Submitted as partial fulfillment towards the degree of

Master of Business Administration

Submitted By Guided ByAlay B. Modi Mr. Milin J. Jani

Mr. Nakul K. Parikh

A.E.S. Post Graduation Institute of Business Management (H.L.),

Gujarat University, Ahmedabad.

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=: Table of Contents :=

Serial No. Contents Page Number1 Acknowledgement 12 Introduction 53 Company Profile 64 Location: Registered Office 75 Directors of the Company 86 Industry Business Scenario & Proposed Strategy 9

i.) ICE – CREAM Division 9ii.) AGRO Division 11

7 SWOT Analysis 15a.) Strength 15b.) Weakness 15c.) Opportunities 16d.) Threats 16

8 Working Capital 179 Past Trends – Working Capital Management 20

a.) Nature of Business 20b.) Market and Demand Conditions 21c.) Technology and Manufacturing Policy 21d.) Credit Policy 22e.) Availability of Credit from the Suppliers 24f.) Operating Efficiency 24g.) Price level Changes 25

10 Working Capital Policy Review 2611 Assessment of Working Capital 27

A.) ICE – CREAM Division 29B.) AGRO Division 34

12 Assessment of Non – Fund based limits 38a.) Letters of Credit 38b.) Bank Guarantee 38c.) Specific Financial Guarantee 38d.) Advance Money performance bank guarantee limit.

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13 Approved MPBF 3914 Working Capital – Financing 40

a.) Trade Credit 41b.) Bank Finance 44c.) Commercial Papers 47d.) Factoring 49

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Serial No. Contents Page Number15 Export Finance – Various option available 5116 Types of Trade Credit Facilities 51

a.) Pre Shipment Finance 51b.) Post Shipment Finance 53

17 New Scheme of Export Financing 5618 Financing of Working Capital in the past 5819 Current Scenario of Financing in the ICE –

CREAM Business61

20 Current Export Financing patent of Vadilal 6321 Technical details of above mentioned various

funding Facilities65

22 Non – Fund based limit 6723 Money – Market introduction 6924 Major segments in money market 7225 Money – Market as an option for Vadilal 7426 Conclusion 7527 References 7728 Balance sheet of Vadilal Industry Limited 78

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ACKNOWLEDGEMENT

I would like to acknowledge the contribution of the following groups and individuals to the development of my project and successfully completion of the summer internship program in Vadilal Industry Limited in the partial fulfillment of the requirement of Project, Business School Ahmedabad, and batch 2006-2008.

In the line, I would like to extent my first and foremost gratitude to my company guide Mr. Milin J. Jani (Finance consultant in Vadilal) who has been the key person for me in getting this, much needed corporate expenditure. He was the person, in whose cabin I could walk in at any time and he was always ready to help me. He gave me tips on the broad spectrum of the corporate life. One thing that attracted me most about him was his sweet nature and working attitude.

In this line, second most admirable personality in Vadilal was Mr. Nakul K. Parikh (deputy finance manager Vadilal). He was instrumental to the successful of my project. His sense of humor always energized me and made me to feel, a part of the finance department of Vadilal. He is the person who has taught me to be practical in the working situation.

Mr. Dinesh Aggarwal (Field Officer of Vadilal). He is one of the people whom I ‘will never forget for his moral support that he extended to me when ever I needed it. He was the key development of informal relations with in the peer group.

My faculty guide, Mr. Taral Pathak (faculty finance, AES PG IBM (HL)-Ahmedabad). He is the person, with out whose guidance this project wouldn’t have been possible. His close supervision always kept me on my toes and hence, I would complete this as per the disclosed schedule.

I would also like to express my gratitude to whole staff of Vadilal for their kid behavior with me. I was never considered as just a trainee. I shared lot of good time with them.

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Last but not the least I would like to express my heartiest thanks to the man behind this fruit. It was he who actually sowed the seed and prepared this path for me. His kind support was always with me during the training period and I got valuable guidance from him on interpersonal aspect.

This project wouldn’t have been possible with out there valuable contribution of the above mentioned personalities. Alay B Modi.

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In tandem with the main objective of this summer internship program, this project has given me immense opportunity to get price less experience by working with Gujarat’s major ice cream manufacturer holding 20% share in the organized ice cream market. It has been a greatest experience for me to work with of the highly experience staff of the Vadilal Industry limited. My journey stared on 20th May, 2007 when I was inducted into the finance department under the kind guidance of Mr. Milin J Jani (Finance head) and Mr. Nakul K Parikh (Deputy Manager Finance). Since then it has UN forgettable and the highly enrich corporate exposure for me. This has also equipped me on the interpersonal aspect of the corporate life rather than just checking the application of the book concepts.

From this, as on date experience of mine. One strong observation I could make is that difference between theory and its application comes because of two reasons. Presence of human element Non availability of the complete information. We all know that the human resources is the most important of all resources held by any organization because it is this resources that actually make things happen and convert dreams into real achievements. However when humans interact, clashes arises due to differences in their individual goal and expectations and it is here the problem starts. However, these things are bound to happen in the organization and one has to learn the art of accomplishing the task on hand by working in such environment.

As rightly thought by Mr. A.O.Shah (Accounts head of Vadilal), in a very fruitful discussion with him, he said that, this is one of the most important aspect of the corporate life. Many times in day our ego’s come in the way, but we have to master the art of SATISFYING OUR EGO BY WORKING IN THE INTEREST OF THE COMPANY.

He did not talk about keeping ego aside, because that reduces our confidence and the zeal for doing work.

Hence to practice this I was entrusted with an important task of representing Vadilal in their consortium of six banks for routine work individually and all alone.

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In each bank there were almost four to five people whom I had to interact with; there for it all amount to twenty five people whom I had to interact with on regular basis. Every body is a different personality in himself and thus I have learned a lot on the part of the transactional analysis. In comparison to this, where in sales major concentration Is on creating first good impression, in this job I have to maintain a relationship with them on a continuous basis. At times many work matches to that of a liaison officer where at times I try to absorb small shocks between them and the company officials by acting in the interest of the company. This has further helped me in improving my skills of handling tough situations.

Apart from this I have been also doing a project on working capital management in which I attempt to develop a deep conceptual understanding of working capital and check the application of its various facets in Vadilal Industry Limited. This has again proved to be a fruitful exercise for me. I learned more on the aspect of forecasting and arranging for finance from various sources giving various internal and external limitations.

There for in the broader sense I would say that it has been a wonderful learning for me which has really equipped me for surviving the cut throat competition environment of the corporate world.

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EXECUTIVE SUMMARY:

The main plot for my project was to study working capital utilization in a company. To find out the risk and type of finance available in the Indian market and for exporters of Indian and to learn about the tools for managing working capital. In the beginning some of the basic information about Vadilal industry limited, its registered office, factories and directors name and their experience in the company. Industry business and proposed strategy in the Vadilal and SWOT analysis of Vadilal in current environment.

The second part of the project contains working capital definition and information about gross and net working capital, past trend of working capital and its scenario in Vadilal. Working capital policy and assessment of it in Vadilal industry in its ice cream and agro division. Assessment of non fund based limit also included in this part.

Different types of working capital financing, its benefits-limitations, various types of Export finance like Pre and post Shipment finance, Current export financing patent and Money market and utilization of its as an option by Vadilal . At last, conclusion about project, what I observed and at Vadilal during my training and what Vadilal should do in enhancing management of working capital in its business is recommended by me.

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INTODUCTION

During the last two month of my work duration in Vadilal apart from doing my work project, I have actively participated in the working of company. This mainly includes the bank liaison work. Apart from this I also worked upon getting clearance of various bank charges from the managing director of the company there by seeking explanation from the respective bank. I also worked upon developing a deep understanding of export related credit facilities. This mainly includes the PCFC (packing credit in foreign currency).

Apart from these small activities, I worked as per the disclosed schedule of my project on working capital and carried out a past trend analysis of working capital in Vadilal and calculated present working capital requirement in Vadilal.

As per the requirement of this final report, I am submitting detailed working on all the major aspects of this project which were planned to be covered in the project proposal with a very brief company profile. Data sources have been primarily secondary sources i.e. from the company’s audited annual statements and their various printed material. Apart from a detailed conclusion at the end, I have my own views on a particular section along with it only.

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COMPANY PROFILE

M/s Vadilal industry limited was established as a public limited company on august 4, 1989.This is a listed company and its shares are quoted on the Bombay and Ahmedabad stock exchanges. This is a flagship company that started with ice cream, which are manufactured at their three plants in India located at Dudheshwar, Ahmedabad & Pundhra, Ganghinagar and Bareilly, Utter Pradesh. In the early nineties they commenced food processing operation at Dharampur, Val sad. They also ventured into financial services area in April 1996. This includes the Forex advisory services & Full fledged money changer (FFMC) facility.

Vadilal also ventured into the field of manufacturing chemicals and industrious gases under the company name Vadilal chemical ltd. This division was stared in 1970; main products manufactured under this gases like Argon, Nitrogen, Hydrogen &Oxygen, Specialty gases, Industrious gases mixtures, Calibration gases, Anhydrous Ammonia and Liquor Ammonia. This company has a customer base of more than 2000 customers.

Apart from this Vadilal also has an operational construction division which was launched in the year 1994. They are mainly into development of the corporate complexes.

Vadilal has earned good name in export and local markets. To meet with the increasing demands, company has gradually modernized through the way of increased production capacities at their various plants.

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LOCATION: REGISTERED OFFICE

Vadilal House 56, Shrimali Society, Navrangpura, Ahmedabad. Pin. No:380009.

State- GUJARAT

FACTORIS

1. Dudheshwar Road, Ahmedabad.

2. Pundhra, Distt: Ganghinagar.

3. Dharampur, Distt: Val sad.

4. Bareilly (Uttar Pradesh).

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DIRECTORS OF THE COMPANY

Name of Directors: 1. Mr. Ram Chandra R Gandhi, Chairman2. Mr. Virendra R Gandhi, Vice Chairman & Managing Director3. Mr. Rajesh R Gandhi, Managing Director4. Mr. Devanshu L Gandhi, Managing Director5. Mr. Chatan M Maniar, Director6. Mr. Kshitish M shah, Director7. Prof. M N Vora, Director8. Mr. Rohit J Patel, Director

Key Person- Mr. Rajesh R Gandhi

Business Experience of Directors/ Partners: All the promoter directors have rich experience in the line of ice cream manufacturing. Mr. Ram Chandra R Gandhi has pioneered Vadilal’s growth and success in ice cream business. Mr. Virendra R Gandhi and Mr. Devanshu L Gandhi are involved in technical functions of manufacturing plants and Mr. Rajesh R Gandhi looks after finance and marketing functions of the company.

The company is selling its products through its sole selling agent – M/s Vadilal Enterprises Ltd. And the marketing arm of Vadilal group.

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INDUSTRY BUSINESS SCENARIO & PROPOSED STRATEGY.

ICE CREAM DIVISION

Vadilal Brand enjoys the reputation for successful innovation and development of flavors. Its new offerings are eagerly awaited throughout the year, not to mention the summer season.

Vadilal Ice cream division now has a production capacity of 125000 liters per day at three sophisticated manufacturing facilities in the country. The geographical locations of these facilities are such that they are in consonance with the market expansion strategies of the division. The company has proposed to set up Ice cream new plant at Calcutta.

