CO:PS:10-11:924 ALL ZONAL OFFICES

DATE: 09.11.2010

REG: Risk Capital Assistance for MSME units Small Industries Development Bank of India (SIDBI) has come out with Risk Capital Scheme which envisages extension of structured finance for growth oriented SMEs. It is felt that there is a growing demand for a suitable mix of debt, equity or mezzanine instruments which could help the SMEs to achieve optimum performance given the constraints of lack of adequate collaterals. Many SMEs face problems in bringing in the required margin money and in order to overcome such hindrance SIDBI has established Direct Risk Capital Assistance established for financing viable MSE units for meeting the shortfall in margin money. Risk Capital Scheme (RCF) could also be utilized to meet some of these requirements. Finance Minister in his Budget speech for Financial Year 2008-09 had allocated fund of Rs.2000 crore for MSME RCF. We give hereunder a brief of the scheme which envisages extension of structured finance for growth-oriented SMEs. Direct Risk capital assistance (Subordinated debt capital) for MSMEs assisted by CBI Objective To make available collateral-free growth funds to deserving MSMEs which could be considered as Quasi equity by their bankers (SIDBI accepts subordinated capital as quasi-equity when giving senior loans) MSMEs of all constitution eligible (as per GoI definition). However, noncorporate structure will be considered on selective basis. At least 5 years existence and earning net profit in the preceding 3 years. Satisfactory banking credit track record with of atleast 2 years A good internal rating in CBI (first 3 notches)/ Good external rating Internal rating in SIDBI in first 3 notches Names of the Customer/ associate concerns/ promoters/ directors should not appear in RBI/ CIBIL caution/ defaulters list and UN list for KYC. The risk capital assistance is in the nature of growth capital should result in positive impact on sales/ profits of the unit. Assistance could be used for any bonafide business purpose like bridging the gap in project funding (i.e gap between CBI term loan and avialable promoters contribution), WC margin, intangibe expenditure (e.g marketing/ brand building, R&D, quality control expenditure, energy efficiency equipments), etc. Assistance is not meant for normal WC requirements of the unit. Subordinated debt capital Need-based subject to comfortable DER (max 2:1), DSCR (minimum 1.5:1) etc as per banking norms. Subordinated capital assistance would be restricted to a maximum of 1/3rd of

Eligibility/ purpose of assistance

Purpose of assistance

Instruments of assistance Quantum of assistance

Rate of return

Penal interest Moratorium and Tenure

Prepayment

Security

Documentation Benefits to CBI

the tangible net worth of the enterprise as on date of application. DER after availing the subordinated capital assistance should not be more than 2:1. The amount of assistance would not normally be below Rs. 50 lakh under Subordinated capital assistance. Higher for equity/ OCCPS. IRR/ interest of 15-16% p.a. Could be lower by 0.25-0.5% for clients with very high external rating (first 2 notches). The return could be structured flexibly based on the cash flows of the enterprise. 2% p.a. Moratorium on principal installments generally upto 3 years. Higher moratorium can be considered on case to case basis. The total tenure of assistance including moratorium period could be upto 7-8 years. No pre-payment would generally be allowed during moratorium period. Thereafter, Prepayment premium of 2% of the amount to be paid besides the IRR stipulated for the entire assistance. A collateral-free assistance so no security/ asset cover is insisted upon. However, Residual charge on the assets financed + existing business assets (subservient to existing and prospective lenders) would be obtained. The first charge on assets financed under risk capital would get charged to CBI on first charge basis. CGTMSE could be obtained if risk capital assistance is upto Rs. 1 crore. Personal guarantees of the promoters. The enterprise shall be required to enter into legal documents with SIDBI for the risk capital assistance. Improvement in asset coverage : In case of capex (expansions), the secured lender could use the sub-debt to prune down its assistance to comfortable levels (which give the bank comfortable asset coverage). The assets created out of risk capital gets charged to senior lenders on first charge basis thereby improving its security comfort. The risk capital assistance could also be used for augmenting the long term WC margin of companies which would improve the current ratios of the borrower. Sub-ordination in payments : While equity/ OCCPS are unsecured and the debt-based risk capital investments are subordinated in secuity to senior lenders, Sub-debt has another feature of Subordination in repayments also. To clarify, in situations where the company faces temporary liquidity tightness wherein it faces problems in servicing the senior lender loans, SIDBI could provide a Cure period (CP) on its Sub-debt assistance for a maximum period of 6 months. In such event, all the payments due in respect of the Sub debt during the CP would then become due on the last date of CP. No penal interest would be charged during CP. During the CP, it would be expected that the temporary problems are sorted out and senior loans become regular. Subsequent CP would not be generally allowed before 18 months from the

