CONTENTS

Page No.

Introduction to Finance About Infrastructure industries Why Infrastructure companies require Funds Source of infrastructure Finance Source of Funds to IVRCL Analysis and interpretations Future Prospects of IVRCL Summary of Findings and recommendations Bibliography

2-8 9-17 18-23 24-45 46-53 54-84 85-87 88-92 93-94

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Chapter 1 Introduction To Finance

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About Finance:The Dimensions of finance have undergone phenomenal transformation during the last few decades. Until the recent past, finance was considered as an economic activity, concerned with procurement of funds for business purpose and the financial managers was considered as keepers of books of accounts and providers of capital needed by the enterprises. However, the financial manager has now become an integral part of the enterprise and his involvement in the problems and decisions pertaining to the management of the asset of the enterprise.

Finance was studied as a part of economics before the turn of the present century. It was only in the early part of the present century when massive consolidation movement took place that finance came to be studied as a corporate discipline. Formation of larger size undertakings by consolidating the smaller ones brought before the management the problem of financing this giant enterprise. Accordingly overwhelming emphasis was placed on the study of source and forms of financing the new industrial giants. Authorities of finance like Meade, Dewing and Lyon deals with in a scholarly fashion the problems of capitalization, choice of capital structure, sale of security, nature and terms of financial contract and similar other matter related to the source of raising funds. Thus the study of business finance remains a descriptive one.

The study of the potentiality of different securities as a source of procuring funds from outside world and the role and functions of institutional agencies including those of

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investment bankers continued to be emphasized during 1929 since these decade witnessed burst of new industries like Chemical, steel, automobile upon the economic sense of U.S.A. the emergence of national advertising and improved distribution practices and the euphoria of high profit margin.

1930s was a period of grave economic recession which created formidable problem of liquidity. Businessmen found it difficult to acquire funds from banks and financial institutions to satisfy their day to day requirements. They had to liquidate their inventory holdings to meet their financial needs. However owing to precipitate fall in price level inventory liquidation these developments upon financial management was manifested in improved methods of planning and control greater concern for liquidity and considerable interest in sound financial structure of the firm. Scholars on business finance opined vehemently that the financial manager would have to play a defensive role to protect the firm from dangers of bankruptcy and liquidation. Thus, during this decade also considerable emphasis was placed on major financial episodes in the life cycle of the company.

The problem of financing assumed a new dimension in the post-world war II period. Reorganization of industries to cope with the peace-time requirements of the economy posed serious problem before the business community to raise substantially large amount of capital from the market. Accordingly, in 1940s financial wizards continued to be concerned with the necessity for choosing such a financial structure as would be able to

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withstand stresses and strains of the post-war adjustments. Thus, the approach to business finance popularly known as traditional approach remained popular till the early fifties. In the early 1950s U.S. economy experienced vigorous spurt in business activity on the one hand and despondent stock market and tightening money market conditions, on the other. In the view of this emphasis shifted from profitability analysis to cash flow generation with a resultant de-emphasis of the previously favoured financial ratio analysis. The financial manager was assigned the responsibility of managing the cash flows in such a manner as would ensure that the organization will have the means to carry out its objectives as satisfactorily as possible and at the same time meet its obligations as they become due. There was, thus, a marked shift away from the institutional and external financing aspects to the primary emphasis on day-to-day financial operation of the firm, matters like cash budget, forecasting, aging receivables, analysis of purchases and application of inventory controls received greater emphasis.

The change in approach to business finance noticed in the early 50s was reaffirmed in the subsequent years. Limited range of profit opportunities for mature industries and relatively tight money market conditions were the major factors which warranted allocation of capital resources to most profitable investments outlets. Accordingly, capital budgeting as a tool to efficient allocation of funds within the firm received dramatic premiums. The financial manager had to assume the new responsibility of managing the total funds committed to total assets and allocating funds to individual assets in consonance with the overall objectives of the business enterprise.

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Consequent upon a series of heated debates regarding cost of capital, optimal capital structure and effects of capital structure upon the cost of capital and the market value of the firm, a host of sophisticated valuation models were introduced and advanced techniques like portfolio selection, mathematical programming and simulations were developed. These techniques helped considerably in improving the practice of financial management.

The period between the mid-60s and the early 70s was marked by a very fruitfully and exciting era for a number of interesting developments. The brief but ominous recession in the share market spurred a large number of diversities, reorganizations and bankruptcies and renewed concern for liquidity and profit margins. The analytical and empirical frontiers of the financial discipline were also at the same time redefined and redesigned. The financial manager started thinking on such important issues as aggregate stock prices, the empirical efficiency of business sales, the profitability of institutional investors and the analytical efficiencies of various portfolio selection criteria on a new line.

Thus, the dimension of business finance which was earlier limited to periodic or episodic events has in recent years broadened to include the study of day-to-day operations of financial events. The case study is now being increasingly used as an aid in learning how to analyse and solve topic and recurring problems of business finance. The interest in case study has stemmed out of desire for a more analytical approach.

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New Trends in Financial Service: The economic liberalization has brought in a complete transformation in the Indian financial services industry. Prior to economic liberalization, the Indian financial service sector was characterized by so many factors which retarded the growth of this sector. In general, all types of activities which are of financial nature could be brought under the term Financial services. The term financial services in a broad sense means Mobilising and allocating savings. Thus, it includes all activities involved in the transformation of saving into investments.

The financial service can also be called financial intermediation it is a process by which funds are mobilized from a large number of savers and make them available to all those who are in need of it and particularly to corporate customers. Thus financial services sector is a key area and it is very vital for industrial development. A well developed financial services industry is absolutely necessary to mobilize the savings and to allocate them to various investment channels and thereby to promote industrial development in a country. Today, the importance of financial services is gaining momentum all over the world. In these days of complex finance, people expect a Financial Service Company to play a very dynamic role not only as a provider of finance but also as a departmental store of finance. With the injection of the economic liberation policy into our economy and the opening of the economy to multinationals, the free market concept has assumed much significance.

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As a result of innovations, new instruments and new products are emerging in the capital market. The capital market and money market are getting widened and deepened. Moreover, there has been a structural change in the international capital market with the emergence of new products and innovative techniques of operation in the capital market. As a result, sophistication and innovations have appeared in the arena of financial intermediations. Some of them are Financial Products 1. Merchant Banking 2. Mutual funds 3. Venture Capital 4. Securitization 5. Derivative security 6. New Products in Forex Market 7. Letter of Credit Financial Instruments. 1. Commercial Paper 2. Treasury Bill 3. Inter- bank Participations (IBPs) 4. Zero Interest Convertible Debenture / Bonds 5. Convertible Bonds 6. Infrastructure Bond 7. Global Depository Receipt (GDR)

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As a result, the clients both corporate and individuals are exposed to the phenomena of volatility and uncertainty and hence they expect the financial company to innovate new products and services as said above so as to meet their varied requirements.