Over the years the ice cream division has developed a cold chain network consisting of 24 C&F agents at strategic locations, 450 distributors and more than 35000 retail dealers. The network is serviced by a large fleet of refrigerated vehicles. Also there is a continuous program of expansion of the network. Refrigeration equipments and retail freezers are sources from world leaders in the technology so as to deliver quality products to the consumers.Vadilal offers the one of the largest range of varieties and the flavors in the world. It has a galaxy of products with a product matrix of over 200 stock keeping units (SKU).

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Although company has been facing a stiff competition from both domestic as well as foreign competitors, they have been quite successful in defending their market share. It has rather grown significantly over the years. Vadilal presently control about 20% of All India Market Share.

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AGRO DIVISION

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Product Range

In addition to the existing products like canned fruit pulps and processed fruits and vegetables, a large range of IQF (Individual quick freezing) and vegetables have been introduced in the overseas markets in consumer packs. Nearly 60 products have been launched in this category under Vadilal “QICK TREAT”, “GARDEN FRESH”, and “LAZEEZ” bands. These products are targeted to the ethnic Indian population and have received very good response from this targeted market. Other introduction include microwavable ready to serve foods (Indian curries) and, frozen “Parathas” and “Samosas” in several variants. There is a large demand for these products from the US/UK markets and Vadilal has already been able to make its presence felt in this segments. It is expected that this segments of products would be able to generate both volumes and contribute to the bottom line of the coming years.

The Processed Food Division (PFD) is also contemplating introduction of ready meals, frozen herbs and organic fruits and vegetables. Recognizing and growing demand for organic foods, Vadilal has already initiated steps for certification of its facilities for organic foods. Efforts are also on to educate selected group of farmers to grow organic produce on a contract with the company. These efforts should bear results over the next 2-3 years and the division would be at an advantageous position to tap the market for organic products.

DISRTIBUTION NETWORK

The company has already appointed distributors, experienced in frozen foods business, in USA, CANADA, UK, KUWAIT, UAE, SINGAPORE, and NEW ZEALAND. The process of distributor appointment is on for Australia, Japan, Saudi Arabia, Oman, South Africa and Russia. This would cover all major markets for the products of PFD. While the company is focusing on the retail segment in each of these countries, it is large institutional buyers in several of these countries.

Processed food division has a professional and highly experienced team handling its international marketing. Development of new segments and buyers in each territory is a priority area for this

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group. Apart from this regular communication with prospective buyers, overseas visits and participation in fairs by this team have created several new buyers and markets for the products of the PFD.

ADVERTISING

Products of division are already advertised on TV. The PFD has recently made several commercials featuring its latest products. These are regularly aired by zee TV- UK, Zee TV-USA and other major channels of North America. Besides, these commercials are also shown in the local TV channels at the other territories. PFD also advertises in international trade magazines dealing with frozen food products.

Company intends to continue these efforts in the coming years also. PFD enjoys the advantage that “Vadilal” brand name is very well recognized by the Indian ethnic population in the targeted countries and enjoys a high brand recall. This has ensured repeat purchases of regular off take at the retail level.

DOMESTIC MARKET

Many of products launched in the overseas markets are also made available in the local markets. Vadilal has already achieved significant volumes in frozen peas and corn. Apart from these large quantities of mango pulps and mango ras (a pulp based proprietary product) are also sold in the domestic market.

Vadilal supplies large quantities of fruit pulps in India to multi-nationals like “PEPSI” and “COKE” for their products. The facilities of PFD are approved by both companies to meet their quality parameters.

The extensive cold chain (one of the largest in the country) of the company, consisting of 24 C&F agents, nearly 450 Distributors and over 35000 retail dealers, has been leveraged in the domestic market. Also, the vast experience of the company in processing and marketing ice creams has helped in successfully launching frozen processed foods of the PFD. Vadilal is among the most recognized brands in the foods business and this advantage

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has been effectively put to use by the Division. An opportunity is exists for using this cold chain for marketing the products of other manufacturers, which have a synergy with the products range of PFD. The growing usage of processed foods by the urban middle class augurs well for the PFD. Price differentials are dropping and there is a growing realization in the government that the sector is to be promoted. This has begun to reflect in their policies. The recent announcement by the government to set up an Agri Export Zone near Val sad would benefit the food processing units nearby, and Vadilal would be a major beneficiary. Overall, the external environment in which the PFD is working is gradually turning out to be more conductive.

The company is also working aggressively on raw material sourcing to reduce the role of middlemen and to work directly with the producers. Efforts are on to the material from nearby areas so as to reduce transit times and improve quality of finished products. “Work on contract farming” and “Organic food production” are also progressing satisfactorily. The company would put in more efforts in these areas in the coming years.

The Company’s Agro Division at Dharampur and Ice-Cream Division at Bareilly have been certified for ISO 9002 standards by underwriters Laboratories Inc., U.S.A. The Agriculture and Processed foods export development authority (APEDA), Ministry of Commerce, New Delhi has conferred certification of merit for the excellence performance.

Given the above business scenario one can easily concluded that Vadilal has bright future ahead of them.

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SWOT ANALYSIS:

STRENGTH:

(a) Vadilal industry Ltd. is one of the largest ice cream manufacturing companies in the Country. The company is having excellent market share in Western India viz. Gujarat and Rajasthan and in certain states of northern India viz. Utter-Pradesh and Uttaranchal. In the last few years, the company has also made expansion of its market by entering into states like Bihar, Jharkhand, Orrisa, Punjab, Haryana, Chandigarh etc by improving the distribution network.

(b) The manufacturing units are located in Gujarat and

Utter-Pradesh for uninterrupted supply of Ice creams, which are well complimented by large distribution network.

WEAKNESS:

(a)The company has been facing liquidity problems in the last few years. The company defaulted in its debt repayment obligation to term lenders and loans were later on rescheduled.

(b) The company could not bring back its investments, which was made outside the business. The company had to write off loans and advances/investments outside business worth Rs.7.44 crore in the year 2003-2004, which has eroded the tangible net worth of company.

(c)High cost of overseas Brand Building exercise complimented by tight liquidity also emerges as a major weakness of the company.

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OPPOTUNITES:

(a) The company is also emerge as the agro bases food processing sector which is one of the major thrust areas of the new central Government. There is a huge overseas market for a food processing company.

(b) Expansion of domestic market for ice-creams and

processed foods.

(c) Withdrawal of “KWALITY WALLS” from small cities/towns.

THREATS:

(a) Increased competition due to entry of local players like “Amul” and “Other Local Brands” with their low priced products.

(b)Any change in government policies and import/export policies may affect the company.

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WORKING CAPITAL

The project is about one of the most important financial aspect of an organization working for some economic motives. Such activity may be of any format, i.e. manufacturing and trading of goods or providing of some services, they all needs working capital to operate and hence need an efficient management of it.

Working capital is that a potion of the total capital which is used in day to day work flow. It is required for carrying all those activities which are required for supplying necessary goods and services to the consumer. It facilitate the actual happening of the activities and there by accomplishing the organizational objectives.

In an equation form working capital refers to summation of all the current assets net of current liabilities.

Working capital=total current assets - total current liabilities

It is all about management of current assets. Management of current assets differs from that of fixed assets in three important ways.

(1)In managing fix assets time is very important aspect; consequently, discounting and compounding techniques play a significant role in capital budgeting and a minor role in the management of current assets.

(2)The large holding of current assets, especially cash, strengthen the firms liquidity position but also reduce the over all profitability. Thus a risk return trade off is involved in holding the current assets.

(3) Level of fixed as well as current assets depends upon expected sales, but it only the

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current assets which can be adjusted with sales fluctuation in short run. Thus the firm has a greater degree of flexibility in managing current assets.

Constantly reducing profit margins due to increased competition has force companies to think about reducing their operating costs, so they can remain profitable. Working capital is one of such element that requires for a close control of management because it has been seen in the recent trends that those companies which have been successful in managing their working capital at optimal levels have become financially strong and grown up considerably.

Requirement of working capital depends on many factors which mainly depend on the area and the type of business under consideration. Moreover it depends on the policy that company adopts regarding employment of working capital in their organization which depicts management working capital style and mindset.

Thus, working capital is that components in an organization that gives a fair idea of the whole organization, its operations and working efficiency. So it become a matter of great importance to all the entities who have some or the other economic interest in the organization like share holders, promoters, creditors and banks who keeps a check on the profitability and solvency of the business to ensure safety of their interest in the organization.

GROSS AND NET WORKING CAPITAL:

Gross working capital It refers to firm’s investment in the current assets. Current assets are the assets which can be converted in to cash within an accounting year and include cash, short term securities, debtors, bill receivables and stocks.

Net working capital It refers to the difference between the current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment with in an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working

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capital arise when current assets exceeds current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets.

PERMANENT AND VARIABLE WORKING CAPITAL:

The operating cycle is a continuous process and, therefore, the need for current assets as felt constantly. But magnitude of the current assets is not always the same. It increased and decreased over time. However, there is always a minimum level of current assets which is continuously required by a firm to carry on its business operations. Permanent or fixed working capital is this minimum level of current assets.

As scale of operation increases amount of permanent working capital required in the business increases and hence becomes an upward sloping curve. However, this is in the long run. In the short run it is a straight line parallel to X axis.

Business activities are not consistent throughout the year. Scale of operation differs from time to time within the same year depending on the nature of business, peak and non peak season of business etc. A company may require some extra amount of funds to facilitate the increased level of operations. However company does not require it on permanent basis hence this amount is called temporary/variable working capital.

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PAST TRENDS-WORKING CAPITAL MANAGEMENT:

Before getting in to the actual figure of working capital used in the past years in the company, I would like to discuss various macro issues related to Vadilal which has a great impact on the having a different importance, influence the working capital needs of the firm. The importance of factors also changes for the firm over time. Some of such most crucial factors are as follows.

NATURE OF BUSINESS:

Working capital requirement of the firm are basically influenced by the nature of its business. Trading and the financial firms have a very small investment in the fix assets, but requires large sum of money to be invested in working capital. In contrast public utility may have limited need for working capital and have to invest abundantly in fix assets. Their working capital requirements are nominal because they may have only cash sale and supply services, not products. Thus, no fund will be tie up in debtors and the stocks (Inventories). For the working capital requirements most of the manufacturing company will fall between the two extreme requirements of the trading firms and public utilities. Such concern has to make adequate investment in the current assets depending upon the total assets structure and other variables.

SCENARIO IN VADILAL:

Vadilal being a manufacturing concern lies between the two extremes. They have to procure raw material, covert them into finished products and realize cash by selling to the target consumers. Inventory accumulation is natural and occurs regularly at each level and thus they have to employ sufficient amount of funds as working capital to facilitate smooth operations.

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MARKET AND DEMAND CONDITIONS:

The working capital needs of a firm are related to its sales. It is difficult to precisely determine the relationship between volumes of sales and working capital needs. In practice, current assets will have to employ before growth takes place. Growing firms may need to invest funds in fixed assets in order to sustain growing production and sales. This will, in turn, increase investment in current assets to support enlarged scale of operations. Growing firms need continue flow of funds. Sales depend upon demand conditions. Large number of firms experience seasonal and cyclical fluctuations in demand for their products and services. These business variations affect the working capital requirements, specially the temporary working capital requirements of the firm. When there is an upward swing in the economy, sales will increase; correspondingly, the firm’s investment in inventories and debtors will also increase. This act of firms will require the further addition if the working capital. On the other hand, when there is a decline in the economy, sale will fall and consequently, levels of inventories and debtors will also fall. Under recession, firms try to reduce their short term borrowings. Seasonal fluctuation also creates production problems for the firms. During period of peak demand, increasing production may be expensive for the firm. Similarly it will be more expensive during slack periods when the firm has to sustain its working force and physical facilities without adequate production and sales. A firm may, follow a policy of level production, irrespective of seasonal charges in order to utilize its resource s to the fullest extent. Such a policy will mean accumulation of inventories during off seasons and there quick disposal during the peak season. The increasing level of inventories during the slack season will require increasing funds to be tied up in the working capital for some months.

