Retailing has acquired, over the past few years, larger dimension and greater importance. Many investors have found the sector lucrative enough to be a source for substantial returns. The sector is expecting an investment of around $30 billion (approximately Rs 1,200 billion) within four to five years pushing the worth of modern format of retailing to $175 - 200 billion (approximately Rs 700 - 800 billion) by 2016.
Organised retailing is growing at rapid pace, over 36 per cent per annum. To sustain this robust growth, the industry requires a substantial investment. Sensing high prospects in retail, various corporate houses are planning to set foot in the sector. Companies like AV Birla, Tata Group, Reliance, Piramal Group and ITC have already started to step onto this field, thereby consolidating their business empire. Retailing has attained a new height with the ingress of the US retail major Wal-Mart after striking a joint venture deal with the retail wing of Bharti Group. From recent developments, it can be well assumed that, like for single brand outlets, government may consider 51 per cent FDI for MBOs too in near future. The FDI accounts for the inflow of $ 7.5 billion (approximately Rs 300 billion) in FY 2006 in comparison with $ 5.3 billion (approximately Rs 212 billion) in FY 2004. Besides investments from big corporate houses or FDI, there are several other avenues to ensure investment flow in retail sector.
To survive in this rapidly changing scenario, retailers are constantly adopting innovative strategies to upgrade each and every front of their operation. Different sections of business operation like font-end, back-end, supply chain and logistics and overall infrastructure require refurbishment from time to time. With problems like soaring real estate price, business expansion plan for retailers becomes sometimes difficult and hampered. A steady funding is the solution to such types of impediments. Funding options available to retailers are bank loan, angel funding, private equity, venture capital and IPO.
Bank loan
Bank loan always comes as the first choice for SMBs. But, a bank is not the taker of business plan as the security for its loans: it lends money in exchange of asset. For existing business, the business itself can be the collateral. The plus point of bank loan is that equities of the business house do not go to ‘somebody outside’ if the business succeeds. In India, nationalised banks (like SBI, IDBI and SIDBI) and private banks (like ICICI, HSBC and HDFC) have several schemes for financing a business. Most of these banks require tangible asset as the security. However, retail industry is service-oriented and assets like plant, machinery, land and building may not fall into the securities. On the other hand, a bank requires a representative from their side to be nominated to the board of directors. Also, SMEs always lose out to the major players in the market in respect of credit rating in securing loans. Nowadays, these banks are offering transaction banking as financial solution that takes care of overall fund management. Understanding the potential of retail sector, banks are contriving thus flexible schemes to suit their needs.
Saving angels
Obtaining finance from an angel investor is another option. In this case, a person or a group of persons or, to use the proper term, angel(s) invests in a business in exchange of ownership equity of the company. The advantage of such financing is that there is no obligation of paying a loan. Instead of this, a significant amount of equity will go to the investor. An angel investor always expects to receive preferred equity security in exchange for his or her investment. To find out a right angel investor is a difficult task. Prior to striking a deal with an angel investor, both the parties - investor and business owner - should come into mutual agreement as regards the prospect of business success. Care must be taken for the partnership should continue for a long time. Mr Srini Sreenivasulu, MD, Lightspeed Venture Partner, says, “Prior to taking an angel investment, a company should decide how much equity it is offering to the angels and also evaluate the credentials of the angels since they will be offered ownership stake. So, it should be kept in mind whether they would be able to add value to the company.” He adds, “An angel investor, on his part, evaluates the business including management, governance and transparency. He also considers the dimension of the business opportunity, a good sustainable profit margin and scalability of the venture.”
Private equity
Private equity is a means for raising fund from a select group of equity investors. It is a broad term, which commonly refers to any type of non-public ownership equity securities that are not listed on a public exchange. Investors typically exercise control over companies in direct proportion to the number of shares that they own. However, selling stock or other securities in a business must be in compliance with the country’s securities law.
Bought-out-Deal (BOD): This is a type of private equity. It is another channel for funding wherein a significant amount of equity of an unlisted company is bought out and afterwards, at the right time, offloaded through OTCEI (Over the Counter Exchange of India) route or IPO route. The deal entails lesser complications, lesser cost of floatation and companies not entitled to issue shares at premium values under SEBI’s conditions can do so through BOD. BODs generally take place with mature companies. Such deals took place between Aditya Birla–Trinethra and Reliance-Adani Retail. Mumbai-based Wadhawan Retail, owners of stores under name ‘Spinach’, have taken over Delhi-based Sabka Bazaar and The Home Store for over Rs 100 crore.