Benefits to MSMEs

Operational methodology

end of previous CP. Clarity of terms : Most of the promoters of MSME units raise substantial unsecured borrowings from the market to part finance their margin requirements. These borrowings generally carry high interest rates (sometimes as high as 2-3% p.m.) and are not more than 2-3 years tenure. These high cost unsecured borrowing could bring many hidden threats to the long term existence of the company / lender. In this regard, sub debt assistance is long term, sub-ordinated and is provided in co-ordination with the senior lender, who is aware of the terms of sub-debt Borrower is able to avail long term (7-8 years with long moratorium of upto 3 years) sub-ordinate capital in an institutional manner and does not need to make ad-hoc borrowings from market. Apart from using the assistance for margin requirements as discussed above, the assistance could also be used for intangible heads like ERP, product development, R&D, etc which sometime the borrowers avoids/ postpones due to lack of funds. No additonal collateral security requirements. No promoters contribution asked at the time of considering risk capital. Sub debt could also be availed by non corporate customers selectively. The assistance is accepted for further leverage by SIDBI for senior loans. Same can be done for CBI also. Sub-ordination in payments : Sub-debt has another feature of Subordination in repayments also. To clarify, in situations where the company faces temporary liquidity tightness wherein it faces problems in servicing the senior lender loans (CBI), SIDBI could provide a Cure period (CP) on its Subdebt assistance for a maximum period of 6 months. In such event, all the payments due in respect of the Sub debt during the CP would then become due on the last date of CP. No penal interest would be charged during CP. During the CP, it would be expected that the temporary problems are sorted out and senior loans become regular. Subsequent CP would not be generally allowed before 18 months from the end of previous CP. CBI branch shall send a brief info sheet on the unit (as per Annexure 1) at the mail ids rajive@sidbi.in and sfrc@sidbi.in (for preliminary approval of SIDBI) Once, the proposal is found in-principally OK by SIDBI, CBI branch can send a formal proposal to either SIDBI Mumbai office (address SIDBI, SFRC (Credit Department), 6th Floor, C-11, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400051) or a nearby SIDBI branch (address may be obtained from sidbi web site sidbi.in) along with the following documents : Formal letter (on letter head of CBI branch) forwarding the proposal for risk capital assistance (as per Annexure 2) Assessment/ appraisal note of CBI (of recent/ last loan sanctioned) Copy of recent/ last sanction letter of CBI. SIDBI would then appraise the proposal after calling application from the

Other financing instruments

unit for risk capital assistance and visiting the unit. On sanction of risk capital, SIDBI shall inform CBI on the risk capital assistance sanctioned. SIDBI branch shall enter into the legal documents with the unit. Thereafter, disbursement of risk capital shall be made from the SIDBI branch. SIDBI will undertake follow-up/ monitoring visits to the unit. Both CBI and SIDBI would endeavour to monitor the unit for each others assistance also. Both CBI and SIDBI would exchange their follow-up/ monitoring visit reports for better co-ordination. In case of any clarifications, CBI branches, before referring the proposals, may contact Risk capital department of SIDBI at Mumbai (Ph no 022-67531222 (Rajiv), 67531329 (Neha), 67531349 (Jeyaraj), 67531199 (Mr Tejasvi). Besides Subordinated debt capital, Investments could be selectively made into equity/ Optionally convertible cummulative preference shares (OCCPS) and other convertible instruments also on case to case basis subject to the enterprise having niche product, scalability potential of business, anticipated upside, etc which could lead to clear exit from equity based instruments. In such cases, CBI may guide the customer directly to SIDBI.

Zonal Managers are advised to identify those branches where Risk Capital Scheme could be utilized to meet requirement of deserving MSMEs customers. The name of the branches be furnished to us and also inform the progress on monthly basis in the format for appraising our higher authorities and SIDBI. Progress on the Scheme for the month ended_________________________Zone_____________

Name of the Account Branch Date of sanction Amount in lac Purpose of Assistance

Kindly acknowledge receipt of this letter.

D BAPANNA DY GENERAL MANAGER-PS ENCL: Annexure I and II

ANNEXURE 1 ON LETTER HEAD OF THE ENTERPRISE Preliminary information for financial assistance under Direct Risk Capital Assistance of SIDBI (under tie-up with CBI) A. 1 2 3 4 Particulars of enterprise Name/ Constitution No of years in existence/ operation Website details, if any Address of registered office and factory (existing/ proposed) 5 Industry/ Product Existing Brief particulars of current business Industry/ Product Proposed 6 Promoters Name/ age 7 Promoters qualifications 7 No of years in same business 8 Networth of main promoters 9 Whether family business 10 Present MSME status/ regd no / date 11 External rating/ agency/ date, if any 12 Association with SIDBI 13 Whether have any JV arrangement 14 Whether have any PE/ VC investment 15 Names of directors on Board other than promoters and their credentials 16 Comments on 2nd line of management 17 Any quality certification/ IPR obtained B Financial performance : Kindly enclose last FY audited financial statement with auditors report, directors report & notes to account) and current year prov figures (Rs. lakh) FY 10 FY 09 FY 08 FY 10 FY 09 Operating Revenues Share Capital Non-operating income Networth PBDIT Term loans (secured) Dep Unsec loans - promoters PAT Unsec loans - others NPM (%) Bank borrowings for WC DER Gross Fixed Assets CR Net Fixed Assets Creditor days Current assets Debtor days Current liabilities Gross invstment in P&M/c Inventory holding (days)

1. 2.