SCENARIO IN VADIAL:

Growing market of ice cream and frozen vegetables both in the domestic and the foreign market along with immense potential with in them put Vadilal on a growth stream. Hence they have to make substantial investments in fixed assets and as discussed above, this accelerates the investment in the current assets to support the enlarged options.

Moreover, seasonal factor plays a major role in case of Vadilal. To a large extent ice cream is a summer’s product and hence its sales fluctuate during the year depending on the climatic conditions. At the same time, under their agro business, they supply frozen vegetables i.e. vegetables are provided to the consumer in their off

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season. For this company has to procure and maintain huge bulk of vegetables so that they can meet its demand in the future (in off season). This increase the requirement of working capital since long term funds cannot be deployed for this work for a simple reason that such liabilities get matured with in one year period.

Since our economy is growing, purchasing power of people is getting increases due to increased incomes and therefore their expenditure on such items is increasing.

In such a scenario, expansion seams to be feasible. With rise in sales, their investment in the inventories and the debtors are also increasing and hence need for working capital is always high and growing. However company has a partial implementation of the “Level production policy” at present which maintains a reasonable pressure on their working capital requirement.

TECHNOLOGY AND MANUFACTURING POLICYS:

The manufacturing cycle comprises of purchases and use of raw materials and the production of finished goods. Longer the manufacturing cycle, larger will be the firm’s working capital requirement. An extended manufacturing time span means larger tie ups of funds in inventories. Non manufacturing firms, services and financial enterprises do not have a manufacturing cycle. A strategy of level or steady production may be maintained in order to resolve the working capital problem arises due to seasonal changes in the demand for the firm products, “STEDY OR THE LEVEL PRODUCTION POLICY” will cause inventories to accumulate during the off season periods and the firm will be exposed to greater inventory cost and risk. Thus if cost and risk of maintaining a constant production schedule are high, the firm may adopt, “VARIABLE PRODUCTION POLICY”, varying its production schedule in accordance with change in demand. Those firms, whose productive capacities can be utilized for manufacturing varied products, can have advantage of diversified activities and solve their working capital problems.

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SCENARIO IN VADILAL:

Vadilal has always strived for maintaining state of technology and manufacturing practices in their all the four manufacturing units. They have also obtained quality certifications from various reputed agencies for their plants especially for Dharampur (Processed food) and Bareilly (Ice cream). However due to some internal and external reasons company has been suffering from a huge operating cycle. Presence of seasonal elements in the business is one of the major reasons for it. Hence to keep the requirement of working capital low, company partially follows the “LEVEL PRODUCTION POLICY”. They cannot adopt variable production policy since their product line does not facilitate this.

However, ice cream as a product is getting accepted in the domestic market throughout the year and hence this problem is slowly getting erased out automatically.

CREDIT POLICY:

The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to consumers depend upon the norms of the industry to which the firm belongs. But a firm has flexibility of shaping its credit policy with in the constraint of the industry norms and practices. A high collection of period will mean tie up of large funds in debtors.

SCENARIO IN VADILAL:

Vadilal industry limited markets its products through the sole marketing arm of the Vadilal group i.e. Vadilal Enterprises Ltd. In other words we can say that Vadilal sell all its production to the Vadilal Enterprises Ltd. However past track records reveals that its payment schedule has been quite dissatisfactory. The actual level of debtors has been in the vicinity of some 2.44 to 2.14 months. This seems to be quite high with respect to the companies business. This results into tie up of funds for comparatively longer period and hence increases the requirement of the working capital thereby increasing the cost of company.

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AVAILIBILITY OF CREDIT FROM THE SUPPIERS:

The working capital requirements of a firm are also effected by credit terms granted by its suppliers. The working capital requirement of a firm is also effected by credit terms granted by its suppliers. A firm will need less working capital if liberal credit limits are available to it from its suppliers. Supplier credit finances the firm’s inventories and reduces the cash conversion cycle.

This is one of the very few elements that are inversely related to the requirement of the working capital. More over the amount and higher the credit period, lesser is the requirement of the working capital. However, suppliers extend credit to us only when they are satisfied about our liquidity position and soundness of the business model.

SCENARIO IN VADILAL:

Till now, Vadilal has enjoying high credit from the suppliers. It has ranged from 3.16 to 2.40 months. Although it is a good sense, it has a darker side attached to it. Such huge credit periods are nowhere credit norms. This means that a company has been struggling with liquidity problem and this gives a negative impression about the company. Hence Vadilal should try to become comfortable with less credit period being offered by the creditors. This will mean that company has improved on the front of liquidity and this will be a positive sign in the real sense.

OPERATING EFFICIENCIES:

The operating efficiency of the firm relates to the optimum utilization of all its resources at minimum cost. The efficiency in controlling operating cost and utilizing fixed and current assets leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency.

SCENARIO IN VADILAL:

This is a serious matter for conversion for the company because there is a huge scope for the improvement in this field. This is one

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of the most important factors will give company an edge over its competitors and gain quality market share.

PRICE LEVEL CHANGES:

The increase in shift in price level make functions of financial manager difficult. Generally, rising price level will require a firm to maintain higher amount of working capital. Some level of current assets will need increased investments when prices are increasing. However, companies that can immediately revise their product prices with rising price levels will not face a sever working capital problem.

SCENARIO IN VADILAL:

This is one of the major considerations for Vadilal because being into a seasonal business there is high probability of fluctuations in the prices of the raw material, however company cannot change its prices in the running season for various marketing related reasons. This forces the company to maintain a high level of working capital as compared to the normal level.

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WORKING CAPITAL POLICY REVIEW:

CURRENT ASSETS TO FIXED ASSETS RATIOPARTICULARS 2003 2004 2005 2006

(1) Fixed Assets: (a) Gross Block 5621.56 5797.96 5743.00 5822.3

Less: depreciation

2374.16 2650.28 2728.11 2973.55

(b) Net block 3247.4 3147.68 3014.89 2848.75

(3) Current Assets, Loans & Advances:

(a) Inventories 2236.21 2070.03 1956.74 1773.04 (b) Sundry Debtors 1956.3 1967.54 1980.86 1848.01

(c) Cash & Bank Balance

259.48 142.21 86.32 266.13

(d) Loans & Advances 1189.50 1174.08 910.18 959.20 (e) Other Current

Assets 83.10 50.97 27.71 30.10

Sub Total (A)

5420.59 5404.83 4961.81 4876.48

Current assets to fix assets ratio

Formula: current assets/fix assets

1.669 1.717 1.645 1.711

A finance manager has to determine an optical combination of the current and the fixed assets so that wealth of the share holders can be maximized. Due to risk and return trade off attached to it, such a decision becomes even more crucial. However for same level of output, firms can have different level of current assets. This occurs due to mind set of the management of the organization and there

working style. Some adopt a “CONSERVATIVE POLICY” in which they maintain a high level of current assets to remain technically solvent but bear high cost of it. On the other hand, some play “AGGRESSIVE POLICY” thereby maintaining low level of current assets, but this reduce their short term liquidity and hence make

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them preferable for the creditors. Between these two lies the “MODERATE POLICY” in which company tries to maintain a reasonable level of current assets which takes into consideration liquidity factor simultaneously with minimizing cost.

As far as Vadilal is concerned, from the above calculations we can easily make out that they have been very conservative in there attitude towards working capital. This might had happened possibly due to the liquidity problem which company had faced in the recent past. Current assets to fixed assets ratio has remained in the range of 1.65 to 1.72.

This shows that company has been loosing a substantial amount of money just because of their being over conservative. Current assets are required to support the fixed assets and hence are generally less than the amount of fixed assets. This shows that, there is a great scope for the company to improve in this area. This will be very useful in increasing the share holder’s wealth.

Moreover, as scale of operation increases, level of current assets required to support the fixed assets decreases. This is because now company starts enjoying economies of scale in their operation. However this thing is not quite visible in case of Vadilal proportion of current assets to total fixed assets has remained quite visible.

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ASSETMENT OF WORKING CAPITAL:

The existing working capital limits from the consortium were last approved on the basis of estimated net sales of Rs. 129.30 crore (Ice Cream division Rs. 91.92 crore and Agro division Rs. 37.38 crore) for the year 2005-2006, as against, the company has achieved net sales of Rs. 107.42 crore. For the year ended on 31/03/2006, which is 83.08% achievement.

The company has estimated/ projected net sales of Rs. 131.43 crore for the year 2006-2007 and Rs.144.58 for the year 2007-2008 and has requested to review existing WC fund limit to Rs. 24.50 crore. During the current year, company has achieved net sales of Rs. 91.60 crore for the 6 months ended on 30/09/2006. The company has clarified that they will achieve net sales of Rs. 131.43 crore during 2006-2007, as mentioned detailed head of sales.

Looking at the past achievement and clarifications furnished by the company, projected net sales of Rs. 131.43 crore. Appears achievable and funded working capital limits of Rs. 24.50 crore is assessed division wise as under.

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ICE CREAM DIVISION:

This division of the company has achieved net sales of Rs. 73.42 crore for the year ended on 31/03/2005, against estimated sales of Rs. 87.65 crore which shows 83.76% achievement. For the year ended on 31/03/2006 the division net sales of Rs. 77.31 crore with a growth of 5.30% over the previous year.

For the current financial year, the division has estimated net sales of Rs.98.31 crore, out which it has achieved net sales of Rs. 76.09 crore up to 30/09/02006. The company has projected net sales of Rs. 108.14 crore for the year ended on 31/03/2007, based on which working capital requirement of the division is assessed as under:

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(Rs. In crore)PARTICULARS Last

Accepted 31/03/2005

31/03/2006 31/03/2007 31/03/2008

Holding Mths Amt. Mths Amt. Mths Amt. Mths Amt.

