CHAPTER IV

PROFILE OF THE SELECTED VENTURE CAPITAL

FINANCING COMPANIES
This chapter discusses the profile and operational policies and practices of
ICICI and IFCI venture capital institutions in India.

4.1

PROFILE AND OPERATIONAL POLICIES AND PRACTICES

OF ICICI87

PROFILE OF ICICI BANK

ICICI Bank (formerly Industrial Credit and Investment Corporation of

India) is Indias largest private sector bank in market capitalization and second
largest overall in terms of assets. ICICI Bank has total assets of about USD 100
billion (end March 2010), a network of over 1308 branches and offices, about
3954 ATMs, and 24 million customers (as end of July 2010). ICICI Bank offers a
wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialised
subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management. But these data are dynamic.
ICICI Bank is also the largest issuer of credit cards in India. ICICI Bank has
listed its equity shares on stock exchanges at Kolkata and Vadodara, Mumbai and
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the National Stock Exchange of India Limited and its ADRs on the New York
Stock Exchange (NYSE).

The Bank is expanding in overseas markets and has the largest

international balance sheet among Indian banks. The Bank now has whollyowned subsidiaries, branches and representative offices in 18 countries, including
an offshore unit in Mumbai. This includes wholly owned subsidiaries in the U.K,
Canada and Russia, offshore banking units in Singapore and Bahrain, an advisory
branch in Dubai, branches in Sri Lanka, Hong Hong and Belgium and
representative offices in the US, China, United Arab Emirates, Bangladesh, South
Africa, Indonesia, Thailand and Malaysia. In particular, the bank is targeting the
NRI (Non-Resident Indian) population. ICICI reported 1.15 per cent rise in net
profit to Rs.1014.21 crores on a 1.29 per cent increase in total income to
Rs.9712.31 crores in September 2010.

History

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian

financial institution, and was its wholly-owned subsidiary. ICICIs shareholding
in ICICI Bank was reduced to 46 per cent through a public offering of shares in
India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in
fiscal 2000. ICICI Banks acquisition of Bank of Madura Limited in an all-stock
amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional

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investors in fiscal 2001 and fiscal 2002.

ICICI was formed in 1955 at the

initiative of the World Bank, the Government of India and representatives of

Indian industry. The principal objective was to create a development financial
institution for providing medium-term and long-term project financing to Indian
businesses. In the 1990s, ICICI transformed its business from a development
financial institution offering only project finance to a diversified financial services
group offering a wide variety of products and services, both directly and through a
number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI became the
first Indian company and the first bank or financial institution from non-Japan
Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the

context of the emerging competitive scenario in the Indian banking industry and
the move towards universal banking, the managements of ICICI and ICICI Bank
formed the view that the merger of ICICI with ICICI Bank would be the optimal
strategic alternative for both entities and would create the optimal legal structure
of the ICICI groups universal banking strategy. The merger would enhance
value for ICICI shareholders through the merged entitys access to low-cost
deposits, greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking services. The
merger would enhance value for ICICI bank shareholders through a large capital
base and scale of operations, seamless access to ICICIs strong corporate

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relationships built up over five decades, entry into new business segments, higher
market share in various business segments, particularly fee-based services, and
access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the
Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and
two of its wholly-owned retail finance subsidiaries, ICICI Personal Finance
Services Limited and ICICI Capital Services Limited, with ICICI Bank. The
merger was approved by shareholders of ICICI and ICICI Bank in January 2002,
by the High Court of Gujarat at Ahmadabad in March 2002, and the High Court of
Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent
to the merger, the ICICI groups financing and banking operations, both
wholesale and retail, have been integrated in a single entity.

ICICI Venture Funds Management Company Limited

ICICI Venture (formerly TDICI Limited) was founded in 1988 as a joint

venture with the Unit Trust of India. Subsequently, ICICI brought out UTIs
stake in 1998 and ICIC Venture became a fully owned subsidiary of ICICI. ICICI
Venture also has an affiliation with the Trust Company of the West (TCW), which
provides it a platform for networking Indian companies with global markets and
technology. Strong percentage and affiliates for ICICI Venture also translates into
access to a broad spectrum of financial and analytical resources thus enabling a
keen understanding of the Indian financial markets and entrepreneurial ethos.

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Financial year 2002-03 was a landmark year for ICICI Venture. ICICI
venture raised the largest Indian Private Equity Fund and also engineered
effective exists and enhanced the value of its existing portfolio. ICICI Venture
Funds launched four new domestic funds whereas six existing funds under
management were either liquidated or were in the process of liquidation. The
most significant achievement of ICICI Venture was the successful first closing of
the Rs.750 billion India Advantage Fund launched this year.

ICICI Venture is one of the largest and most successful private equity firms
in India with funds under management in excess of USD 2 billion. Its investment
focus areas span across private equity, buyouts, real estate and mezzanine
financing. It has several firsts to its credit in the Indian Private Equity industry.
ICICI Venture, over the years has built an enviable portfolio of companies across
sectors including pharmaceuticals, information technology, media, manufacturing,
logistics, textiles, real estates etc., thereby building sustainable value.

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Investment Strategy
Deal Sourcing

ICICI Ventures investment process starts with the sourcing of deals.

Being the premier private equity player in India, ICICI Ventures reputation and
brand equity has been attracting investment proposals and deals from
entrepreneurs, management teams, promoters and intermediaries. Deals are also
directly sourced from industry contacts of the management team. Besides, ICICI
venture also leverages its network with investment banks, fund investors, and also
draws upon its access to the ICICI Bank Limited network with its large corporate
clientele.

Deal Evaluation
ICICI Venture engages in a rigorous and disciplined decision-making
process prior to making an investment. When considering a potential transaction,
ICICI Venture conducts a timely and thorough due diligence investigation. The
skills of the ICICI Venture investment professionals are important to the due
diligence process, as they are able to determine the optimal structure and
financing methods for a particular transaction, as well as negotiate favorable
acquisition terms. ICICI Venture has an in-house risk, legal and compliance team
which provides transactionary support
enhance the response time.

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to the investment teams and greatly

The investment proposal would move through various stages of

preliminary analysis, initial meeting, internal valuation discussion, valuation
negotiation, term sheet negotiation, management committee meeting and due
diligence appraisal meeting before it is proposed in the Investor Committee
meeting.

Investment Decision

The Investment Committee reviews a deal recommended for investment

and either approves or rejects the investment proposal.

The Investment

Committee may, if considered necessary, ask for further analysis, additional due
diligence or any other clarifications. The final decision is based on a majority
vote in the Investment Committee.

Post-Investment Process

ICICI Venture endeavors to ensure that the Portfolio Companies are

governed effectively and that there is active involvement and timely intervention
by the team once the investment is made. The team creates value in the Portfolio
Companies by taking strategic, operational and financial initiative aimed at
strengthening their competitive position vis-a-vis competitors and industry
benchmarks.

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The Investment team works with management teams to identify

opportunities for enhancing value through cost reduction and internal
rationalization. They also work together to implement growth strategies based on
market definitions, customer segmentation, price management, focused marketing
and sales plans, strategic capital investments and / or the introduction of proven
technologies.

The Investment teams also help in further strengthening the

management teams. ICICI Venture works actively with management teams to

identify and execute acquisitions.

Exit Strategy
ICICI Venture seeks to achieve a timely and appropriate exit to return cash
and profits for its investors. Such exit strategies may include;
 Selling off the stake to strategic investors.
 Initial public offering in India or overseas.
 Sale to any other private equity fund or venture capital fund
 Secondary sale on stock markets
 Merger with an existing listed company
 Management / Company buy-backs.
The holding period of each investment is generally between 3 to 5 years.
This however depends upon the stage of investment and the performance of the
sector and the company.

