Chapter – I

Introduction
 1.1 Background of Study

In a perfect world, there would be no necessity for current assets and liabilities because
there would be no uncertainty, no transaction cost, information search costs, scheduling
costs, or production and technology constraints. The unit cost of production would not
vary with the quantity produced. Borrowing and lending rates shall be same. Capital,
labour, and product market shall be perfectly competitive and would reflect all available
information, thus in such an environment, there would be no advantage for investing in
short term assets.

However the world we live is not perfect. It is characterized by considerable amount of

uncertainty regarding the demand, market price, quality and availability of own products
and those of suppliers.

The real world circumstances introduce problems which require the necessity of
maintaining working capital. For example, an organization may be faced with an
uncertainty regarding availability of certain crucial inputs/raw material in future at
reasonable price. This necessitates the holding of inventory, i.e. current assets. Similarly
an organization may be faced with an uncertainty regarding the level of its future cash
flows. Moreover insufficient amount of cash may incur substantial costs. This may
necessitate the reserve of short term marketable securities, again a short term capital
asset.
1.5 Objective of the Study

To understand the concept of Working capital and its practical application on the basis of
theoretical learning at Institute.

To examine Working capital Financing policy adopted by the Firm.

To study the application of various financial requirements and norms to finance current
assets and clear current liabilities.

To study several instruments used by the firm to finance its day-to-day activities.

To prescribe remedial measures to problems if any observed.

2.1 Methods of Data collection

i] Primary data:

Basic information is directly collected from the company employees at Finance and
Accounts department of ESSAN, Hyderabad.

Moreover information gathered through studying past contracts undertaken by the

Company and several related documents and Materials provide by the staff members.

ii] Secondary data:

Annual Report of the company

Company Website and other related sites from internet.
Reference Books provided at the firm.
College Text Book
2.2 Limitations

As my training period clashed with the firms quarterly auditing period the concerned
person in Finance and Accounting Department were busy with auditing work and thus
were not able to provide more time to during the training period.
 1.2 background of Topic
1.1 What Is Working Capital?

w orking capital refers to the cash a business requires for day-to-day operations, or,
more specifically, for financing the conversion of raw materials into finished goods, which
the company sells for payment. Among the most important items of working capital are
levels of inventory, accounts receivable, and accounts payable.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's
ability to fund operations, reinvest and meet capital requirements and payments. A good
way to judge a company's cash flow prospects and its overall efficiency is to look at its
working capital management (WCM).

In simple words Working capital is the excess of Current assets and the Current
Liabilities. Working capital is the heart of the business. If it is week the business cannot
prosper and survive. Therefore it is said that fate of large scale investment in fixed assets
is often determined by a relatively small amount of current assets. The company must
have adequate working capital as much as needed by the company. Excessive working
capital leads to funds lying idle with the firm without earning any profit where as
inadequate working capital shows the company doesn’t have sufficient funds for
financing its daily needs.

1.2 Need for Working capital…

The Prime object of the Company is to obtain maximum profit through its business. The
amount of profit largely depends upon the magnitude of Sales. However the sale does not
get converted to cash instantaneously. Some companies are inherently better placed than
others. Insurance companies, for instance, receive premium payments up front before
having to make any payments; however, insurance companies do have unpredictable
outgoings as claims come in. Normally a big retailer like Wal-Mart has little to worry
about when it comes to accounts receivable: customers pay for goods on the spot.
Inventories represent the biggest problem for retailers. Manufacturing companies, for
example, incur substantial up-front costs for materials and labor before receiving
payment. Much of the time they eat more cash than they generate. There is generally a
time gap between sale of goods and receipt of cash. This Time gap is technically termed
as Operating Cycle/ Working capital cycle.

The working capital cycle can be defined as:

The period of time which elapses between the point at which cash begins to be
expended on the production of a product and the collection of cash from a customer

The diagram below illustrates the working capital cycle for a manufacturing firm (Fig.1)
1)

Each component of working capital (namely inventory, receivables and payables) has two
dimensions TIME and MONEY. When managing Working capital, “TIME IS MONEY”.
If you can get money to move faster around the cycle (collect monies due from the
debtors more quickly) or reduce the money tied up (reduce inventory level relative to
sales). The business will generate more cash or it will need to borrow less money to fund
working capital. As a result the cost of Bank interest can be reduced or additional money
will be available to support additional sales or investment. Similarly if one negotiates
improved terms with suppliers e.g. getting longer credit or an increased credit limit, one
festively create freed finance to fund future sales.

Page 4 of 80
A perusal of Operating cycle reveals that the cash invested in operations are recycled
back into cash. However it takes sometime to get converted and this leads to need of
Working capital. Cash being the lifeblood of a Company, the manager’s primary task is
to keep the cash flowing and use this cash flow to generate profits. The shorter the period
of operating cycle, larger will be the turnover of funds invested in the operations.

1.3 Determination of Working Capital.

The working capital needs of a firm are influenced by various factors. The important
ones are:
1. Nature of business.
2. Seasonality of operations
3. Production policy
4. Market conditions
5. Conditions of supply

Nature of Business The working capital requirement of a firm are closely relate to the
nature of its business. A service firm, like an electricity undertaking or a transport
corporation, which has a short operating cycle and which sells predominantly on cash
basis, has modest working capital requirements. On the other hand, manufacturing
concern like ESSAN INDUSTRIES Ltd, which has a long operating cycle and which
sells largely on credit, has very substantial working capital requirements. It is largely
dependent on the products specifications, technology and production policy.
(Source: Financial Management, Theory & Practice (7th ed) …by Prasana Chandra)
Current Asset (%) Fixed Asset (%) Industries
10-20 80-90 Hotel and Restaurants
20-30 70-80 Electricity Generation and Distribution
30-40 60-70 Aluminum, Shipping
40-50 50-60 Iron and Steel, Basic Industrial Chemicals
50-60 40-50 Tea Plantation
60-70 30-40 Cotton Textile, Sugar
70-80 20-30 Edible Oils, Tobacco
80-90 10-20 Trading, Construction
Table: 1 Distribution of Current and Fixed Asset.

Seasonality of Operations Firms which have marked seasonality in their operations

usually have highly fluctuating working capital requirements. Their operations would be
season specific and thus this increases the need of working capital during that specific
Production Policy Firms may acquire different policy of production as per their
management’s decision. If their management finds the year long production to be more
profitable and less risky than the seasonal specific production then the requirement of
working capital will be spread all over the year than in particular period of seasonal
production. At, ESSAN INDUSTRIES the Production is carried out through out the
year as per the contracts won by the company. So the Working capital is need through out
the year.

Conditions of Supply Firms with irregular and intermittent supplies need to maintain
large working capital to meet market demand. These firms will be required to maintain
large inventory even at high cost if the supplies are limited or irregular. Thus the cost of
working capital increases and that further place pressure to increase sales turnover. At
ESSAN, the supplies are regularly available and the working capital is maintained at the
regular level.

Market Conditions Firms which face cutthroat competition from other firms in the
industry need to maintain the level of the inventory at such a position that they are able to
meet their customer requirement in time and with consistency. This will require the firm
to maintain the working capital at the level which is most profitable but at the same time
feasible. ESSAN faces competition from several players like Jyoti Constructions and
KEC International ltd.
 1.3 Economic Scenario

The Indian economy has shown great resilience in face of global recession, due to the
policy intervention and stimulus of Government of India. Though it was not able to
sustain average growth rate of over 8% from FY 2004-05 to FY 2006-07 but it has grown
at a healthy rate of 6.6% in 2013-2014. In 2014-2015 the economy is expected to grow at
6.7% supported by higher domestic consumption and lower inflation-.
The global economy was truly on a roller coaster ride last year, we saw prices of all
assets and commodities attaining peaks in the first half of the year and then falling to
unprecedented lows in the later half of the year. While the overall recovery is likely to be
slow, emerging economies like china and India might see an upturn in economy sooner
than later.
OUT LOOK & OPPORTUNITIES.
Transmission & Distribution Division
Indian Outlook
Company primarily works with PGCIL, SEBs and a few private sector clients. Our
largest client, PGCIL has announced investments plans of Rs. 55,000 crores during the
XI Plan period - about Rs. 10,000 - 11,000 crores worth of investments annually. For FY
08-09, PGCIL has achieved targets in the range of Rs. 8,000 crores and their targets for
the next two years are in the range of Rs. 12,000 crores and Rs. 16,000 crores. The
investment planned by Central and State during 11th Five year Plan can be summarized
as under:

Sector Rs. In Crores

Central Utilities 55,000
State Utilities 65,000
TOTAL 1,20,000
Table: 2 Sectoral Investment plan of Govt.

The Government thrust on re-structured APDRP Programme with allocation of Rs.

50,000 crores in 11th 5 year plan to reduce distribution losses also offers lot of
opportunities to the Company in the distribution sector.

Company has completed 5,000 Kms of 765/400 KV Transmission Lines in India.

Its success in securing the first ever 800 KV Transmission Line Project and 1200 KV
Tower testing orders from PGCIL, conforms company’s strong capability to execute and
deliver job on time.

The Company is presently executing projects for RRVPNL, MPSEB, WBSEB, etc. and
enjoying good creditability with them. The Company is equipped enough to grab
opportunities for developing Transmission network with SEBs available from time to
time.

It has also seen opportunities from private sector customers who are building
Transmission Lines for evacuation of power from their own generation or working with
PGCIL for specific requirements.

The Company has plans to grab PPP opportunities for development of Transmission
network which have emerged in the recent past.

International Outlook

Emerging markets such as Africa and Middle East continue to offer immense
opportunities on account of need of better power transmission network, funding support
from multilateral agencies, power generation plans and spending by oil producing
countries. The North American and Australian market are also opening up for
strengthening their transmission network, where Indian value proposition will be more
beneficial on account of cost and competent technical resources.

Our international operations have grown from Rs. 40 crores to over Rs. 500 crores in the
past 5 years with EPC and supplies projects in 28 countries.

Company continues to expand its footprint in the existing markets and to consolidate its
presence which is evident from our consistent success in Algeria - Secured 10 contracts
worth over Rs. 1,000 crores ( USD 200 million), USA & Canada -successfully supplied
over 6,700MTs to this far away markets, UAE - secured 2 contracts worth Rs. 250 crores
and Zambia - Completed 2 projects worth over Rs. 90 crores in shortest time.

Company has secured largest ever power transmission turnkey jobs of over USD 250
million from Ministry of Energy and Water, Kuwait, which is to be completed in 24
months.

Company continues to see growth in the overseas market with lots of opportunities in
GCC countries and Africa
Company may adopt a route of forming subsidiaries/JV overseas to enter into newer
markets and/or territories.
 CHAPTER-2
COMPANY PROFILE
1.4 Company Profile

Profile

Essen Industries is a Hyderabad based company, primarily focusing on IT & ITES. The
company mainly addresses Asia Pacific, Europe and US markets and is looking to
broaden its horizons to other parts of the world. Essen has trained man power with over
200 man-years of experience working with a highly structured system.