Current AssetsStock Inv. Raw Materials 1.75 1.84 4.52 1.62 3.88 1.89 6.06 2.74 9.47Packing Materials 3.00 3.69 2.92 4.37 3.49 4.00 3.68 4.00 4.05Stock in process -- -- -- -- -- -- -- -- --Stores & Spares -- -- 0.77 -- 0.36 -- 0.46 -- 0.56Finished goods 0.50 0.77 3.36 0.65 2.70 0.80 3.84 0.80 4.29

Receivables Domestic 1.75 2.44 17.5 2.14 15.9 2.01 16.5 2.52 22.69 Exports -- -- -- -- -- -- -- -- --

Other Current AssetsCash & Bank Balance

-- -- 0.58 -- 0.25 -- 0.35 -- 0.40

Other Current Assets -- -- 2.73 -- 2.32 -- 3.98 -- 3.73

Total Current Assets

-- -- 32.4 -- 28.9 -- 34.9 -- 45.6

Current LiabilitiesCreditors for Goods 1.50 3.16 7.77 2.30 5.50 1.24 3.97 1.20 4.32Other Current Liabilities

-- -- 10.4 -- 8.39 -- 9.94 -- 10.23

Installment of TL due -- -- 0.00 -- 2.35 -- 1.00 -- 3.25Advance from customers

-- -- 0.50 -- 0.43 -- 0.44 -- 0.45

Total Current Liabilities

-- -- 18.6 -- 16.6 -- 15.4 -- 18.3

Working Capita Gap -- -- 13.8 -- 12.3 -- 19.5 -- 27.3

Minimum Required NWC

-- -- 8.10 -- 7.23 -- 8.72 -- 11.4

Actual/Projected NWC

-- -- 9.18 -- 7.77 -- 11.0 -- 17.3

MPBF -- -- 4.60 -- 4.57 -- 8.50 -- 10.00

Excess Borrowing -- -- -- -- -- -- -- -- --

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RAW MATERIAL:

The actual holdings for raw materials were 1.84 months and 1.62 months as on 31/03/2005 and 31/03/2006 respectively, against last accepted level of 1.75months which is in line with accepted level. The company has estimated/projected raw materials holding levels of 1.89 months as on 31/03/2007 and 2.74 months as on 31/03/2008 keeping in mind it’s planning to procure raw materials in bulk at competitive prices. Moreover, the company is proposed to set up new plants at Calcutta, therefore, the company has projected raw material holding level on high side.

PACKING MATERIAL:

Since the company introduces new flavors in variety of packaging, it has to maintain a higher level of packaging materials. The actual level of packaging materials were 3.69 months and 4.37 months as on 31/03/2005 and 31/03/2006 respectively as against last accepted level of 3.00 months. The company has estimated/projected holding level of 4.00 months for the year ended on 31/03/2007 and 31/03/2008, which may be treated as reasonable but still company should work out a policy to lower down this holding period. As it is not included in the operating cycle, however, it employs substantial amount of funds.

FINISHED GOODS:

The actual level of finished goods were 0.77 months as on 31/03/2005 and 0.65 months as on 31/03/2006, against last accepted level of 0.50 months. The company has to maintain higher holding of finished goods on account of different varieties of ice cream (over 200 items) and different packaging sizes, to meet with the market needs. The company has estimated/projected level of 0.80 months for the year ended on 31/03/2007 and 31/03/2008, which appears reasonable given the product range and seasonality factor.

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RECEIVABLES:

The company is marketing its products in the domestic market through its group company. Vadilal Enterprises Ltd. (VEL), The Company should make timely recovery from Vadilal Enterprises Limited as VEL is not extending this much of credit to its distributors. In this connection the company has explained that VEL is incurring all type of expenses such as market development, product development advertisement expenses, and distribution expenses etc, to promote the product along with its sales. Further VEL is investing sizable funds in Deep Freeze Machines and refrigerated vehicles to cater the Ice Cream to consumers. The actual level of debtors were 2.44 months and 2.14 months as on 31.03.2005 and 31.03.2006 respectively, which were higher compared to the last accepted level of 1.75 months. The company markets its products solely through its group company Vadilal Enterprise Limited. The company has estimated/projected level of receivables at 2.01 months as on 31.03.2007 and 2.52 months as on 31.03.2008. Which is line with the actual hence we may accept the same. However given the industry norms seems to be very high. Therefore, company should take some concrete steps to reduce this debtor collection period and hence increase the debtor turnover ratio. Due to this company’s working capital requirement increases significantly and hamper their profitability seriously.

Although these level of holding periods are quite high and objectionable, we still take them into consideration for the computation of the working capital requirement of the company because our aim is to workout feasible options and results which have some practical meaning rather than just having sound theoretical conformation.

OTHER CURRENT ASSETS: Break-up of other current assets is as under: (Rs. In crore)PARTICULARS 31/03/2005 31/03/2006 31/03/2007 31/03/2008

Interest Receivables 0.28 0.30 0.00 0.00Trade/ Security Deposits 1.09 0.55 0.60 0.65Deposit with Govt. Authorities

0.52 0.49 0.51 0.53

Other Misc. Current Assets. 0.84 0.98 2.87 2.55

TOTAL 2.73 2.32 3.98 3.73

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Other Current assets include the other trade deposit with “Vadilal International ltd.” The company explained that the Company has been granted exclusive and non-assignable license to use trademark within India and outside by way of execution of trademark license agreement between the company and “Vadilal International Ltd.”

Pursuant to the term of said agreement, company has kept interest free deposit of Rs. 4.00 crore with “Vadilal International Ltd.” for using “Vadilal” logo, which is shared by both Ice cream and Agro division, equally of Rs.2.00 crore each. Resultantly, Vadilal International Limited is not entitled for royalty payment as the deposit is in lieu of royalty payment. As the logo of “Vadilal” is necessary for running the business, the company has explained the deposit should be treated as a strategic investment and as such to be treated current assets. They have continued to treat as current assets.

The estimated/ projected level appears reasonable looking to the division.

CREDITORS FOR GOODS:

Actual level of creditors was at 3.16 months in 2005, and 2.30 months in 2006. The company has estimated/projected creditors for goods at the level of 1.24 months as on 31/03/2007 and 1.20 months as on 31/03/2008. The company has explained that they desire to make early payments to the creditors with an improvement in their Net Working capital and increase in working capital limits, for better bargain of purchase of raw materials. This will also improve their credit worthiness and hence quality of credit will increase.

POST SALE FACILITY IN ICE CREAM DIVISION:

In the Ice Cream division entire sales of the company is routed through Vadilal Enterprises limited. A group company and hence no post sale facilities for Ice Cream division is sanction/proposed. Vadilal Enterprises Ltd. is enjoying Working capital facilities of Rs. 2.75 crore against stock and book debts with Bank of India.

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AGRO DIVISION:

The division estimated net sales of Rs. 37.40 crore (Export sales of Rs. 27.38 crore), in 2005 -2006 against which it could achieve net sales of Rs. 30.11 crore (Export sales of Rs. 23.04 crore).

It has estimated net sales of Rs.33.12 crore (Export sales of Rs. 25.34 crore) in the current year 2006-2007. The company has achieved net sales of Rs. 24.23 crore (Export sales Rs. 15.76 crore) during April-September 2006.

The company has projected net sales of Rs. 36.44 crore for the year ended on 31/03/2008 (export sales of Rs. 27.88 crore), based on which the working capital requirement for its agro division is assessed as under:

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AGRO DIVIION: WORKING CAPITAL REUIREMENT

(RS. IN CRORE)PARTICULARS

31/03/2005 31/03/2006 31/03/2007 31/03/2008

Mths Amt. Mths Amt. Mths Amt. Mths Amt.

Current AssetsStock Inv. Raw Materials 0.07 0.08 0.08 0.07 0.07 0.07 0.07 0.08Packing Materials 0.35 0.12 3.04 1.00 0.50 0.20 0.50 0.22Stores & Spares -- 0.13 -- 0.40 -- 0.50 -- 0.60Finished goods 4.09 7.66 3.20 5.82 4.00 7.32 4.00 8.06

Receivables Domestic 0.90 0.50 0.37 0.22 2.05 1.33 3.08 2.20 Exports 0.95 1.79 1.22 2.35 2.00 4.00 3.00 6.97

Other Current AssetsCash & Bank Balance -- 0.29 -- 2.41 -- 2.55 -- 2.79Other Current Assets -- 6.20 -- 6.84 -- 7.75 -- 8.47

Total Current Assets -- 16.8 -- 19.7 -- 24.0 -- 29.4

Current LiabilitiesCreditors for Goods 1.13 1.25 1.47 1.21 1.41 1.50 1.43 1.61Other Current Liabilities

-- -- -- -- -- -- -- --

Installment of TL due -- -- -- -- -- -- -- 0.75Advance from customers

-- 0.14 -- 0.14 -- 0.19 -- 0.24

Current Liabilities -- 0.70 -- 0.74 -- 0.82 -- 0.98

Total Current Liabilities

-- 2.09 -- 2.19 -- 2.52 -- 3.58

Working Capita Gap -- 14.7 -- 16.9 -- 21.5 -- 25.8

Minimum Required NWC

-- 3.75 -- 4.19 -- 4.94 -- 5.61

(Exclusively Export Receipt)

Actual/Projected NWC -- 4.23 -- 4.91 -- 5.46 -- 5.81

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MPBF -- 10.5 -- 12.0 -- 16.0 -- 20.0

Excess Borrowing -- -- -- -- -- -- -- --

RAW MATERIALS:

The actual levels of holding were 0.07 months and 0.08 months as on 31/03/2005 and 31/03/2006 respectively. The company has projected holding level at 0.07 months as on 31/03/2007 and 31/03/2008 respectively, which is line with the last actual holding level hence we may accept the same.

PACKING MATERIAL:

Looking at the actual holding levels of packaging material they were 3.04 months as on 31/03/2006. It was on higher side due to packaging material purchased in last quarter of the year they may accepted as the estimated or projected level of holding at 0.50 months as on 31/03/2007 and 31/03/2008. Company should keep a strict check on this amount, as it is not directly involved into the operation cycle.

FINISHED GOODS:

The actual level of holding was 4.09 months as on 31/03/2005 and 3.20 months as on 31/03/2006. The company is required to procure the raw material during the crop season, process it and store it for dispatch through out the year till next season arrives. As such, Finished Goods holding remain very high. The company has actual or projected level of holding at 4.00 months as on 31/03/2007 and 31/03/2008, which in line with last accepted level hence may be accepted.

The holding period cannot be reduced due to seasonal availability of the raw material. Moreover in this case, as rightly said by Mr. Vishal Nayak, who heads the domestic agro business of Vadilal, company’s season of agro business is in the off season of that particular vegetable. When that vegetable is easily available in the market, nobody buys frozen vegetables. Therefore finished goods inventories are very natural to occur in case of Vadilal.

RECEIVABLES:

The actual level of holdings as on 31/03/2006 was 0.37 months for domestic and 1.22 months for exports receivables as against the accepted level of 2.00 months for the Domestic and Exports. The company has estimated or projected

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level of holding for Domestic receivables at 2.05 months and for exports at 2.00 months as on 31/03/2007. In view of the higher credit period is proposed to export buyers we may accept the above level. This has been decided as the promotional step for their agro export business. Two months seems to be quite reasonable in export business as transactions take more time for completion as compared to their domestic counterpart.

CREDITORS:

The actual level of holding was 1.13 months and 1.47 months as on 31/03/2005 and 31/03/2006 respectively, whereas the last accepted level was 1.52 months.

The company has estimated or projected the creditors at 1.41 as on 31/03/2007 and 1.43 months as on 31/03/2008,which is in the line with the actual hence we may be accepted.

These are quite satisfactory for Vadilal.

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ASSESSMENT OF NON FUND BASED LIMITS:

Letter of credit: Rs. 1.50 crore (D/P, D/A-Foreign/ Inland: Usage up to 120 days): The company requires letter of credit (L/C) limit for procurement of Raw Materials and Packaging Materials. Though the company has utilized the limit so far on need based for procurement of raw materials and or packaging materials, the company has submitted that they may require the facility for importing some raw materials in future at competitive rates.

Bank Guarantee: Rs.2.00 crore

The company requires to give guarantee to various Govt. authorities such as excise, sales tax etc. and at times performance guarantee to buyers for agro products and EMD etc.