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Operational Policies and Practices Of ICICI

Creation of ICICI is another milestone in the growth of the Indian capital

market. One of the features of the operations of the IFCI and the SFCs was that
they confined themselves to lending activity and kept away from underwriting and
investing business, obviously because of the considerable risks involved in the
latter, although they were authorized to help industrial concerns by way of lending
and guaranteeing, underwriting and investing. The result was that a large number
of upcoming entrepreneurs continued to experience tremendous problems in
raising funds in the market. They could not secure the desired amount of loan
assistance from the existing financial corporations owing to their thin equity base.
To encourage industrial development in the private sector, a considerable
provision of underwriting facilities was considered necessary. Furthermore,
foreign capital became necessary to accelerate the pace of industrialization. To fill
these gaps in the institutional structure of the Indian capital market, the Industrial
Credit and Investment Corporation of India was established in January 1955.

The idea underlying the establishment of the ICICI first crystallized as a

result of certain deliberations among the Government of India, the World Bank
and certain American financiers. The idea was further pursued and a Steering
Committee was set-up consisting of five members. Two members of this Steering
Committee visited the USA and the UK to enlist the support of investors in those

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countries and of the World Bank. These endeavors ultimately culminated in the
founding of the Corporation.

Unlike the IDBI, the IFCI and the SFCs, which were set-up as governmentowned institutions, the ICICI was organized as a wholly- owned private
institution. In fact, it was one of the development banks which the World Bank
had sponsored in a number of under developed countries. The ownership of the
Corporation was entirely in private hands; but some safeguards were built into the
structure of the corporation against the taking cognizance of enormous risks
involved in project lending the Corporation has always been endeavoring to
formulate appropriate policies to minimize the risk and maintain a high level of
profitability. The appraisal techniques have constantly been improved taking into
account the lessons from previous failures.

The Corporation lays greater focus on monitoring and supervision of the

projects so as to ensure greater control over projects.

Apart from the assessment of a projects viability on project-specific

factors, some of the key factors now systematically taken into account are the
projects ability to withstand reduction in import duty on final products,
economies of scale, comparison of capitalization costs with other similar projects
and upgradation of technology through research and development. In the changed

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context of market related cost of funds, ICICI is also encouraging companies to

opt for a stronger equity in the financial structure.

Of late, the Corporation has decided to have a two-stage project appraisal

under which loans will be disbursed as demand loans during project
implementation and will be converted to commercial loans only at the time of
production. It will introduce a new loan clause giving it the right to increase the
rate of interest whenever the RBI hikes the base lending rate.

Policy and Nature of Industrial Projects to be Assisted

In choosing projects for assistance, the Corporations policy has been to

foster the growth of such projects as would help in the creation of new capacities
for consumption goods, durable and capital goods, as well as in the creation of
new capacities for industrial materials such as steel, cement, paper, and basic
chemicals. Besides, it assists in the expansion of the capacity and production of
consumer products.

As for the ownership of the projects to be assisted, it is the policy of the

Corporation to cater to the financial needs of the enterprises which are organized
in the joint, public and co-operative sectors. This is partly the result of rapid
changes in the pattern of share holding and management of industrial enterprises.
For a long time, it provided financial support only to limited companies. Since

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1969, the Corporation has decided to provide foreign currency loans to

partnership and proprietary concerns in co-operation with the banks and the SFCs.

Policy on Size of Assistance

Reflecting its strategy of limiting its exposure in very large projects the
corporation has made it a policy to assist primarily medium-sized projects. It has
also laid down prudential exposure limits for individual companies and companies
under the same management groups. The corporation has decided to set its
exposure limit in any individual company and business group below the ceiling
stipulated by RBI of 25 per cent and 50 per cent, respectively, ICICI also ensures
that its exposure in specific industries is restricted to 15 per cent of the credit risk.

Policy in Forms of Assistance

Right from its inception the corporation adopted the policy of offering
range of product and services which are in great demand. Earlier, it decided to
provide foreign currency loans and underwriting facilities to private sector
enterprises because of non-availability of these facilities. Subsequently, it
diversified its business into rupee loans to cater to the growing demands from the
industry sector. After sometimes, the Corporation decided to render financial
services including leasing and merchant banking.

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A noteworthy feature of underwriting policy of the corporation is that it

places great emphasis on the long-term viability of the enterprise rather than on
the immediate sale ability of its issues. Projects which are potentially risky or low
profits yielding, or which involve long gestation periods but are of strategic
importance to the national economy have received special attention. The
corporation is governed by the service motive rather than the profit motive in
considering a project for underwriting purposes.

Recently, the corporation followed a policy of direct subscription to shares

instead of underwriting in cases where the issues were of less than Rs.25 lakhs.

Further, it has been the policy of the corporation to build up its investment
portfolio through direct subscription, underwriting and exercise of conversion
option.

In order to improve the exportability of Indian products ICICI has made it

a policy to provide assistance to new as well as existing concerns for technology
up gradation, modernization and balancing equipment.

In 1992-93 the Corporation added two new schemes to its activities. These
include Agricultural Commercialization and Enterprise (ACE) project and Trade
in Environmental Services and Technologies (TEST) programme. The ACE
programme has been formulated to specifically address the critical areas of

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deficiency in the horticulture sector by providing financial as well as technical

assistance for projects relating to post-form activities. The TEST programme has
been launched to bridge technology gaps in the areas of environmental protection.

Sensing burgeoning demand of corporate advisory services, mergers and

acquisitions arising out of tremendous growth and development in the secondary
market and liberilisation measures of the Government. ICICI has now decided to
offer a comprehensive package of fund-based and non-fund based services to
clients through a separate investment banking company. The company, modeled
along the lines of an international investment bank, has been christened ICICI
Securities and Finance Company Limited (I-SEC) I-SEC is a joint venture
between ICICI and JP Morgan and Company Incorporated.

The corporation has also decided to engage in mutual fund business so as

to wider the scope of its operations by focusing on investment as a thrust area and
to make available its experience and skills in appraising, investing and managing
its assets to wide cross-section of the investing public. The affairs of the mutual
fund will be managed by an Asset Management Company (AMC) set up by ICICI
which will also operate the schemes of the fund. The operations of AMC will be
research driven in devising innovations schemes as well as managing its
investment. The corporation has already, in principle, the approval of SEBI to
sponsor a mutual fund.

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In addition to the above, to complete the linkages in providing the entire

spectrum of financial products and financial services, ICICI also proposes to set
up a commercial bank. The commercial bank along with providing ICICI a
competitive edge will enable the corporation to extend comprehensive funding
and non-funding facilities to its corporate clients and strengthen relationship with
them. RBI has already permitted ICICI to set up commercial bank.

Interest Rate Policy

ICICI has, of late, adopted variable interest rate policy offering its select
customer a variable rate of interest. The variable interest rate is charged on the
basis of a certain percentage over the corporation advance rate. The ICICIs
advance rate is determined with reference to an anchor rate derived from a
combination of the let-off yield of the 364 days treasury-bill, the minimum
lending rate for institutions and cost of borrowing through 364 days certificate of
deposits and rated bonds.

The variable rate is determined every quarter by the Board of ICICI. To

begin with the corporations advance rate is 15.5 per cent. The Corporation
charges a spread over this rate, depending on the credit risk of the borrower. The
maximum rate that a borrower is required to pay is 18.5 per cent. Thus, the
corporations rate will vary between 15.5 per cent and 18.5 per cent.

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Policy on Maturity Period

The Corporation has adopted the policy of lending to its borrowers for
seven to eight years maturity while it used to borrow funds with 15 to 20 years
maturity, thus maintaining a favorable maturity match between its assets and
liability structure. Since 1985, ICICI has raised funds from the market on
medium- term maturities, thus lowering the maturity of incremental debt.

Policy on Security and Margin

Like the IFCI, the ICICI grants loans with or without security. The
Corporation insists upon a legal mortgage of all the fixed assets. It also accepts a
charge on the moveables, subject to hypothecation in favor of the lone
companys banks for securing cash credit and overdraft facilities for working
capital. Regarding the margin requirements, the ICICI generally seeks a margin of
50 per cent, which may be relaxed for capital intensive projects, like those in
fertilizer and aluminum industries.

Policy Regarding Merchant Banking Activity

The Corporation has decided to strengthen its merchant banking activity to

exploit the vast emerging investment opportunities arising out of liberilisation in
pricing of issues of capital by existing companies, entry of private sector mutual
funds and opening of the Indian capital markets for foreign portfolio investors.

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For this purpose, the Corporation has planned a comprehensive exercise in this
regard.