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Chapter 2 About Infrastructure Industries

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Infrastructure Industries - an Overview:

The Indian infrastructure industry is riding on a growth wave powered by the large spends on the ongoing infrastructure programs. The evidence of this growth is visible all over the country in the form of new highways, dams, power plants, setting up of Special Economic Zones (SEZ), Housing sectors and pipelines. It includes hospitals, schools, townships, offices, houses and other buildings, urban infrastructures, highways roads, Outer Ring Roads (ORR), BOT/BOOT/DBOOT/, Bridges, Tunnels, Water Desalination Pipe line Projects, ports, railways, airports, power systems, irrigation and agriculture systems, telecommunications etc. Covering as it does such a wide spectrum, infrastructure and its construction are the two basic inputs for socio-economic development, as it generates substantial employment and provides a growth impetus to other sectors through backward and forward linkage.

Construction activity is an integral part of countrys infrastructure and industrial development. Construction is the second largest economic activity in the country. It is the second biggest contributor and the second highest employer after agriculture. Currently, it employs, directly or indirectly a total of 32.5 million workers. The size of the construction industry in India is over $25 billion and it accounts for more than 6% of the GDP. Construction accounts for 40-50 percent of the total investment in the country. This necessitates an investment requirement of Rs.4, 000 billion every year in the sector. The Builders Association of India places the size of the sector at Rs.2, 400,000 million or almost $50 billion.

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The Governments decision to allow 100% foreign investment in the construction sector has also put the spotlight on a sector that has been growing very rapidly. The Governments emphasis on the infrastructure sector is evident from fund allocations budgeted in its various Five-Year plans.

Sector

Infrastructure Spending IX th Plan X th Plan ( US $ Billion ) 2.20 21.60 1.04 35.13 15.42 29.53 12.87 0.56 22.02 140.37 XI th Plan 7.78 27.96 7.31 86.00 18.67 33.33 19.33 0.64 27.78 228.80

Air Port Irrigation Ports Power Railways Roads Telecom Tourism Urban Infrastructure Total

1.47 12.76 1.11 19.24 10.31 12.13 17.80 0.13 13.02 87.97

The most noteworthy step has been the establishment of Special Purpose Vehicles (SPVs) to fund infrastructure projects namely roads, ports, airports and tourism that are financially viable. The SPV would borrow funds especially in the form of long-term debt. The borrowed amount would be funded by inter-institutional group. Thus infrastructure sector is definitely poised for major growth and offers immense business potential for the Construction industry.

Sector wise opportunities in Infrastructure industry in the coming 5 years is given below.

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Investment in Infrastructure Sector in India 2007-2012

Sector Power Roads Railways Telecom Irrigation Water Supply & Sanitation Ports Airports Gas Storage Total Rs.Crore s 525,722 368,652 271,422 231,086 183,135 106,351 86,989 40,821 39,626 16,188 1,869,992 US$ in bn. Rs.41/s$ 128.22 89.92 66.20 56.35 44.67 25.94 21.22 9.96 9.66 3.95 456.09 Se ctoral Share (%) 28.11 19.72 14.51 12.36 9.79 5.69 4.65 2.18 2.12 0.87 100.00

It would kick start growth in infrastructure and construction activities. India initiated an ambitious reform programme, involving a shift from a controlled to an open market economy showing signs of overheating because of basic infrastructure constraints, both physical and human. So far, the bulk of infrastructure was in the public sector. Public sector in India operating in a protected set up has been largely subsidised by the Government. Since the launching of reform, Government is trying to reduce its borrowing which means that further subsidization will not be possible. There is one area where there is a need for private sector and foreign investment to come in. Because of the long gestation period, and many social implications, the infrastructure sector compares unfavorably with manufacturing and many other sectors. For this, specific policies in this area are needed to make infrastructure attractive. Clearly, there is a wide gap between the potential demand for infrastructure for high growth and the available supply. This is the challenge placed before the economy, i.e. before the public and private sector and foreign

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investors. This can also be seen as an opportunity for a widening market and enhanced production. The Role of FDI in Infrastructure The importance of infrastructure sector also follows from the fact that foreign investors are now looking at infrastructural development as a yardstick for directing their investments. In fact infrastructural development had taken precedence over wage levels in assessing the investment potential in developing countries. In India infrastructure sector itself is becoming an attractive investment area for FDIs. Already there is a huge demand for funds from the manufacturing sector. On top of that is the demand from the infrastructure sector. Both draw heavily from the savings of the household sector. The growth of financial savings of household sector however is not rising fast. In this context, the importance of increased obligation of domestic saving needs underscoring. Government Policy for Inviting Private and Foreign Investment To encourage foreign funds flow into the infrastructure sector, the Financing Ministry has allowed Foreign Institutional Investors (FIIs) also to invest in unlisted companies. This was aimed at helping infrastructure companies as they would not be in a position to list their shares in the initial phase. FIIs now deploy 100 per cent of their funds in corporate debt. However, the Ministry has not dispensed with the 20 percent withholding tax on such investment as per the suggestions of the IIR report.

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Speaking at the World Infrastructure Forum, John Taylor, Director, Infrastructure, Energy and Financial Sector Department, ADB, emphasised that the "counter guarantee" scheme was designed to cover specific risks including "discriminatory government action of various kinds, non-delivery of inputs or non-payment for output by State-owned entitles, availability of essential public services, changes in the agreed regulatory framework or tax regime, provision of essential complementary infrastructure, compensation or delays caused by government action or political uncertainty, transfer risks, foreign currency availability and convertibility." In a bid to make the core sector attractive for FDI, the Cabinet Committee on Foreign Investment (CCFI) has modified the 49 percent on foreign equity in the infrastructure sector to render fund mobilisation easier. This major policy decision which will indirectly raise the foreign equity investment in infrastructure sector to well over 51 per cent if a domestic partner fails to meet his commitment from internal sources, including borrowing, should help the large industrial houses. The new mechanism is designed to overcome the constraints for foreign equity in the infrastructure sector. Under the norms, companies operating in the sector can bring in equity through the mechanism of an investing company for the purpose of making investment in a licensee company in the service sector where there is a prescribed foreign equity.

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Infrastructure: The Recent Budget Following were the specific proposals relating to infrastructure;

1) Telecommunications, oil exploration and industrial parks have been accorded the status of infrastructure; 2) the policy regarding oil exploration which was realised sometimes back was highlight; 3) The Finance Minister reiterated his commitment to many recommendations of the India infrastructure Report; and 4) budgetary support to the National Highways Authority of India was enhanced from Rs. 2bn. to Rs.5bn. The Finance Minister opened up the health insurance sector to Indian private firms. Although, a small niche area, this is a significant move as it indicates the likely future deregulation of the sector. The Central Plan outlay for 1996-97 including mainly on infrastructure has not shown any improvement, Inspite of a near crisis situation in infrastructure. This may be result of hypothesis made by the Government all along; i.e. private sector will take over whenever Government vacates, thus solving the problem. The feasibility and pragmatism of this hypothesis remain to be watched. Compared to the allocation on Central Plan outlay and their growth in 1995-96, the performance in 1996-97 was not significant. The growth rate in the energy sector which declined both in real and nominal terms in 1996-97. The 1997-98 budget support for this sector has virtually been negated by the impact of inflation when the real increase has become negative. The same scenario emerges in the budgetary support to communication in 1997-98 with respect to science, technology and