Our Vision:

To support our customers to be competitive

Mission: Pursue for excellence in product design

Cost competitiveness

Value addition

Profitability

Create opportunities and develop engineers from Local colleges

Value Proposition Single window for Engineering, IT and IT enabled Services Processes
of large organization with response of young organization

Product development competency Cost-effective offshore development Flexibility

Banking and Financial Services

Banking and Financial Services is the largest industry vertical serviced by Essen
Industries with over 5000 people providing wide range of services to businesses across
North America, Europe, Australia and Asia.

Our process expertise in this vertical includes a repository of knowledge of best practices,
extensive experience in transitioning processes from our clients, and the application of
Six Sigma and Lean to eliminate defects and variation and to reduce
inefficiency. Combining this with our analytical capabilities, our technological expertise,
and our operational insight, we seek to create long-term relationships with our clients as
 an integral part of their organization and not just as a service provider. Our key
differentiators include:

Global Delivery

From our global locations in India, China, the Philippines, the U.S., Mexico, the
Netherlands, Spain, Hungary and Romania, Essen Industries offers a comprehensive
global delivery solution that includes onshore, near shore, and offshore locations.

Do More with Less

The delivery capability of Essen Industries is built on a strong Six Sigma foundation,
which drives continuous improvement and sustains cost savings beyond labor arbitrage.

Comprehensive Financial Services

Essen Industries has proven capabilities in Commercial Finance, Consumer Finance,

Mortgage Services, Investment Banking / Wealth & Investment Management, and
Securities & Asset Management. To complement our deep process expertise in each of
these areas, Essen Industries offers a comprehensive suite of Technology Capabilities for
banks and financial institutions, which uniquely positions us to deliver business impact
specific to your needs. In addition, we also offer a comprehensive suite of Governance
and Enterprise Risk Management Solutions.

Synergies Driven By BPO and ITO Integration Benefits

Our ability to integrate technology and process expertise enables us to act rapidly at a
reduced total cost of ownership to our clients. We provide the following unique
advantages to our customers by leveraging the BPO and IT synergies:

 Solutions reflecting standardization of process for shared services; one team bringing an
end-user perspective to solution design
 Design, data validation, building and testing of the solution for the desired end result
 Zero loss of knowledge in operations with continuous participation in the design,
validation and adoption of the new solution
 Accelerate time to market; improve cycle time for rolling-in and managing change
 Decrease cost of ITO integration by reducing total software issues and identifying them
earlier in the process
 Reduce total cost of ownership (BPO and IT) through lower IT maintenance and inherent
functionality that enables process standardization
 Reposition and realign knowledge sharing, which enables and empowers all resources to
better understand and deliver business objectives.
Engineering Services

The Essen Engineering Services Group has a multi-faceted team of skilled engineers with
experience in concurrent product development: design, analysis, development,
manufacturing, testing and product support to cater the needs of customers in diverse
industries.

Product Design and Development

Essen Engineering team can assist in any phase of product development lifecycle, from
concept design to service manual of the end product. Essen Engineers ensures efficient
product development lifecycle, with well-established quality processes and usage of
design tools, periodic interaction with the customer to ensure the best results at faster
rate.

Business Operations

Concept Rendering

Styling

Benchmarking

Feasibility

Visualization tools

Design

Product Design

Concept Design

Packaging & Fouling

Value Engineering

Design Tools

Design for Manufacturing

Design for Assembly

 Design Failure Mode & Effects Analysis Process Design Failure Mode &
Effects Analysis Design for cost Design Verification plan Design Support Legacy
Conversion Modeling, Assembly & Drafting Styling and Surfacing Reverse Engineering
GD&T, Interference checks & Stack Analysis Manufacturing drawings and Bill of
Material (BOM) generation Design Software Ideas Unigraphics Pro/E CATIA V5
Solid Works Solid Edge AutoCAD Analysis Meshing Linear & Non-linear, Static &
Dynamic Analysis Testing Test Rig Design & Development of testing plans Testing
of components, subsystems and systems

Manufacturing Support

Engineering Change Request

Fixture Design and Development

Assembly Fixtures

Checking Fixtures

Testing Fixtures

Product Support

Service Manuals

Parts Catalogues

User Manuals

Training Manuals

Photo realistic rendering

Manufacturing

The manufacturing industry is one of our key industries at Essen Industries. Essen
Industries provides a comprehensive set of business processes, analytics and
technological services to a wide variety of discrete as well as process manufacturing
industries ranging from oil and gas, industrial and infrastructure to engineering, hi-tech,
automation, and aerospace, to name a few.Essen Industries Pvt.Ltd. services and
solutions suite covers the entire manufacturing cycle. We provide end-to-end capabilities
in order-to-cash and procure-to-pay. Post-sales services complete our portfolio for the
manufacturing industries.

Essen Industries Pvt. Ltd. supplements the critical business processes of

manufacturing industries with key high-end services like analytics, re-engineering,
financial planning and analyses, Human Resources, IT infrastructure, and software
solutions. Our deep domain expertise and horizontal capabilities enable manufacturing
and industrial businesses to focus on their core competencies. Essen Industries Pvt.Ltd.
supports the following core manufacturing and industrial processes:

Sales and Marketing

Quality analysis in business development, strategy planning, market potential analysis,

new product development and introduction, environmental scanning and financial and
economic analysis.

Order-to-Cash

Supporting transactions in the inquire-to-order and order management functions. Specific

point solutions like spares order management and contact center processes are also
available. Accounts receivable, cash application and collections round out the order-to-
cash portfolio. Essen Industries also owns a platform for revenue cycle management
functions.

Procure-to-Pay

Broad suite of services and solutions covering spend analysis, strategic sourcing,
procurement transactions and accounts payable. In addition, Essen Industries provides
key enabling processes like vendor data management, catalog and contracts management,
and e-Auction bid support. Essen Industries 's accounts payable capabilities are
complemented by our shared services invoice processing and document management
capabilities. Essen Industries offers a rapidly deployable P2P platform supplemented by
point solutions that optimize AP processing.

Inventory Optimization and Operations Planning

Essen Industries Pvt.Ltd. provides supply-chain analytics, demand forecasting and

planning, inventory planning and management services, and capacity planning services to
support the critical core manufacturing processes.

Post-Sales and Customer Service

Key post-sales and customer-service functions like contract and warranty

administration, field service support, installed base management, service parts
optimization, customer care, loyalty and service analytics.

Hire-to-Retire
 Essen Industries Pvt.Ltd. supports Human Resources function by providing
transactional services in the hire-to-retire process, from global mobility to payroll. Essen
Industries has award-winning products and services in training and e-Content.

The above end-to-end manufacturing processes are supported by our following

broad functional practices:

Analytics Re-engineering Finance and Accounting Procurement & Supply Chain

IT Infrastructure Services Software Services

Healthcare

Essen Industries Pvt.Ltd. Healthcare practice specializes in increasing revenue,

reducing administrative costs and improving cash velocity for clients in the Payer,
Provider, Life Sciences, Equipment Manufacturing and Services segments. We have over
3,000 associates across the world providing services across the healthcare industry.

Our solutions leverage a unique combination of custom technology, process

excellence, thoroughly trained staff and fanatical adherence to quality management. We
routinely work with every Medicare and Medicaid intermediary, every BCBS plan, most
Workers Compensation plans, most Auto Accident plans and all major commercial
insurance plans. Our associates negotiate with over 100,000 providers each year on
behalf of our Payer, Manufacturing and Services clients. We reach close to one million
healthcare patients each year on behalf of our Provider clients.

Essen Industries Pvt.Ltd. Advantage:

20 years of outsourced healthcare expertise with global footprint

Robust set of healthcare systems and process integration skills

Lean and Six Sigma methodologies built into our solutions

Ability to provide services in a combination of onshore, near-shore and offshore

for an optimum mix of cost, quality and control

Domain Expertise: Our team of healthcare professionals includes: Over 200 Physicians,
Pharmacists and Underwriters over 40 certified Medical Coders over 100 Healthcare
Analytics resources with advanced degrees

Solutions for Payers

Essen Industries Pvt.Ltd. comprehensive services focus on delivering bottom-line

impact by reducing administrative and medical costs. Our solutions include: Document
management (sorting, scanning, imaging and applying optical and intelligent character
recognition)

Enrollment and membership management

 Claims capture and management

Network management

Identification and management of overpaid claims

Premium billing and collections

Identification and management of subrogation and coordination of benefits (COB)

Customer service, including re-instatements

Fraud analytics

Actuarial services

Solutions for Providers

Essen Industries Pvt.Ltd. partners with providers to help improve cash flow and
net revenue and reduce revenue cycle costs. We have significant experience with all
provider types, such as:

Community and pediatric hospitals and academic medical centers Rehabilitation

and psychiatric hospitals Medical groups Homecare and home infusion Home, hospital,
store and physician practice based DME Hospital outreach and stand-alone laboratories

As an end-to-end revenue cycle outsourcer, Essen Industries Pvt.Ltd. has

expertise in every aspect of a provider's registration, billing, collections and cash
application functions. We have analyzed and optimized every component and have
developed unique people/process/technology solutions to increase collections and reduce
costs.

Our outsourcing solutions are tailored to fit each client's needs. Examples of these
services include:

End to end revenue cycle management, from registration to cash application

Registration, order entry, and insurance verification Billing, follow-up and collections
Follow-up and collections for aged accounts (e.g.: over 60/90/120/150 days or older)
Denial and appeal management Self-pay management Cash application

Solutions for Life-Sciences / Pharmaceuticals

Essen Industries Pvt.Ltd. has many years of experience managing business

processes for four of the top ten global pharmaceutical companies and delivering
substantial business impact. We provide a diverse portfolio of services that includes:
Finance & Accounting Accounts receivable and deduction management. Procurement &
Supply Chain Analytics E-Learning Re-Engineering Solutions for Healthcare Equipment
Manufacturers and Service Providers

Essen Industries Pvt.Ltd. offers end to end solutions that improve our clients'
efficiency and productivity. Our services include: Sales support and order management
Service contract lifecycle management Financial and cost accounting and reporting
Accounts receivable management, including collections Deductions management Supply
chain optimization IT helpdesk and infrastructure management Pharmaceuticals

Pharmaceutical companies continually face the challenge to enhance discovery

and delivery of newer drugs and compounds. The time, effort and money spent on
research and development (R&D) is never enough. Pharmaceutical companies are always
juggling between reducing SG&A (Selling, General and Administration) costs and
enhancing allocation of funds towards R&D, sales and marketing effectiveness, and
distribution efficiency in order to improve profitability and maintain competitiveness.
Downstream activities such as financing and after-sales support are also rapidly gaining
importance.