We shall now dwell upon the operational practices of the ICICI so as to

know how far the Corporation has been able to achieve the objectives set for it.
This we shall examine in the light of the assistance provided by the Corporation to
different industries and to different States for the development of backward
regions of the country.

Evaluation of Operations of ICICI

ICICI has completed more than 39 years of its life as on 31st March, 1995.
During this period the corporation has played an active role of a financier,
promoter, merchant banker, lease financier and a trustee. In the following
paragraphs we shall examine the performance of the corporation from the above
angles except promotional performance which has been discussed at length
earlier.
Role of ICICI as a Merchant Banker
The Corporation, right from its inception, perceived its role in the new
issues markets as one of the providers of underwriting support not only for
existing companies but also for new enterprises. The assumption of this role
became necessary because entrepreneurs were not in a position to provide the

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entire equity capital for their organization, and were not known in the market. The
ICICI continues to regard this as one of its functions. in its bid to counter the
problems if entrepreneurs in procuring funds from different services, the
corporation has, of late, started merchant banking activities, and has a separate
division to attend to this work. Through this Division, the corporation renders
expertise services to companies in respect of financial matters and help them to
raise funds from the market.

Up to March end 1993 the Division has successfully assisted companies in

raising a total amount of Rs.27791 crores, including Rs.20717 crores from the
capital market. This includes assistance to private companies going public.

As a merchant banker, ICICI is managing most of the larger issues both in

domestic and non-resident market. It has also been associated with the issue of
public sector bonds by some large organizations like Indian Petrochemical
Corporation Limited., National Thermal Power Corporation Ltd., and Mahanager
Telephone Nigam Ltd., The Corporation has steadily continued to expand the
capital market by concentrating its marketing efforts for public issues beyond the
main metro cities.

The Merchant Banking Division commenced providing corporate

consultancy services during 1986.

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During 1987-88, the Merchant Banking Division explored new ideas like
assisting clients in floating overseas mutual fund and developing a package for
financing infrastructure facilities. The division also continued its active role in
developing suitable packages for undertaking rehabilitation and capital
restructuring proposals as well as for take over and merger bids.

The corporation maintained its leading position in various segments of

merchant banking activities like loan syndication and issue management. In
1988-89, it was associated with most of the major issues which floated in the
market. During this year, the Merchant Banking Division completed 117
assignments (84 assignments in 1987-88) and helped its clients raise Rs.2033
crores (Rs.1732 crores in 1987-88), including Rs.1418 crores from the capital
market.

For the first time in 1988-89 the Merchant Banking Division commenced
advisory services on foreign currency management and resources, overseas
company floatation and management/organizational restructuring. It also played a
key role in collaborating with other institutions for setting up the over-thecounter
market which has already started operating.

In order to meet the challenges posed by changing environment and to fully

exploit the opportunities offered, ICICI has decided to offer the entire range of
fund and non-fund based services through a separate investment banking

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company. In February 1993 the Corporation set up new company. ICICI

Securities and Finance Company Limited (I-SEC). I-SEC is a joint venture
between ICICI and JP Morgan and Company Incorporated- a global financial
firm. JP Morgan has taken a 40 per cent equity interest in the new company at a
premium, ICICI has taken the balance to 60 per cent at par.

Investors Services

During 1993-94 the ICICI has started formally providing Project Advisory
Services (PAS) to assist the creation of better projects and improve the business
environment the Division provides assistance to the corporate sector in the preinvestment stages on government policies and procedures, feasibility studies
search for joint venture partners and entry strategies. In addition, it provides
assistance to central and state governments on policy related issues in specific
sectors.

During 1994-95, the Division intensified its business in the power and
telecommunications sectors and initiatives have been taken for suggesting
improvements in the export capability, restructuring and opening up of the
automotive, electronics and mining sectors, respectively.

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Business Consultancy Division

The Corporation has set up Business Consultancy Division (BCD) during

1994-95 to provide world-class consultancy services to corporate, focusing on
restructuring and transformation through operational strategies, manufacturing
systems, architecture and financial re-engineering. The Division works with
reputed international experts of Indian origin with a view to bringing international
managerial perspective to private enterprises in India, to make them globally
competitive.

Role of ICICI as a Trustee

ICICI acts as a Trustee for debenture issues made by companies. Trustee

services include completion of legal documentation and security for the
debentures as well as giving the requisite approvals on behalf of the debtureholders to the borrowing companies up to March 31, 1989, the Corporation took
trusteeship for 529 debenture issues aggregating Rs.4143 crores. During 1987-88
alone, ICICI took up debenture trusteeship for 173 issues amounting to Rs.2412
crores.

Technology Development
ICICI has given highest priority to technology up gradation in Indian
Industry through indigenous effort. It has sought to assist industry in this area

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through specialized schemes which involve a collaborative effort between Indian

Companies and Foreign Companies/Agencies or Indian research laboratories.
Among these specialized schemes are programme for the Advancement of
Commercial Technology (PACT), Programmes for Acceleration of Commercial
Energy Research (PACER), Agricultural Commercialization and Enterprise
project (ACE), project and Technology Support Services Programme (TSSP); the
first three are funded by the United States Agency for International Development
(USAID) and the last by the International Development Association (IDA).

As on March 31, 1993 total assistance of Rs.32 crores has been approved
under PACT for 41 projects. Cumulative assistance under PACER amounted to
Rs.21 crores. Under TSSP, ICICI has rendered aggregate assistance to Rs.43
crores to 23 projects.

Venture Capital Scheme of ICICI

ICICI launched its venture capital scheme in 1987. Under the Scheme,
long-term financial assistance is extended to projects involving development
and/or commercialization of new technologies, for which entrepreneurs, due to
inherent high risks, may not be able to raise funds through conventional lending
mechanisms. The assistance is provided in the form of participation in share
capital, conditional loans and normal loans.

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During 1987-88, ICICI sanctioned an aggregate assistance of Rs.482 crores

to eight companies in the field of computer hardware and software, environmental
engineering, steel, dyestuffs and medicinal products. The disbursements amounted
to Rs.2.97 crores. So as to further intensify its efforts for technological
advancement ICICI set-up with UTI the Technology Development and
Information Company of India Ltd., (TDICI) in 1988 which has commenced
operations. Further, the Corporation has established, along with UTI, Indias first
venture capital fund. The fund is for an amount of Rs.20 crores to be subscribed
initially by UTI and ICICI in equal proportions. At a later date, units of capital
will be offered for public subscription. The Fund will be used for providing
assistance mainly in the form of equity, conditional loans and convertible
debentures to set-up technological ventures which have potential for fast growth.

ICICI and Commercial Bank

ICICI has set up in 1994 a commercial bank viz., ICICI Banking

Corporation Ltd., in order to provide comprehensive funding ad non-funding
facilities to its corporate clients. The bank provides to the Corporation the retail
presence required for raising resources from the household sector.

The bank has been set up as a 100 per cent subsidiary. With the
enhancement of value to shareholders equity as one of its prime objectives.

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Financing operations

In 2011 the country's largest private sector lender, ICICI Bank has set up a
USD 100 million (about Rs. 460 crores) dedicated venture capital fund for small
and medium enterprises (SMEs) and mid-market companies.

The "Emerging India Fund" is an ICICI group initiative to provide growth

capital to Indian companies in the SME and mid-market segment, an ICICI Bank
spokesperson said.

This is a USD 100 million fund to be managed by ICICI Investment

Management Company Limited (IIMCL), a wholly owned subsidiary of ICICI
Bank. The fund, the spokesperson said, has already received firm commitments
from several reputed institutions and the first closure of the fund is likely to
happen in the next few weeks for USD 50 million.

The fund is registered with SEBI as a domestic venture capital fund,

spokesperson added. Meanwhile, ICICI Bank has proposed to acquire Bank of
Rajasthan through a share-swap in a non-cash deal that values BOR at about Rs.
3,000 crores.

The merger would be through offering 25 shares of ICICI for every 118
shares of BOR. Following the merger, the total business of ICICI Bank will cross
Rs. 4 lakhs crores and its branch network will increase by 25 per cent. BOR has

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463 branches and amalgamation would push up the number of ICICI Bank
branches to about 2,500.