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environment, although the growth is definitely better than what was provided in the last five years, it still remains very low. Besides, even if allocation in the sector is raised with a greater inflow of FDI and a large participation of private sector, the immediate problem will still remain, since, infrastructure is prone to long gestation. Consequently, the inadequacy of infrastructure will continue for quite some time, unless technology up gradation can be done in the infrastructure production, including construction activities, for reducing the gestation lags and simultaneously improving the quality of products. With this infrastructure constraint any indiscriminate growth may lead the economy to a situation of over-heating and a further rise in inflation. This poses challenges before the sector in several areas:
i

) Capital accounts convertibility could also lead to large funds kept by Indians abroad

flowing into India. The various estimates have put the NRI funds abroad at & 150-200 billion ii) India is not alone in seeking foreign funds in the core sector. China requires US $ 5000 billion in the next two decades. So does Korea. India has to compete with them. iii) One of the key problems in the commercialization of infrastructure is allocation or risks. The successful design of a project involves correct demarcation and allocation or risks. So far, projects were opened up to the private sector without adequate feasibility studies. The result projects once considered viable turn unviable when the bidders find their costs shooting up. This needs correction.

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iv) The other problem is that infrastructure demand for funds is mostly long term and can come from the insurance and pension funds. But, these two areas have not been opened up. Here early action is needs. v) Official and private perceptions over the viability of a project vary often widely. Differences have to be narrowed. vi) In an infrastructure constrained economy with a high interest rate any large programme of investment may add to inflationary potential unless gestation lags in the projects are reduce. Here comes the choice of an appropriate technology to reduce investment lags which in infrastructure projects in India are very high compared to that in many successful reforming countries. vii) The report (IIR) says that on the basis of existing tariff levels, it will be possible for port authorities to service debt obligations and pay a reasonable return on equity. But there is a need to delegate adequate power to port trust to facilitate speedy creation and operation of assets. viii) The Ports will have to upgrade the facilities to international levels. In the modernised ports, cargo would be mechanically handled; there would be special facilities for handling container and bulk cargo and computer-based cargo clearance including customs clearance. ix) Similarly, the future of road development lies in finding out innovative ways of leveraging funds from the market to augment budgetary resources as also in adopting modern equipment-based technology leading to expeditious, construction of the much wanted roads.

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Chapter 3 Why Infrastructure Companies require funds

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Finance, which has been aptly described as the life-blood of company is pre-requisite for mobilisation of real resources to organize and execute things as per the contract in the case of construction and Infrastructure companies. Depending upon nature of the activity to be financed, business requires short-term, medium and long term finance. An Infrastructure Industry requires funds for its productive activities at different stages:

Tendering Stage

Award of Contract Stage

Performance of Contract Stage

Execution Stage
Tendering Stage:

Maintenance Stage

Tendering is the first stage for any construction company. The Government or Private organizations in order to execute their works will issue an open offer to eligible bidders with certain Terms & conditions. Generally the employers of the contract ask the participants to deposit Earnest Money Deposit (EMD) with them which will be

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repayable after the completion of the contract or unless otherwise specified therein. So an Infrastructure company needs huge funds in the form of EMD to participate in different Tenders.

Award of Contract Stage: The successful contractor in the Tender will be awarded the contract by the employer. Once the contract is awarded the contractor has to deposit 5% or 10 % or a percentage specified in the contract on the contract value with the employer towards Performance guarantee. This is because in case if the contractor does not execute the work after awarding of the contract the employer will retain this amount. Hence the contractors have to secure funds to deposit Performance guarantee with the employers.

Performance of Contract Stage: This is the stage where the contractor has to start the work as per the terms & conditions of the contract. This stage will be divided into two stages I) Execution Stage II) Maintenance Stage

i) Execution Stage: Under this stage the contractor has to procure the following Things for smooth functioning of work at site a) For acquiring Plant & Machinery, Equipments etc; b) For Deploying Labour and administration staff at the site for execution of the Work

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c) For providing basic amenities like temporary sheds, office building, approach Roads, Canteen and other things to Labour and staff.

d) For meeting the Working capital requirement, this includes Inventories raw Materials, components, work in progress and operating expenses wages, salaries, lighting and other running expenses. e) Funds are also required for making loans and advances in the course of day-to-day Purchases, building up other assets. f) For discharge of various statutory obligations like VAT, Service Tax, Tax deducted / Collected at Source.

II) Maintenance Stage:

This is also called defect liability period. That is after

completion of the project the contractor has to under take maintenance of the concerned project for a specific period say 1 to 3 years. During this period the contractor has to pay staff maintenance charges and any minor or major defects in the structure of the project. Effect of New Trends: The Indian government is increasingly encouraging Public-Private Participation (PPP) in social development of nations infrastructure thru the Build-Own-Transfer Model. The stupendous success of the BOT model in the roads (viz; Pradanamanthri Sadak Yojana) sector has led the Government to offer substantial road lengths in the National Highways for construction via this route. Infrastructure industries set to take advantage of the infrastructures spread momentum of the central and state governments through the

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Public-Private-Participation (PPP) route and is leveraging its project expertise and management capabilities by actively foraying into Asset Ownership involving projects on BOT/BOOT/DBOOT models.

The build-own-operate-transfer (BOOT) is essentially an extension of the project financing concept. It is a special financing scheme which is designed to attract private participation in financing constructing and operating infrastructure projects. In a BOOT scheme, a private project company builds a project, operates it for a sufficient of time to earn an adequate return on investment and then transfers it to the host government or agency. Quite often, the value of efficiency gain from private participation can outweigh the extra cost of borrowing through a BOOT project, relative to direct government borrowing. BOOT/BOT sectors can be either solicited or unsolicited. When proposals are solicited, the project is identified and formulated by the government and the private sector is invited to submit offers for participation. Private companies or a group of companies can also submit unsolicited proposals on their own accord.

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BOOT / BOO structure of a power plant

Lenders

Loan

Debt Service

Contractor

Fuel Equity

Investors
Return on Equity

Owner

Transport

Payment

Operation& Maintanenc

Elect. supply Company

Payments

Land Lease

Power Plant
KW Hrs

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Chapter - 4 Sources of Infrastructure

Finance
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There is a need for large and continuing amounts of investment in almost all areas of infrastructure in India. This includes transportation (roads, ports, railways, and airports), energy (generation and transmission), communications (cable, television, fiber, mobile and satellite) and agriculture (irrigation, processing and warehousing). The key issue is, while the need exists, how these projects will get financed.

In the past the government has been the sole financier of these projects and has often taken responsibility for implementation, operations and maintenance as well. There is a gradual recognition that this may not be best way to execute/finance these projects. This recognition is based on considerations such as: I. Cost Efficiency: Privately implemented and managed projects are likely to have a better record of delivering services which are cheaper and of a higher quality. The India Infrastructure Report estimates that the Indian economys growth rate would have been higher by about 2.5% if the delays and cost overruns in public sector projects had been managed efficiently. The report goes on to state that the predominant cause for such delays / overruns was not under-funding of the projects, but arose, on account of clearances, land acquisition problems, besides factors internal to the entity implementing the project.