Venture Capital funding: This is also a type of private equity funding. It offers finance in exchange of equity stake of the company. Many of this kind specialise in certain industries and provide seed funding, expansion capital, buyout financin oss a variety of sectors. While talking about the pros and cons of venture capital funding, Amit Kapoor, Vice President, Matrix Partners India, stresses on the overall benefits that the company receives in spite of the potential threat to the entrepreneur and losing his complete freehand in the business. He observes that venture capital helps in bringing about corporate governance, taking strategic and financial decisions like leveraging equity, upgrading hiring policy and marketing strategy. It creates better valuation of the company. The venture capital funding helps adding seriousness to the business endowing with corporate touch and liberating the business from a family affair.
Mr Sanjay Shroff, VP (Finance) of Moods Hospitality Pvt. Ltd, points out venture capitalists’ understanding of a start-up-company. He says, “Being a comparatively new company in India, Moods Hospitality, through venture capital funding, was able to bring value to the company in terms of active participation in decisions making and formulating business strategies. Also, it has brought in new business connections through their vast connection.”
The company has realised its expansion plan: “Before we raised funds from Matrix, we had 10 outlets - five company-owned and five franchised. Post-funding, we have currently 29 outlets - 20 company-owned and nine franchised. By March 2008, we are expecting 55 outlets - 36 company-owned and 19 franchised. At the time of raising the funds, we were present in five cities. Post- funding, we are now in 14 cities. By March 2008, our presence is expected to be in 20 cities.”
Funding through IPO
However, some investment requires long gestation period. Also, a large-scale investment is required when the infrastructure of a company goes for a total revamp or when the company thinks over diversification. In such cases, public issue or Initial Public Offer (IPO) proves to be the appropriate channel to help a retailer raise a copious amount of money. In comparison to other routes, IPO or public issue has lesser limitation. So, it can be feasible for both new and existing retailers. This route is beneficial and has the following features:
- Right for long-term investment
- A substantial amount can be raised
- Helps acquire creditors’ trust
- Building up assets through public equity helps in getting bank finance since most of the financial institutions do not fund without the securities of tangible assets.
- It makes debt-to-equity ratio low, thereby giving the retailer liberty to fund his various retail operations
- It ensures proper asset liability management for long-term projects
While opting for IPO route, a retailer has to satisfy some criteria apart from various regulations of processes. These criteria require a solid company image, a high return, capability to declare higher dividend, higher Earning per Share (EPS), stable capital structure and other traits of a profit making companies. For adopting this route, a private limited company has to be converted into public limited company. The company should abide by the various regulations set by Companies Act, Securities Contract (Regulation Act) and other rules issued by the Government and SEBI (Stock Exchange Board of India).
As revealed by DPS Kohli, Chairman, Koutons Retail India, the company has opted for IPO route to raise funds as big as Rs 130 crore to Rs 145 crore. Out of total 35.2 lakh shares, 26 lakh shares are new issues and 9.2 lakh shares are for sale by the promoters. He feels that IPO will, apart from expediting the company’s growth and fresh investment, enable the company to implement higher business visibility, increase the market-accepted valuation of the company leading to credit availability at cheaper rate and opening up new lines of finances for future growth.
While speaking about the appropriate time for listing a company on stock exchanges, Akhil Chaturvedi, the director of Provogue (India) Ltd, a well known apparel retail company that went for IPO in 2005, stresses on the responsibility of a company and the basic nature of its operation when its promoters want to list the company on stock exchanges - “An IPO is a source of mobilising a resource, which calls for much more responsibility and accountability not just to a select-few but to the scores of invisible investors who have invested not only their money but also their faith in the company’s belief that the IPO was the best option for the business and its expansion. And, that is completely non-negotiable.”
Inferential overview
Funding a business is like watering a plant. For its sustainability, growth and diversification, funding acts as lifeblood to the organisation. But, successful investments depend on selecting the right route of funding, which demands consideration of scale, type and phase of the business. Due attention and care must be given before arriving at a decision.
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