4.2

PROFILE OF
PRACTICES88

IFCI

AND

OPERATIONAL

POLICES

AND

Profile of IFCI

IFCI Venture Capital Funds Ltd was originally set up by IFCI as a society
by the name of Risk Capital Foundation (RCF) in 1975 to provide institutional
support to first generation professionals and technocrats setting up their own
ventures in the medium scale sector, under the Risk Capital Scheme. In 1988,
RCF was converted into a company.

Risk Capital and Technology Finance

Corporation (RCTC), when it also introduced the Technology Finance and

Development Scheme for financing development and commercialization of
indigenous technology. To reflect the shift in the companys activities, the name
of RCTC was changed to IFCI Venture Capital Funds Ltd., (IVCF) in February
2000.

88

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Mission
To act as catalyst in enlarging entrepreneurial base by funding/facilitating
funding to ventures involving innovative product/process/technology with entry
barriers and aiming to maximize wealth of stake holders.

IVCF (formerly known as Risk Capital and Technology Finance

Corporation Ltd.) is a subsidiary of IFCI Ltd. and is a public financial institution.
It was promoted with the objective of broadening entrepreneurial base in the
country by providing funds to fill gap in promoters contribution in project. IVCF
promoted as a society Risk Capital Foundation in 1975, was corporatized in
1988.

IVCF had initially started providing financial assistance by way of soft

loans to promoters under its Risk Capital Scheme. Since 1988, it also started
providing finance under Technology Finance and Development Scheme to
projects for commercialization of indigenous technology of new processes,
products, market or services.

Over the years, IVCF acquired great deal of

experience of investing in technology-oriented projects.

Based on IVCFs credentials and strengths, UTI entrusted it with the

management of a new venture capital fund named Venture Capital Unit Scheme
(VECAUS-III) in 1991. The size of VECAUS-III was Rs.80 crores, contributed
by UTI and IFCI.

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IVCF has gained long experience in financing technology oriented and

innovative projects and is well versed with opportunities and problems of such
units. The highlights of IVCFs experience are:

 IVCF has provided finance to over 350 ventures since inception.

 IVCF has supported commercialization of over 50 new technologies.
 IVCF has pioneered effort for widening entrepreneurial base in the country.
 IVCF has catalyzed introduction of venture capital activity in India.
IVCF has professionally qualified team of executives with several years of
experience. Over the years, the team has gained necessary insights in identifying
investment opportunities in high growth industries.

The teams approach is

proactive, hands-on and flexible.

IVCF, with its institutional background, not only provides necessary

comfort level to the entrepreneurs but also helps them during critical phases of
venture.

To consolidate its presence in the venture capital industry, IVCF

proposes to promote new venture funds in due course of time.

IVCF initially provided financial assistance through soft loans to promoters

under its Risk Capital Scheme, later it started offering finance under Technology
Finance and Development Scheme to projects for commercialization of

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indigenous technology for new processes, products, market or services. Over the
years, IVCF acquired expertise and experience of investing in technology-oriented
and innovative projects. Since its inception, it has provided finance to over 350
ventures and supported commercialization of over 50 new technologies. It has
pioneered effort for widening entrepreneurial base in the country and catalyzed
the introduction of venture capital activity in India.

IFCI Venture Capital Funds Limited (IVCF) has launched three new funds
in emerging sectors of the economy namely:
(i)

India Automotive Component Manufacturers Private Equity Fund I

Domestic (IACM-I-D) with a target corpus of Euro 60 million
equivalent to Rs.396 crores. This fund will be dedicated for investment
mainly in Indian Automative Component companies and in other
related/emerging sectors.

(ii)

India Enterprise Development Fund ((IEDF) a venture capital fund set

up with target corpus of Rs.250 crores to invest in knowledge based
projects in key sectors of Indian economy with outstanding growth
prospects.

(iii)

Green India Venture Fund (GIVF), a venture capital fund set up with a
target corpus of Euro 50 million (approx. Rs.330 crores) with the
objective to invest in commercially viable Clean Development
Mechanism (CDM), energy efficient and other commercially viable

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projects with an aim to reduce negative ecological impact, efficient

usage of resources such as energy, power etc., and other related
sectors/projects.

Operational Polices and Practices of IFCI

Objectives and Scope of Business

IFCI, established 40 years ago, in 1948 soon after independence, today

ranks one of the oldest and most experienced public financial institutions in the
country.

The principal objective of the Industrial Finance Corporation of India is to

make medium and long-term funds more readily available to industrial concerns,
particularly in those circumstances in which banking accommodation is
inappropriate or recourse to capital market is impracticable.
Initially, the IFCI was authorized to assist only those public limited
companies and co-operative societies organized in the private sector and
incorporated by an Act of legislature or registered in India, which were engaged in
the manufacture or processing of goods, or in shipping, or in mining, or in the
hotel industry, or in the generation or distribution of electricity, or any other form
of power. The IFC Act was amended in 1960 to widen the scope of its activities
by including, in the definition of industrial concerns, those engaged or to be
engaged in the preservation of goods. Public sector projects, private limited

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companies in private sector and proprietary and partnership concerns were,

therefore, outside the ambit of the business of the Corporation.

In 1970 a far-reaching decision was taken by the Government of India,

whereby the Corporations business was broadened to assist such public sector
undertakings as were organized as public limited companies under the Companies
Act of 1956, or had declared at least a maiden dividend, built up sufficient internal
resources to undertake expansion programmes, and had not approached, or did not
approach, the government for budgetary support for their expansion programmes.
Since most of the public sector projects are organized as private limited, they
could not avail themselves of the assistance of the Corporation. Accordingly, the
IFC Act was further amended in 1973 to authorize the Corporation to finance
private limited companies in the public sector.
The IFCI (Amendment) Act, 1986 has made it possible for the Corporation
to provide assistance inter alia for medical, health or other allied services.

In the year 1992-93 the Central Government permitted the corporation to

do financing of industrial concerns engaged/to be engaged in the development,
maintenance and construction of roads.

Thus, at present any limited company in the public, joint or private sectors
or a co-operative society incorporated and registered in India which is engaged or
proposes to engage itself in the manufacture, preservation or processing of goods

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or in the shipping, mining or hotel industry or in the generation or distribution

electricity or any other form of power, transport, setting up or development of
industrial estates, fishing, maintenance, repair, testing or servicing of machinery,
equipment, vehicles, etc., providing medical, health or allied services, providing
services relating to information technology, telecommunications or electronics,
leasing or sub-leasing, providing engineering technical, financial, managerial,
marketing and allied services, research and development activities is eligible for
financial assistance from the Corporation. It may be noted that the Corporation
does not provide financial support to financial institutions. Further, it can extend
assistance only for productive purpose such as purchase of new machinery,
construction of factory building and purchase of land. Its finances are not
available for purchase of raw materials or for the repayment of existing facilities,
save in exceptional circumstances. Financial assistance is available for setting up
of new industrial projects as also for the expansion, diversification, renovation or
modernization of existing ones. Further, companies engaged in the development,
maintenance and construction of roads can also avail financial assistance from the
corporation.

Functions
IFCIs role extends to the entire industrial spectrum performing varieties of
activities such as project financing, equipment financing, equipment leasing,
promotional, merchant banking and nodal agency.

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Under its project financing activity, IFCI provides direct financial

assistance for the setting up of new industrial projects as also for the expansion,
diversification and modernization of existing ones, in the form of rupee and
foreign currency loans, under writing and/or direct subscription to shares/
debentures as also guarantees for deferred payments and foreign loans to all
medium and large sized industrial projects set-up or proposed to be set-up in the
country.

In its promotional role assumed since 1970, the thrust of the IFCIs
endeavor is on providing supportive measures to improve the productivity of
human as well as material resources and to accelerate the process of
industrialization in its multi-faced form.

IFCI, empowered by amendment of IFCIs charter in 1982, undertook

Merchant Banking operations. The accent of the Corporations merchant banking
services is on providing a wide variety of services in the wake of the growing
needs and of complexities involved in the establishment of medium and large
industrial enterprises, starting from project counseling, issue management, credit
syndication to consultancy for outing or sick industrial units.

