Read the following details of ABC Ltd. carefully : ABC Ltd. has applied for enhancement of both fund based and non-fund based credit limit to its bankers. This is a public limited company listed on both BSE and NSE. The

Read the following details of ABC Ltd. carefully : ABC Ltd. has applied for enhancement of both fund based and non-fund based credit limit to its bankers. This is a public limited company listed on both BSE and NSE. The management and affairs of the company are being looked after by a Board of directors. The Board comprises three whole-time directors and seven part-time directors. X (Chairman and Managing Director) has a long association with the electrical industry and he is also Chairman of the leading chamber of Original Equipment Manufacturers (OEM) in electrical industry. He has won national awards for his contribution in the industry. He is a graduate. Y, a whole-time director, is brother of X. He looks after the technical and manufacturing activities of the company. He is an engineer. Z is also a whole-time director and looks after marketing, business development and finance areas of the company. He is son of X. Products The company is one of the leading equipment manufacturers for electrical industry of the country and engaged in manufacturing LOW AND MEDIUM VOLTAGE equipments for distribution of electricity. Marketing network The company has a robust marketing and distribution network in the low and medium voltage electrical distribution industry. It comprises 20 branches and 30 representative offices covering length and breadth of the country with its headquarters in New Delhi. The branches are spread over in all major State capitals and big cities. Distribution and service network The company has more than 3,000 authorised dealers and 2,500 retail outlets across the country. The service set-ups are having well trained service engineers located at headquarters and all branches to provide efficient after-sales service. Capital Structure (as on 31.3.2014) The total paid-up capital of the company is ₹400 crore. The reserves and surplus of the company are ₹1,178 crore. The shareholding pattern of the company is as under: Sl. No. Name of Shareholders Size of Holding (in crore) % of Holding 1 X 160 40 2 Y 40 10 3 Z 80 20 4 N. Pvt. Ltd. 40 10 5 Others 80 20 Total 400 100 N. Pvt. Ltd. belongs to the promoters of ABC Ltd., whose shareholding pattern is as follows: Sl. No. Name of Shareholders Size of Holding (in crore) % of Holding 1 X 40 40 2 Y 20 20 3 Z 40 40 Total 100 100 X and Z are featuring as defaulters in the RBI list of defaulters. The company has clarified that X and Z are not related to the defaulting companies and it is only similarity in names. They did not put any affidavit from the directors at the time of documentation. The company has also confirmed that they do not have any court cases relating to financing initiated by any bank or other financial institution. Corporate Governance The company holds its Board meetings generally in Delhi. In the last year (2013), the Board met 4 times i.e. on 1 st January, 2013, 30 th June, 2013, 30 th August, 2013 and 29 th December, 2013. The proposal for further loan was approved by the Board in its meeting held on 4 th April, 2014 where 7 directors out of 10 were present. All the whole-time directors were present in the meeting. D has been appointed as the Chairman of the Audit Committee of the Board. The Chairman of the Audit Committee was not present at the last Annual General Meeting of the company held on 30 th September, 2013. The company assigned a major contract to N. Pvt. Ltd. on 30 th August, 2013 where 6 members of the Board were present, including all three whole-time directors. Minutes of the meeting reveal that none of the directors abstained from the deliberation while assigning contract to N. Pvt. Ltd. The company is facing stress in its business operation due to slow down of the economy and particularly in electrical industry. The Board decided to boost up its operations and it requires infusing more working capital to gear up the operations. In order to finance enhanced operation, the Board proposed to have its cash credit limit increased from ₹200 crore to ₹300 crore with a sub-limit of ₹50 crore for packing credit/packing credit in foreign currency/foreign demand bill of exchange/bill re-discounting. Sub-limit is required due to expected foreign orders from EU countries. The existing sanctioned limit is ₹200 crore. It was reported that the bank offers margin of 25% on cash credit/overdraft against book debts/packing credit/packing credit in foreign currency. Bank interest for domestic credit is Base Rate + 2.50 (floating) totalling 13% rate of interest. For packing credit/foreign demand bill/foreign bill of exchange, the bank charges 11.25% as interest. Packing credit in foreign currency/bill re-discounting rate is 6-months LIBOR + 350 bps. In addition, there are 0.50% commitment and usance charges on letter of credit. The bank also charges normal commission on bank guarantee. Details of Securities Proposed Particulars Description Value (in crore) Source and date of report Nature of charge (a) Primary Working capital Stock and book debts 300 Stock statement and ledger 1 st Charge Term loan Fully automated plant with CNC equipment at Delhi 250 Valuation report dated 06.04.2014 of XYS Valuers 1 st Charge (b) Collateral Land and building Property at New Delhi 500 Valuation Report dated 6.4.2014 of XYS Valuers 1 st Charge Plant and machinery Fully automated plant with CNC equipments on which 1 st charge is held with term lenders 250 Valuation Report dated 6.4.2014 of XYS Valuers 2 nd Charge The company is not willing to give any personal guarantee by its whole-time promoter directors. The select financial indicators of the company for last 2 years, estimates for current year and projection for next year are as under: Financial Indicators Particulars 31.03.2012 (Audited) 31.03.2013 (Audited) 31.03.2014 (Estimated) 31.03.2015 (Projected) Shareholders' funds : Share capital 400 400 400 400 Reserve and surplus 1,020 1,149 1,178 1,256 Non-current liabilities : Long-term loans from banks/FIs 400 360 320 280 Current liabilities and provisions : Current liabilities 450 510 610 800 Total 2,270 2,419 2,508 2,736 Non-current assets : Land 200 200 200 200 Furniture and fittings 81 83 75 77 Building 270 243 219 197 Plant and machinery 340 289 246 294 Investments 400 400 400 400 Current assets : Current assets 979 1,204 1,368 1,568 Total 2,270 2,419 2,508 2,736 Sales 1,800 1,700 1,810 1,860 Other income 200 190 210 250 Total income 2,000 1,890 2,020 2,110 Total expenditure before depreciation, interest and tax 1,700 1,750 1,800 1,850 Profit before depreciation, interest and tax (PBDIT) 300 140 220 260 Depreciation 99 87 76 82 Interest (tentative) 41 36 33 30 Net profit before tax/loss 160 17 111 148 Net profit after tax/loss 106 11 73 98 Particulars 31.03.2012 (Audited) 31.03.2013 (Audited) 31.03.2014 (Estimated) 31.03.2015 (Projected) Capital employed 1,820 1,909 1,898 1,936 Fund based credit from bank 200 200 200 300 Net profit as a % of capital employed 5.82% 0.58% 3.85% 5.06% Ratios Current ratio 2.18 2.36 2.24 1.96 Debt-equity ratio 0.28 0.23 0.20 0.17 Profit before depreciation, interest and tax (PBDIT) as a % of sales 16.67 8.24 12.15 13.98 Net profit as a % of sales 5.89% 0.65% 4.03% 5.27% Term debt/ PBDIT 1.33 2.57 1.45 1.08 Inventory turnover (days) 45 45 45 45 Debtors velocity (days) 30 30 30 30 Creditors velocity (days) 60 45 45 45 Cost of sales to net sales 0.94 1.03 0.99 0.99 Note: The company has a policy of charging depreciation on WDV basis. Any purchase after the middle of year is charged with depreciation at half rate. Keeping the above details in view, prepare a Proposal Assessment Report covering the following for Credit Approval Committee of the bank: Major factors deciding the credit enhancement.