will be able to access funds cheaper.

Another innovation is assignment of future cash flows. Only one company (Reliance) has raised funds using this route, Mr Pai noted. This is similar to escrowing of cash flows, but is not confined to one revenue stream.

Utilities (electricity and water supply companies) and oil and gas companies do this frequently abroad, because of the well-defined cash flows.

Mr Pai said that it was possible for companies to adopt a combination of some of these methods to further lower the cost of borrowing. For example, a BPO company escrowed off its cash flows as security, and on top of it, also gave a third party partial guarantee, he said.

Mr K. Sridharan, Executive Director - Finance, Ashok Leyland, described how the company raised $100 million through a foreign currency convertible bond issue and noted that getting the timing right was of essence. He said that a CFO should watch international developments "like a hawk" to seize the right opportunity.

Mr Sridharan said that when Ashok Leyland planned the issue, all the other Asian countries, from Thailand to Taiwan had raised debt from the European market. As a result, the market was "craving for" debt issues from India, and that too, from the old economy companies. Besides, the US treasury rate was at a historic low (of about 2.9 per cent). Ashok Leyland could, therefore, raise funds at an interest rate of 0.5 per cent. Sweeteners were thrown in the form of options to convert into equity at attractive prices and investors lapped up the issue, he said.

Speaking on `governance driven financing', the Managing Director of ICRA, Mr P.K. Choudhary, observed that the demand for corporate governance rating was yet to increase in the country.

He noted that this was perhaps because a good corporate rating did not translate into tangible gains for the company, such as either a premium price on the stock exchanges or a lower cost of debt. Nevertheless, ethical business practices would lead to a company's prosperity, he said, a view which was echoed by another speaker, Dr Deepankar Gupta of the Jawaharlal Nehru University, Delhi.

Earlier, delivering the keynote address over the video, Prof Bala Balachandra, from Kellogg School of Management, USA, said that the CFO of a company was the best suited to assess risks and therefore a CFO is an obvious choice for `Chief Risk Officer' post.

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