With a view to making available finance to existing leasing and hire

purchase concerns in the corporate and co-operative sectors, which have been in

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leasing and/or hire-purchase business for at least three accounting years and have
a satisfactory track record of performance and sound financial position, IFCI
introduced from the 1st November 1987, a scheme of Financing Leasing and Hire
Purchase concerns. The scheme envisages grant of financial assistance, either in
the form of a line of credit, or loans simplicities, or discounting of notes drawn
against lease rentals.

A new dimension to IFCIs diversified business mix was added recently

with the Government of India authorizing. IFCI on the 26th May, 1988 to take up
leasing business under the scheme of Equipment Leasing which came into force
with effect from the 1st June, 1988 IFCI provides equipment on lease to existing
industrial concerns in the corporate and co-operative sectors.

IFCI also provides a non-revolving line of credit to machinery, equipment

and computer manufacturing concerns for sale of their equipment to actual user
purchaser concerns on deferred payment basis.
A landmark development in the history of Industrial finance corporation in
the year 1993 was reconstitution of the Corporation as a company under the
Companies Act. The IFCI Act was amended in April, 1993 to convert the
institution into a company so as to impart higher degree of operational flexibility
in the operations of the corporation and thus to enable it to access the capital
market and reduce its dependence on Government guaranteed funds.

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Operational Policies
A special feature of the IFCIs policies has been that they are tailored to the
growing needs of the country and are integrated with the objectives of the
countrys Five Year Plans and the national policies, more particularly in the
field of industry, enunciated by the government from time to time. Therefore that
IFCI, in its operations, has been guided by the industrial policy statements and
priorities laid down by the Central Government. As the government reviews these
priorities from time to time, it helps the IFCI, as also other participating financial
institutions, to make use of their services and scarce resources in those vital
sectors of industry where they are needed most. The Corporation is supposed to
act on business principles. At the same time, however, it has to keep in view the
interests of industry, commerce ad the general public. Furthermore, it pays due
attention to the need for the dispersal of industry, the industrial development of
relatively less developed areas of the country, and the growth of industries in the
co-operative sector.

The Corporation has laid down the following policies with respect to the
sanction, disbursement and recovery of assistance rendered by it.

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Policy on Magnitude of Assistance

The Corporations policy is to cater to the needs of medium and large sized
projects, either singly or jointly with other all India financial institutions like the
IDBI, the ICICI, the UTI, the LIC and the GIC. Where the assistance required is
in the nature of rupee loans only, the IFCI ordinarily entertains applications from
those eligible industrial concerns whose project cost is more than Rs.2 crores.
Projects costing over Rs.2 crores may be considered by the IFCI independently,
for these do not require, on the basis of the existing practice, a prior reference to
an inter-institutional forum. IN case it feels that the financial participation of some
other institution in a project costing Rs.2 crores to Rs.3 crores will be desirable,
the IFCI arranges such participation itself by contacting the other institutions. As
for the projects costing over Rs.3 crores, the IFCI has been financing them under
the system of consortium financing, with due participation of any other financial
institutions acting as the lead institution. The Endeavour of all India financial
institutions, including the IFCI is to ensure that, as far as possible, an applicant
concern should deal with only one institution for the appraisal of its project, the
disbursement of funds and post-sanction follow-up. With this end in view, a new
scheme, known as the Participation Certificates Scheme, covering projects costing
not more than Rs.10 crores, has been formulated, under which the applicant
concern approaches only one all-India financial institution, which acts on behalf
of all the all-India financial institutions which purchase participation certificates

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from it against the disbursement of the loans made by it. The IFCI, together with
other institutions, is actively concerning ways and means of making the scheme
applicable to all proposals for assistance by removing the ceiling of Rs.10 crores.

In November, 1985 consortium financing approach was adopted so as to

ensure dispensation of financial assistance to bigger projects without loss of time.
Under this approach, all projects with a capital cost up to Rs.5 crores could be
financed by IFCI either on its own or in participation with other national and
state-level financial institutions and banks, as may be found feasible, without
making any reference to any of the inter-institutional forums. In case of additional
assistance required for expansion/diversification/ modernization/ rehabilitation
programmes of existing industrial concerns, the same could also be financed
directly by IFCI, ICICI, IDBI and IRBI, depending upon the respective lead
responsibility either on its owner in association with any other financial
institutions. Only the cases involving over run assistance or those projects/
schemes whose project cost was above Rs.5 crores were required under the new
arrangements to be discussed at the inter-institutional forum of senior executives
meeting.

In 1992 the public financial institutions liberalized the consortium lending

arrangement by permitting individual institutions to fund projects up to a
maximum cost of Rs.50 crores.

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Policy Regarding Purpose for Which Assistance is Available

IFCI has made it a policy to render financial support for setting up new
projects, expansion and diversification of existing projects, modernization
programmes, and for meeting part of overrun in the project costs and for
balancing equipment, rehabilitating, etc.

During the last decade (1978-88), the Corporation took bold and quick
policy decisions to diversify its business as also the business mix. A number of
new schemes in the realm of industrial financing were added, one by one, almost
every year. Mention in this regard may be made of the Equipment Finance
Scheme, Modernization Assistance Scheme, creation of specific funds for
development and modernization of sugar, textile and jute industries, Concessional
Finance Scheme for manufacture and use of alternate and renewable energy
sources, incentive schemes for 100% and other export-oriented units based on
their export performance, scheme of financing the industrial estates in the
Corporate and Co-operative Sectors Scheme of Financing Corporate Hospitals
and Multi-Disciplinary Health Centers, Scheme of Financing Leasing and Hirepurchase concerns, Scheme of Non-Revolving Line of credit to machinery/
equipment manufacturing concerns for sale of their equipment to actual user
concerns, scheme of Equipment Leasing and providing of Merchant Banking and
Advisory Services.

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The Corporation does not ordinarily grant assistance for the purpose of
working capital, for it is a normal function of commercial banks to provide such
capital. The IFCI does not allow its funds to be utilized for meeting the existing
liabilities of industrial concerns, save in exceptional circumstances for the
acquisition of capital goods for commercial or trading purposes. Likewise, subloans in foreign currencies are granted only for the import of capital goods and not
for financing the import of raw materials or spares, or for the payment of
royalties, dividends, etc.

Towards the end of 1994 IFCI decided to enter for the first time in shortterm financing activity by deploying a certain portion of its funds for financing
working capital needs of corporate. The Corporation will also render other forms
of short-term financing facilities including bridge loans and project finance.

Policy on Nature of Industrial Projects to be Assisted

The Corporation was set up to provide financial support to non-financial

and non-trading concerns organized in the private, public, joint and co-operative
sectors. It has been its policy to assist both traditional and non-traditional
industrial projects. It attaches considerable importance, inter alia, to those projects
which are either import-substitutive or export- oriented, or are aimed at on serving
energy and other critical resource.

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Pursuant to the announcement of the new industrial policy in July, 1991, a

major deregulation of a domestic industrial sector was introduced. Consequently,
the Central Government withdrew the guidelines to financial institutions including
IFCI giving priority to various industries for granting loans.

The Central Government has, inter alia, given certain pointers to the
financial institutions including IFCI as to the manner in which the latter can
support the countrys exports more strongly, viz., adopting of company specific
focus, supporting technology up gradation, ensuring global competitiveness,
providing short-term export finance, etc.

Policy on Duration of Assistance

The maximum period for which assistance may be provided by the

Corporation has been fixed under the IFC Act. According to this Act, the
Corporation is authorized to grant loans repayable within a period not exceeding
25 years, and underwrite the issue of stock, bonds or debentures by industrial
concerns, subject to their disposal by the Corporation within a period of seven
years. Within this framework, it decides the period of assistance and draws up a
repayment schedule, keeping in view the gestation period and the estimated cash
flows. Its policy is to extend loans for a period of 12 to 15 years. Only, in
exceptional cases does it decide to lend out money for 20 years. The normal

200

repayment policy of the Corporation is to allow an initial moratorium of two to

three years to an assisted concern before the first repayment of the principal
amount of the loan commences. The repayment period ad the period of
moratorium are determined on the basis of the profitability and the cash-flow of
the applicant concern, taking into consideration the norms of debt service
coverage. However, in no case is the repayment period stipulated to be less than 6
or 7 years, having regard to the debt service coverage of better than 2:1; the
amount of earlier installment may be lager while those in later periods may be
smaller. The Corporation seems to be conservative in as much as it lends money
for much shorter periods than is provided for under the IFC Act.