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1. Equity Considerations: Since it is hard to argue that every infrastructure project uniformly benefits the entire population of the country, it may be more appropriate to impose user charges which recover the cost of providing these services directly from the user rather than from the country as a whole (the latter is the effect if the government builds the project from its own pool of resources). If users are to be charged a fair price then the project acquires a purely commercial character with the government then needing to play the role only of a facilitator.

2. Allocation Efficiency: Since users are likely to pay for services that they need the most, private participation and risk-return management has the added benefit that scarce resources are automatically directed towards those areas where the need is the greatest.

3. Fiscal Prudence: Both at the centre and state levels, for a variety of reasons, there is a growing concern that the absolute and relative (to GDP and GSDP respectively) levels of fiscal deficit are high and that incurring higher levels of deficit to finance infrastructure projects is infeasible. Given the strength of these arguments, the government has made several attempts to create the preconditions for a sustainable and scaleable involvement of the private sector in the development of infrastructure within the country. These have included promotion of Development Finance Institutions (DFIs) such as the Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) and

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The Industrial Credit and Investment Corporation of India (ICICI) and specialised entities such as the Power Finance Corporation (PFC), Infrastructure Development and Finance Corporation (IDFC), Urban Infrastructure Development Fund (UIDF) and Tamil Nadu Urban Infrastructure Development Fund (TNUDF). For a variety of reasons while each of the entities mentioned has added value to the system in its own unique way, there is a concern that, in their current form, the DFIs no longer appear to be viable (being under capitalised and unprofitable) and the specialised vehicles are not growing fast enough and may not provide a complete answer to the problem.

However, while there are certainly issues surrounding the availability of suitable intermediaries with an adequate amount of risk capital for infrastructure financing, there does not appear to be a shortage of funds per se within the economy. This situation of adequate supply of liquidity is of a relatively recent origin (and is apparently not restricted only to India) and appears to be the result of the manner in which the Reserve Bank of India (RBI) is managing the macro economy (specifically domestic interest rates and exchange rates), the sluggish demand for funds from both manufacturing and agriculture sectors and the continuing high propensity to save amongst Indians with a preference for long-maturity investments. Individual Indians have shown a great deal of willingness to save and hold those savings in very long-term assets either as deep Discount bonds, savings linked insurance policies, savings bank accounts, and post-office savings and pension funds. Indian individual investor appears to be highly risk averse and is prepared to accept even very large negative real returns by holding large amounts of risk-free investments rather than supplying risk capital that will earn higher returns.

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Thus, for infrastructure finance, while the aggregate supply of funds does not appear to be a problem, there is a need for a layer of credit enhancement, which can absorb the risks associated with such financing. There is also a need for intermediaries, instruments and markets that can perform the functions of risk, maturity and duration transformation to suit the desires of the investors. While Foreign Direct Investment (FDI) has the potential to provide some of the equity capital, it appears very likely that the Government itself would have to emerge as the provider of the bulk of this risk capital with banks and capital markets providing the bulk of the debt finance. In the past the Government has tried to combine the role of provider of this risk capital and debt funds within integrated development banks but for a variety of reasons, this approach has not met with much success. There is therefore an urgent need to examine the evidence at hand and attempt to discover new ways of addressing the problems that appear to be retarding the pace at which infrastructure investment is progressing.

II. Characteristics of Infrastructure Finance:

Infrastructure projects differ in some very significant ways from manufacturing projects and expansion and modernisation projects undertaken by companies. 1. Longer Maturity: Infrastructure finance tends to have maturities between 5 years to 40 years. This reflects both the length of the construction period and the life of the underlying asset that is created. A hydro-electric power project for example may take as long as 5 years to construct but once constructed could have a life of as long as 100 years, or longer.

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2. Larger Amounts: While there could be several exceptions to this rule, a meaningful sized infrastructure project could cost a great deal of money. For example a kilometer of road or a mega-watt of power could cost as much as US$ 1.0 mn and consequently amounts of US$ 200.0 to US$ 250.0 mn (Rs.9.00 bn to Rs.12.00 bn) could be required per project. 3. Higher Risk: Since large amounts are typically invested for long periods of time it is not surprising that the underlying risks are also quite high. The risks arise from a variety of factors including demand uncertainty, environmental surprises, technological obsolescence (in some industries such as telecommunications) and very importantly, political and policy related uncertainties. 4. Fixed and Low (but positive) Real Returns: Given the importance of these investments and the cascading effect higher pricing here could have on the rest of the economy, annual returns here are often near zero in real terms. However, once again as in the case of demand, while real returns could be near zero they are unlikely to be negative for extended periods of time (which need not be the case for manufactured goods.) Returns here need to be measured in real terms because often the revenue streams of the project are a function of the underlying rate of inflation.

III. Types of Risk Capital Required:

There are two types of risk capital that are deployed in any project: 1. Explicit Capital: This is typically the equity that a developer or a sponsor commits to the project. Here while the downside is unlimited (to the full extent of the amount of money the sponsor has committed to the project), if the project does well, there is no limit on the upside either. The sponsor seeks to conserve his capital and maximise the returns

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on it by deploying unique and project specific skills and by managing the underlying risks associated with the project. Given a limited supply of capital, the promoter also tends to concentrate his energies and capital in a small number of relatively lumpy investments so that he does not spread himself and his resources too thinly. In a typical infrastructure project, the developer puts together a consortium of capital providers who not only commit capital to the overall project but also assume complete operational and financial responsibility for specific risks (such as engineering, procurement and construction; operations and maintenance and fuel supply), thus, lowering the capital requirements from the developer.

2. Implicit Capital: This is typically the risk capital (in the form of economic capital or tier 1/2 capital adequacy) that is committed by a lender to the project. Loans have the characteristic that while the downside is unlimited (i.e., to the full extent of the amount lent - as in case of equity/explicit capital but with the cushion of the explicit capital), the upside is limited to the rate of interest charged on the loan. Secondly, the loans typically involve much larger amounts of money relative to the equity investments. Given the fact that a typical lender raises money from retail deposits (or bond holders) he needs to hold a reasonably high amount of capital to assure his depositors that irrespective of the fate of the project, he will be able to meet his obligations. Assuming that the desired rating aspiration for the lender is AAA (i.e., the lender would like to assure its depositors of a near zero default risk) an unsecured loan to a typical ten year infrastructure project (rated, say A-, with an average maturity of six years) could require as much as 25% tier 1 capital