Essen Industries Pvt.Ltd. has years of experience managing business processes for
four of the top ten global pharmaceutical companies, and delivering substantial business
impact. Essen Industries provides a diverse portfolio of the following services: Finance
and accounting Procurement and supply chain Analytics E-Learning Re-engineering.

Essen Industries Pvt.Ltd. not only smoothly runs transactional finance and
accounting processes, we also provide high-end planning and reporting support. We
develop creative e-learning solutions to impact operational efficiency and the learning
curve of the back-office teams. Essen Industries helps its pharmaceutical clients gain
control over their supply chain costs by providing transactional procurement services
remotely. We also provide analytical support that aids the sales teams in assessing the
market trends and features on an ongoing basis, while maximizing their efforts to boost
their touch-points in the market. Our unique re-engineering team analyzes customer
processes/data and recommends ways to transform them leading to impact on cycle
times, inventory, resource requirements, working capital, etc.

Essen Industries Pvt.Ltd. state-of-the-art managed operations, global networks,

troubleshooting solutions and cutting edge technology enable highly reliable operations at
a reduced cost, allowing us to reinvest the saved capital in our product development and
marketing efforts.

Transportation

Essen Industries Pvt.Ltd. provides a diverse portfolio of high-quality, offshore back-

office services to drive efficiency among the world's leading transportation companies -
whether global airlines, travel agencies, GDS, car rental firms or cruise lines. Our suite of
service solutions comprises the following:

CRM & Trade Support

Business Operations

Finance & Accounting

Employee Services

Marketing Support

Travel and transport services are highly competitive segments of the world's
largest service industry. It is essential that customers are provided best-in-class service to
match the high standards of their end users. Our transportation process engineers and
customer service representatives are known for their industry knowledge, energy, and
personal courtesy.

As the pioneer in outsourcing logistics management, we manage global high-end

processes remotely. Our transportation associates analyze customer processes and
recommend ways to transform them through our unique reengineering approach. Our
experience includes providing the accounting and invoice processing for the largest fleet
owner in the goods and road transportation segment. Our state-of-the-art consultant
services, business reengineering, managed operations, global networks, troubleshooting
solutions and cutting-edge technology offer best-in-class services in transportation.
Chapter – III

Working Capital Financing

Analysis
3.1 Background

Running an Industrial unit involves dealing in commodities, goods, cash and various
money instruments. To acquire these, the corporates need to secure finance of different
types. The requirements of the corporates being of two types, namely, short-term and
long-term, the nature of finance required also is of same two types. Securing both types
of funds required by the corporate and their utilisation to an optimal extent to ensure that
the cost of such funds is minimised are the activities which together constitute Corporate
Finance.

Corporates are able to generate only a minor portion (25-35%) of these finances
internally, the rest has to come from external sources, if a corporate has to grow and
remain profitable. Corporate Sector, therefore, has to depend heavily on the market
sources. The present chapter discusses the main sources of finances for working capital.
Although long-term funds partly finance current assets and provide margin money for
working capital, large part (around 65-75%) of working capital is virtually exclusively
supported by short-term sources. The main sources of working capital financing are Fund
based and Non-fund based bank credit, commercial papers and factoring.

As ESSAN is largely an EPC Contracting company which provides an integrated solution

to its clients all over the world starting from Designing to Operations and maintenance of
Power Transmission and distribution it requires huge amount of working capital to carry
on its day to day activities smoothly without any interruption. Furthermore, as ESSAN, is
also engaged in export of power transmission, it needs huge financial assistance for
export purpose.
 3.2 Market Scenario
Financial Assistance provided by financial institutions & commercial banks mainly are
divided as under (Fig .3)

Financing

Fund Based Non-fund Based

Over Draft/ Cash Credit Letter of Credit

Line of Credit Bank Guarantee
Bill Discounting / Purchasing
Working capital Demand Loan
Short-term Corporate loan
Packing Credit (export finance)
Foreign Bill Purchasing
Commercial Papers

Today, the market providing financing solutions to corporate is very competitive. The
only difference that the provider can make is the differentiation through its services.
Modifying some of the product features can distinguish the service provider but there is
very less scope in that front as the current products are almost in line with its most
innovative nature. Companies utilize this product according to its nature of business as
well as financial terms agreed with its supplier and customers.

ESSAN meets its working capital needs by borrowing Fund based loans and Non-fund
based loans from different banks. Fund based loans include loans like Overdraft / Cash
credit, Working capital term loan, Working capital demand loan, Packing Credit,
Advance against retention money, Foreign Currency Loan, Foreign Discounting Bill
Purchasing, etc. Where as Non-fund based loans include Letter of Credit and Bank
Guarantee. Generally in any company the requirements of Non-fund based loans is more
than Fund based loans.
The Banking and financial institutions grants financing limits based on assessment of the
working capital requirement of individual party. The assessment factors include various
characteristics such as the nature of industry, industry norms, actual level of activity for
the previous year and the projected level of activity for the subsequent year to arrive at
the working capital requirement. The bank financing limit is thereafter decided after
factoring in margins on the different types of current assets forming part of the working
capital.

For borrowers having consortium arrangement: The limit will be fixed by the lead bank
along with the bank having the next largest shares. The individual banks' share will also
be intimated by the lead bank to all the member banks in the consortium.

The main factors considered in the estimation of working capital requirement

 The nature of business and sector-wise norms 

 The level of activity of the business 

The steps involved in arriving at the level of Working Capital Requirement

 Based on the level of activity decided and the unit cost and sales price projections,
the banks calculate at the annual sales and cost of production. 

 The quantum of current assets (CA) in the form of Raw Materials, Work-in-progress,
Finished goods and Receivables is estimated as a multiple of the average daily
turnover. The multiple for each of the current assets is determined generally based on
the industry norms. 

 The current liabilities (CL) in the form of credit availed by the business from its
creditors or on its manufacturing expenses are deducted from the current assets
(CA) to arrive at the Working Capital Requirement (WCR). 
Standard Formulae for determination of Working Capital

The issue of computation of working capital requirement has aroused considerable debate
and attention in this country over the past few decades. A directed credit approach was
adopted by the Reserve Bank of ensuring the flow of credit to the priority sectors for
fulfillment of the growth objectives laid down by the planners. Consequently, the
quantum of bank credit required for achieving the requisite growth in Industry was to be
assessed. Various committees such as the Tandon Committee and the Chore Committee
were constituted and studied the problem at length.
Norms were fixed regarding the quantum of various current assets for different industries
(as multiples of the average daily output) and the Maximum Permissible Bank Financing
(MPBF) was capped at a certain percentage of the working capital requirement thus
arrived at.

Working Capital assessment formula prescribed by the Tandon Committee is as under:

Working Capital Requirement (WCR) = [Current assets i.e. CA (as per industry norms)
– Current Liabilities i.e. CL]

Permissible Bank Financing [PBF} = WCR – Promoter’s Margin Money i.e. PMM (to be
brought in by the promoter)
As per Formula 1: PMM = 25% of [CA – CL] and thereby PBF = 75% of [CA – CL]
As per Formula 2: PMM = 25% of CA and thereby PBF = 75% [CA] – CL

The analysis of balance sheet in CMA data is said to give a more detailed and accurate
picture of the affairs of a corporate. The corporates are required by all banks to analyse
their balance sheet in this specific format called CMA (Credit Monitoring Arrangement)
data format and submit to banks. The Maximum permissible Bank Financing Limit under
fund based is fixed on an annual basis. However, since such limit is provided to meet
specific requirements, utilizing the limits is subjected to the DP (Drawing Power), which
is decided on a monthly / quarterly basis.
The effective bank financing is therefore to the extent of the lower of:

 BANK FINANCING LIMIT: Determined on an annual basis based on an

assessment
 of the current year’s projections and the actual figures for the previous year. 
 DRAWING POWER: It is Linked to the quantum of current assets (and current
liabilities) owned by the business with appropriate margins. Fixed on a monthly/
quarterly basis depending on the submission of Monthly/Quarterly Information System
returns indicating the position of the stock statement, receivables, Work in Progress,
payables, etc. 

Bank Financing (max. permissible) = Maximum Permissible Bank Financing

Limit (MPBF) OR Drawing Power whichever is less

How is DP (Drawing Power) Calculation done?

Loan or Limits are being fixed against HYPOTHECATION of particular stock. The
borrower use to submit his stock statement on regular basis say monthly, fortnightly and
quarterly as decided by the bank and the borrower. Bank and borrower both are agreeing
vide an arrangement letter regarding % of the margin on the stock. so after reducing the
margin the bank allow a borrower to draw amount against the stock and fixes the
Drawing power subject to the maximum of his loan.

Condition A: Suppose the Borrower has 10 lacs of Goods. With 50% Margin his limit is
fixed as 5 lacs and also the drawing power
i.e.) Limit = Drawing Power = 5Lacks

Condition B: Suppose if the Borrower is having only 8 lacs of goods with him in the
next month. Now Limit will be the same 5 lacs and DP will be 4 lacs.
i.e.) even though he has a limit of 5 lacks his available
Credit limit allowed to withdraw will be just 4 lacs (50% of 8Lacks).

Condition C: Suppose if the Borrower has now 12 lacs of goods with him in the third
month. Now the limit = 4 lacs and DP = 4 lacs (& not 6 lacs).
i.e.) Limit or DP whichever is lower.
Illustrative Example of bank finance:

Turnover of a manufacturing unit: Rs. 750 Crores p.a (assumed uniform across the
year) Assumed value addition norm: 50% (i.e. cost of raw material = 50% of
Realisation)

XYZ Company Projections

Current
Current Assets
Liabilities
- Raw materials Rs. 50 - Payables Rs. 35
Crores Crores
- Work in Rs. 25
progress Crores
- Finished Goods Rs. 60
Crores
Rs. 125
- Receivables
Crores

Requirement assessed as per norms applicable for the industry:

Industry Amount as Promoter Applicable

Norm (a) per Norm Projection (c) norm (d)
(b)
Current Asset

- Raw material 1 month Rs. 31.25 Rs. 50 Crores Rs. 31.25

Crores Crores
- Work in Progress
Rs. 15.62 Rs. 15.62
(assumed at 50% 10 days Crores Rs. 25 Crores Crores
complete)
- Finished Goods 15 days Rs. 31.25 Rs. 60 Crores Rs. 31.25
Crores Crores
- Receivables 1.5 months Rs. 112.50 Rs. 125 Crores Rs. 112.50
Crores Crores
Rs. 190.62 Rs. 260.0 Rs. 190.62
Crores Crores Crores
Less:Current Liabilities
Rs. 18.80
- Payables 15 days Rs. 35 Crores Rs. 18.80 lakh
Crores

Working Capital Rs. 171.82 Rs. 225.0 Rs. 171.82

Requirement Crores Crores Crores
 Notes:

 Assumptions here include: No export turnover, uniform working capital

 requirement through out the year 
 Industry norms have been specified in the Tandon Committee Report for all
important industry categories 

 Raw materials have been valued at cost of raw material (assumed at 50% of
realization) 

 Work in progress has been valued at 50% complete basis 

 Applicable norm (d) is the more conservative of (b) or (c) from the bank’s point
of view. 