Policy on Bridging Loans

The IFCI, together with the IDBI and the ICICI, has been operating a
scheme of granting bridging loans to such borrowers as have been sanctioned
loans but are not in a position to create a substantive security immediately for the
loans urgently required by them. Under the scheme, loans ranging between 75 per
cent and 90 per cent of the sanctioned loans are granted against the execution of:

a) Regular loan agreements/bridging loan agreements;

b) Personal guarantees of promoters/directors;
c) Hypothecation of machinery and other moveable assets;
d) Negative lien on fixed assets in favor of the Corporation; and

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e) A demand promissory note.

In the case of co-operatives, instead of a personal guarantee, a 100 per cent

State/ Central Government guarantee is acceptable. Where an institution or a bank
is already holding a charge on the borrowers fixed assets, a letter of consent,
allowing the creation of an exclusive first charge, is also required to be obtained.

During 1982-83, a new scheme of granting bridging loans against the

public issue of shares was introduced. These loans carry a concessional rate of
interest of 10 per cent per annum. The amount raised later through public issues is
utilized for the repayment of the bridging loans taken from the financial
institutions.

Policy on Security and Margin

Until recently, the Corporation secured the assistance sanctioned by it,
other than under the soft loan scheme, by a regular legal mortgage of fixed assets,
both present and future. It accepted an equitable mortgage in case where:

i)

The existing facility had already been secured by a regular legal

mortgage; and

ii)

One of the institutions, in case of joint financing, had taken or was

taking a legal mortgage.

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The IFCI together with all the other all India institutions, has now
decided to accept an equitable mortgage as a regular security for loans as well as
for such facilities as guarantees for deferred payments/ guarantees for foreign
loans.
Bridging loans are provided against;
a) The personal guarantees of promoters/directors controlling the
company;
b) A letter of consent from bank(s) holding charge on the companys fixed
assets to allow the creation of an exclusive first charge or pari passu
charge, as the case may be, in favor of the institution and a floating
charges- over all the movable assets;
c) The hypothecation of machinery and other movable assets;
d) A negative lien on fixed assets in favor of the institutions; and
e) A demand promissory note of the borrower in favor of the Corporation.

Regarding the margin requirements, the Corporation has adopted a uniform

margin of 50 per cent, though it relaxes this margin in some cases. It also requires
that the mortgaged properties should be fully insured against fire, riot and civil
commotion risks.

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Interest Rate Policy

The Corporation follows a subsidized interest rate policy, under which it

charges a lower interest rate to its borrowers. The normal rate of interest charged
by the Corporation is 14 per cent per annum. This is in contrast with the market
rate of interest, which is between 15 and 18 per cent. The underlying idea behind
this policy is to assist relatively weaker business entrepreneurs who are not in a
position to secure funds from existing normal channels.

Another feature of the interest rate policy of the Corporation is that it is an

admixture of both uniform and differential rates. The interest rate is uniform
because it is the same for all categories of borrowers, irrespective of their credit
standing and the risks involved in the grant of loans. The Corporation had earlier
adopted the policy of charging a gross interest rate, with a provision of rebate of
half per cent for prompt payment of installments. In 1977, it dispensed with this
practice and made a provision for the payment of interest at the net rate, subject to
the condition that the defaulted installments of principal and interest would carry a
further interest of 2 per cent per annum by way of liquidated damages. The
interest on the defaulted installments is charged as compound interest and is
required to be covered under the security created.

At the same time, the Corporation has pursued a differential interest rate
policy, in that it charges different interest rates for rupee and foreign currency

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loans. It charges a relatively lower interest rate for loans to entrepreneurs in

backward areas and for loans extended under the Soft Loan Scheme. In the year
1980, the Corporation, together with the ICICI and the IDBI, decided to charge 1
per cent per annum interest over and above the lending rates in respect of
assistance sanctioned to private limited companies and closely held companies,
whose shares were not listed on any stock exchange.

In 1990 IFCI and other term lending institutions introduced a two-tier

interest rate structure for loans to industrial projects. The first tier is applicable
during the initial two years or the implementation period of the projects,
whichever is earlier from the date of signing the loan agreement and the second
tier to the remaining period of the loan. For the first tier the normal interest
remained unchanged at the present level of 14 per cent per annum. For the second
tier, the normal interest rate has been fixed at 15 per cent p.a. The review interest
rate structure came into effect from August, 1990. The existing differential in
interest rate, vis-a-vis the normal rates for special categories of projects such as
those located in backward areas, for energy conservation, technology up gradation
was maintained.

Towards the end of 1993 all-India financial institutions including IFCI

adopted floating interest rate policy. According to this policy, variable interest
rate will be charged on the basis of certain percentage over the corporation

205

advance rate. The advance rate will be determined with reference to an anchor rate
derived from a combination of the cut-off yield of the 364 days treasury-bill, the
minimum lending rate for institutions and cost of borrowing through 364 days
certificate of deposits and rated bonds.

The rate of interest will be determined every quarter by the Board of

Directors. To begin with the Corporations advance rate will be 15.5 per cent. The
Corporation will charges a spread over this rate, depending on the credit risk of
the borrower. The maximum rate to be charged will be 18.5 per cent.

Policy Regarding Convertibility

Following the Government guidelines issued in 1971, the IFCI reserved the
right of conversion of a part of the rupee loans extended by it into the equity
capital of the assisted concerns in cases where the aggregate financial assistance
exceeded Rs.25 lakhs. The stipulation was discretionary on the part of the
institution when assistance was Rs. 25 lakhs to Rs. 50 lakhs, but was mandatory
when such assistance exceeded Rs.50 lakhs. Wherever the convertibility clause
was utilised, the terms and conditions relating to the conversion of the loan into
equity were negotiated and settled with the assisted concerns in advance.
With the Governments decision to modify the policy guidelines, the
convertibility clause will apply to financial assistance exceeding Rs.1 crores
instead of Rs.50 lakhs prescribed heretofore. It has also been decided that the

206

institutions will exercise the conversion option in such a way that they do not
acquire more than 40% of the share capital of an existing concern. However, in
case of persistent default in payment of loans or mismanagement of an assisted
concern or continuous closure for over three months of an industrial unit of a
company producing goods and services essential to the community, the financial
institutions may, with the concurrence of Government, exercise their conversion
option in such a way that their shareholdings could go up to 51% or above.

However, the convertibility, clause will not apply in the following cases:
1) Loans sanctioned in foreign currencies.
2) Rupee loans sanctioned to units in the co-operative sector.
3) Rupee loans granted under the Soft Loan Scheme or for modernization
assistance, rehabilitation of sick units or for financing small overruns in
respect of projects already financed by institutions.
4) Rupee loans irrespective of the amount sanctioned to all those
undertakings which are either in the public sector or which attract the
provisions of Section 619 B of the Companies Act, 1956.

In 1988, the financial institutions, in consultation with the Government,

made the following changes.

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i) Diversification/expansion schemes of existing units set-up in noindustry/ special region areas will not attract convertibility clause, except in the
event of default.
ii) Corporate hospitals/multi-disciplinary health centers and 100% export
oriented units will be exempted from the convertibility clause, except in the event
of default and/or the export-oriented units seeking debonding.
iii) Foreign currency loans to continue to remain exempt from the
applicability of convertibility clause, except in the event of default. The
mandatory convertibility clause on institutional loans has been abolished in 1993.

Policy Relating to Modernization of Industries

For the modernization and rehabilitation of five prominent industries, viz.,

cement, sugar, engineering, jute and cotton textiles, a soft loan scheme was
introduced in 1976-77. The details of the scheme have already been discussed
under IDBI. Under the scheme, the IFCI has been given the lead responsibility
for the sugar and jute industries.
The loans under the Soft Loan Scheme are extended on concessional terms
not only in regard to the rate of interest, but also in regard to the promoters
contribution, debt-equity ratio, initial moratorium and re-payment period.

