Note on Private Equity, Venture Capital, Angel Funding, Series A funding

What is Private Equity:

 ·         An asset class that involves value enhancement and high returns generation by sharing business expertise of the Investor complementing the Entrepreneur

·         Offer greater opportunity to exercise control over investments as compared with other passive asset classes like equities, mutual fund, real estate, commodities, fixed income
·         Equity investments in relatively mature, primarily unlisted companies requiring growth capital
·         Each investment is backed by an investment thesis which plays out over a period of three to five years

Types of Private Equity and stage of investment: 

·         Buyout

These funds provide equity capital to mature firms in need of capital or ownership transition. Transactions tend to have a layer of debt in their financing. Small and mid-sized buyout transactions tend to have lower proportions of debt in their capital structure relative to their large and mega-sized counterparts.

·         Venture Capital

These funds provide equity capital to start-ups and companies in the early stages of growth. Portfolio companies tend to be focused upon technology, healthcare or “green” technologies. These companies tend to exhibit high levels of growth, with the potential to become profitable businesses. The immaturity of these businesses means that some will inevitably fail. However, within a successful venture capital fund, any failures will typically be counterbalanced by a number of extremely profitable investments.

·         Growth Capital

These funds provide expansion capital to enable a company to scale a business. Investments tend to be made after the early stages of a company’s life. Returns are largely dependent upon cash flow growth.

·         Special Situations

These funds tend to invest in mezzanine or mid-layer debt capital, which provides more protection than equity financing in the event of default. These funds can aim to achieve equity-like returns via the use of warrants and equity-like features. Mezzanine debt tends to exhibit lower risk and return features than other, purely equity-based, private equity stages.

The term special situations also includes distressed debt and funds specializing in energy and turnaround investments.

Key differences between other funds and PE:

Criteria	Venture Capital	Private Equity	Buyout’s	Mezzanine
Stage of company	Early	Growth	Mature	At all stages
Level of Risk	High	Moderate	Moderate	Moderate
Assessment of Focus	Mostly Technology	Diversified	Diversified	Diversified
Investment Size	< $ 10 m	> $ 10 m	> $ 50 m	> $ 5 m

PE Investment Process:

·         Structuring the Business

·         Preparation of Business Plan and marketing Collateral

·         Short list and evince interest from the investors

·         Structuring, Valuation and Negotiation

·         Obtain Term sheet

·         Due Diligence

·         Definitive Agreement

·         Closing Formalities

·         Funding

Advantages of PE:

     ·         Meet Financial Objective

·         Corporate Governance

·         Networking and Global Integration

·         Operational Orientation

·         Corporate Strategies

·         Long Term Capital Commitment

·         Easier access other source of finance

·         Experience & Expertise in Risk Reward Analysis and Capital allocation

·         Build Confidence in – Customers, Employees, Suppliers, Banks & other lending institution and Markets

·         Relatively less expensive fund raising exercise in comparison to IPO

Disadvantages of PE:

·         Raising Private Equity finance is very demanding, time consuming; at times the business may suffer if promoter devotes more time for the transaction

·         Depending on the investor, promoters may lose a certain amount of power to make management decisions

·         Will have to invest management time to provide regular information for the investor to monitor

·         Might create conflict or differing opinion in long‐term strategy due to pressures of EXIT from the investor

·         The cost of complying with regulations could be relatively higher

·         Non‐alignment of Interest of fund manager on the board and entrepreneur could hamper the growth of company

DEFINITION of 'Series A Financing'

The first round of financing undergone for a new business venture after seed capital. Generally, this is the first time that company ownership is offered to external investors. Series A financing may be provided in the form of preferred stock and may offer anti-dilution provisions in the event that further financing through preferred or common stock occurs in the future.

Series A financing tends to occur when the company is generating some revenue from its business model, but rarely will the business be generating net profits at this point. Most series A investors will be venture capital funds or angel investors who are willing to accept the high levels of risk found in these early-stage company investments.

As an enterprise grows and requires additional capital, the subsequent rounds of preferred stock issued to investors are called Series B, Series C, and so on. This allows investors in those subsequent rounds of financing to know where they stand in the hierarchy of claims to future profits. Typically, the business is revalued before each round of financing, so terms of conversion may be vastly different for different rounds depending on the valuation of the company at each stage.