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To be committed to it. Since the capital is required to cover the lender against all the uncertainties surrounding a specific project, the lender seeks to reduce the amount of capital deployed by diversifying across projects (unlike the promoter who seeks to specialise and concentrate his exposure) and by ensuring that to the extent possible, the explicit capital (brought in by the promoter) is sufficient to cover the risks beyond the worst-case scenarios. The lender seeks to be compensated for this capital through the rate of interest charged on the project loan. Given the relatively large amounts of funds required for each project and the comparatively smaller number of such providers, lenders in the past have typically not had the opportunity to sufficiently diversify their risks nor have they had a sufficient amount of tier 1 capital. Not unexpectedly, having held significantly less than the required amount of implicit capital, they have very quickly found themselves under capitalised relative to the level of credit rating that they had committed to their depositors and in some cases have even defaulted to them. The risk capital (explicit and implicit) required for infrastructure projects is the most scarce and, therefore, very expensive resource. Given the risks, amounts and maturities involved, required rates of return on such capital could well be excess of 25% to 30% per annum even in todays low interest rate environment. Given the large amounts of risk capital that could potentially be required this would have a significant impact on the cost of the eventual service that is sought to be provided. In the past, the sources that have been tapped for this capital have included professional developers, manufacturers of equipment, contractors, domestic and international equity investors (who have tended to supply primarily the implicit capital required by lenders) and in several cases the government itself (both central and state governments). While the supply of this capital

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from private sources seems extremely limited, the experience of the government in supplying this capital has not been a very happy one. Typically the entities to whom capital has been supplied by the government have not even been able to service their lenders properly leave alone providing a positive return on equity to the government.

These include users of implicit capital (SEBs, irrigation bodies, warehousing corporations etc.) as well as explicit capital (entities like IFCI at central government level and various State Finance Corporations at local levels). As has been argued earlier, once an adequate supply of total (explicit and implicit) capital is ensured, the supply of funds is not really a binding constraint. The whole question of Sources of Infrastructure Finance then becomes a much narrower question of Sources of Risk Capital for Infrastructure Finance in the first instance and then secondarily a question of the manner in which these funds may be intermediated from the providers to the borrowers.

This paper attempts to address these issues along four dimensions: a) Reducing the amount of capital required by each project; b) Increasing the supply of this capital; c) Facilitating the flow of funds to this sector, and d) Enhancing the role of banks as intermediaries.

IV. Reducing the Amount of Required Risk Capital:

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As a first step, before looking for new sources of this risk capital, given its extreme scarcity and very high cost, every attempt needs to be made to limit the amount of capital that is required by ensuring the following:

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1. Removal of the Effect of Controllable Uncertainties: All controllable uncertainties (such as those imposed by unexpected changes in policy, tax rates and political considerations) are either eliminated or the government directly takes the financial responsibility for them in a timely manner. This has the effect of imposing a general tax on the entire country for these uncertainties and taking it away from individual projects. This is, of course, relatively easy to articulate but much harder to implement in a democratic polity where governments and their political compulsions change frequently but the importance of a stable, even if imperfect, policy environment cannot be overemphasized. Ease in contract administration and adherence to these contracts by all entities including state entities is a good example of a controllable uncertainty that has the potential to reduce the quantum of total capital required.

2. National Diversification Benefit: Even though a developer may be implementing only a small project in a small command area, if the desire is to ensure that the cost of the service provided by it is benchmarked at a national level and does not vary a great deal from region to region, the benefit of national or state level diversification could be made available to each project. From a lenders point of view, it should be possible to diversify away as many components of the risk as possible through the use of credit and equity derivatives. Credit derivatives and other related contracts have the effect of allowing the reduction of capital consumption through diversification without necessarily having to incur the costs of buying or selling the underlying credit exposure.

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3. Global Diversification Benefit: Several infrastructure projects involve exposure to global risks such as rainfall, temperature and fuel and other commodity prices. Permitting lender to access these markets directly or through brokers will allow them to reduce their exposure to many of these risks, thus once again, reducing their consumption of implicit capital.

V. New Sources of Risk Capital

In terms of new sources of capital, in addition to convincing the existing set of capital providers to commit more capital by creating an enabling policy environment, the following ideas could be explored: 1. First Loss Default Guarantee Funds (FLDGs) created by the Government: This is a very important idea, particularly in a situation where the overall supply of funds is adequate but there is a constraint in the supply of total risk capital and the government is seeking to operate within its fiscal limits. As a concept it requires governments to:

(a) Stop spending the money required for projects; (b) Focus on eliminating the effects of uncertainties caused by it and (c) To the extent that uncertainties remain, provide risk capital in a manner that preserves the incentives of all the other players to act in a consistent manner. FLDGs seek to provide non-event specific partial credit guarantees to lenders (unlike the partial credit guarantee being explored by World Bank ) are limited to only a part of the loan (say 25.0%) and operates on a first loss basis (i.e., in case of 25.0% FLDG the first 25.0% of the loss would be absorbed by the Fund). This manner of providing capital is in

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Many ways superior to recapitalising existing intermediaries or creating new ones with Government capital.

The corpus which supports the FLDGF may be invested in interest bearing government securities so that the corpus continues to grow and there is no net impact on the government deficit (i.e. is cash neutral). Unlike in the case of recapitalisation where the government capital becomes the primary or the sole risk capital being deployed, in the case of FLDGs even if they are administered mechanically, the government capital is secondary capital. The primary capital being deployed is the implicit capital supporting the balance 75.0% of the loan. The FLDG has the effect of reducing the total quantum of the implicit capital that is needed but not to zero. The belief is that in seeking to maximise the return even on a lower amount of implicit capital the lender would be equally diligent. And, it may also bring in smaller and more specialised providers of implicit capital and loan funds (since the need to diversify would go down). FLDG concept draws its value from the diversification benefits inherent in a larger number of projects. FLDG pool makes this diversification benefit available to the lenders by reducing the project risk borne by them. In the US markets, monocline insurance companies like the MBIA provide such credit supports for urban local bodies and other borrowers. 2. Securitisation: A large project loan could then be broken up into several smaller pieces which could then be bought by insurance companies, individuals, banks, pension funds, etc. each of whom would have other diversified investments. This would typically

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be done in conjunction with a FLDG of the sort described earlier so that the securitised instrument acquires an investment grade character and can be subscribed to even by highly (credit) risk-averse lenders. In addition, if well established, active trading of such paper has the effect of establishing a pricing benchmark for such project risk and if packaged along with other securities, could even produce a very high quality paper. However, for this to happen at a large scale a great deal of facilitative legislation and incentive structures would have to be built.

3. Creation of several very large intermediaries (capital bases in excess of US $ 5.031 billion each): These intermediaries could then manage the risk within their own balance sheets either by diversifying across many activities or across many projects. Currently only two entities exist with such a large amount of capital: State Bank of India and Life Insurance Corporation. Going forward, there may be a need to facilitate the creation of more such entities through the merger of several smaller ones. Creation of several dedicated but small intermediaries for this purpose has precisely the opposite effect. The intermediary is often under capitalised to begin with and for each project needs to commit a larger amount of (implicit) capital than a larger, more diversified entity would need to. While this approach has the benefit that the supplier of funds and supplier of risk capital is now one entity, there is always a very valid concern that such an intermediary, given a wide variety of choices, may choose to stay away from infrastructure investments altogether or may choose not to build the relevant expertise focusing instead on a completely different area.