Specific Financial Guarantee: Rs. 1.10 crore

Bank of Baroda favoring “Ministry of Food Processing Industry” sanctioned a specific financial Guarantee limit of Rs. 1.10 crore on 07/04/1999, outside the consortium due to urgent requirements of the Company. This Guarantee was required by the company for obtaining soft loan of 0.90 crore with interest @4.00% p.a. for a period of 6 years (Including one year’s moratorium). Company processes to continue with this limit.

Advance Money performance bank guarantee Limit: Rs. 1.75 crore

The company is getting Advance Money against Bank Guarantee from its customer’s i.e. Coca- Cola and Pepsi co (India) for supply of mango pulp etc. This limit is to allow against earmarking of stocks of Agro division. The advance money guarantee limit of Rs. 1.75 crore is proposed to continue with this limit.

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APPROVED MPBF: (Maximum Permissible Bank Finance)

The consortium member banks has approved the following MPBF, for Fund Based & non fund based credit limits/facilities for the year 2006-2007 in its meeting held on subject to approve of respective higher authorities of member banks, to Vadilal industries limited (VIL) as under:

Detail of facilities (In Crore) Nature of Facilities Existing

LimitProposed

Limit

Fund Based: Working Capital:

Ice Cream Division Cash Credit (Hypothecation of Stocks)

8.50 8.50

Agro Division a) Cash Credit (Hypothecation of Stocks)

3.00 3.00

b) PC, PCFC cum FBP/FBD/PSDL/FCBP 13.00 13.00

TOTAL(A) 24.50 24.50

Non Fund Based: For Both Divisions a) D.A.U.E 0.20 0.20 b) Guarantee (Inland/Foreign) 2.00 2.00 c) L/C (DP/DA 120 days) Foreign/ Inland 1.50 1.50 d) Advance Money Performance Guarantee

1.75 1.75

TOTAL(B) 5.45 5.45

Total Exposure 29.95 29.95

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WORKING CAPITAL—FINANCING

In India, short terms funds are used to finance working capital. Two most significant short-term source of finance for working capital are: Trade credit and Bank borrowing. The use of trade credit has been increasing over years in India. Trade credit as a potion of current assets is about 40%. Bank borrowing is the next important source of short term financing in the business for working capital finance. Before seventies bank credit is avail by the firms very easily. It becomes restricted source in the eighties and nineties because of the change in the government policy; Banks have to strictly follow the norms prescribed in financing working capital requirements of the firms. Now there are no government norms, and banks are free to take business decision in granting finance for working capital.

TWO OTHER SOURCE OF WORKING CAPITAL FINANCE RECENTLY DEVELOPS IN INDIA ARE:

FACTORING OF RECEIVABLES COMMERCIAL PAPER

TRADE CREDIT:

Trade credit refers to the credit that a customer gets from its suppliers of goods in the normal course of business. In practice, the buying firms do not have to pay cash immediately for the purchase made. This deferral of payments is a short term financing called trade credit. In India, it contributes to about one third of the short term financing. Particularly, small firms are heavily dependent on trade credit as a source of financing since they find its difficult to raise funds from banks or other sources in the capital markets.

Trade credit is mostly an informal arrangement, and it is granted on an open account basis. A supplier sends goods to the buyer on credit, which the buyer accepts, and in effect agrees to pay the amount due as per sales terms in the invoice. However, the buyer as debt does not formally acknowledge this. He does not sigh any legal instrument. Open account trade credit appears as sundry creditors on the buyer’s balance sheet.

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Trade credit may also take the form of bills payable. When a buyer signs a bill- a negotiable instrument- to obtain trade credit, it appears on the buyer’s balance sheet as bills payable. The bill has a specified future date, and is usually when the supplier is less sure about the buyer’s willingness and ability to pay, or when supplier wants cash by discounting the bill from a bank. A bill is formal acknowledgement of an obligation to repay the out standing amount.

BENEFITS OF TRADE CREDIT:

Trade credit is the spontaneous source of financing. As the volume of the trade of the firm increases, trade credit also expands. Major advantages of trade credit are as follows:

1.Easy Availability: Trade credit is relatively easy to obtain than other source of finance as direct interest (in the form of increased sales) of the supplier is attached to it. Except in the case of financially very unsound firm, it is almost automatic and dose not requires any negotiations. The easy availability is particularly important to small firms, which generally face difficulty in raising funds from the capital markets.

2.Flexibility: Flexibility is another advantage of the trade credit. Trade credit grows with the growth in the firm’s sale. The expansion in the form’s sale causes its purchases of goods and services to increase, which is automatically financed by the trade credit. In contrast, if the firm’s sale contract, purchases will decline and thus, consequently trade credit will also decline.

3.Informality: Trade credit is an informal and spontaneous source of finance it does not require any negotiation and formal agreement.

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COST OF TRADE CREDIT:

Trade credit appears to be a cost free source of finance, as it does not involve any explicit interest charges. However, in practice it is not free. It involves an implicit cost, which may be transferred to buyer by the supplier in the form-increased prices or the forgone cash discount extended by suppliers to buyer for the early payment of the dues. At times for meeting their finance requirements, companies stretch their account payables. However, this again proves to be very costly both implicitly and explicitly. Explicitly in the sense that company might have to pay penal interest for the delayed period and implicitly in the sense that this adversely affects the company’s credit worthiness.

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ACCRUED EXPENSES:

Accrued expenses representing a liability that a firm has to pay for the services that it has already received. They represent a spontaneous interest free source of financing. The most important components of the accruals are wages and salaries, taxes and interest.

Accrued wages and salaries represent obligations payable by the firm to its employees. The longer the payment interval, the greater the amount provided by the employees. However, legal and practical aspects put constraint on the flexibility of the firm in lengthening the payment interval.

Accrued taxes and interest constitute another source of financing. Corporate taxes are paid after the firm has earned the profits. This is deferred payment of the firm’s obligations and thus, is a source of finance. Like taxes, interest is paid periodically during the year while the firm continuously uses the borrowed funds. These expenses are not deferrable for long and a firm does not have control over its frequency and magnitude. It is a limited source of short term financing.

DEFERRED INCOME (RECEIVED IN ADVANCE):

Deferred income represents the funds received by the firm for goods and services, which it has agreed to supply in the future. These receipts increase the firm’s liquidity in the form of cash; therefore, they constitute an important source of financing.

Advance payments made by the customers constitute the main item of deferred income. These payments are not recorded as an income until the goods and services delivered to the customers. They are therefore shown as a liability in the firm’s balance sheet.

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BANK FINANCE FOR WORKING CAPITAL:

Banks are the main institutional source of the working capital finance in India. After trade credit bank credit is the most important source of financing working capital financing. The amount approved by the bank for the firm’s working capital is called credit limit. Credit limit is the maximum funds that a firm can obtain from the banking system. In the case of firm with seasonal business bank may fix separate limit for peak and non-peak season indicating the time period during the year when these two limits will be applicable. In practice’ bank do not land 100% of the limit sanctioned. They deduct Margin money from it.

Forms of bank finance:

A firm can withdraw funds from the bank in various forms within the maximum permissible limit. They are as follow:

1. Overdraft: Under overdraft facility the borrower is allow to withdraw funds in excess of the balance in his current account up to a certain specified limit during a stipulated period. Overdrawn amount is repayable on demand. It is a very flexible arrangement from the borrower’s point of view since he can withdraw and repay funds whenever he desires within the overall stipulation. Interest is charged on daily balances on the amount actually withdrawn subject to some minimum charges.

2. Cash Credit:

It is the most popular method of bank finance for working capital in India. Under the cash credit facility the borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit. He is not required to borrow the entire sanctioned credit at once, rather, he can withdraw periodically to the extent of his requirement and repay by depositing the surplus funds in his cash credit account. There is no commitment charge; therefore, interest is payable on the amount actually utilized by the borrower. Cash credit limits are sanctioned against the security of current assets. Funds borrowed under this facility are repayable on demand.

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3. Purchase or Discount of Bills:

The bank purchase or discounts the borrower’s bolls. The amount provided under this agreement is covered within the overall cash credit or over draft limit. When a bill is discounted, the borrower is paid the discounted amount of the bill. However bank collects the full amount on maturity. Difference between the amounts is the bank charge for its service.

4. Letter of credit: There is always remaining a risk on the part of being default on the part of the buyers. Therefore suppliers and particularly foreign suppliers insist on getting a guarantee from the buyer’s bank for the payment in the event of default on the part of the buyer. This facility extended by the bank to its customers in the form of an instrument called “Letter of credit”. This arrangement passes the risk of suppliers to the bank. This facility is only extended to the bank only to the sound customers. However, unlike cash credit or overdraft facility letter of credit is an indirect form of financing; the bank will make payment on behalf of the buyer only if he fails his obligation.

5. Working capital loan:

A borrower sometimes required an extra amount of funds due to occurrence of some unforeseen contingencies. This is given to them in the form working capital loan. However borrower is required to pay a higher rate of interest as compared to the normal rate.

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GUIDELINES FOR BANK FINANCE:

Bank credit is a scare source of finance. Banks are the safest place for an individual to keep money. However, returns on bank deposits are very less as compared to the other investments options. Therefore banks get limited amount of deposits that they can offer under various credit facilities. Moreover there are many other contenders for the bank credit. This mainly includes the agricultural, small-scale industries, farmers, small man and many others. Public enterprises also approach commercial banks for their working capital requirement.

Hence, monetary authorities have been very particular regarding the efficient and legitimate use of bank finance by the companies. In this regards, reserve bank of India has taken many steps from time to time for beginning many changes in the bank system with the changing needs. An important chapter of these changing needs is the reform journey of “Tondon committee and the Chore committee”.

These committees laid down norms that formed the basis for extending bank finance to the companies for fulfilling their credit needs for the working capital. They introduced the concept of MPBF (Maximum Permissible Bank Finance). MPBF formed a substantial part of the working capital gap (Current assets-Current liabilities). This was done on the recommendations of the working committee according to which banks were recommended to finance only a part of working capital requirement and not the 100%. Logic behind such recommendation was that, since certain amount remains invested in the business on permanent basis, which is also termed as permanent working capital, such amount should be finance from the long termed source of funds of the firm.

These committees also recommended on the style of credit and the information system (flow). In addition to this chore committee recommended banks to consider peak and non peak limits separately in the case of the businesses which are having seasonal element in them.

These efforts have been very successful in reforming the credit system of the banks. It has resulted in more optimize usage of bank finance. However still we have to do a long way on this path since lot of inefficiency still exist some of which have developed with the passage of time and changing requirement.

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COMMERCIAL PAPER:

Commercial paper is an important money market instrument to raise short-term funds. They were introduced in India by reserve bank of India on the recommendations of the Vaghul working in the year 1989.

Commercial paper is a form of unsecured promissory note issued by firms to raise short-term funds. The buyers of commercial papers include banks, insurance companies, unit trusts and firms with surplus funds to invest for short period with minimum risk. Given this investment objective of the investor in the commercial paper market, there exists demand for commercial papers of highly creditworthy companies.

Corporate, Primary dealers (PDs) and the All India financial institutions (FIs) are eligible to issue commercial papers (CPs) A company can issue commercial paper amounting to 75% of the maximum permitted bank credit. Maturity of commercial paper in India lies between 91 to 180 days. Interest on the commercial paper is less than bank borrowing rate. A firm does not pay interest on the commercial paper rather sells it at a discount rate from the face value. They later redeemed at par.

A corporate would be eligible to issue CPs provided--

A). The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4.00 crore.

B). Company has been sanctioned working capital limit by banks or All India financial institutions: and

C).The financing Banks or institutions classifies the borrower account of the company as a Standard Assets.