Computation of working capital requirement

Working Capital Requirement arrived at therefore is Rs. 171.82 Crores

⇒ Formula 1
PMM (Promoter Margin Money) as per formula-1 = 25% of 171.82 Crores = Rs.
42.95 Crores ~ Rs. 43 Crores
Hence, Permissible Bank Finance 1 = Rs. 129 Crores

⇒ Formula 2
PMM as per formula-2 = 25% of Rs. 190.6 Crores = Rs. 47.65 Crores
Permissible Bank Financing as per formula 2 = [75% of 190.6 Crores – Rs.
18.8 Crores ] = Rs. 124.1 Crores

For ESSAN INDUSTRIES Formula 2 is applicable. As per the erstwhile guidelines of

Reserve Bank of India, sanction of aggregate fund based working capital limits of Rs. 1
crore and above from the banking system would be subject to the second method of
lending so as to ensure maintenance of a minimum current ratio of 1.33:1.
Illustration of Drawing Power:

This Drawing power is applicable for Fund based facility. Company gets Fund based
loans against Stock and Debtors. For e.g. if the company is having stock of 100 crores,
debtors of 260 crores and Creditors of 150 crores then company will get Fund based
loan of 120 crores.
For e.g.
Amt in Crores
Stock 100
Debtors 260
Total 360
Less: - 25% Margin Money (90)
270
Less: - Creditors (150)
Fund Based Loans 120

As illustrated the DP arrived is Rs 120 Crores and the Limit (as per 2 Formula)
is Rs. 124.1 Crores. Thus the MPBF (Maxi. Permissible Bank Finance) arrived
at will be Rs 120 Crores i.e. Lower of DP and Financing Limit.
 3.3. ESSAN INDUSTRIES AND
ITS CREDIT LIMITS
Figures of Working Capital Limits enjoyed by ESSAN are: (Fig.4) ESSAN
Credit
Limits

The Company has supported its Working capital finance from the Consortium of Bankers
• INDIAN BANK ( lead bank)
• Oriental Bank of Commerce
•

•
• Union Bank of Commerce
•

• State Bank of India

• EXIM Bank

ESSAN has shown a continuous growth during past few years. The Company continues
to be among the leading players in transmission sector not only in India but also on the
international front.

ESSAN has been able to continuously increase its order book with focus on improving
profitability.

It continues to deliver on commitments to clients and its focus on creating additional

capacity in terms of resources in the previous year has helped the company to take the
leap forward.

Their client base continues to expand with focus on long-term relationships.

It has continued to diversify using the group's strengths as a whole which is an added
advantage for a lot of Infrastructure projects on PPP basis

Last but not the least their strong financials ensures that it continue to focus on long term
growth and in creating shareholders value.

3.4 FINANCIAL ANALYSIS

The Company has been amply supported by its bankers and lenders who have shown
enormous trust and confidence in its ability and intention and stood by the company at all
times. Some figures that prove companies calibre are:

1) NET SALES (Total Sales – Excise Duty) (Fig. 5)

NET SALES

2000 600

1800
500
1600

1400
400

% Change (Base'04)
1200
Rs in Crores

1000 300

800
200
600

400
100
200

0 0
Mar '09 Mar '10 Mar '11 Mar '12 Mar '13 Mar '14
Rs (Crores ) 342.24 541.32 839.72 1,524.35 1,737.58 1882.49
Growth (%) 100.00 158.17 245.36 445.40 507.71 550.05

⇒ From above Chart, we can say that ESSAN had successfully take advantage of
increase in a domestic demand as well as in a international market
⇒ As we can see that, current sales of ESSAN is 5.5 Times of a year ended on March -
4. Sales of ESSAN were increased from Rs 342.24 in 2008-09 Crores to 1882.49
Crores in year 2013-014.
2) Net worth (Share Capital + Reserves and Surplus) (Fig. 6)

NET WORTH

900 1000

800 900

800
700
700
600

- '0 4 )
R s . i n C r o Re s

600
500

( a e '0
500

% B s 3
400
400
300
300
200
200

100 100

0 0
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Rs In Crores 91.38 113.8 167.93 642.44 767.77 836.95
Change (%) 100.00 124.53 183.77 703.04 840.19 915.90
Year
4) Production Capacity (Fig.8)

PRODUCTION CAPACITY

120000
108000

100000

84000 84000 84000

80000
CAP ACIY in M T

60000 54000

40000

20000

0
2009-10 2010-11 2011-12 2012-13 2013-14
 1. CURRENT RATIO

This Ratio compares assets which will become liquid within approximately twelve
months with liabilities which will be due for payment in the same period and is intended
to indicate whether there are sufficient short term assets to meet the short- term liabilities.
Recommended current ratio is 2:1. Any ratio below indicates that the entity may face
liquidity problem but also Ratio over 2:1 as above indicates over trading, that is the entity
is under utilizing its current assets.
CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES
(Table 3) Rs.In Lakhs

2009-10 2010-11 2011-12 2012-13 2013-14

Current Assets 31694.23 48558.72 134627.27 133041.21 192570.91

Current
Liabilities 24511.41 38601.3 68754.63 59920.87 81647.35

Ratio(Times) 1.29 1.26 1.96 2.22 2.36

(Fig 9)

Current Ratio

2.50 2.22 2.36

1.96
2.00

1.50 1.29 1.26

Ratio

1.00

0.50

0.00
2009-10 20010-11 20011-12 2012-13 2013-14

Interpretation: It can be observed that Current Ratio of ESSAN varied between 1.26: 1
and 1.95: 1 during the period from 2009-10 to 2011-2012. Later it has increased to 2.36:1
in 2013-14. It is evident that, on an average, per every one rupee of current liability, the
company has been maintaining 1.81 rupee of current assets as a cushion to meet the short
term liabilities. Usually, a Current Ratio of 2:1 is considered to be the standard to

Page 39 of 80
indicate sound liquidity position and it is observed that the company has attained this
sound position in past two years.

Moreover, as per RBI guidelines the Current ratio should be 1.33:1 for attaining finance
from banks.

2. DEBT Equity Ratio (Total)

This Ratio establishes relationship between the outside total Liabilities (Long Term &
Short term Liabilities/debt) and the Owners fund.

Total Debt Equity Ratio = Total Debts (Long Term = Short Term) / Owners
Fund
(Table 4) Rs in lakhs
2012-13 2013-14
Total Debt 33556.7 66750.46
Owners Fund 76777 83695
Total D/E Ratio (Times) 0.437 0.798

(Fig 10)

Total Debt/Equity Ratio

1.6
1.39
1.4

1.2
0.98
1
0.798
Ratio

0.8
0.6 0.52
0.437
0.4

0.2
0
2009-010 2010-11 2011-012 2012-13 2013-14

Interpretation: The ratio suggests that for every Rs 100 shareholders fund, there is
outsider debt of Rs 79 in 2013-14, and Rs 43.7 in 2012-13.
Higher Ratio means outside creditors have a larger claim than the owners of the Fund.

Page 40 of 80
 3. DEBT Equity Ratio (long Term)

This Ratio establishes relationship between the outside Long Term Liabilities/debt and
the Owners fund.

Long Term Debt Equity Ratio = Long term Debts / Owners Fund
(Table 5) Rs.In Lakhs
2012-13 2013-14
Long Term Debt 7038.63 13413.96
Owners Fund 76777 83695
Total D/E Ratio (Times) 0.092 0.16
(Fig. 11)

Long Term Debt/ Equity Ratio

0.7
0.59
0.6
0.5

0.4
Ratio

0.3
0.21
0.2 0.14 0.16
0.092
0.1

0
2009-10 2010-11 2011-012 2012-13 2013-14

Interpretation: The ratio suggests that for every Rs 100 shareholders fund, there is long-
term debt of Rs 16 in 2013-14, and Rs 9.2 in 2012-13.

Higher Ratio means outside creditors have a larger claim than the owners of the Fund.
 4. DEBT Service Coverage Ratio

Banks and financial Institution which provide the bulk of Long-term loans judge the debt
capacity of a firm in terms of its (DSCR) Debt Service coverage Ratio.

∑ PAT + ∑ DEP + ∑ INT + ∑Le

DSCR = _____________________________
∑INT +∑ LR +∑Le (Table 6) Rs in Crores

Year 2009-10 2010-11 2011-12 2012-13 2013-14

Profit after tax(PAT) 29 67 159 150 94
Depreciation (DEP) 5 9 17 22 27
Interest on Long term Loan(I) 3 4 6 7 8
Loan Repayment Instalment(LR) * 20 20 20 24.26 16
Lease Rental for Year (Le) Nil Nil Nil Nil Nil
DSCR 1.85 4 9.1 7.38 8.06
 Figures for 2004-05, 2005-06, & 2006-07 are hypothetical 
(Fig 12)

DSCR

10
9.1

9
8.06
8 7.38
7
Ratio

6
5
4
4
3
2 1.85

1
0
2009-10 2010-11 2011-012 2012-13 2013-14

Interpretation:
DSCR for the ESSAN has shown a considerable and substantial growth in past 5
years. This has been due to its consistent & dedicated effort in meeting its customer’s
needs in time and thus increasing its credibility in the market. As per Banks and FIs, a
ratio of 1.5 is considered favorable.
The Lenders (Banks and Financial Institutions) evaluate the Credit worthiness of
the Borrower on the basis of the above mentioned ratios and facts and figures of
their past performance.

These details are available from the CMA Reports submitted by the borrower on Annual
basis.
For borrowers having consortium arrangement: The limit will be fixed by the lead bank
along with the bank having the next largest shares. The individual banks' share will also
be intimated by the lead bank to all the member banks in the consortium.

Once the Limits are assigned, the lender (in order to safeguard its money) keeps watch on
the performance on Quarterly basis and the proper utilization of funds by of the unit by
demanding borrower to submit their QIS (Quarterly Information System) reports.
The Key Components of QIS reports are:

1. QIS-Form I this gives (i) the estimates of production and the sales for the current year
and the ensuing quarter. (ii) the estimates of current assets and liabilities for the ensuing
quarter.

2. QIS-Form II This gives (i) The actual production and the sale during the current year
and for the latest completed year, and (ii) the actual current assets and liabilities for the
latest completed quarter.