1. 2.

Rs. lakh as on _________ Rs. lakh as on _________

Micro/ Small/ Medium enterprise (Manufacturing/ Service sector) MSMED reg no .. dated .. New customer/ Existing / Associate concern assisted by SIDBI since -

FY 08

C Other group and associate concerns (financial figures of the recent audited FY) (Rs lakh) Name/ location Existing since/ Activity Financial position/ results as on __________ NW Sales PAT Any special comments on the operations/ financials or any significant information of the associate concerns may be provided.

D Credit/ Banking facilities Details of assistance from SIDBI/ other banks/ FIs in respect of customer (Rs lakh) (For enterprise and all group/ associate concerns)
Name of Bank/ branch Name of PE/ VC investor Facility Sanc amt/ date Outstan ding as on --Security given/ whether CGTMSE

D.1 D2. D.3

D4 E E.1 E2 E3 E4

Month and year of first time availment of credit facility from any scheduled commercial bank/ All India FI. Whether any over dues in any banking credit facilities, VC/ PE fund obligations (debentures, Pref shares etc) of the applicant enterprise/ associate concerns in past 2 years Whether any of the accounts of the applicant enterprise/ associate concern classified as NPA or any restructuring done during past 3 years. Kindly also indicate if any OTS done ever in the applicant enterprise/ associate concerns. Whether any default in promoters personal/ consumer loans/ credit card payments, etc. Business Plan Brief details of project/ purpose of assistance/ benefits to the enterprise Pl provide detailed Venture outlay (Project cost) and means of finance (including promoters margin, regular term loans and Risk capital assistance). Whether any assistance is sought from CBI also? Business projections (with basic assumptions) (Rs lakh) FY 11 FY 12 FY 13 Sales PAT Market Information Briefly mention about market for companys products and marketing strategy/ selling arrangements Name of the top 5 customers with sales value in last FY. Kindly also indicate average total no. of customers Geographical reach whether local/ regional/ national/ exports (pl name countries) Brief comments on main competitors Any firm marketing tie-ups Corporate governance: Are there any arrears of taxes/ statutory liabilities (undisputed or disputed) & legal suits/ litigation on the company/ associate concerns or the promoters. If so details may be provided in a separate Annexure. Key strengths and risk factors of the business (briefly) Any other relevant information

F. F.1 F.2 F.3 F.4 F.5 G

H I

Date and Place : Signature Name/ Designation In case the applicant enterprise is newly established or less than two years in operations, kindly also provide last years audited financial statements of the main associate concerns along with details of marketing aspects, customers, etc.

ANNEXURE 2 ON LETTER HEAD OF CBI branch Forwarding letter for risk capital (Subordinated debt capital) assistance under SIDBIs Direct Risk Capital Assistance (Tie-up with CBI) To, SIDBI, branch We forward herewith a proposal in respect of one of our customer seeking risk capital for your consideration. The conduct of the account with us is satisfactory. Brief Particulars of the Unit 1.1 1.2 1.3 1.4 Name of the unit/ incorporation date Products manufactured MSMED status/ regd. & date Address - Regd./ Admin office

Factory site Existing Purpose of Risk capital and amount 1.5 sought 1.6 Customer of CBI since (Credit facilities Date/ month/ year only) 1.7 Internal rating of CBI and date 1.8 Names of promoters 1.9 Net-woth of promoters (Rs lakh) 1.10 Comments on promoters resourcefulness 1.11 Compliance with KYC guidelines 1.12 IRAC category of the account with CBI Standard/ Substandard/ Doubtful etc 1.13 Any restructuring done in past 3 years Yes/ No (If yes, pl give details) Any overdrawals or cheque bouncing 1.14 instances in the account 1.15 General conduct of account Any associate / sister concerns known to 1.16 CBI Name of any other lender in the unit 1.17 known to CBI 1.18 Any positive comments 1.19 Any adverse comments Details of CBI assistance to the unit : Nature of facility CC TL BG LC Purpose Sanc. amt. Disb. amt. Outstanding as on .. Interst rate (%) Overdues, if any (Rs lakh) Security obtained

Total Date : Signature/ Seal Name of Signatory/ Branch-In-charge