All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India (CRISIL) or Investment Information and Credit Rating Agency of India limited (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Rating India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose.

The minimum credit rating shall be of CRISIL or such equivalent rating by other agencies.

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The issuers shall ensure at the time of issuance of CPs that the rating so obtained is current and has not fallen due for review and the maturity date of CPs should not Government beyond the date up to which the credit rating of the issuer is valid.

MARITS:

1.) It is an alternate source of short-term finance during the period of tight bank Credit.

2.) It is a cheaper source in comparison to bank credit.

3.) From an investor prospective, it gives him an opportunity to make a safe short-term investment of surplus funds.

LIMITATIONS:

1). Maturity of the paper cannot be extended. 2). It is available only to the highest rated companies. A

company facing Temporary liquidity problems may not be able to raise funds by issuing Commercial papers.

3). Amount of funds available in the commercial paper

market is limited to the Excess liquidity of the purchasers of the commercial paper.

4). It cannot be redeemed before maturity. Therefore, if a

firm does not need fund any more, it has to still incur the cost of interest.

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FACTORING:

Factoring is a unique financial innovation. It is both a financial as well as management support to the client. It is a method of converting a non- productive, inactive asset by selling its receivables to a company that specializes in their collection and administration.

The agreement between the supplier and the factor specifies procure. Usually, the firm sends the customers orders to the factor for evaluating the customer creditworthiness and approval. Once the factor is satisfied by the customer’s creditworthiness and agrees by it, the firm dispatches the goods to the customer. The customer will be informed that his account has been sold to the factor, and thus he is instructed to make payment to the factor.

FACTORING SERVICES:

Purchase of receivables is considered to be the fundamental function of factoring. However, factor provided following three services:

1.) Sales ledger administration and credit management.2.)Credit collections and protections against the default and bad-

debt losses.3.) Financial accommodation against the assigned book debts.

COST AND BENEFITS OF FACTORING:

There are two types of costs involved:

1.) The factoring commission or service fees.2.) The interest on advance granted by the factor to the firm.

Factoring commission is paid for the credit evaluation and collection and other services and to cover bad debt losses. Also the interest on advances is higher than the prevailing prime rate of interest or the bank overdraft rate.

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BANEFITS OF FACTORING:

1.) Factoring provides specialized services in the credit management, and thus, helps the firm’s management to concentrate on manufacturing and marketing.

2.) Factoring helps the firms to save cost of credit administration due to scale of economic and specialization.

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EXPORT FINANCE-VARIOUS OPTIONS AVAILABLE

Export finance is a short-term, working capital finance allowed to an exporter. An exporter may avail financial assistance from any bank. Commercial banks dealing in export finance are bound by the guideline being issued by the Reserve Bank of India. (Exchange control regulation by FEMA-1999, Industrial and export credit department guidelines, department of banking operations and development guidelines), Trade control organizations, internal chamber of commerce guidelines-UCPDA, Export credit guarantee corporation guidelines, FEDAI guidelines.

Type of credit facilities available:

There are basically two types of credit facilities available for exporters from banks for meeting their working capital requirement. They are- 1). Pre shipment finance, 2). Post-shipment finance.

PRE-SHIPMENT FINANCE:

It consists of three kinds of facilities: A) Packing credit (EPC/PCFC)B) Advances against receivables from the government like duty

draw backs etc.C) Advance against cheques/drafts received as advance

payments.

A.) PACKING CREDIT (EPC/PCFC):

This facility available to the exporters against the confirm export orders in their hands. Money is required for arranging, packaging and shipment of the required material as per the specifications of the export order. Packaging credit is available for the period of 90, 180, 20, 360 days as per the requirement of the exporter, provided they fulfill the regulations and requirements of the bank.

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B.) QUANTUM OF FINANCE:

Usually bank will maintain a margin of 25% on the FOB value of the contract. Insurance and freight charges can also be financed at a larger stage.

LIQUIDITY OF PACKAGING CREDIT:

Packaging credit advances are always liquidated with the export proceeds of the relevant shipment. At this stage pre-shipment liability of the exporter is converted to the post shipment liability.

For any reason if export does not take place at all, entire advance will be recovered at appropriate interest applicable to “export credit not otherwise specified” plus 2% from the original date of advance.

Packing credit can be avail in two ways that is EPC i.e. Export Packing Credit and PCFC i.e. Packing Credit in Foreign Currency. A major difference in the two that, while on EPC interest is charge at a sub BPLR rate. However, on PCFC interest is charged at LIBOR i.e. London Inter Bank Offered Rate. Therefore the later one proves to be cheap as compared to its counterpart.

Facility of PCFC is available in all the convertible foreign currency and covers only cash exports.

ADVANCE AGAINST CHEQUE/DRAFTS RECEIVED AS ADVANCE PAYMENTS:

If an exporter receives either a cheques or draft representing advance payment towards future exports and in case will be treated as export finance for working capital and a concessional rate of interest will be charge on it like a normal pre-shipment advance.

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POST-SHIPMENT ADVANCE:

Post shipment finance is essentially an advance against receivables, which will be in the form shipping documents. Payment should be received in an approved manner within the prescribed limit but with in a maximum period of six months from the date of shipment. For realization of export proceeds, countries all over the world have been divided into two groups’ i.e. Asian Clearing Union (ACU) and non-ACU countries. Exports to the group of ACU countries (Myanmar, Bangladesh, Pakistan, Iran, and Sri-Lanka) should be realized in ACU dollar (U.S.Dollar). Other than ACU Countries realization of the exports proceeds can be in any freely convertible currencies.

DIFFERENT TYPES OF POST-SHIPMENT ADVANCES:

1). Export bills Purchased/Discounted. 2). Export bills Negotiated 3). Advance against export bills sent on collection basis. 4). Advance against export on consignment basis. 5). Advance against Undrawn balances. 6). Advance against duty drawback.

1). Export bills Purchased/Discounted (Other than LC):

The export bills, representing genuine international trade transactions, strictly drawn in terms of Technology sale contract/live firm contract/order may be discounted or purchased by the banks. Proper limit is sanction to the exporter for purchase of export bills facility. Since, the export is not covered under the latter of credit; risk of non- payment may arise. The risk is more pronounce in case of documents under acceptance. In order to safe guard the interest of the bank and also the exporter, ECGC offers coverage of credit risk through their guarantee policy at the post-shipment stage.

2). Export bills Negotiated:

When export documents, draw under LC, are presented to the bank for negotiation, they are care fully scrutinized to check that they confirm to the terms and the conditions of the LC. LC issuing bank under takes its commitment only if the

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beneficiary submits the stipulated documents confirming to LC terms. Even a slight deviation from those terms can give an excuse to the issuing bank refusing the payments to the negotiating bank.

3). Advance Against Export Bills Sent on Collection Basis:

At times, the exporter might have fully utilized his bills limit in certain cases the bills drawn under LC may have some discrepancies. On such cases the bills is sent on collection basis. In some cases, the exporter himself may request for sending the bills on collection basis anticipating the strengthening of the foreign currency. Banks may allow advance against these collection to an exporter.

4). Advance Against goods Sent On Consignment Basis:

Goods are exported on consignment basis at the risk of exporter to sell abroad. Eventual remittance of the sales proceed will be made by the agent or consignee. The overseas branch correspondent of the bank will be instructed to deliver documents against trust receipt. Advances granted against the export bill covering goods sent on consignment basis will be liquidated from remittance of the sale proceeds with in six months from the date of shipment, confirming to the exchange control regulations.

5). Advance against Undrawn Balance:

In certain line of export trade, it is the practice of the exporter to leave a part of the amount as undrawn balance. Adjustments are made by the buyer for difference in weight, quality etc. Ascertained after arrival and inspection or analysis of the goods. Authorized dealers can handle such bills provided the Undrawn balance is in conformity with the normal level of balance left Undrawn in the particular line of export trade subject to a maximum of 10% of the full export value.

6). Advance against Receivables from Government Such As Duty Drawback:

Where the domestic cost of production of certain goods is higher in relation to international price, the exporter may be

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got support from the government so that he may compete effectively in the overseas market. The government of India and other agencies provides export incentives under the export promotion scheme. This can only be in the form of refund of excise and custom duty known as Duty Drawback.

Banks will grants advances to the exporters against their entitlement under above category at lower rate of interest for a maximum period of 90 days. However, these advances being in the nature of unsecured advances cannot be granted in isolation and could be granted only if all other type of the export finance is extended to the exporter by the same bank.

Maximum Eligible Finance:

In the case of Post-Shipment advances, normally no margin is maintained for bills drawn under LCs. Only in case of export bills purchased against contracts or firms orders, depending on the additional security available, some banks demand certain amount of margin.

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New Scheme of Export Financing:

Rediscounting of Export Bills Abroad: (EBRD)

This facility will be an additional window available to the exporter along with the existing rupee financing schemes to an exporter at post shipment stage. This facility is available in all convertible currency. The scheme covers export bills up to 180 days from the date of shipment (Inclusive of normal transit period and the grace period).

The scheme envisaged Ads rediscounting the export bills in overseas markets by marketing arrangements with an agency or bank by way of a credit or banker’s acceptance facilities or any other similar facilities at rates linked to the London inter bank offered rate (LIBOR) for six months.

Exporters can also directly arrange for rediscounting facilities abroad without prior permission from the reserve bank provided the spread stipulations mentions in the above paragraph are adhered to. The exporter will, however, be required to arrange the facility through a designated branch of the authorized dealers.

Options for the Exporters:

Now exporters have got the following options:

a). To avail pre- shipment credit and post-shipment in rupees.

b). To avail pre-shipments in rupees and post- shipment in the form of Rediscounting of export bills in foreign currency.

c). To avail pre- shipment in foreign currency (PCFC) and post- shipment as Export bills Rediscounting in foreign currency (EBRD).

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Exporter will try to avail any facility in the denominated foreign currency depending upon the premium or discounting factor of the currency in which he has got exposure. For example: If the exporter has got exposure in U.S.Dollar and if this currency is at premium beyond a particular level, he will not Government for any foreign currency facility. Instead, He will prefer to avail rupee loan and try to earn the premium factor of the dollar.

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FINANCING OF WORKING CAPITAL IN THE PAST:

For fulfilling its working capital requirement company has to be relied upon banks and have taken various kinds of fund based and non-fund based credit facilities from them. This includes:

1). Cash Credit 2). Working Capital Demand Loan 3). PCFC i.e. Packing Credit In Foreign Currency. 4). EPC i.e. Export Packing Credit (In Domestic Currency). 5). Overdraft. 6). Bill Discounting From Banks. 7). Letter Of Credit.

Company has been dealing with banks since its inception. Currently they have a consortium of six banks which includes:

1). Bank of Baroda. 2). State Ban of India. 3). State Bank of Travancore. 4). South India Bank. 5). EXIM Bank. 6). IDBI Bank.

This banks have been sanctioned MPBF (Maximum Permissible Bank Finance) for an amount of 29.75 crore to the current year 2007-2008 as well as previous year 2006-2007. This includes both fund based and non-fund based limit.

WHY A BANK CONSORTIUM?

A consortium is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with objective of participating in a common activity or pooling their resources for achieving a common goal.

Consortium is a Latin word, means “Partnership, Association or Society” and derives from consort “Partner”, itself from con-“Together” sorts-“Fate”, meaning owner of means or comrade.