3. Half yearly Operating Statements-Form III This gives the actual operating
performance of the half year ended against the estimates for the same.

4. Half yearly Funds flow Statement-Form III B This gives the sources and the uses of
funds for the half-year ended against the estimates for the same.
 3.5 FINANCIAL INSTRUMENTS USED AT ESSAN

3.5.1. Fund Based Credit from Banks and FIs

3.5.2. Non-Fund Based Credit from Banks and FIs

3.5.1. FUND BASED CREDIT FROM BANKS AND FIs

3.5.1.1 Overdrafts / Cash Credits

3.5.1.2 Packing Credit
3.5.1.3 Packing Credit in Foreign Currency (PCFC)
3.5.1.4 Bills Purchased/Discounted
3.5.1.5 Foreign Currency Non-Resident (Bank) - FCNR (B)
3.5.1.6 Advance against Undrawn Balances
3.5.1.7 Commercial Paper
3.5.1.8 Working Capital Demand Loan

Once the Bank arrives at the Limit “Assessed Bank Finance” earlier known as MPBF,
which is lower of the Drawing Power and the Bank Financing Limit, the company
can utilize multiple numbers of instruments to get finance for supporting their
working capital needs. The Company cannot exceed its borrowing from the limit of
ABF / MPBF.

How fund based working capital loans are divided among different sub- heads:-

Company gets Fund based loans against Stock and Debtors. For e.g. if the company is
having stock of 100 crores, debtors of 300 crores and Creditors of 150 crores then
company will get Fund based loan of 150 crores.
For e.g.
Amt in crores
Stock 100
Debtors 300
Total 400
Less: - 25% Margin Money (100)
300
Less: - Creditors (150)
Fund Based Loans 150

These 150 crores amount is also known as Drawing Power of the company. The company
receives these amounts from bank under two heads. They are
⇒ Fund Based Loan
⇒ Packing Credit

First of all the amount of packing credit is deducted from the amount sanctioned by the
bank for Fund based loans. Company gets packing credit against export material.
Company receives Packing Credit for the purchase of the raw materials. Whenever the
bank receives the payment from the party then the amount of packing credit is reversed
by the bank.

After the amount of Packing Credit is deducted from the amount sanctioned, the
remaining amount is divided among various components. These components are
⇒ Cash Credit
⇒ Working Capital Demand Loan
⇒ Foreign Discounting Bill Purchase
⇒ Foreign Currency Non-Resident loan

The amount is divided among various components as per the decision of Bank. Generally
the bank gives Cash Credit equal to 20% of the remaining amount. The company can ask
the bank to transfer funds from Working Capital Direct Loan to Cash Credit loan. For e.g.
if the company is having 20 crores in Cash Credit a/c and it has to make payment of 30
crores then the company can ask bank to release 10 crores from Working Capital Direct
Loan to Cash Credit a/c. The company can ask bank to release funds from the Working
Capital Direct Loan as and when need arises. The bank charges interest on the amount
utilized by the company.
It is not necessary for the company to raise Foreign Currency Non-resident Loan.
Company raises this type of loan when it is required to make payment in currency other
than Rupee.

Fund based short term bank credit working capital requirement is projected by a bank is
given below. Rs. In Lacs
 PARTICULARS 2009-2010 2010-2011 2011-2012

A. Gross Annual Sales for the period 49000.70 82565.57 147661.48

B . Total Current assets on the above date

1. 65 % of A or Projected current assets 29257.91 48046.03 76224.91
whichever is low.

2. Highest level in the past 3 years in terms

85% 60% 60%
of sales

3. B2 X A 41650.60 49539.34 88596.89

4. B1 or B3 whichever is lower 29257.91 48046.03 76224.91

C . Net working capital on projected date

6943.66 11057.77 18173.09
1. 25% of B4 – maturing term liabilities

2. 16.66% of B4 4874.37 8004.47 12699.07

3. Projected as per Balance sheet 6147.63 10443.12 18435.44

4. Projections of NWC
6943.66 11057.77 18435.44
( C1, C2 or C3 whichever is higher)

D . Other Current liabilities projected 16736.70 26752.44 30789.47

E . Fund based Short Term Bank Credit 5577.55 10235.82 27000.01

SAY 5600.00 10250.00 27000.00

 3.5.1.1 Cash Credit/Overdrafts

Under cash credit/overdrafts form/ arrangement of bank finance, the bank specifies a
predetermined borrowings/credit limits. The borrower can draw/ borrow up to the
stipulated credit/overdraft limit. Within the specified limit/line of credit, any number or
drawings are possible to the extent of his requirement periodically. Similarly, repayments
can be made whenever desired during the period. The interest is determined on the basis
of the running balance/amount actually utilized by the borrower and not on the
sanctioned limit. . A minimum charge may be payable irrespective of the level of
borrowing, for availing o this facility.

This form of advance is highly attractive from the borrower’s point of view because
while the borrower has the freedom of drawing the amount in installments as and when
required, interest is payable only on the amount actually outstanding. Also, it is flexible
in that borrowed funds are repayable on demand, banks usually do not recall cash
advances. ESSAN has to keep margin of 25% for cash credit/overdraft. Rate of interest
on OCC is not exceeding 9% for company irrespective of BPLR (Banking Prime Lending
Rate).

3.5.1.2 Packing Credit

Packing credit is also known as “Pre-shipment Credit”. Financial assistance provided

by the commercial banks to exporters before the shipment of goods is called pre-
shipment finance. Pre-shipment finance is given for working capital for purchase of raw
material, processing, packaging, transportation, ware-housing etc. of goods meant for
export. Pre-shipment finance is presently given to Indian exporters at a concessional rate
of 10% for a period of 180 days. Pre-shipment credit for a further period of 180 days to
270 days is given at 12%.

 Packing Credit Finance Categories:

 Packing credit falls in following categories.
Rupee Pre-shipment credit or Packing
Credit Packing credit on deemed exports
Rupee export packing credit to manufacturer-supplier for export routed through
export houses.
Rupee packing credit to sub-suppliers
Rupee pre-shipment credit to specific sectors/segments.

→ Eligibility:
The packing credit is given on the strength of letter of credit opened in favor of exporters
or in favor of some other person by foreign buyer or against a confirmed and revocable
export order received by company. The applicant should, however, hold an importer-
exporter code number from the licensing authority concerned.

 Company can avail any loan or advance on the basis of:

Letter of Credit opened in your favor or in favor of some other person, by an overseas
buyer;
(a) A confirmed and irrevocable order for the export of goods from India;
(b) Any other evidence of an order or export from India having been placed on the
exporter or some other person, unless lodgments of export order or Letter of
Credit with the bank has been waived.

Packing Credit is granted for a period depending upon the circumstances of the individual
case, such as the time required for procuring, manufacturing or processing (where
necessary) and shipping the relative goods. Packing credit is released in one lump sum or
in stages, as per the requirement for executing the orders/LC.
The pre-shipment / packing credit granted has to be liquidated out of the proceeds of the
bill dawn for the exported commodities, once the bill is purchased/discounted etc.,
thereby converting pre-shipment credit into post-shipment credit. ESSAN has to keep

margin of 10% for packing credit. Rate of interest on Packing credit is not exceeding 7%
irrespective of BPLR.
It is granted to the clients for making advance payment to the suppliers for acquiring
goods to be exported. Thus, it is clean in nature and usually extended to the parties, who
are rated as first class, for a very short duration. However, bank should assess the
procurement period and once the goods are acquired and are in the custody of the
company’s client.

→ There are three broad types of packing credit:

A. CLEAN PACKING CREDIT

This represents an advance made to the exporter on the basis of a firm export
order or a letter of credit, without any control over raw materials or goods.
Each proposal is decided on the basis of particular requirement of the trade and
the creditworthiness of the exporter.

B. PACKING CREDIT AGAINST HYPOTHECATION OF GOODS

Under this arrangement, the goods meant for export are hypothecated to the bank
as security.
When the bank advance is to be utilized, the exporter is required to furnish stock
statements and continue to do so whenever there is stock movement.

C. PACKING CREDIT AGAINST PLEDGE OF GOODS

Under this arrangement, the goods meant for export are pledged to the bank with
an approved clearing agent who ships the same on the advice of the exporter.

3.5.1.3 Packing Credit in Foreign Currency (PCFC)

The packing credit or pre-shipment credit that was spoken earlier was disbursement of
rupee funds, that is, advancing money in rupee to the exporter for the purpose of
procuring, processing or manufacturing the goods for exports. Under this scheme the pre-
shipment credit is disbursed in foreign convertible currency at interest rates linked with
LIBOR (London Inter Bank Offered Rate). This credit is again self-liquidating in nature
and is adjusted by the discounting or purchase or negotiation of the export bills.

The banks change Earners Foreign Currency (EEFC), resident foreign currency accounts,
foreign currency non-resident account bank scheme accounts and foreign currency
available in escrow account. For all practical purposes this resembles the packing credit
advance disbursed in rupees, except that the interest charged is based on LIBOR and the
disbursement is made in foreign convertible currency. The advantage of this scheme is
lower rate of interest and covering of foreign exchange risk where goods are imported for
the purposes of export.

For instance, if export order is for US$ 20,000 and the import component is say 60
percent, assuming that the exporter avails PCFC of US$ 12,000, the liability would be
adjusted against the submission of the export documents. Under the PCFC of US$ 12,000
no exchange conversion is involved. The exporter saves the difference between buying
and selling exchange rates. If PCFC is availed by the exporter against an export order, the
bills drawn under the said export order will be discontinued at LIBPR plus the loading
factor of the bank.

Indian exporters can avail both pre and post shipment finance in foreign currency.
Interest rates under the scheme are linked to LIBOR and the rates charged by Indian
Banks over LIBOR for such credits would not exceed 1.5%. Export credit in foreign
currency is available in US Dollar, Euro, Pound Sterling and Japanese Yen. Export credit
is available without exchange risk and at internationally competitive rates. Banks extend
credit on "need basis" of exporters and collateral security is not insisted. Banks also

provide lines of credit for longer periods say three years, to exporters with satisfactory
track records without insisting on the submission of export order/Letter of Credit.

Packing Credit Foreign Currency (PCFC)

 Interest charged at LIBOR + 1.5% (Max.)

A 90 days Dollar Packing Credit can be availed at 3m LIBOR + 1.5%.

6.10% + 1.50% = 7.60%.

PCFC drawls in cross currencies are allowed, subject to the exporter bearing the risk in
currency fluctuations. However, cross currency drawls are restricted to the US Dollar.
For instance, for an export order in a non-designated currency like the Swiss Franc,
PCFC will be given only in USD.