Fund Raising : Debt Funding other than Bank Finance - Commercial Paper, Deposits, Debentures, ECB

Commercial Paper - unsecured and cost effective way of raising short term funds for corporates having a good credit rating

1. Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP as a privately placed instrument, was introduced in India
in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

2. CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue.

3. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

4. CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by single investor should not be less than Rs.5 lakh (face value).

5. An FI can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

6. CP will be issued at a discount to face value as may be determined by the issuer.

7. The initial investor in CP shall pay the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP, when the CP is held in physical form, the holder of the CP shall present the
instrument for payment to the issuer through the IPA.Issuing and Paying Agent (IPA)

8. Disclosure In Financials:
---> Shown Under Current Liabilities
----> Interest: Total Interest cost shall be taken as pre paid interest and same shall be charged to Profit and Loss account.

CPs guidelines.
1. Cps Should be in Dmat form with NSDL\CDSL
2.Can now be issued as
-Standalone Facility (means without approval from Consortium Bankers)
-Against Working Capital Requirements
3.Eligibility Criteria to issue CPs
a.Tangible NW not less than 4.00cr
b.should have Working capital limits sanctioned by Banks\FI
c.The borrower account should be classified as Standard Asset
d.Should have valid credit rating from ICRA\CRISIL\FITCH\CARE
e.The rating should be current & not due for renewal at the time & during issue
f.Borrowing should not exceed the rating amount or maximum amount authorized
by BOD by way of resolution
4.Who Can Act as IPA(Issuing & Paying Agent)
Any Scheduled Bank can act as IPA
5.General Guidelines
CP will be issues at discount value
No CP Issue can be underwritten
Period not <15> one year 
Minimum Denomination - 5,00,000.00 & multiples thereof(each ofFV 5.00L as1 unit)

6.Breif Process
Approach IPA, enter into IPA agreement & it should stamped as per stamp duty law
Issuer should have agreement with Depository(NSDLis alloting ISINs for Cps)
Issuer can get ISIN (created based on maturity date)by submitting Letter of Intent in the format prescribed by NSDL & it is same for whole CP programme. ISIN number should be known to IPA through Issuer \Registrar
As per RBI requirement the entire CP Prog should completed within 2 weeks from date of commencement of issue.
IPA Should open 3 accounts one is CP - Account for crediting the funds second CP- Allotment account & thirdly CP Redemption Account.
Upon the instructions of the Issuer, Registrar will credit the Cp units to CP Allotment A/C .
Upon Redemptin all investors transfer their Dmat Cps to CP - Redemption a\c with written instruction to IPA to pay the amount. Subject to availability of funds IPA settles the CP Account & advice the Registrar to cancel the Dmat CP as a Debit Corporate action..
7.List of details submitted to IPA
Original Rating letter (one time).
Jumbo CP\Demand Promissory Note with duly stamped.
Deal Confirmation signed by both parties(BSCPL & Bank)
Confirmation to eligibility norms prescribed by RBI (with supporting Copy of Board
resolutions, copy of Latest audited B\S & rating letter).
CP Placement Deal (Value date)i.e.Request letter.
The docs submitted to RBI also should be through IPA only.
ISIN Number from NSDL.
Board Resolutions (293(1)(a),293(1)(d), & for issue of Cps)
8. Docs to NSDL
Master file creation form(company details, CP details & IPA details)
Coporate action form for CPs(regarding fell details of CPs)
Letter of intent for ISIN No.
9.Docs to Bank
Undertaking that total borrowing is within the limits.
Letter of Offer for CPs
Deal Confirmation \Contract Note.
RTGS request.

Acceptance of Deposits by companies under new companies act 2013

ELIGIBLE COMPANY WHICH CAN RECEIVE DEPOSITS FROM PUBLIC

“Eligible Company” means a public company as referred to in sub-section (1) of section 76, having a net worth of not less than Rs. 100 Crores or a turnover of not less than Rs. 500 Crores and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies before making any invitation to the Public for acceptance of deposits.

Provided that an eligible company, which is accepting deposits within the limits specified under clause (c) of sub-section (1) of section 180, may accept deposits by means of an ordinary resolution;

 QUANTUM OF DEPOSITS THAT CAN BE ACCEPTED

A. From members

• No Eligible company shall accept or renew any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid-up share capital and free reserves of the company and
• No other company shall accept or renew any deposits from its members if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid-up share capital and free reserves of the company.

