In a first for a state financial corporation, Kerala Financial Corporation (KFC), will soon launch two schemes for new-age entrepreneurs and start-ups. Towards this end, the KFC board has approved purchase order refinance, Sanjeev Kaushik, Chairman and Managing Director, told BusinessLine here.

No collateral needed

"If somebody has purchase orders to manufacture, we will give him money against the order, without security."

The second is a venture debt scheme where, if the unit has already received venture capital equity, KFC will offer venture debt without collateral.

Both these schemes would be backed by a state government guarantee.

"We have often found that as an entrepreneur, one may not always want to give too much of venture equity to a venture capitalist," Kaushik said.

"It’s a relatively new concept, with a few such schemes having been started in Delhi or Mumbai," he said.

Special debt scheme

Venture debt is a special form of debt financing for venture equity-backed start-ups that are not serviced by traditional banks or NBFCs.

This is mostly occasioned due to lack of collateral in the form of physical assets, a profitable history or promoter guarantee.

The venture debt serves as a complement to equity financing and is usually structured as three-year term loan with warrants or options for the company’s stock.

Subordinate debt

"Earlier we thought of setting up a venture capital fund as an alternative investment fund. It would be a a subsidiary type of activity. But later we settled for venture debt and purchase order refinance."

KFC cannot give out equity at this point of time because SFC Act does not allow it to grant equity funding. But between equity and debt, there’s a third category called subordinate debt. It’s more expensive than debt but has equity-like features. "So it will assume risk; for example, it will give you a three- to five-year moratorium, may not take a collateral. After the moratorium period, you have to return the coupon for the loan you’ve taken."

Responding to a question, Kaushik said that as a state financial corporation, KFC keenly looks to the Reserve Bank’s periodical credit policy for cues.

"Absolutely yes, because our base rate is dependent on the cost of funds that we raise from the market. But we have a clear mandate here in which development, and not profitability, is priority."

KFC would like to give out reasonable priced loans to its small industry consumers and stay competitive via-a-vis banks, Kaushik said.

Comfortable position

Asked if the poor finances of the state government would be a restraining factor on raising resources or lending, he replied in the negative. He said KFC was not dependent directly on the state government with respect to raising resources through infusion of equity.

The fund position is comfortable for the next six to eight months. "Our bonds are not guaranteed by the state government. We float them based on our own rating in the market. So we talk privately with investors and do regular investor calls."

Kaushik is counting on his experience in the private sector - he was a Managing Director with HSBC in London – as well as with the Union Finance Ministry in guiding KFC and charting the way forward.

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