3.5.1.4 Bills Purchased/Discounted

Bank credit is being made available through discounting of usance bills by banks. The
RBI envisaged the progressive use of bills as an instrument of credit as against the
prevailing practice of using the widely-prevalent cash credit arrangement for financing
working capital. The amount made available under this arrangement is covered by the
cash credit and overdraft limit. Before discounting the bill, the bank satisfies itself about
the credit-worthiness of the drawer and the genuineness of the bill. To popularize the
scheme, the discount rates are fixed at lower rates than those of cash credit, the difference
being about 1-1.5 percent.

The modus oprendi of bill finance as a source of working capital financing is that bill
arises out of a trade sale-purchase transaction on credit. The seller of goods draws the bill
on the purchaser of goods, payable on demand or after a usance period not exceeding 90
days. On acceptance of the bill the bank releases the funds to the seller. The bill is

presented by the bank to the purchaser/acceptor of the bill on due date for payment. The
bills can also be rediscounted with the other banks.

PCFC will be liquidated with the discounting of bills under export bill rediscounting
(EBR). All export bills, demand and usance, are eligible for EBR scheme. All exporters
are eligible to cover their bills drawn under letters of credit, non-credit bills under
sanctioned limits in the bill rediscounting scheme. The bank offers export bill
rediscounting for a maximum period of 180 days, inclusive of grace and transit periods.

3.5.1.5 Foreign Currency Non-Resident (Bank) - FCNR (B)

FCNR (B) loans are a source of short term funding available to corporate. Out of the
resources mobilized by the banks under the FCNR (B) scheme, banks have been
permitted to provide foreign currency denominated loans to their customers. Banks
decide the purpose, tenor and interest rates on such loans. While the introduction of the
scheme has placed cheap credit at the disposal of Indian corporate (as interest rates are
linked to LIBOR), the foreign exchange risk is borne by the party who has availed the
loan.

The interest rate for the tenor of the loan is fixed on the date of draw down and the
corporate can hedge his exchange rate risk by booking a forward cover. The illustration
given below will provide you with more clarity.

Corporate A has got a rupee credit at 16% p.a.

Corporate A can switch this rupee loan to a dollar FCNR (B) loan/take a fresh
FCNR (B) loan. The cost of a 6-month FCNR (B) LOAN is as follows

Date of Draw down 14/2/2007

6 Month $ Libor (%)
6.32

Bank’s Margin (Spread over LIBOR – assumed)

2.00

Cost of forward cover (annualized %)

3.10
Other transaction costs
0.58
 Net rate (%)
12.00

The comparative cost advantage is evident as it results in a net saving of 4% over his
rupee cost of funding. The spread over LIBOR would depend on the credit worthiness of
the party involved. Thus, corporate can utilize this opportunity to reduce their interest
burden and thereby minimize costs.

Term deposit can be placed with authorized dealers in India in four specific foreign
currencies (US Dollar, Pound Sterling, Euro or Japanese Yen). These accounts earn fixed
or floating rate of interest within the ceiling rate of LIBOR/SWAP rates for the respective
currency/ corresponding term minus 25 basis points (except on Yen). ESSAN has to pay
rate of interest on FCNR loans is LIBOR + 2%.

3.5.1.6 Advance against Undrawn Balances

Usually, in case of certain products exporters are required to draw bills on overseas
buyers upto 90 to 98% of FOB value of the contract, the residuary balances i.e.
“unknown balances” is payable by the overseas buyer after satisfying himself about the
quality/quantity of goods.

Hence, undrawn balances exist where the overseas buyer makes payment, after making
adjustment for difference in weight quality/quantity of goods. Payment of undrawn
balances is contingent in nature. Banks may consider granting advances against undrawn
balances at concessional rate of interest based on their commercial judgments and the
track record of the buyer. Advance against undrawn balances can be made at a concessive
rate of interest for a maximum period of 90 days. Such advances are, however, eligible
for concessional rate of interest for a maximum period of 90 days only to the extent these
are repaid by actual remittances are from abroad and provided such remittances are
received in 180 days.

3.5.1.7 COMMERCIAL PAPER

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. It is a short-term loan issued by a corporation, typically for financing
accounts receivable and inventories It was introduced in India in 1990.It was introduced
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. Subsequently,
primary dealers and satellite dealers were also permitted to issue CP to enable them to
meet their short-term funding requirements for their operations. The people eligible to
issue commercial paper are corporate, primary dealers (PDs) and the All-India Financial
Institutions (FIs). But there is also a limitation to the corporate that are eligible. Only
those corporate who has:

the tangible net worth of the company, as per the latest audited balance sheet, not
less than Rs. 4 crore;
been sanctioned working capital limit by bank/s or all-India financial institution/s;
and
the borrower account classified as a Standard Asset by the financing bank/s/
institution/s are eligible to issue commercial paper.

Commercial paper is available in a variety of denominations and usually ranges in

maturity from 2 to 270 days. A minimum of 15 days and a maximum of 1 year time

period have been prescribed for the commercial paper. The aggregate amount of CP from
an issuer shall be within the limit as approved by its Board of Directors or the quantum
indicated by the Credit Rating Agency for the specified rating, whichever is lower.

As regards FIs, they 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. Usually the CP is issued in the
denominations of Rs.5 Lacs or multiples thereof.

Individuals, banking companies, other corporate bodies registered or incorporated in

India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional
Investors (FIIs) etc. can invest in CPs. However, amount invested by single investor
should not be less than Rs.5 Lacs (face value). However, investment by FIIs would be
within the limits set for their investments by Securities and Exchange Board of India
(SEBI).

There is an Issuance and Paying Agent (IPA) which is usually a scheduled bank. The role
of IPA is an important one when the redemption procedure is to be carried out. Initially
the investor in CP is required to pay only 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,

(a) 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.

(b) When the CP is held in demat form, the holder of the CP will have to get it redeemed
through the depository and receive payment from the IPA.

The roles and responsibilities as prescribed by the RBI can be briefly stated as: Issuer:

Every issuer must appoint an IPA for issuance of CP.

The issuer should disclose to the potential investors its financial position as per
the standard market practice.
After the exchange of deal confirmation between the investor and the issuer,
issuing company shall issue physical certificates to the investor or arrange for
crediting the CP to the investor's account with a depository.
Investors shall be given a copy of IPA certificate to the effect that the issuer has a
valid agreement with the IPA and documents are in order (Schedule

Issuing and Paying Agent:

IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and
amount mobilized through issuance of CP is within the quantum indicated by CRA for
the specified rating. IPA has to verify all the documents submitted by the issuer viz., copy
of board resolution, signatures of authorized executants (when CP in physical form) and
issue a certificate that documents are in order. It should also certify that it has a valid
agreement with the issuer (Schedule III). Certified copies of original documents verified
by the IPA should be held in the custody of IPA.

3. 5.1.8 Working Capital Demand Loan

A borrower may sometimes require ad hoc or temporary accommodation in excess of

sanctioned credit limit to meet unforeseen contingencies. Banks provide such
accommodation through a demand loan account or a separate non-operable cash credit
account. The borrower is required to pay a higher rate of interest above the normal rate of
interest on such additional credit. ESSAN has to pay rate of interest on WCDL not
exceeding 9% irrespective of bankers BPLR.

Page 56 of 80
3.5.2. NON-FUND BASED CREDIT FROM BANKS AND FIS

Credit facilities, which do not involve actual deployment of funds by banks but help the
obligations to obtain certain facilities from third parties, are termed as non-fund based
facilities. These facilities include issuance of letter of credit, issuance of guarantees,
which can be performance guarantee/financial guarantee.

For its export financing purposes as well as for supplying and erection of transmission it
mainly uses non fund based working capital i.e.

3.5.21. Letter of Credit

3.4.2.2. Bank Guarantee
For bid purposes, ESSAN uses BG as their transaction instrument.

At ESSAN, two types of BG are opened:

1) International bank guarantee which is given to the international bidder and is always in
dollar form.

2) Domestic bank guarantee which is used for domestic trade purpose.

3. 5.2.1 letter of credit

A letter of credit, often abbreviated as an LOC or LC, and also referred to as a

documentary credit, is a document issued by a financial institution or any bank which
essentially acts as an irrevocable guarantee of payment to a beneficiary. This means, that
once the beneficiary has presented to the issuing or negotiating bank documents
complying with the LC terms, the bank is obliged to pay irrespective of any instructions
of the applicant to the contrary. In other words, the obligation to pay is shifted from the
applicant to the LC issuing bank.

The LC can also be the source of payment for a transaction, meaning that an exporter will
get paid by redeeming the letter of credit. Letters of credit are used nowadays almost
exclusively in international trade transactions of significant value, for deals between a
supplier in one country and a wholesale customer in another.

The parties to a letter of credit are usually a beneficiary who is to receive the money
(seller), the issuing bank of whom the applicant is a client, and the advising bank of
whom the beneficiary is a client. Since nowadays almost all letters of credit are
irrevocable, (i.e. cannot be amended or cancelled without prior agreement of the
beneficiary, the issuing bank and the confirming bank, if any), the applicant is not a party
to the letter of credit.

Flow in Letter of Credit Transactions

The procedure as to how the letter of credit is processed can be explained elaborately as
below: (Fig 13)

1) A commercial negotiation or purchase order is binding the importer and the exporter.

2) Upon such a request from the exporter, the importer may request the opening of
documentary credit to its issuing bank in favor of the exporter, hence becoming the
beneficiary of the credit.

3) The issuing bank advises the documentary credit to the bank of the exporter.
4) The bank of the exporter subsequently notifies (and it is called advising bank) or
confirms (and it becomes the confirming bank) the letter of credit.

5) The next step is up to exporter who will have to ship the goods ordered. The
documents of transport required for the completion of the transaction will be remitted to
the exporter typically by the shipping company.

6) The exporter presents the whole set of documents required in the terms of the Letter of
Credit to its bank. This bank will perform some document checking to ensure their
compliance with the terms of the documentary credit. In case the bank had originally
confirmed the credit or if a discount is granted to the exporter, the payment will be done
to the exporter.

7) The bank of the exporter is sending the documents to the issuing bank that performs
the payment or acceptance after a thorough checking of the documents.

8) The issuing bank transfers the documents to the importer and proceeds with the debit
of its account for the principal amount.

9) The importer receives the goods, especially thanks to the document of title (bill of
lading).

Price of LC

The issuer pays the LC fee to the bank, and may in turn charge this on to the beneficiary.
From the bank's point of view, the LC they have issued can be called upon at any time
(subject to the relevant terms and conditions), and the bank then looks to reclaim this
from the issuer.

There is the chance that the issuer goes insolvent, for example, and thus the bank is
unable to claim back the money it has already paid out. This credit risk to the issuer thus
makes up a large portion of the cost of issuing LCs.