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Bank Consortium means an association of more than one bank, which joins together to fulfill the financial requirements of any company. They share a proportionate charge on the company’s assets and finance the requirements of the company proportionately in a pre decided manner. Such arrangements diversified the risk from any one bank. In other words risk of default on the part of the company gets divided among the consortium members hence a bank can finance a more amount of money depending on the degree of risk it can take.

Consortium banking is faded away with the demise of financial institutions. However, that the kind of revolution that had occurred in the financial system of India, this concept is regaining its popularity. According to banking sources, banks are appointing a single security trustee who will draft the terms and conditions for the entire group of banks involved in lending.

Consortium lending had become past due to problem in setting non-performing assets to the Corporate Debt Restructuring (CDR) method. Disagreement among bankers used to cause the entire process to fall through. In extreme cases in the past, even major lenders had gone ahead with the debt restructuring process without the full consent of lenders. Therefore each bank had decided to have its own terms and conditions for lending to a corporate account. However, consortium banking has made a come back after the legal procedure, for setting bad accounts has been simplified and streamlined by the Reserve Bank Of India, and through the enactment of the Securitization Act.

Company also has excess to the private sources for funds in the form of Bill Discounting. However this source is used only to fill the transitional gaps on monthly bases. This is not any major source of finance.

Given the history of Vadilal, these banks have been the most feasible source for financing their requirement of working capital. Banks generally do not finance with adequate security. Company has very well fulfilled these requirements by means of hypothecation of stock and mortgage of fixed assets.

Apart from this, company also uses trade credit from its suppliers in the form of sundry creditors, which are also known as account payable.

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As far as the cost of the funds it concerned, they are as well as per the running market rates and nothing extra is to be paid. However, their cost variates due to change in bank interest rates i.e. BPLR (Benchmark Price Lending Rate) from time to time. Thus from all this we can say that company has quite successfully met its finance requirement for their working capital given the external and internal limitations.

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CURRENT SENARIO OF FINANCING THE ICE-CREAM BUSINESS:

Company is still relies upon banks for fulfilling there working capital requirement for which they have taken various above mentioned facilities from bank. Following are the technical aspect of the each of the availed facility by the company for there domestic business of ice cream.

a). Cash Credit:

Purpose: To Meet The Working Capital Needs Of Their Ice-Cream Business.

Security: Company is required to maintain sufficient security for this facility with the bank. They are as follow:

1). D.P. (Drawing power) not executed by the company.

2). Hypothecation of raw material, finished goods, stores and spares, Packing material lying or stored at their Dudheshwar, Bareilly, Pundra, Proposed plant at Culcutta and other godowns of there associate concerns at company’s C&F site and other place.

3). Letter of continuing security.

4). Letter of undertaking.

5). Irrecoverable power of Attorney for book debts.

Provision: Cash Credit limit is allowed against stock at various plants as per requirement.

General Terms:

1). Company requires to submit monthly statement of stock and book debts hypothecated to the bank as of the last date of each month by 10th of the following month. Any delay attracts penal interest @ 2% p.a. no drawing is allowed against unpaid stock.

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2). No drawing is allowed on the goods received against LC and they are to be shown separately in the stock statement.

3). Company is required to take full insurance of the stock covering comprehensive risk in the name of the bank and original policy is to be submitted to the bank.

4). Company is also required to submit statement of book debt every of month. A chartered accountant at the end should duly certify such a statement every quarter.

Margin: Margin requirement for availing this facility is 25%, which is to be maintained by the company.

ROI: Interest rate is equal to BPLR + Spread Of Bank. However this is subject maintained by the company. The credit rating of the company.

This facility has mandatory approved annually.

Apart from this company heavily uses trade credit to finance their working capital requirement for their ice cream business. Company also uses private bill discounting for their short terms funds requirement at reasonable rates.

Another major source of finance that Vadilal uses to finance there working capital requirement in their ice cream business is “TRADE CREDIT”. Credit periods taken from the creditors are quite high. This might be proving costly for the company, as trade credit is not a free source of finance: Explicit costs are attached to it.

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CURRENT EXPORT FINANCING PATENT OF VADILAL:

Currently company has taken both the type of financing facilities from the bank i.e. PRE and POST-Shipment financing. Under pre-shipment company takes two types of credit facilities i.e. EPC (Export Packing Credit) and PCFC (Packing Credit in Foreign Currency), under pre-shipment they have taken FBD/FBP (Foreign Bill Discounting and Foreign Bill Purchase) for meeting their working capital requirement. Now their financing mechanism goes like this:

Company takes credit on the export orders on hand through EPC/PCFC widow for producing goods. These goods are than transported through ship to their destination. In this whole transaction it is the banks of both the parties (Vadilal and their customers) that take care of the financial aspect of the transaction.

On our request our bank puts money in our CC account for utilization. Such a credit is permissible for 180 days. Within this 180 days company is required to submit the export documents in the bank for realizing payment from the foreign party. EPC/PCFC account is liquidated when payment is received from the foreign customer by its bank and then duly deposited in our banks account in India.

After goods are sent for pre-shipment, documents are submitted to the domestic bank with 180 days (failing to this bank charges 2% penal interest from the company). These documents include invoice and inland letter. These documents are than submitted to the foreign bank by the domestic bank seeking conformation of the payment by the customer within the stipulated period. Then these documents are given to the customer against, which he can take delivery of the goods from the shipping company.

On the due date, customer makes payment to their bank and that bank submits the amount to our bank and hence the account is liquidated.

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As far as Vadilal is concerns they have to pay this penal interest almost regularly. This mainly due to the seasonality of the business. Since their raw material like Mangoes are seasonal in nature, company has to procure it once in a year keeping in mind their requirement for the whole year. Company takes orders from their customers in advance for the whole year and accordingly takes EPC/PCFC for procurement of raw material.

It is but natural that the period of 180 days is crossed and hence they have to pay penal interest. This is a serious loophole in case of export working capital financing of Vadilal.

Company has also taken “POST-SHIPMENT” financing facilities from the consortium in the form of FBP/FBD. Whenever the company is in the in of extra financing they take it from the bank by discounting their export invoices from the bank.

In this, when after taking EPC/PCFC, company makes goods and send them, they raise invoice for it. The Vadilal from the bank discounts these invoices. However bank discounting those against EPC i.e. company’s EPC is liquidated and FBD/FBP is raised thus name of the liability changes and company is able to get more finance for its operations.

Company has taken these facilities in a smart manner. Company has taken combine limit for these facilities. This facilitates them to use the idle funds in one facility for the other.

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TECHNICAL DETAILS OF ABOVE MENTIONED VARIOUS FUNDING

FACILITIES ARE AS FOLLOW:

1). Nature of Facilities: FBD/FBP/PCFC

Security: Following securities are required A). D.P. not signed by the company.

B). Hypothecation of the book debts. C). Power of attorney executed by the

company.

D). Stamped under taking with respect to liquidation of the post-Shipment demand loan.

E). Letter of pledge of security.

F). Letter of FBP under taking of purchase of demand documentary bills drawn to the company on the overseas buyers accompanied by shipping documents.

Margin: Margin required for this purpose is NIL.

ROI: It is based on the BPLR (it is sub BPLR) and depends upon the time period for which we take this facility.

General Terms:

1). Company requires to submit monthly statement of stock and book Debts hypothecated to the bank as of the last date of each month by 10th of the following month. Any delay attracts penal interest @ 2% p.a. no drawing is allowed against unpaid stock.

2). No drawing is allowed on the goods received against LC and they are to be shown separately in the stock statement.

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3). Company is required to take full insurance of the stock covering comprehensive risk in the name of the bank and original policy is to be submitted to the bank.

4). Company is also required to submit statement of book debt every of month. A chartered accountant at the end should duly certify such a statement every quarter.

5). Company has to take out for all exports, Export performance insurance of ECGC to cover FBP/PSDL credit facilities and the copy of the same to be kept on branches records and company should declare each shipment under the said policy.

2). Nature of Facility: Drawings against Unclear Effects (review)

Purpose: For drawing against Cheques and D.D in clearing.

Security: Company is required to give letter of recording to the bank.

Margin: Margin require in this case is NIL.

Commission and Interest: They are charged as per the rules of the banks.

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NON-FUND BASED LIMIT:

1). Nature of Facility: Inland/Foreign letter of credit

Purpose: To procure raw material, packing material and spares etc.

Margin: 10% cash margin in the form of FDR

Commission and Interest: As per FEDAI (Foreign Export and Development Authority of India) rules or RBI/ Bank’s rules.

Security: A). L/C application executed by the company. B). Hypothecation of goods procured under DA

L/C.

2). Nature of Facility: Inland/Foreign letter of Guarantee.

Purpose: A). For issuing guarantee in lieu of EMD advance and performance.

B). For issue of guarantees to various government departments.

C). For issue of guarantees to co-operative dairies for supply of milk etc.

Margin: Company is required to maintain 10% cash margin in the form of FDR

Commission and Interest: It is charged as per the bank rules.

Security: A). Counter immediately to be executed by the company under its common seal.

B). Other papers/ documents as required by the bank from time to time.

3). Nature of Facility: Advance Money Performance Guarantee.

Purpose: The guarantee should be issued as against advance money to received from Hindustan Coca-Cola bottling northwest private limited and Pepsi co India holding limited and their associates companies.

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Margin: Company is required to maintain 10% cash margin in the form of FDR

Commission and Interest: It is charged as per the bank rules.

Security: A). Counter immediately to be executed by the company under its common seal.

B). Extension of hypothecation of goods created under cash credit.

C). Stock against outstanding in advance money guarantee limit to be earmarked. No drawing against such stock in cash credit to be given.

LOOPHOLES –LEVERAGED BY THE EXPORTERS:

In present scenario exporters raised dummy orders and takes PCFC against them. They keep that amount in CC account and thus, they save interest a lot. However a point to be noted is that these orders are not 100% dummy; they are so only for a short period. Company places dummy orders in anticipation of the actual orders in futures. This is done on the basis of the past experience and taking into consideration last years transactions with the customers.

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MONEY MARKETS-INTRODUCTION:

The money markets are the financial markets for the transactions in wholesale short-term loans and deposits, and trading for short-term financial instruments. Many money market transactions are overnight, from one day to the next, and most transactions have maturity of three months or les. Money market exits to meet the needs of the financial institutions and companies seeking short-terms funding or with a short-terms surplus of funds to lend or invest for a limited period.

Well functioning money markets providing a safe income yielding outlets for the short- term investment of funds both for the banks and firms and also be an important source of short-term funds for banks in need of quick liquidity.

Indian money markets were fairly under the age of development till mid 80’s. The most prominent of money markets during those times was the inter bank call money market which was restricted market with a narrow base and limited number of participants. The T-BILL market was also very narrow with reserve bank of India holding most of the T-BILLS outstanding. Key money market instruments, which are common in the developed markets of the advanced market economies such as certificates of deposits and commercial papers, did not exist. Since the mid 80’s however, money market in India have under gone a great deal of change. Instrumental in this change has been the recommendations of two influential committee reports commissioned by the reserve bank of India in the mid 80’s, the Chakravarty committee, which submitted it’s its report in the 1985 and the Vaghul committee, which submitted it’s report in 1987.

Closer examination of the financial institutions reveals that beyond the simple act of exchanging securities for funds. There are major differences between one financial transaction and another. The purposes for which the money is borrowed with in the financial system vary greatly from person to person, institutions to institutions, and transactions to transactions. And the different purposes for which the money is borrowed result in the creation of different kind of financial assets, having different maturities, yields, default risks, and other features.