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VI. Facilitating the Flow of Funds:

As discussed earlier, fortunately for India, while there is an acute scarcity of risk capital, There is no shortage of the long-maturity funds that are required for infrastructure finance. Individuals have shown a great deal of willingness to save and hold those savings in very long-term assets either as 25 year deep-discount bonds; very long-term savings linked insurance policies; savings bank accounts, post-office savings and pension funds. However, the individual investor is very risk averse and even at very large negative real returns appears prepared to hold risk-free investments rather than risky ones. In addition even though there has historically been a great deal of uncertainty surrounding the rate of inflation within the Indian economy, the investor appears to show a great deal of affinity for deposits and investments which have a fixed nominal rate of return. Given the characteristics of infrastructure finance, while aggregate supply of funds does not appear to be a problem, there is a need for intermediaries and markets that are able to perform all the three functions of risk, maturity and duration transformation. Other sources of funds have traditionally been the government itself (central, state and urban local body) and multi-lateral institutions such as the World Bank and Asian Development Bank. Some of the steps that need to be taken to make the large supply of domestic funds more easily available to infrastructure projects include:

1. Redefine NDTL to include only cash or cash-like instruments : Currently Net

Demand and Time Liabilities (NDTL) are defined to include almost all the liabilities of a bank. The definition is important because under the Banking Regulation Act, SLR and CRR are defined with reference to NDTL. SLR and CRR obligations impose a financial Andhra University 39 of 89

cost on the bank but are important where a bank is performing a maturity transformation role (as in the case of savings deposits which may potentially be withdrawn on demand). However, where a bank is mobilising fixed maturity deposits or bonds, particularly where the original maturities are greater than one year, it is not clear why CRR and SLR would be required to be maintained. One of the rationales for the continuance of specialised DFIs for infrastructure finance has been they are able to issue long-term bonds at low spreads over the G-Sec rate and do not have to maintain CRR and SLR on them. This is an anomaly which can easily be addressed within the Banking Regulation Act so that banks will be able to issue long maturity bonds (including 25 year Deep Discount Bonds) at identical rates.

2. Strongly encourage the use of Derivatives: Typically, equity, commodity, forex and interest rate derivatives form the primary products in the derivative markets while the insurance companies, banks, hedge funds and large corporates are the larger participants. Derivatives markets are important for the risk transformation roles they play. In the Indian context, these markets are underdeveloped due to a large number of regulatory issues. Currently credit derivatives are not permitted in the Indian markets while the banks are not permitted to trade in equity and commodity derivatives. Further, the market for interest rates derivatives is very thin because there are strict restrictions on the participation of banks in the exchange Traded derivatives. While Over-the-Counter (OTC) derivatives may be traded by the banks, the large public sector banks are largely absent from the market. Insurance companies, the other natural counter-parties, have not yet received permission from the

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Insurance Regulatory and Development Authority (IRDA). Through the use of such derivatives it will be possible for participants to design products which are capital efficient and are tailored to the requirements of infrastructure finance. For example, floating nominal rates give more fixed real rates of interest than do fixed nominal rates of interest. Given the preference for fixed nominal rates on the part of the long-term retail investor, derivative markets provide the only bridge between the two sets of needs.

3. Free up the allocation of funds from Insurance Companies and Provident Funds: This is a much harder challenge and before this is done the following points would have to be clearly examined: In the absence of these funds, will there be a decline in the availability of funds for the central/ state governments and Currently insurance companies and provident funds hold no capital against credit risk and interest rate risk but nevertheless have to deliver promised returns to their investors in a default free manner. Nor presumably do they have the expertise to manage these risks. This could be one possible reason why these entities may have been allowed to lend to DFIs but not directly to the underlying borrowers. Where will this capital come from and how will these competencies be built. Given the mixed record of state governments and DFIs in servicing their obligations, it is not clear whether the desired objectives have been achieved from the point of view of the insurance company and its investors. On the contrary, it is entirely possible that problems of under capitalisation that have been encountered by DFIs in the past may feed through to these funds as well. Use of securitised instruments in conjunction with FLDGs, use of

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professional fund managers and specialised entities such as credit rating agencies and centre of competency such as IDFC and well defined restrictions such as diversity score, duration mismatch and average credit rating of the asset portfolio may hold some of the answers to the questions of competency and capital adequacy. Similar structures could be used wherever state governments are implementing financially viable projects. Where the projects do not have inherent viability but for a variety of social reasons still need to be invested, it would be hard to argue that money borrowed from provident funds and insurance companies should be used to finance these investments. VII. Enhancing the Role of Banks as Intermediaries: Given all the issues surrounding the supply of risk capital and the supply of funds, the manner in which these scarce resources may be intermediated is a very important question. The earlier discussion (also borne out by the Indian experiences) suggests that thinly capitalised, specialised entities focused on the provision of infrastructure and project finance are likely to experience a great deal of difficulty in maintaining viability. Such entities are likely to impose soft-budget constraints on the projects that they finance and given the long-cycle nature of these projects, these entities are likely to over-extend themselves in the initial years because of their desire to grow. Given this behaviour, they are also likely to delay the creation of markets since developers and promoters are going to find it easier to approach such an entity for first time and for on-going finance than a larger group of more dispassionate investors operating with hard-budget constraints. As has been argued earlier, no single entity will have sufficient capital to meet the requirements of infrastructure finance in the country - parceling this risk out amongst a very large number of investors for each of whom this represents only a small exposure is

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the only way in which this capital can be found. For this to occur, the development of markets for these instruments is imperative and urgent. While a few specialised entities exist (such as IDFC) which can play a key role as new generation intermediaries, banks as a class are currently the best positioned to play this role. But, even if all the suggestions regarding sources of risk capital and sources of funds are implemented there is a very real concern that given so many competing choices Banks may choose to under invest in infrastructure and focus instead on other businesses. Or, worse, they could suffer from problems similar to those faced by the DFIs and in the medium term render themselves ineffective. Several steps need to be taken to strongly incentives banks to participate in infrastructure finance in a well structured manner. 1.Eliminate the distinction between an advance and an investment: Given the importance of instruments such as commercial paper and bonds in providing finance to companies and the ease with which borrowers move between one form of financing and another, there is a strong case that this distinction should no longer be made even in the balance sheets of banks. Even though both sets of instruments increase the level of credit risk borne by the bank in an identical manner, considerations such as credit / deposit ratio, priority sector requirements and a strong regulatory preference for Advances over Investments create a distorted set of preferences. From a risk management perspective in an environment of a larger and disparate set of investors (domestic and international banks, mutual funds, FIIs, insurance companies, pension funds, HNIs etc.), sophisticated financial intermediaries are likely to give a much more preferential treatment to liquid assets relative to illiquid assets expressing a strong preference for instruments which may be traded resulting into lower yields for tradable

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instruments. This would become critical in the case of infrastructure finance because a very large number of investors willing to invest in securitised paper would be needed. Once the entire asset base of a bank is treated on par there would be much greater incentive to participate in the market and not focus on originating every single transaction.