B. From public

• No eligible company shall accept or renew any deposit from public, if the amount of such deposit other than the deposit received from members, together with the amount of deposits outstanding on the date of acceptance or renewal exceeds 25% of aggregate of the paid-up share capital and free reserves of the company.
• No Government company eligible to accept deposits under section 76 shall accept or renew any deposit, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35% of the paid-up share capital and free reserves of the company.

CONDITIONS TO BE SATISFIED FOR ACCEPTING DEPOSITS

o   Resolution to be passed by company in general meeting.

o   Rules as may be framed by RBI to be complied with.

o   Circular to be issued to members showing financial position of the company, the credit rating obtained, details of outstanding deposits, if any, and other particulars as given below.

o   Deposit Repayment Reserve Account to be opened with a scheduled bank and atleast 15% of amount of deposits maturing during the current and next financial year to be deposited in the account. This account cannot be used for any other purpose.

o   Deposit insurance to be provided in the manner prescribed below:

ü  Every company referred to in sub-section (2) of section 73 and every other eligible company inviting deposits shall enter into a contract for providing deposit insurance at least thirty days before the issue of circular or advertisement or at least thirty days before the date of renewal, as the case may be

ü  The deposit insurance contract shall specifically provide that in case the company defaults in repayment of principal amount and interest thereon, the depositor shall be entitled to the repayment of principal amount of deposits and the interest thereon by the insurer up to the aggregate monetary ceiling as specified in the contract

ü  In the case of any deposit and interest not exceeding twenty thousand rupees, the deposit insurance contract shall provide for payment of the full amount of the deposit and interest and in the case of any deposit and the interest thereon in excess of twenty thousand rupees, the deposit insurance contract shall provide for payment of an amount not less than twenty thousand rupees for each depositor

ü  The amount of insurance premium paid on the insurance of such deposits shall be borne by the company itself and shall not be recovered from the depositors

ü  If any default is made by the company in complying with the terms and conditions of the deposit insurance contract which makes the insurance cover ineffective, the company shall either rectify the default immediately or enter into a fresh contract within thirty days and in case of non-compliance, the amount of deposits covered under the deposit insurance contract and interest payable thereon shall be repaid within the next fifteen days and if such a company does not repay the amount of deposits within said fifteen days it shall pay fifteen per cent interest per annum for the period of delay and shall be treated as having defaulted and shall be liable to be punished in accordance with the provisions of the Act.

o   Certificate to be provided regarding absence of any default by the company in repayment of deposit or interest thereon, either before or after the commencement of this Act.

o   Repayment of deposit and interest may also be secured by creation of charge on the assets and property of the company in compliance with rules in this regard.

o   Deposits which are unsecured or partially secured shall be so mentioned in all documents related to invitation or acceptance of deposits.

o   Credit rating should be obtained for accepting deposits from public

o   Every deposit accepted by a company under this section shall be repaid with interest in accordance with the terms and conditions of the agreement entered between the company and depositor.

o   In case of failure of company to repay deposits or interest thereon, the depositors can approach the Tribunal to obtain necessary orders for the company to make the payment or for any loss or damage incurred

DEBENTURE - COMPLIANCE

Debenture Redemption Investment is to be made before 30th April @15% of debentures to be redeemed up to 31st March of next year.

Every company required to create/maintain DRR shall on or before the 30th April of each year, deposit or invest, as the case may be, a sum which shall not be less than fifteen percent of the amount of its debentures maturing during the year ending on the 31st day of March next year in any one or more of the following methods, namely: (a) in deposits with any scheduled bank, free from charge or lien (b) in unencumbered securities of the Central Government or of any State Government; (c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882; (d) in unencumbered bonds issued by any other company which is notified under clause (fl of section 20 of the Indian Trusts Act, 1882; (v) The amount deposited or invested, as the case may be, above shall not be utilized for any purpose other than for the repayment of debentures maturing during the year referred above, provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall below 15 per cent of the amount of debentures maturing during the 3lst day of March of that year'

CHAPTER X of SEBI

GUIDELINES FOR ISSUE OF DEBT INSTRUMENTS

10.3 Creation of Debenture Redemption Reserves(DRR)

10.3.1 A company has to create DRR in case of issue of debenture with maturity of more than 18 months.

10.3.2 The issuer shall create DRR in accordance with the provisions given below,

(a) If debentures are issued for project finance for DRR can be created upto the date of commercial production.

