Going gets tough for India Inc as risk capital gets costlier

The situation has gone from bad to worse for corporate India, especially the medium to small enterprises. They are not able to raise much needed risk capital, also known as equity capital.

It is on the back of equity capital that companies raise more money from banks and financial institutions.

Though lending from banks may differ from sector to sector, and company to company, on an average, the bank lends Rs 4 for every Re 1 raised by the company through equity.

Despite the Sensex trading at 19,000, the primary market - or IPO market - is almost dead following lack of appetite on the part of investors.

The other option for equity capital is private equity (PE) investors. But PE money, known to be patient capital, is not willing to take any bets given the current state of the market. Thus, the few firms which are willing to invest are exploiting the situation.

Today, PE firms will not give a valuation of more than six times for a company, compared with nine to 10 times only five to six months back. But companies are not ready to bow down - they want 13 to 14 times valuation for selling a stake to PE firms.

Some PEs have become more stringent in their valuation norms too. They are valuing companies on their profitability rather than their revenues. Though it varies according to urgency and size of the requirement, one thing is sure: raising money has become costly for corporate houses in India.

The hope that money moving out of debt will flow into risk capital is still a distance dream.