For providing assistance for the development of sugar industry and

modernization of textile mills, the Central Government created Textile

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Modernization Fund Scheme in August, 1986 and Jute Modernization Fund

Scheme in November, 1986. The Textile Modernization Fund Scheme is operated
by IDBI. Apart from considering requests for the modernization of textile units, it
envisages the provisions of special loan to be given for meeting the requirement
of promoters contribution in the case of weak units, i.e., those units which have a
negative net-worth or whose accumulated losses have eroded 50% or more of
their peak net-worth during the immediately preceding five accounting years.

The Sugar Development Fund, operated by IFCI, envisaged provision of

assistance for modernisation/rehabilitation of plant and machinery of sugar mills.
The assistance would be deemed as promoters contribution by the Financial
Institutions

for

the

purpose

of

considering

need-based

modernization/

rehabilitation proposals.

The loan carries interest @6% p.a. with a moratorium of 6 years and is
subject to conversion at per unlike in the case of modernization loans which have
no conversion option.

Policy Relating to Entrepreneurs and Technologists

The corporation has formulated a specific policy of encouraging new

entrepreneurs and technologists to set-up industries so as to fill in the gaps in the
institutional infrastructure for the promotion and growth of industries, or to

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provide guidance and training to new entrepreneurs, particularly those who are
entering in the field of tiny, small-scale, medium or medium large-scale industry
for the first time.

The IFCI has introduced several schemes to help the entrepreneurs. We

shall now discuss these schemes:

a) Technical Consultancy Organizations (TCOs):

The all-India financial institutions, including the IFCI, have sponsored the
TCOs in association with the State level institutions and banks to provide the
necessary impetus, in particular, to the rapid industrialization of less developed
regions. The basic idea underlying the creation of the TCOs is to provide guidance
and advice to new entrepreneurs during the various phases of the project cycles,
namely, project identification, project formulation, project implementation and
project operation, so that the project undertaken is brought to a state of fruition.
These TCOs are now reasonably well-equipped with information/data and
expertise in different disciplines. Applicants are advised to avail themselves of the
services of the TCOs in all matters relating to project planning, including the
marketing aspects. From time to time the TCOs have also organized
entrepreneurial development programmes for the benefit of small entrepreneurs.

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b) Risk Capital Scheme:

In 1975, the corporation decided to sponsor the risk capital foundation

(RCF) with a view to providing special assistance to new entrepreneurs,
particularly technologists and professionals for the promotion of medium-sized
industrial projects. The assistance is provided to entrepreneurs by way of interest
free personal loans on soft terms to enable them to meet a part of the promoters
contribution to the equity capital of the projects promoted by them and for which
financial assistance has been sanctioned by one of the all-India term lending
institutions, viz., the IFCI, the IDBI, or the ICICI, singly or jointly. The personal
loan granted by the RCF is normally limited to 50 per cent of promoters
contribution to the equity of the project, subject to an upper limit for a single
project of Rs.10 lakhs where there is only one promoter and of Rs.15 lakhs where
there are two or more promoters, provided that the loan is secured by the pledge
of his/their shareholdings to the RCF. The RCF also requires a mortgage
redemption insurance policy to be taken out by the assisted promoter on his life
for the full amount of the loan. During the year 1982-83, the RCF liberalized Risk
Capital Scheme so as to widen the definition of the entrepreneur, increase the
limits of assistance, grant a part of the assistance by way of subscription to the
equity shares of the promoted company in the RCFs own name with suitable buyback arrangements with the promoters, and consider assistance in selective cases

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when the promoted concern is the recipient of assistance only from state level
institutions and banks.

c) Promotional Schemes:

So as to give impetus to industries in the rural, cottage, tiny and small-scale

sectors including the much needed guidance in modernization, market research,
marketing assistance, control of pollution, etc., catalyzing the promotion of
technological research and development in the industries and above all, improving
the productivity of material and human resources, ensuring at the same time, a
better deal to women entrepreneurs and entrepreneurs belonging to weaker
sections of the society, IFCI has introduced several promotional schemes.

These schemes, listed below, have come into operation from time to time
(the year of their introduction given in the bracket against each of them).

Consultancy Fee Subsidy Schemes

The following schemes can be categorized under this group:

i)

Scheme of subsidy of New Entrepreneurs for meeting cost of

Market Research/ Surveys (1977).

ii)

Scheme of Subsidy to Small Entrepreneurs in the Rural, Cottage,

Tiny and Small-Scale Sectors for meeting Cost of Feasibility
Studies, etc. (1978).

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iii)

Scheme of subsidy for promotion of Ancillary and Small-Scale

Industries (1978).

iv)

Scheme of Subsidy for Revival of Sick Units in the Tiny and SmallScale Sectors (1982).

v)

Scheme of Subsidy for implementing the Modernization programme

of Tiny, Small-Scale and Ancillary Units (1985).

vi)

Scheme of Subsidy for Control of Pollution in the Small and

Medium-Scale Industrial Units (1985).

Interest Subsidy Schemes

The following schemes can be included under this category:

i)

Scheme of Interest Subsidy for encouraging the Adoption of

Indigenous Technology (1977).

ii)

Scheme of Interest Subsidy for Self-Development and SelfEmployment of Unemployed young persons (1982).

iii)

Scheme of Interest Subsidy for Women Entrepreneurs (1985).

iv)

Scheme of Interest Subsidy for encouraging Quality Control

Measures in Small-Scale Sector (1986).

Assistance Scheme
Scheme of Assistance for Development of Technology through in House
R&D Efforts (1984).

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The consultancy Fee Subsidy Schemes are aimed at providing subsidized

consultancy services to industrial units in identified areas to tiny and small-scale
and ancillary units through TCOs. These schemes are intended to provide
encouragement to

unemployed

youths,

women entrepreneurs, adoption,

harnessing the indigenous available technology, etc., and arebeing operated

through the SFCs.

In January 1988, RCF was converted into Risk Capital & Technology
Finance Corporation Ltd., (RCTC). The RCTC has been authorized to continue
with all business and activities being carried out by RCF hitherto.

Policy Relating to Backward Area Development

In line with the governments policy of reducing regional imbalances, the

IFCI has followed a policy of fostering industrial growth in less developed
states/areas. As part of its policy, the Corporation offered in July 1970 a package
of concessions to new projects in such areas. In January 1972, similar concessions
were extended for the expansion of projects. The main features of the scheme are
concession in the rate of interest (12.5 per cent as against the basic lending rate of
14 per cent), longer initial grace period (5 years against the Corporations normal
practice of 3 years), extended amortization period (15 to 20 years as against the

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normal period of 10 to 12 years), reduced margin of security (reduced margin of

30 to 35 per cent as against the Corporations general policy of a margin of 50 per
cent), lower contribution by the promoters to the cost of the project (17.5 per cent
as against the normal requirements of 20 per cent), larger participation by the
Corporation in the equity and preference capital of assisted projects, and a 50 per
cent reduction in its normal service charges in respect of commitment charge,
underwriting commission, non-refundable examination fee for processing the loan
applications, and legal charges.
The overall ceiling on the loans from the Corporation has been fixed at
Rs.1 crore. It will be extended to 2 crores rupee loan by the all-India financial
institutions all taken together. Underwriting assistance from term financial
institutions, including the Corporation, is made available on concessional terms up
to a ceiling of Rs.1 crores in the aggregate, irrespective of the cost of the project.

Realizing the limitations of the financial and fiscal incentives in promoting

industrial development in industrially less developed areas, the IFCI, together
with the IDBI and the ICICI, felt that a number of other factors should be taken
into account for developing a strategy whereby the establishment of new
industrial projects in industrially developed areas would be facilitated and
accelerated. In view of this, in 1974, the Corporation decided to undertake a
number of promotional activities, both individually and jointly with the IDBI and
the ICICI with a view to fostering the industrial development of the less

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developed areas. A critical evaluation of the promotional role of the IFCI, as well
as of the IDBI and the ICICI has been made separately.