(b) The DRR in respect of debentures issued for project finance may be created either in equal instalments or higher amounts if profits so permit.

In the case of partly convertible debentures, DRR shall be created in respect of non-convertible portion of debenture issue on the same lines as applicable for fully non-convertible debenture issue.

In respect of convertible issues by new companies, the creation of DRR shall commence from the year the company earns profits for the remaining life of debentures.

(e) DRR shall be treated as a part of General Reserve for consideration of bonus issue proposals and for price fixation related to post tax return.

Company shall create DRR equivalent to 50% of the amount of debenture issue before debenture redemption commences.

Drawl from DRR is permissible only after 10% of the debenture liability has actually been redeemed by the company.

The requirement of creation of a DRR shall not be applicable in case of issue of debt instruments by infrastructure companies.

Section 117C requires every company to create a Debenture Redemption Reserve (DRR) to which 'adequate amounts' shall be credited out of its 'profits' every year until such debentures are redeemed, and shall utilize the same exclusively for redemption of a particular set or series of debentures only. Thus, the quantum of DRR to be created before the redemption liability actually arises in normal circumstances should be 'adequate' to pay the value of debentures plus accrued interest (if not already paid), till the debentures are redeemed and cancelled. Since the Section requires that the amount to be credited as DRR will be carved out of profits of the company only, there is no obligation on the part of the company to create DRR if there is no profit for the particular year.

External Commercial Borrowing (ECB),

The Reserve Bank of India has issued a Circular dated 30 November 2015, outlining the new framework for External Commercial Borrowings (ECB), replacing the existing guidelines issued about a decade ago. The overarching principle of the new framework has been to liberalise and encourage long term ECBs denominated in foreign currency, and ECBs denominated in INR. 

For this purpose, these ECBs have been segregated from other ECBs as separate ‘Track II’ and ‘Track III’ respectively under the new framework. Further, there have been various amendments made in respect of other ECBs having average maturity of less than 10 years.

Process improvements with Six Sigma, DMAIC ,SIPOC methodology

A SIPOC diagram is a tool used by a team to identify all relevant elements of a process improvement project before work begins. It helps define a complex project that may not be well scoped, and is typically employed at the Measure phase of the Six Sigma DMAIC (Define, Measure, Analyze, Improve, Control) methodology.

SIPOC

The idea behind the SIPOC methodology is to view each process as a different organization in itself. Each process therefore has its own suppliers, inputs and corresponding customers and outputs. The aggregation of all these processes is the system. This helps define each process with clarity. It also helps find what exactly is going wrong where. For instance, if there is a system outage, then the process is not to blame. Corrective action must be taken to ensure that the infrastructure suppliers perform better. Here are some of the salient features of the SIPOC methodology.

High Level Process Map: A SIPOC methodology is in-effect a high level process map. It does not have details regarding who is supposed to be doing what. Rather it defines the working relationships between the various stakeholders. Some steps are required to effectively implement the SIPOC methodology. They are as follows:

Acquaint Suppliers: A large number of issues arise in the process because the suppliers are not well versed with the requirements. The suppliers could be internal or external to the organization but that is not the point of contention. The idea is orient the suppliers and make them aware of the rules, policies and procedures set for them. The Service Level Agreements must be explicitly stated to ensure that the suppliers know exactly what is expected of them.

Scheduling Inputs: Based on the negotiations and inputs from suppliers, one must carefully schedule inputs. Inputs can be in the form of men, money, material, machinery or information. The inputs must be provided to the process in the most optimum manner. There are many operations research techniques which can b e used in this regard to lower the cost levels and increase the service levels.

Process:

The SIPOC provided an effective methodology to get an in detail look at the process. Some things that are usually defined as the part of SIPOC are as follows:

§ Boundaries: The process boundaries must be explicitly stated. Blurred boundaries lead to ambiguity which further leads to non performance of tasks.

§ Sub Processes: The intermediate processes and inputs and outputs must be clearly defined as a part of the process definition.

