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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), a Next Generation Company (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) of INR45.5 million from SIDBI, a term loan of INR75.4 million from Reliable Finance Limited (RFL), 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......................

Infrastructure

The Company had a building with three floors with a total built-up area of 40,000 square feet in an industrial area. A state of the art Internet Data Center (IDC) of 10,000 square feet had been set up on the second floor of the building. The building had been constructed with eco-friendly material and technology such that it would require substantially lesser air conditioning and electricity............

Products and Services

The company’s research and development efforts gave birth to three different products, namely, eNlight Cloud, eMagic and MTvScan.

• eNlight Cloud: This software and the state of the art infrastructure enabled ESDS to offer highly advanced and cloud enabled servers to its clients. The servers could be operated under various platforms like Microsoft Windows,.............

Milestones

• 2005: ESDS was incorporated and started providing technical support to web hosting companies in UK and USA

• 2006: Acquired small web hosting companies in the UK

• 2007: Turned around the acquired companies into profit making ones

• 2008: ................

Awards and Recognitions

The company had implemented world class systems and processes and had obtained ISO9001: 2008 certificate, ISO 27001: 2008 certificate and ISO 20000-1: 2005 certificate which was respectively accreditation for quality management..............

Suppliers

ESDS procured hardware such as servers, networking equipment, and desktops for its own use as also for its clients from reputed companies like Dell, HP, Cisco and IBM under an arrangement with all of them..........

Customers

Started with a very few number of customers in 2005, by 2012 the company had over 33000 customers from diverse sectors such as information technology........

Subsidiaries

ESDS had the following four subsidiaries:

• ESDS Internet Services Private Ltd.: It commenced its operations in 2012. This firm provided connectivity services and bandwidth services to ESDS

• eUK Host Ltd.: It was a UK-based internet company established in 2001. It was later acquired by ESDS and................

Financial Performance

The operating results and the financial position of ESDS over the last two years were as presented in Exhibit III..............

A New Project and Additional Funding Support Needed

ESDS obtained a project from the District Central Cooperative Bank (DCCB) to provide data center service to this bank on BOOT (Build, operate, own and transfer) model...........

Outlook

The IT industry, particularly, the web hosting and data center business, were still emerging in nature and the prospects were very bright. There were many big and well established players in the domestic market as well as in the foreign markets...........

Due Diligence and Credit Rating

The officials of the Nashik branch of SIDBI carried out due diligence and credit appraisal of ESDS. They have also checked the Reserve Bank of India’s defaulters list, did due diligence of suppliers and customers of ESDS and found that everything was in order.............

SIDBI’s Concerns

The branch manager of SIDBI’s Nashik branch was highly satisfied with the credit worthiness of ESDS and could foresee that the company had a very high growth potential and hence would give more business to the bank in the future..............

Exhibits

Exhibit I: ISO Certifications

Exhibit II: Key Financials of ESDS’ Subsidiaries

Exhibit III: Operating Results and Financial Position of ESDS during the Last Two Years Ending March 31

Exhibit IV: Credit Facilities Availed by ESDS

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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