2. Require detailed product and client segment level profitability, NPA, provisioning and consumption of capital to be reported: This is important because otherwise income streams and growth from a few segments mask the under performance of the bank in other segments. This reduces incentives to build specialisation in each area of business that the bank is engaged in and creates the potential for future catastrophes once the positive returns from the few sectors disappears. This reporting will ensure that right from the beginning the banks are engaged in infrastructure finance in a disciplined manner.

3. De-emphasise the role of the Non Performing Asset Ratio as an Independent Performance Measure: In its evaluation of banks, despite the fact that strong provisioning guidelines and capital adequacy rules have been imposed, in its recent guidelines, the RBI has started to emphasis the NPA Ratio as a stand-alone performance measure. This is both inconsistent and counter-productive. If provisioning has been done properly then the Non Performing Asset is actually the good part of the loan (the bad part has already been provisioned away) and more importantly if the lender has engaged in high-risk, high-return businesses

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(such as infrastructure finance), he is likely to have a higher proportion of assets which are not performing relatively to a lender that has only engaged in low-risk businesses. The question to ask would be, are the risk-return models in balance, i.e., what is the return on equity after an appropriate level of provision has been taken and what is the capital adequacy. This independent emphasis on the NPA ratio is sending a strong signal to banks that they need to move away from businesses such as infrastructure finance.

4. Directed Credit: If banks behave as risk-neutral intermediaries, in order to get them to participate in any sector the only requirement would be to ensure that the risks and the returns of the sector are in balance. However, if the concern is that banks are behaving in a risk-averse manner and there is a belief that the positive externality of a rupee of investment in infrastructure exceeds that of a similar rupee in any other sector, it would be very useful to explore the inclusion of infrastructure as a component of the priority sector. However, this should be done while also ensuring that banks are able to meet these requirements by purchasing suitable instruments in the market and not only through originating every asset themselves. RBI has taken a step in this direction with the recent circular dated July 20, 2004 with respect to Investment by banks in Mortgage Backed Securities - Lending to Priority Sector under Housing Loans. The circular has endorsed the view that exposures of banks in securitised debt (currently restricted to Mortgage Backed Securities) be classified as priority sector lending, if the underlying assets satisfy priority sector norms. This would give a boost to canalizing funds of banks, which may not have origination infrastructure in specific sectors such as housing finance / infrastructure etc.

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5. Capital market exposure limit and ability to take security of shares: Most of the infrastructure finance projects are executed through special purpose vehicles (SPVs) floated by the sponsors. It is common for lenders, both in India and abroad, to take charge over entire equity of the SPV as a part of security package for the amounts lent. This facilitates easier management of the asset from a lenders perspective. This requires the Banking Regulation Act to be amended to enable banks to take pledge of shares exceeding 30.0% of paid-up capital in case of infrastructure projects. Several projects in the country (especially telecom, ports and toll roads) have entered their concession period stage and are amenable to acquisition financing. Given that the project risk is over and the large scale of finances involved, banks can, if permitted, find very safe opportunities in such acquisition financing. Such consolidation can release equity for the existing promoters, which can come back as seed capital for more infrastructure projects. Further, banks might be taking some direct equity exposure also for better monitoring of the project or retaining some upside in the project. Such equity exposures may be excluded from a banks capital market exposure limits.

VIII. Conclusion
Infrastructure growth is a critical necessity to meet the growth requirements of the country. Government led infrastructure financing and execution cannot meet these needs in an optimal manner and there is a need to engage more investors for meeting these needs. Even though the Indian financial system has adequate liquidity, the risk aversion of Indian retail investors, the relatively small capitalisation (compared to the large quantum and long duration funding needs of infrastructure finance) of various financial

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Intermediaries requires adoption of innovative financial structures and revisiting some of the regulations governing the Indian financial system. The risk capital required in the infrastructure sector can be understood as the Explicit Capital brought in as equity by the project sponsors and the Implicit Risk Capital provided by the project lenders. Implicit Capital providers seek to manage their risk-return reward by ensuring availability of adequate Explicit Capital and diversification across various projects. Given this profile of the Explicit Capital, greater flow of this risk capital can be ensured by removing the effects of controllable uncertainties in the policy environment and making available the benefits of diversification through alternate mechanisms. New sources of this risk capital can be sourced by providing partial risk guarantees (in form of First Loss Deficiency Guarantees), formation of highly capitalized financial intermediaries and encouraging securitization transactions. In addition to above, various regulatory initiatives and market reforms are required to enable the commercial banking system to participate more Vigorously in providing infrastructure financing.

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Chapter - 5 Sources of funds To IVRCL

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The company needs finance at every stage of the project. Project finance is both for short-term and long-term. The sources from which the company can meet its financial needs for projects are:

Internal Sources a. Internal Accruals b. Interest on Deposits c. Sale or Hire of Surplus Assets d. Liquidation of unwanted / Scrap Inventories. e. Dividends

External Sources a. Share Capital & Debentures b. Banks & Financial Institutions c. Unsecured Loans , NBFCs & Public Deposits d. Foreign Currency Convertible Bonds e. Mobilization Advance / Material Advance f. Suppliers Credit/Deferred Suppliers Credit

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a) Internal Accruals: IVRCL can submit tender quotations by adding its profit margin to the cost of construction. At the end, the project will end-up with profits on successful completion of its costs as per quoted rates. These margins are internal accruals and company can transfer these profits to Reserves & Surpluses after transferring / payment of necessary provisions, dividends and taxes. In some occasions, IVRCL will enter into an agreement by subcontracting the entire or partial of the awarded contract work and will get fixed percentage of profits as per the agreement with sub-contractors.

b) Interest on Deposits: The surplus funds in the company will deposited in Fixed Deposits Interest on FDs and interest on Investment received shall be the sources of internal accruals. Similarly interest received on loans given to other companies shall be the source of internal accruals.

c) Sale or Hire of Surplus Assets: C ompany can also generate funds by sale or Hire of its surplus assets which may not used in near future either due to old or high transportation charges for shifting these assets from one project to another project.

d) Liquidation of unwanted /scrap Inventory: Any Inventory which is scrapped is not required to the company will be sold and thereby generating another form of internal accruals.

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e) Dividends: IVRCL has invested funds in some other company securities or mutual funds. The dividends received by the company from these investments are the sources of internal accruals.

External Sources a. Share Capital & Debentures: The long-Term securities available to the company for rising capital are Shares & Debentures. Shares include ordinary shares and preference shares. Ordinary shares provide ownership rights to investors. Debentures or bonds provide loan capital to the company, and investors get the status of lenders. IVRCL had made its public issue during 1995. As of 31st Mar 2009 the total capital stood at Rs.267.01 millions. The capital consists of

(Rs. in millions) Equity Share Capital (Public issue) Shares issued under ESOP Total 0.03 267.01 266.98

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b. Banks & Financial Institutions: In view of importance of infrastructure and the need for funds in such projects involving large capital outlays, banks are permitted to extend term finance for creation / expansion / modernisation of infrastructure. With the quickened pace of economic development under the impetus of the Five Year Plans, the most striking change in the Indian economy has been the initiation of industrial revolution and further the recent economic liberalization by the government has hassle encouraged the financial institutions are granting loans to Infrastructure industries. With high credit worthiness, default free track record, the IVRCL is able to avail the funds extensively both from Banks and financial institutions. Different types of loans availed as on 31st March 2009 is

(Rs.in million) Term Loans Non-Convertible Debentures Working Capital Loans: Term Loans (Project specific) 1926.85 5718.57 10184.82 539.40 2000.00

From Consortium banks Total

During the year the company raised secured non-convertible debentures of Rs.2000 million for payment of some high cost debts and to meet the long term working capital margin. The NCDs were fully sub-scribed by Life Insurance Corporation of India.