Forms of LC

Page 59 of 80
The various types of letters of credit which are commonly used in the commercial market
are:

Revocable Credit

This can be amended or cancelled at any time by the importer without the consent
of the exporter. This option is not often used, as there is little protection for the
exporter. By default all credits are irrevocable, unless otherwise stated.

Irrevocable Credit

Once issued this can only be changed or cancelled with the consent of all the
parties. The seller must merely comply with the terms and conditions of the credit
in order to receive payment.

Confirmed Credit

In some instances, exporters may request a credit to be confirmed by another

bank, (usually a bank in their own country). If a bank adds its confirmation to a
credit, it means that it is obliged to pay if the terms and conditions of the credit
are complied with. This obligation to pay exists even if the issuing bank or
country defaults.

Payment Credit

This is available for payment at the tellers of the paying bank, as nominated in the
credit. The seller can, therefore, present documents to the paying bank and does
not have to wait for the documents to be forwarded to the issuing bank for
checking and subsequent payment.

Negotiation Credit
 This is always payable at the counters of the issuing bank. Buyers can use
negotiation credits to delay payment until the documents have been received and
checked by the issuing bank.

Deferred Payment Credit

Similar to payment credits, except that they are payable at a future date.

Acceptance Credit

The accepting bank guarantees payment to the holder of the bill of exchange on
maturity date - regardless of whether the credit is confirmed or not. This option
comes with an acceptance fee which can be substantial.

Back-to-Back Credit

The original letter of credit is used as security to open another credit in favor of
the exporter's own supplier. The bank confirming the original credit may not
necessarily be the issuing bank of the second credit.

Transferable Credit

This is normally used when the exporter is not supplying the goods and wishes to
transfer all or part of the responsibilities under the credit to the supplier(s).

Red Clause Credit

This enables the exporter to obtain advance payment before shipment. This is
provided against the exporter's certificate confirming its undertaking to ship the
goods and to present the documents in compliance with the terms and conditions
of the documentary credit.

Page 61 of 80
Green Clause Credit

Similar to a Red Clause Credit, but in addition to pre-shipment finance the

exporter also receives storage facilities at the port of shipment at the expense of
the buyer.

Packing Credit

This offers pre-shipment finance to the seller against warehouse receipts,

forwarding agent's receipts or similar documents that prove the goods are no
longer in the seller's possession.

Standby Credit

Similar to a normal letter of credit, this method differs in that it is a default

instrument, whereas a normal credit is a payment instrument. A standby credit is
only called upon in the event of failure to perform. Its function is, therefore, that
of a guarantee.

Revolving Credit

This allows for the credit to be automatically reinstated under certain

circumstances. It is normally used where shipments of the same goods are made
to the same importer.
Parties to Letter of Credit:-

There may be three to four parties to a Letter of Credit.

Applicant / Importer :
Importer is the opener* on whose behalf or account Letter of Credit issued by the
bank.

Applicant Bank :
The bank that issues or opens the Letter of Credit on behalf of the customer /
importer is Applicant Bank.

Exporter:
 Exporter is the “Beneficiary” of the Letter of Credit who is entitled to receive the
payment of his bills according to the terms of Letter of Credit.

Intermediary bank / Confirming bank :

Intermediary bank is the bank usually a branch or the corresponding of the opening bank
in the exporting country through which the credit without any obligation on its parts, it is
called the “Advising” or “Notifying” bank. If the beneficiary bank adds its own
undertaking to the credit while advising it to the beneficiary, it becomes the “confirming”
bank.

Paying / Negotiating bank:

The bank which negotiates the beneficiary’s bills under the credit and pays for it
is known as “Paying “Negotiating bank.”

In the international market, the company is executing more & more projects. Projects
worth USD 150 Million are under execution apart from the bids submitted and jobs under
view in the international market. The turnkey international jobs are having three
components which are supply of towers, supply of bought-outs and local construction
work. The bought-outs are supplied internationally qualified supplier only and these
suppliers don’t agree to supply without L/C, which has resulted into higher requirements
of L/Cs. In the current year company is expected to buy bought out of approx. Rs.150
crores for which the L/Cs will be opened on DA 90/180 days basis.

The availability of raw materials like steel, aluminums and line materials in time has
become very difficult and since there is gap between supply and demand so even certain
domestic suppliers insists for letter of credit or cash payment terms against delivery of
goods. Of course, in oversea market, the suppliers are ready to extend credit upto 360
days under L/C or company can arrange cheaper finance upto 360 days on its financial
strength from overseas branches of Indian banks.

Advantages of the L/C:

Provides a sort of an assurance to the exporter.
 The exporter does not have to bother about the exchange control regulations of
the importer’s country, since the banks of the importer’s country, since the banks
of the importer’s country open them and these institutions are in the know of the
exchange control regulations of that country.
Eases the financial position of the exporter since he can get pre-shipment as well
as post-shipment credit.
If importer takes care of certain safeguards, the quantity and the quality of the
goods are assured.

Discrepancies:
Discrepancies are the mistakes committed either by negotiation or from common errors.
But due to this negotiation importer has to suffer a lot, and also at a same time exporter
has to pay fine for that so one should take precautions for that.

Some common Discrepancies are as under:

Credit expired.
Classed Bill of Lading.
Presented after permitted time from the date of issue of shipping documents.

Credit amount exceeds.

Short shipment.
Description of goods on invoice differs from that of credit.
Goods shipped on decks.
Bill of Lading, Insurance documents, bill of exchange not endorsed correctly.
Absence of signature, where required on the paper.
Bill of exchange drawn on wrong party.
 3. 5.2.2 Bank Gaurantee

A bank guarantee means the guarantee from a lending institution ensuring that the
liabilities of a debtor will be met.

A letter of guarantee is a written promise issued by the Bank to compensate (pay a sum
of money) to the beneficiary (third party, local or foreign) in the event that the obligor
(customer) fails to honor its obligations in accordance with the terms and conditions of
the guarantee/agreement/contract. In other words, if the debtor fails to settle a debt, the
bank will cover it.

The purpose for which the bank guarantee is usually provided is for two reasons:

Foreign Bank Guarantee

This guarantee is issued at the request of a correspondent bank in favor of local

companies that organize international bids or foreign suppliers.

Local Bank Guarantee

This is issued by the Bank at the request of contractors, wholesalers, companies involved
in transaction, etc. for the purpose of handling the guarantee request they receive in their
operation.

“The Guarantee is a unilateral agreement between the Bank and the beneficiary, which is
conducted on behalf of a third, party usually the beneficiary’s business partner.”

Legal Requirements:-

Guarantees are not governed by any particular legal regulations. Issuing Guarantees for
foreign beneficiaries is not subject to approval nor need these Guarantees be reported.
Guarantees can be issued by authorized dealers under their delegated authorities notified
vide FEMA 8/2000 date 3rd May 2000. Only in case of revocation of Guarantees
involving US $ 5000/- or more to be reported to Reserve Bank of India along with the
details of claim received or details of claim not honored by the mandatory on revocation.

Elements of Guarantees:-

There are no standard International regulations for Guarantees, so Guarantees may be

worded freely, depending on individual requirements. However Guarantees should at
least contain the following clauses:

i) An introduction referring to the key elements of the underlying transactions.

ii) An abstract undertaking according to which Guaranteeing Bank promises to pay the
Guarantee amount upon receipt of the first written demand from the beneficiary
together with his statement of default.
iii) A clause specifying the expiry date by which any claim amount must have been
received by the Bank indicating specific calendar date or a statement that the
validity of the Guarantee is unlimited.

Direct or Indirect Guarantee:-

Direct Guarantee:
A Direct Guarantee is one given directly to the beneficiary abroad by the Bank, resulting
in a direct legal relationship between the issuing Bank and the beneficiary. The advantage
of a direct Guarantee is not only that it is less expensive but also that it is subject to the
law of the country in which the Guarantee is issued unless otherwise specified in the
Guarantee. If the Guarantee indicates a specific calendar date on which the Guarantee
will expire, the Bank and consequently the mandatory will be released from their liability
even if the letter of Guarantee is not returned.
 Indirect Guarantee:

When a beneficiary insists that the Guarantee be issued by a local bank then the
Guarantee will be issued through a correspondent of issuing Bank at the country of the
beneficiary. In such cases the Guarantee is known as Indirect Guarantee. Such
Guarantees will be issued by the correspondent against the counter Guarantee of the
mandatory. Issuing Indirect Guarantee is more time consuming and always more
expensive, because of the cost in addition to the Guarantee commission charged by the
foreign Bank. Commission is charged till final validity of the Guarantee and usually it
will be collected in advance.

Flow of Bank Guarantee:-

The flow for acquiring bank guarantee is as follows: (Fig 14)

1 – Contract

2 - Application to issue of a bank guarantee

3a - Letter of guarantee sent to the beneficiary directly

3b - Letter of guarantee sent through the advising bank

REQUIREMENT OF BANK GUARANTEE FOR ESSAN:

Company secures most of the orders through tenders only. For securing the contract,
company has to submit tenders and based on the rates and technical prequalification, the
contracts will be awarded to the most competitive qualified bidder. Company’s
requirement of guarantee are favoring Power Grid Corporation of India Limited, State
Electricity Boards, Central Electricity Boards of various countries, reputed EPC
contractors overseas and Indian and joint venture partners.

Under the business at every stage, right from the bid stage, when the tenders are
submitted, the company has to submit the guarantees in various forms like Bid Bond
guarantees, Performance guarantees, Advance Money guarantees, Retention Money
guarantees, Security Deposit, Counter guarantee in favor of various overseas banks for
financing arrangement in local currencies.

A. Bid bond guarantee:

This is also known as tender bond guarantee.

An importer invites tender in an international, to be sure that the exporters who are
competing for the contract are willing and able to adhere to the terms of the offer, he
demands a Tender Guarantee in the amount of 1% - 5% of the value of contract. If an
exporter is awarded a contract and withdraws his offer, for whatever reasons, the
importer can obtain compensation for his loss by claiming payment under the tender
Guarantee in order to cover the cost of a new invitation to tender and also loss incurred,
on account of delay in supply.

A tender Guarantee usually runs from three to six months from the tender closing dates,
this being the time, the importer needs to examine the offer received.

Frequently, the tender Guarantee contains the requirement that, when the contract is
awarded subsequent Guarantees such as Performance Guarantee be provided.
B. Performance guarantee:

After the wardens of the contract, the contractor is required to furnish a guarantee
whereby the execution of the contract as per terms and conditions is guaranteed. This is
known as the performance guarantee. Usually the performance guarantee is for 10
percent of the contracted amount. By this guarantee the importer is assured that the
contract would be executed as per the specifications and terms of the contract and in case
of failure by the contractor to perform as per the contract terms the guarantee is invoked
whereby the bank is compelled to pay the amount of guarantee. The period for which the
performance guarantee is issued is usually for a longer period than the bid bond
guarantee.