§ Process Owner: One person must be made accountable to see end to end execution of the process. This person will take care of any intermediate challenges that come in the way.

Outputs: Outputs must be expresses in terms of deliverables which can be verified. Therefore having outputs such as customer satisfaction is not correct. This can be the purpose of the process, however the output will be something like the best possible service (define using SLA) provided in the least possible time (Specify time in minutes). It is important to keep the outputs quantifiable because what cannot be measured cannot be managed.

Customer: The customer’s job is to consume the outputs of the process as well as provide feedback. The feedback could be related to the current performance of the process. It could also be regarding the future changes expected in the outputs of the process. For instance, the sales department is the customer of operations. They should communicate to operations if they see a period of slow sales so that production can be adjusted accordingly.

Quality Control with Six Sigma

The business management approaches are mostly centered on the quality control of products or services. The primary objective of keeping the quality of products and services up to the mark is to aim at the long-term success of delivering customer satisfaction.

The ISO 9000 International Organization for Standardization defines quality control as the operational techniques and activities that are used in order to fulfill the requirements for quality.

As improving the quality standards of products and services is an ongoing concern for businesses, Six Sigma quality management approach is taking the center stage. It aids the aim to remain in operation and make significant profit.

Six Sigma uses the DMAIC framework.

Six Sigma Vs TQM :Now-a-days, Six Sigma quality has emerged as the hot business management topic. It has been inherited directly from TQM or Total Quality Management. The toolset and concepts used in Six Sigma quality management are the same as TQM.

Six sigma Vs Kaizen Vs Lean : Kaizen tries to improve the business as a whole by creating a standard way of working, increasing efficiency and eliminating business waste. Six Sigma is more focused on quality output (the final product). ... Lean is all about eliminating waste to increase process speed and quality through the reduction of process waste

Dibert on Siz sigma

When we talk of ISO certification for Quality Management,what is Quality : “Quality is the systematic pursuit of excellence.”

Quality as Philosophy

•             The pursuit of perfect that never ends.

•             Quality is conscience.

•             Excellence.

•             Quality is the fulfillment of needs.

•             Quality is the degree of feeling happiness.

•             Quality is the intangible that makes a better world tangible.

•             Quality is a set of principles and a set of methodologies for achieving the joint benefits of greater productivity, lower costs, better utility, durability, and satisfaction with products and services simultaneously that helps to develop customer preferences for sustained and acceptable use.

•             Maximizing the benefit and minimizing the harm to society associated with any product or service.

Definition of Quality

•             Quality is a way of life. It is a culture that makes us work in all our activities with a customer focus and with a philosophy of efficiency and excellence in what we do and in what we produce.

•             Quality is the state in which all value entitlements (in its broadest meaning) are fully realized for customers and other stakeholders focused for the present with future considerations.

Quality as a Personal Ethic

•             All of us doing, always better, the right things.

•             Do the right thing, the right way, the first time, for the right reason.

•             Treating everyone like a guest in your home.

•             Always going the extra mile to create a holistically-satisfying experience for every stakeholder we deal with.

•             The pursuit of excellence and deep understanding of all we do.

Quality in the Eyes of the Customer

•             Quality is what the customer says it is.

•             Meeting or exceeding my customer's expectations.

•             I know it when I experience it.

•             My total experience of the provider.

Quality in the Eye of the Producer

•             Quality is compliance to a specification.

•             Conformance to requirements.

•             Fit for use.

•             Meeting customer requirements.

•             The property of a product or service measured against the needs of the customer.

•             A complete set of realized inherent characteristics of products, process, or system to meet (customer) requirements.

•             The provision of value to the customer as defined by the customer.

•             Conforming to the requirements of the customer.

•             The contract between the user and the supplier, between the  customer and the producer.

•             The value of a company's product/service.

Quality for the Enterprise

•             Quality is the true value of worth of an entity.

•             Enterprise performance.

•             Meeting the needs of customers (external and internal).

•             It is the conscience of a company and its fundamental  responsibility for its consumers.

•             Quality is related to the organization's capacity to satisfy stakeholder expectations.

•             Quality is the degree to which the organization meets the needs and expectations of all its stakeholders.

•             Meeting the requirements of the customer, the company, and related parts.

•             A long-term profitable relationship with co-workers and customers.

   "Quality is the systematic pursuit of excellence."