In the nation’s money market, loans have an original maturity of one year or less. Money markets loans are used to helps corporations and government to pay the wages and salaries to

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the workers, make repairs, purchase inventories, pay dividends and taxes, and satisfy other short terms working capital needs.

Money market in a large financial center consists of following:

1). The inter bank markets for the short terms loans and deposits.

2). The EURO currency market.

3). The market in discount instruments like Treasury bills, Bank bills and trade bills.

4). The market in certificate of deposits.

5). The commercial paper market.

6). The market for sale and repurchase agreement (Repo market).

These all are “OVER THE COUNTER” (OTC) markets, in the sense that trading or dealing is not conducted in a single location on an exchange floor. Rather the market is consist of a huge web of inter connected direct dealing lines, telephone lines and customer links at offices of banks, brokers, other financial institutions and large and medium size non-bank companies.

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WHO USES MONEY MARKETS?

Money markets are used by organizations with funds to lend or invest short term. These are mainly banks and investment institutions but also include government agencies, and commercial companies.

Participants in the market fall into three broad category:

a). Borrowers. b). Lenders/Investors. c). Intermediaries:

1) Money brokers2) Bringing borrower3) Lender/investor together.

Some financial institutions specialized in money market transactions, Buying and selling money market instruments, or accepting short-term cash deposits and reinvesting the funds in short- term instruments.

Money markets are important for the commercial banking system. Banks settle are large portion of the payment transaction of their customers by transferring funds between their accounts at the central bank. In addition, the banks settle payment between bank customers and the government, like, payment of taxes, with the central government through their accounts at the central bank. At any time individual bank might have a shortage or surplus of funds. Inter bank transactions, to borrow short term to fund a shortage and lend short-term to earn interest income from a surplus, are an important feature of money market operations.

Money markets are also significant because interest rates in these markets affect interest rates in other banking operations, particularly bank lending.

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MAJOR SEGMENTS IN MONEY MARKET:

The major segments of the money markets in India are call (overnight money), Short notice (up to 14 days money), Certificates of deposits (CDs), Commercial papers (CPs), Commercial bills and Money Market Mutual Funds (MMMFs). The activities in most of these segments other than call money and to some extent commercial papers and commercial bills were negligible.

The following short-term investment opportunities are available to companies in India to invest their temporary cash surplus.

1). TREASURY BILLS:

Treasury bills (TBs) are short-term government securities. The usual practice in India is to sell TB at discount and redeem them at par on the maturity. The difference between the issue price and the redemption price, adjusted for the time value of the money, is return on treasury bills. They can be bought and sold at any time thus they have liquidity. Also they do not have the default risk.

2). COMMERCIAL PAPERS:

They are short-term unsecured securities issued by highly credit worthy large companies. They are issued with a maturity of three months to one year. CPs is marketable securities, and therefore, liquidity is nit a problem. (They have been discussed in detail in the previous portion of this report).

3). CERTIFICATES OF DEPOSITS:

They are papers issued by banks acknowledging fixed deposits for a specified period of time. CDs are negotiable instruments that make them marketable securities.

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4). BANK DEPOSITS:

Firms can deposits temporary cash in a bank for fixed period of time. The interest rate depends on the maturity period. For example: the current interest rate 30 to 45 days deposit is about 4% and for 180 days to one year is about 8% to 9%. The default risk of the bank deposits is quite low since the government owns most banks in India.

5). INTER CORPORATE DEPOSITS:

Inter-corporate landing/borrowing or deposits (ICD) is a popular short-term investment alternative for companies in India. Generally a cash surplus company will deposit its funds in a sister or associate companies can negotiate inter-corporate borrowings or landing for very short periods. The risk of default is high, but returns are quite attractive.

6). MONEY MARKET MUTUAL FUNDS: (MMMFs)

MMMFs focus on short-term marketable securities such as TBs, CPs, and CDs or Call Money. They have a minimum lock in period of 30 days, and after this period, investor can withdraw his or her money any time at a short notice or even across the counter in some cases. They offer attractive yields. They are usually 2% above than on bank deposits of same maturity. MMMFs are of recent origin in India, and they have become quite popular with institutional investor and some companies.

OVERVIEW OF MONEY MARKETS:

A). Banks, Market Dealers (Loans, Deposits, Bills, CD, CP and Repo).

B). Large non-bank companies.

C). Local government authorities.

D). Small non-bank companies & Retail investors.

E). Central Government/ Central bank.

F). Other Financial Institutions.

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MONEY MARKET- AS AN OPTION FOR VADILAL:

Vadilal has not been active in the money market in the recent past. Company has restricted itself to banks and trade credits for fulfilling their financing requirement. This has primarily happened due to following reason:

A). Lack of orientation towards it. B). Low credit rating. C). Absence of feasibility of the available product.

For some reasons, Vadilal is always demand side of the funds. Due to low credit rating, company could not use financing option of commercial papers. However, company has been using the option of inter corporate deposits occasionally. But this is happening with in the group companies only. Company has never been able to accumulate surplus cash and therefore, instruments available for parking surplus funds automatically closes.

Since company is drawing and their scale of operation is expanding, it is advisable that company should work out a financial option for their working capital requirement from money market.

Given the present tools, the commercial paper seems to be the most suitable one. However, as discussed earlier, a company needs to fulfill some basic criteria as directed by the reserve bank of India for becoming eligible for issuing commercial papers.

Vadilal fulfill all the criteria except for the credit rating of at least P-2 from CRISIL or an equivalent rating by other agencies. Therefore, company should work on improving its credit rating. This will benefits company in their all respects. It will also lower down their existing rate of interest on the currently available credits facilities from the banks. This is not some thing witch company can do within one or two months, it is an on going process, and might take years. But company will have to think about it, the more early they do, the better it is for them.

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CONCLUSION:

Vadilal being a growing enterprise is on the expanding mode. This is even favored by the growing market for its products and hence company’s funds requirements are always on up swing. As far as the conformity of the existing practices to the prescribe norms is concerned, there are differences and some of them are substantial. Whether it is inventory management policy or receivable management policy, certain things are objectionable. But the company justifies them officially, given the seasonal nature of the business. Competition in the ICE-CREAM markets is continually growing and thus there is a constant pressure on the profit margin of the company. Hence to remain profitable, company must reduce its operating cost to the maximum possible extent. An efficient management of the working capital will automatically ensure it.

Company should also try to explore various other source of financing which includes money market instruments primarily. These funds are cheap as compared to bank finance but involved may issue which are critical to their access. Company must take care of it.

One thing I would like to mention at this time is that, “W0RKING CAPITAL” cannot be managed in isolation. Various other financial departments have an effect over it. It is infect a back line work, which supports forward line activity of sales and marketing. No one department works in isolation, it has to be a comprehensive growth of the company as a whole.

OBSERVATION & RECOMMANDATION

In this line I would like to mention the observation that I have made in the last 7 week of my training;

Company prepares two categories of products, one is ICE CREAM and the second one is FROZEN DESERT. The basic difference between the two is that, while later is prepared from skimmed milk powder and vegetables oil, Ice cream is prepared from milk. Certainly there is a huge difference in the taste of both the products. However, USP of frozen dessert is that it is a health friendly product as compared to ice cream, which contains lot of

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categories. People are less aware of this fact and they compare this product with ice cream only. In fact they consume it considering ice cream only despite of the fact that it is no-where written on the packing that it is ice cream. Therefore on the taste parameter, consumer rate it is a low product.

I feel, company should make efforts to float it as a separate category of product and position it distinctly in to the minds of consumer. At present there is a confused position it distinctly into the minds of consumer. At present there is a confused positioning of the product and this is having a negative impact on sales of this product. Instead of “ONE + ONE” offer, company should sell it at a premium but certainly at a lower cost then that of the ice cream. Company should launch a campaign for educating customer regarding the benefits of this product so that we can create a distinct consumer segment for it.

At the end, I would like to say that, given the internal and external circumstances, company is managing their working capital quite successfully. But there is still a huge scope for improvement. Those improvements are on the desirable mode now but will definitely become mandatory in near future as business environment will become more complicated and competitive. Company should think about it and introduce necessary changes keeping in mind the sold target of improving its creditability and credit rating. I do not suggest any restructuring of their business process, but I feel that, identifying require changes in each department and executing them with a view to minimize wastage will certainly do its job.

In this seven weeks of my summer training I have learn a lot not just on any particular aspect, rather it has been a fruitful learning experience for me in all the spare of corporate life. Apart from just reinforcing the academic learning it taught me how to work in an environment, which is full of uncertainties. Above all my decision-making skills have improved a lot and I have learned to take decision in the absence of complete information, though I need to practice it more. I hope that I can make full use of what I have learned in Vadilal in my professional career.

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REFERENCES:

For this project, I have referred following books and websites;

A). Financial management--- I.M.Pandey.

B). Financial Management theory And Practices—Prasanna Chandra.

C). Working Capital Management—Satish M. Mathur.

D). Financial Results—Data from Audited Statements of the Company.

E). Company’s Website—For Company Information.

F). Sanction Letters Of Various Banks For Credit Facilities.

Company’s officials have been very helpful in competition of the work. People from various departments helped me to understand the company, its business and various other related issues with this project and this has all happened despite of their peak season going on right now.

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BALACE SHEET OF VADILAL INDUSTRIES LTD.

(Rs.In Lac)

PARTICULARS 2002-2003

2003-2004

2004-2005

2005-2006

SOURCES OF FUNDS

(1) Shareholder’s Funds: (a). Share Capital 718.78 718.78 718.78 718.78 (b). Reserve and Surplus

1969.02 1961.06 1898.57 2147.14

(2) Deferred Government Grant

0 0 0 0

(3) Loan Funds: (a). Secured Loans 3214.7 3050.26 2791.4 2432.92 (b). Unsecured Loans

957.36 767.08 788.74 751.94

(4) Deferred Tax Liability (Net)

422.36 437.76 395.33 464.59

TOTAL

7282.22 6934.94 6592.82 6560.12

APPLICATION OF FUNDS:

(1) Fixed Assets: (a). Gross Block 5621.56 5797.96 5743.00 5822.30 Less: Depreciation

2374.16 2650.28 2728.11 2973.55

Net Block 3247.40 3147.68 3014.89 2848.75 (b). Capital Work In Progress

62.11 150.71 37.61 91.95

(2) Investments 569.34 427.28 331.54 331.90(3) Current Assets, Loans & Advances: (a). Inventories 2236.21 2070.03 1956.74 1773.04 (b). Sundry Debtors 1652.30 1967.54 1980.86 1848.01 (c). Cash & Bank 259.48 142.21 86.32 266.13

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Balance (d). Loans & Advances

1189.5 1174.08 910.18 959.20

(e). Other Current Assets

83.10 50.97 27.71 30.10

Sub Total (A) 5420.59 5404.83 4961.81 4876.48

Less: Current Liabilities & Provisions: (a). Current Liabilities

1932.15 2103.06 1619.81 1410.92

(b). Provisions 85.07 92.50 211.01 239.79

Sub Total (B) 2017.22 2195.56 1830.82 1650.71

Net Current Assets (A-B) 3403.37 3209.27 3130.99 3225.77

(4) Misc. Expenditure 0 0 77.79 61.75 (To the extent written off) TOTAL 7282.22 6934.94 6592.82 6560.12

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