C. Advance payment guarantee:

This guarantee is also known as repayment guarantee. Almost all the turnkey project and
construction contracts provide for payment of an advance under the contract by the
importer. In all such cases the importer may require an advance payment guarantee to be
executed by the contractor. This guarantee provides for the repayment of the advance
paid the contractor does not fulfill the contract.

The advance payment Guarantee in favour of the buyer serves to ensure that the advance
payment will be refunded if the seller fails to meet his obligations. The amount of the
Advance Payment Guarantee is normally 15% -30% of the contract value.

D. Retention money guarantee:

Many of the turnkey contracts/construction contracts provide that a part of the contract
amount be retained by the importer for a certain period of time during which period he
verifies the proper functioning of the work executed by the contractor. Thus, in a typical
contract, the retention money could be five percent of the contract value and the retention
period could be 12 months.
E. Security deposit:

In some of the orders contractee asks for security deposit to the extent of 5% to 10%.
Accordingly company has estimated Rs. 20 crores for the security deposit guarantee assuming
that company has to give security deposit on 10% of orders booked by them.

F. Guarantees for overseas borrowing:

At present companies are putting thrusts on turnkey jobs overseas with or without joint
venture/s. presently company is executing overseas jobs of over USD 200 Millions in overseas.
In the view of this, company need to borrow locally to bridge the temporary gap for local work
in these countries, hence it proposes to keep guarantee limit to arrange oversea borrowings.

3.5.3 Mode of security

For working capital advances, commercial banks seek security either in the form of
hypothecation or in the form of pledge.

Hypothecation:

Under this arrangement, the owner of the goods borrows money against the security of movable
property, usually inventories. The owner does not part with the possession of property. The
rights of the lender (hypothecate) depend upon the arrangement between the ender and the
borrower. Should the borrower default n paying his dues, the lender (hypothecate) can file a suit
to realize his dues by selling the goods hypothecated.

Pledge:

In a pledge arrangement, the owner of the goods (pledgor) deposits the goods with the lender
(pledge) a security for the borrowing. Transfer of possession of goods is a precondition for
pledge. The lender (pledge) is expected to take reasonable care of goods pledged with him. The
pledge contract gives the lender (pledgee) the right to sell goods and recover dues, should the
borrower (pledgor) default in paying debt.

Chapter – IV

Findings and Conclusions

 Findings and Conclusions

From Two months training at ESSAN, on the Topic “Working Capital Financing” I have gained
lot of knowledge as to how the Financing activities at the corporate firms are carried out.

Keeping in view the tremendous growth that company has attained during past 5 years, it is
quite evident that the activities at all the level have improved and boosted to company’s overall
growth.

The financial Review also states that the financing of Working capital has been very effectively
carried out during past years even during Liquidity Crunch at the Global Economy level

The Company has dared to stand tall even during the slow down and has gained Goodwill for
their timely order execution and Delivery

Their performance has been commendable and thus the Rating Agency “CARE” has rated the
Firm at PR1+ Level (Highest rating) and CARE AA for acquiring short term and long term
loans.

Working Capital Management should not be treated as an isolated management function but it is
the part and parcel of overall corporate management functions and impact of corporate
management policy and strategy effects working capital management practice of the firm. It is
thus necessary to work out and analyze cause-effect relationship of every function of the
management to assess its impact on the working capital management.

SWOT Analysis can help the company to understand their Strengths on which they can bank
upon and take the leap further. Analyzing their internal Weakness and working on it to
overcome them, being aware and constantly searching for the Opportunities ahead and standing
confident against the external Threats could help the Company to keep the momentum towards
their mission of growth and development like a “Kalpavriksha” – A wish fulfilling every
expanding tree.
Bibliography

Internet Resources:
www.investopedia.com
www.kalpatarupower.com
www.banknetindia.com
www.basiccollegeaccounting.com
www.wikipedia.com www.carerating.com
www.wikianswers.com

Reference Books:
Financial Management … By Prasanna Chandra (7 Ed)
Publication: Tata McGraw-Hill …Chapter 30: Working Capital Financing

Financial Management…By I. M Pandey, New Delhi

Annexure
ESSAN LIMITED
BALANCE SHEET AS ON 31st MARCH 2009
Rs. in Lacs
PARTICULARS AS AT 31/3/2014 AS AT 31/3/2013
SOURCES OF FUNDS :
Shareholder's Funds :
Share Capital 2650.00 2650.00

Reserves & Surplus 81045.03 74127.03

83695.03 76777.03

Loan Funds :
Secured Loans 48543.97 29585.07
Unsecured Loans 16926.66 3000.00
65470.62 32585.07
Deferred Tax 1279.84 971.63
TOTAL 150445.49 110333.73

APPLICATION OF FUNDS :
Fixed Assets :
Gross Block 35909.22 29597.34
Less :Depreciation 10069.32 7328.83
Net Block 25839.90 22,268.50

Capital Work-in-Progress 999.50 193.40

29839.40 22461.903

Investments 12682.52 14751.48

Current Assets, Loans & Advances

Inventories 23688.60 15370.22
Accrued value of work done 35532.01 28567.92
Sundry Debtors 97715.65 65068.31
Cash & Bank Balances 4451.89 8917.61
Loans & Advances 31182.77 15117.61
192570.91 133041.21

Less :Current Liabilities & Provisions

Current Liabilities 72142.92 51309.59
Provisions 9504.42 8611.28
81647.35 59920.87

Net Current Assets 110923.57 73120.34

Miscellaneous Expenditure -
TOTAL 150445.49 110333.73
 ESSAN LIMITED
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED ON 31ST MARCH 2014
Rs in Lacs
FOR THE YEAR FOR THE YEAR
ENDED ENDED
31/03/2014 31/03/2013
INCOME :

Sales & Services Gross 191362.20 176820.35

Less : Excise Duty 3112.35 3061.96
Sales & Services Net 188249.85 173758.39
Other Income 3075.63 2148.78
Provision for Diminution in value of
Investment/Doubtful Debts reversed -
Increase(Decrease)in Stocks
a) Transmission Division 5177.63 (1107.19)
b) Real Estate Division - (6.95)
TOTAL 196503.10 174793.03

EXPENDITURE :

Material Cost 106946.78 85751.71

Employee' Emoluments 10861.79 9058.49
Manufacturing & Operational Expenses 42248.27 38302.52
Administrative, Selling & Other Expenses 11097.16 14134.49
Financial Expenses 10558.82 5210.19
Depreciation 2736.46
Less : Transferred to Revaluation Reserve 4.65 2731.81 2180.41
TOTAL 184444.63 154637.80

PROFIT BEFORE TAX 12058.47 20155.23

Provision for Taxation 2190.00 4796.00
Current Tax 119.17 102.45
Fringe Benefit Tax 308.21 261.56
Deferred Tax

NET PROFIT FOR THE YEAR AFTER

9441.09 14995.23
TAX
Balance brought forward 31991.69 21328.98
Less : Prior Year's Adjustment (4.03) (7.23)
Add : Prior Year's Income Tax (10.94)

AMOUNT AVAILABLE FOR 41417.82 36316.97

APROPRIATION
Appropriations :
Proposed Dividend 1987.50 1987.50
Add : Corporate Tax On Dividend 337.78 2325.28 337.78 2325.28
Transfer to Debentures Red Reserve 300.00 -
Transfer to General Reserve 1200.00 2000.00
Bal C/f to Balance Sheet 37592.54 31991.69
TOTAL 41417.82 36316.57

Page 78 of 80
No. of Equity Shares at the end of the year 26,500,000 26,500,000
Profit for calculation of EPS (Rs.) 9441.09 14995.23
Nominal value of Equity Shares (Rs.) 10.00 10.00
Basic/diluted earning per Share (Rs.) 35.63 56.59

CASH FLOW STATEMENT

CASH FLOW STATEMENT OF KALPATARU FOR YEAR ENDED 31ST MARCH 2014
INFLOW/(OUTFLOW)-RS.
2013-2014 2012-2013
A. CASH FLOW FROM OPERATING ACTIVITIES:

Net profit before taxation, and extraordinary items 12058.47 20155.23

Adjustments for :
Depreciation 2731.81 2180.41
Interest Paid 6844.09 3971.51
Dividend Received (405.28) (744.97)
Interest Received (1831.86) (812.86)
Amortization of Preliminary and Share Issue Expenses - 5.01
Provision for Diminution in Investments 1.30 (0.16)
Loss/Profit(-) on sale of Assets 5.09 6.43
Foreign Currency Translation Difference (178.19) (20.39)

OPERATING PROFIT BEFORE WORKING

CAPITAL CHARGES 19225.43 24740.21

Adjustment for:
Trade and other Receivables (50594.50) (25605.42)
Inventories (8318.38) 456.77
Margin Deposits with Banks 368.88 134.00
Trade Payables 21740.65 7161.39

CASH GENERATED FROM OPERATIONS (17577.92) 6886.96

Income Tax Paid (2309.17) (4898.45)

Prior Year’s Adjustment (14.87) (7.23)
CASH FLOW BEFORE EXTRAORDINARY ITEMS (19902.06) 1981.27

Extraordinary Items - -

NET CASH FLOW FROM OPERATING ACTIVITIES (19902.06) 1981.27

B. CASH FLOW FROM INVESTING ACTIVITIES:

Purchase of fixed assets (7223.52) (3828.17)

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Sale of fixed assets 104.47 90.87
Investment In Shares - (25.15)
Investments in mutual funds 3506.65 10388.18
Investments in Subsidiary (1438.98) (3222.00)
Loans to subsidiaries & Others (5082.10) 135.60
Interest Received on Loans 1831.86 812.86
Dividend Received 405.28 744.97
Deposits with Banks 5525.25 1222.38
CASH USED IN INVESTING ACTIVITIES (2371.10) 6319.54

C. CASH FLOW FROM FINANCING ACTIVITIES:

Processed from issue of NCDs 8000.00 -
Repayment of Term Loan (1624.67) (1726.75)
Working Capital Finance & Unsecured Loans 26510.22 640.77
Interest Paid (6858.26) (3981.25)
Dividend Paid (1987.50) (1987.50)
Corporate Dividend Tax (337.78) (337.78)

NET CASH SURPLUS IN FINANCING ACTIVITIES 23702.01 (7392.51)

D. NET INCREASE (DECREASE) IN CASH AND

CASH EQUIVALENT 1428.85 908.30

E. Opening Cash and Cash Equivalent 3387.71 2479.41

F. Closing Cash and Cash Equivalent 4427.31 3387.71

DIVIDEND Paid
Year Month Dividend (%)
2014 N.A 75
2013 May 75
2012 May 75
2011 May 50
2010 May 50
2009 May 30
2008 May 15
2007 Jul 15
2006 Aug 15