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ESDS Software: Financing Next Generation Companies*

CASELET, FINANCIAL MANAGEMENT
ET Cases - GSMC, 6 pages
AUTHOR(S) : Dr. Manickaraj M (Associate Professor, Finance, National Institute of Bank Management, Pune)

Case Preview

ESDS Software: Financing Next Generation Companies

 

ESDS Software Solution Private Limited (ESDS)1, a Next Generation Company2 (NGC) and an existing customer of Small Industries Development Bank of India  (SIDBI) approached SIDBI for a term loan of INR10.5 million. The company was already availing a Participatory Debt (PD)3 of INR45.5 million from SIDBI, a term loan of INR75.4 million from Reliable Finance Limited (RFL)4, and bank guarantee from Commerce Bank. The additional loan was sought for financing a project to be executed for one of ESDS’s new customers. The Nashik Branch of SIDBI had done the credit appraisal and sent the papers to the SIDBI head office for approval. The top management of SIDBI had to decide on the request for the term loan of ESDS and the appropriate measures for mitigating the risk that would be involved in the additional exposure.  SIDBI also wanted to study the characteristics and needs of such companies to develop products suitable for financing such NGCs.

Profile of the Company

Mr. Piyush Somani (Piyush), a graduate in electronics engineering, had worked for a meter manufacturing company and then for software company both for a year each. He quit his job in 2004 and started offering web hosting support services in partnership with his friends. At the age of 25 Piyush decided to venture on his own and established ESDS in 2005. Neither he nor his family had any business background before establishing ESDS. Initially, ESDS offered support services to few webhosting companies in the US and the UK. Piyush realized that the scope for support services was very limited and hence started offering webhosting and designing data centers for clients......................

 



1 https://www.esds.co.in
2 “An NGC could be a small technology start-up that quickly gains global recognition and market dominance through its innovative, never-before-seen product or business model. It could equally be a large agricultural firm that becomes a global leader through its aggressive merger and acquisition (M&A) activities, or a manufacturer that dominates the markets for its products through extensive global supply chains and superior cost advantage.” (Source: World Economic Forum (2013), “Closing the Gaps: Financial Services Needs of Next-Generation Companies” (accessed date: October 14th 2014) from http://www3.weforum.org/docs/WEF_FS_NeedsNext-GenerationCompanies_InsightSeries_2013.pdf )
3 Participatory Debt was a risk capital product and it was offered to high risk customers at a higher rate of interest. In addition, the bank may take a share of the profit earned by the borrowing company.
4 Reliable Finance Limited (RFL) is a privately owned non-banking finance company focusing on financing Small and Medium Enterprises (SMEs).

Teaching Note Preview

ESDS Software: Financing Next Generation Companies

 

Synopsis

ESDS established in 2005 by Mr. Piyush Somani, a young and first generation entrepreneur was a data centre and webhosting services company. He could not avail credit from commercial banks and hence took a term loan of INR75.4 million from Reliable Finance Ltd. Later, he could avail Participatory Debt of INR45.5 million from SIDBI. He approached SIDBI again with a request for a term loan of INR10.5 million. The Branch Manager of the bank’s Nashik branch did the credit analysis of the company. Though he was convinced of the credit worthiness of the company, he had concerns regarding lack of collateral for the loan and referred the file to the head office of the bank for approval. The top management of the bank noticed that many such technology companies in the services sector were coming up. Since the bank had established a separate business vertical for financing service sector enterprises and had launched risk capital products, it was particularly interested in understanding the characteristics and financial services needs of such companies to develop appropriate risk assessment tools, risk mitigation techniques and offer financial products aligned to their needs.

Expected Learning Outcome

ESDS is an ideal example to motivate the bank executives/students to look proactively at the inherent characteristics and needs of NGCs and on how to fulfil their needs.

Assignment Questions

  • I. Is ESDS different from most other business enterprises? If yes, how?
  • II. What problems the NGCs normally face in availing financial products and services?
  • III. How the banks/FIs can address the issues of NGCs and can fulfil their requirements?
  • IV. What are the risks involved in extending loan to ESDS?
  • V. ...........................

 

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Abstract


ESDS established in 2005 by Mr. Piyush Somani, a young and first generation entrepreneur was a data centre and webhosting services company. He could not avail credit from commercial banks and hence took a term loan of INR75.4 million from Reliable Finance Ltd. Later, he could avail Participatory Debt of INR45.5 million from SIDBI. He approached SIDBI again with a request for a term loan of INR10.5 million. The Branch Manager of the bank's Nashik branch did the credit analysis of the company. Though he was convinced of the credit worthiness of the company, he had concerns regarding lack of collateral for the loan and referred the file to the head office of the bank for approval. The top management of the bank noticed that many such technology companies in the services sector were coming up. Since the bank had established a separate business vertical for financing service sector enterprises and had launched risk capital products, it was particularly interested in understanding the characteristics and financial services needs of such companies to develop appropriate risk assessment tools, risk mitigation techniques and offer financial products aligned to their needs.



Pedagogical Objective

  • To look proactively at the inherent characteristics and needs of NGCs and to develop appropriate risk assessment tools and risk mitigation techniques


** GSMC 2014, IIM Raipur

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