Investment and Underwriting Policies

In the matter of investments, the IFCIs policy is to play the role of a

catalyst. Basically, the investment operations of the Corporation relate to the
acquisition of shares pursuant to underwriting operations, direct subscription to
equity of small, medium-sized projects, and exercise of convertibility options.
As a matter of general policy, the IFCI continued to look upon
underwriting activity only as a method of project financing. Direct subscription to
the equity of small and medium sized projects are made on a selective basis. A
redeeming feature of the underwriting policy of the corporation is that it places
considerable emphasis on the long-term viability of the enterprise and no on the
immediate sale ability of the issue.

Regarding the sale of securities, it is the policy of the corporation to

dispose of the shares in small lots in the open market through recognised stock
brokers or to sell them to investment institutions at agreed price. In deciding
whether to dispose of the shares or not, the corporation takes into account the
following factors:

a) The IFCIs existing holdings with reference to the dates of acquisition:

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b) The financial performance of the company;

c) Expected Bonus/Rights Issue;
d) Past dividend records and likely prospects of maintenance of dividend;
e) The present market quotations and future trend;
f) The effect on the stock market and management of the company; and
g) The average return to the IFCI with reference to the price at which, and
the period for which, the shares have been held.

Policy Regarding Diversification of Business

The central management in their endeavour to meet challenges both from
domestic as well as foreign institutions following the Government policy of
economic liberalisations have, of late, decided to diversify into the area of
financial services. Thus, the corporation has engaged itself both in fund-based and
non-fund based activities such as merchant banking, and leasing. It has set up a
separate department Merchant Banking of Allied Services Department for the
purpose. This department has taken up project counseling, loan syndication and
debenture trusteeship assignments. In 1990 the corporation decided to participate
in the Call Money Market to lend call loan for a period up to 14 days.

In the year 1993 IFCI decided to set up a mutual fund and diversify its
operations to over the Counter Exchange of India. Further, IFCI has entered into a
strategic alliance with ABN AMRO Ban of Netherlands to facilitate providing a

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wider spectrum of financial services in a collaborative arrangement. The

corporation is also planning to set up a joint venture company with an
international financing organisation to undertake fully integrated investment
banking operations of international standards.

Operational Practices of IFCI

IFCI completed 46 years of its operations as on 30th June 1994. During this
period, the Corporation has performed the role of a financier, promoter and
merchant banker. In the following paragraphs we shall evaluate the financing as
well as merchant banking operations; promotional work of the corporation has
already been discussed separately.
Evaluation of Financing Operations
Plan-wise analysis of the total sanctions by the IFCI reveals that there was
a successive increase in the amount of total assistance sanctioned by it. Thus,
during the First Plan period IFCI granted Rs.27.03 crores which surged to Rs.72.0
crores in the Second Plan. Thus, in the initial years of its operations, right up to
1956, IFCI had performed limited role as lender. Those years were the years of
turbulence in the history of the country and teething troubles for IFCI.

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The subsequent ten years witnessed expansion in operations of the

corporation. Thus, aggregate assistance rendered rose to Rs.170.62 crores during
the third plan period.

This period could be regarded as a decade of growth with stability. For the
first time IFCI entered in the underwriting business in 1958. Further, it also
entered for the first time in the business of guaranteeing deferred payments with
the approval of the Central Government. Another important development during
this period was enactment of the IFCI Act in 1960 enabling it to guarantee loans
raised by industrial concerns from scheduled banks or state co-operative banks,
deferred payments due from industrial concerns and provide foreign currency
loans and make direct subscriptions to the stocks or shares of an industrial
concern. The period 1967-1978 witnessed quantitative expansion of the operations
of IFCI and innovative and qualitative thrusts in the corporations efforts.
Quantitatively, total sanctioned assistance buoyed up by about 64 per cent.
Qualitative change in operation of IFCI was more remarkable during this period.
Thus, entry of the Corporation in public sector financing, providing considerable
flexibility in the operations and removal of various constraints and controls by the
enactment of IFCI (Amendment) Act, 1972, introduction of the concept of
consortium financing and lead institution concept in the project financing and
assumption of promotional role provided qualitative thrust to the corporations
financing of industries.

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The fourth decade of IFCIs operations has been a decade of substantial

growth with diversification. IFCIs total sanctions in this decade have been of the
order of Rs.4492.90 crores, representing over four-fifth of the aggregate
assistance provided by the corporation so far. The factors which have helped in
achieving such spectacular performance in the decade ended the 30th June 1988
are:

a) Emphasis on industralisation given in the Sixth and Seventh Five-Year

Plans with larger allocation of funds for the purpose.
b) Measures taken by the Government to strengthen the capital market and
to provide new and attractive opportunities both for savings and
investments.
c) Enlargement of the scope of activities of IFCI following amendments in
IFCI Act in 1982 and 1986.
d) Process of liberalisation by Government cluminating in the relaxation
of Fiscal and Administrative controls, yielding place to flexibility with
accountability.
e) Upgrading of the existing offices of IFCI and opening of more offices
so as to provide efficient and fast services to the clientele.
f) Enactment of a special legislation for dealing with the sick industrial
companies and removing clearly the fear of nationalisation or to take

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over which had loomed largely on the minds of industry in the earlier
decade.
g) Substantial relaxation allowed by the Government in the convertibility
guidelines.

During the seventh plan period total assistance sanctioned by the

corporation was Rs.5,381 crore which was more than three fold of what was
sanctioned during the sixth plan.

During two annual plans the corporation sanctioned assistance of the order
or Rs.4,953 crore was disbursed. During the 15 months period in 1992-93 the
first year of Eighth Plan-overall the sanctions of IFCI under its various schemes of
assistance aggregated Rs.3,714 crore in respect of 533 projects.

Pursuant to conversion of IFCI from a statutory corporation into a

company and keeping in view the introduction of stringent norms of income
recognition, asset classification and provisioning, an added thrust was given to
quality of the proposals considered for financial assistance by IFCI. Following
this cautious approach during the financial year 1993-94, overall sanctions of IFCI
aggregated Rs.2,790 crores in respect of 325 projects.

Over the period of 46 years of its operations the corporation sanctioned

assistance to the tune of Rs.19,429.35 crore, covering at 11,656 projects spread all

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over the country. This is really a remarkable expansion in the operations of the
corporation.

IFCI, during this decade, took bold and quick decisions to diversify its
business as also the business mix. A number of new schemes in the realm of
industrial financing were added one by one, almost every year. Mention may be
made of Equipment Finance Scheme, Modernisation Assistance Scheme, Creation
of specific funds for development and modernisation of sugar, textile and jute
industries, concessional finance scheme for manufacture and use of alternate and
renewable energy sources, incentives schemes for 100% and other export-oriented
units based on their export performance, scheme of financing the industrial estates
in the corporate and co-operative sectors, scheme of financing corporate hospitals
and multi-disciplinary health centres, scheme of financing leasing and hirepurchase

concerns,

scheme

of

non-revolving

line

of

credit

to

machinery/equipment manufacturing concerns for sale of their equipment to

actual-user concerns, scheme of Equipment Leading and providing of Merchant
Banking and Advisory Services.

Performance of IFCI as Merchant Banker

In 1986 Corporation set up Merchant Banking & Allied Services

Department (MBASD) to render merchant banking and other financial services
like equipment leasing, equipment procurement etc. MBASD also intensified its

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activities in the area of project counselling, loan syndication and debenture

trusteeship assignments.
So far, IFCIs MBASD has handled (since inception in July 1986 and upto
31st March, 1994) as may as 659 assignments, which include 297 public issues,
helping in the mobilisation of funds of the order of Rs.6,121 crore.

During the year 1993-94, MBASD along with its Bureau at Bombay
handled 134 merchant banking assignments of which 50 related to issue
management, 50 to project counselling and appraisal, 33 to debenture trusteeship
and 1 to loan syndication. The issue management assignments helped mobilisation
of funds of the order of Rs.3,047 crore. In a recent survey of merchant banks
carried out by Prime Database, IFCI has been ranked at the sixth Position in terms
of number of issues handled during 2010-11 as compared to 21st position in
2009-10.

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