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The company has taken term loans to finance purchase of plant, machinery, equipment and vehicles specific to certain projects and for the company as a whole. The of loan availed as on March 31, 2009 stood at Rs.539.40 million as against Rs.572.75 million , the amount of loan availed as on March 31, 2008. However, additions to these assets during the year were Rs.1824.13 million. The company has availed project specific working capital loans for certain major projects to the meet the working capital requirements of those specific projects. The company has also availed working capital loans from a 10 member consortium banks to finance infrastructure projects where no project specific funding has been done. The limits are optimally operated with all the member banks in the consortium duly meeting the requirement of these banks in compliance with the terms of the loan agreements with them. c. Unsecured Loans, NBFC & Public Deposits: Another source of raising funds by Infrastructure Company is taking unsecured loans from promoters and their relatives and from Non Banking Finance Companies (NBFC). In addition to this company also raised funds by accepting cumulative and noncumulative deposits from public For academic sake Non-banking companies could accept unsecured deposits from the public to the extent of 10% of their aggregate paid-up capital and free reserves. Different types of unsecured loans availed as on 31st March 2009 is (Rs.in million) Public Deposit Banks & Others Nil 3409.94

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d) Foreign Currency Convertible Bonds: "Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; IVRCL has availed funds by raising Foreign Currency convertible Bonds (FCCB). During 2005-06 the company has issued at par, 5 year 1 day Zero Coupon US $ 65.00 MILLION (INR 2980 million as on the date of issue) comprising of 650 bonds of US $ 100,000 each to finance capital expenditure and investment in BOOT/BOT projects including import of capital goods and direct investment in joint ventures or subsidiaries related thereto. The bond-holders have an option of converting these with a fixed rate of exchange on conversion as on the date of conversion. At the end of Mar2007 some of the holders of FCCB utilized their option of convertibility and $ 39.30 million have converted into equity shares. Consequently 76, 97,740 numbers of equity shares of Rs.2/- each have been allotted to such bond holders. e) Mobilization Advance / Material Advance: At the beginning of the contract generally a construction company can receive 5 % to 10% of the contract amount from the employer towards Mobilization advance and Material advance. These amounts can be utilized for preliminary works viz; mobilization of labour at site, construction of temporary sheds to Labour and administration staff etc, after commencement of work the

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contractor can submit bills to his employer to the extent of work completed. These bills are called Running Account Bills. The contractor can submit bills till he completes the work as per terms & conditions of the contract. The employer will deduct the Mobilization and Material Advance which he has given to the contractor from each Running Account bill and release the balance amount after deducting statutory deductions.

g) Suppliers Credit/Deferred Suppliers Credit: During the normal course of business IVRCL can get credit from their suppliers from 1-2 months. Thus the amount available during that period is one of the basic source of funds available to the company in the form of credit allowed by suppliers. Similarly the company purchases capital assets viz; Ready mixers concrete vehicles, Cranes, Transport vehicles, for its operations. The company is allowed by its suppliers to pay the amount on EMI basis instead of paying lump sum amount. Thus the company enjoys deferred payment facilities from its suppliers, is another source temporary funds available to the company.

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Chapter - 6 Analysis And Interpretations

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The specimen of sources and their application of funds of IVRCL

SOURCES OF FUNDS Share Holders Funds Share Capital Stock Options Reserves & Surplus Loan Funds Secured Loans Un-Secured Loans Deffered Tax Liability Total 2006-07 259.32 40.34 12,917.54 3,887.51 1,664.79 55.89 18,825.39 (Rs. in Millions) 2007-08 2008-09 266.98 4.19 15,788.61 5,787.86 4,890.55 103.09 26,841.28 267.01 17,838.76 10,184.82 3,795.43 117.41 32,203.43

Application of Funds Fixed Assests (Net of Depreciation) 1,929.13 Capital work-in-progress 505.92 Investments 2,828.94 Total 5,263.99 Current Assets, Loans And Advances: Inventories 825.37 Sundry Debtors 6,332.10 Cash & Bank Balances 2,238.20 Other Current Assets 6,367.47 Loans and Advances 10,919.47 Total ------------ ( A ) 26,682.61 Current Liabilities and Provisions Current Liabilities Provisions Total -------------( B ) Net Current Assets ( A - B ) Total

3,191.94 540.86 3,409.07 7,141.87

5,206.97 195.51 3,892.03 9,294.51

1,943.39 6,584.88 1,771.37 10,746.75 7,780.51 28,826.90

2,093.49 11,430.31 1,008.68 14,284.06 9,318.73 38,135.27

12,894.59 226.62 13,121.21 13,561.40 18,825.39

8,780.12 347.37 9,127.49 19,699.41 26,841.28

14,786.79 439.56 15,226.35 22,908.92 32,203.43

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Table showing Capital Growth in IVRCL Infrastructures & Projects Ltd.

TABLE SHOWING CAPITAL GROWTH Particulars Issued, Subscribed and Paid up capital % of Growth 2006-07 259 100% (Rs. in millions ) 2007-08 2008-09 267 267 103% 100%

Capital Growth

103% 103% 102% 102% 101% 101% 100% 100% 99% 99% 2006-07 2007-08 2008-09

Growth %

Year

Analysis: The authorized Share Capital of the company consists of 175,000,000 equity shares of Rs.2/- each amounting to Rs.350,000,000 and 25,000,000 preference shares of Rs.2/each amounting to Rs.50,000,000.

During the year 2006-07 the company increased the equity share capital by Rs.45.44 million. The total paid up share capital as at March 31, 2007 stood at Rs.259.32 million.

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During the same year the company issued and allotted 15,000,000 equity shares of Rs.2/each to Qualified Institutional Buyers at a price of Rs.370/- per share aggregating Rs.5550 Million. This resembles the reputation of the brand name in the International scenario. During the year 2007-08 & 2008-09 the company increased the equity share capital on account of conversion of FCCB and allotment under ESOP(Employee Stock Option Scheme). Therefore the total paid up capital as on 31 st Mar2009 stood at Rs.267.01 Millions On the prima facie observation of the balance sheet, these funds were utilized for discharge of loan funds from Banks and financial institutions which are normally costlier.

Inference:From the above table we infer that the growth rate of the Capital increased by 3%

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Table showing Reserves & Surplus

(Rs.in million) Year Reserves & Surplus Growth 2006-07 12,918 100% 2007-08 15,789 122% 2008-09 17,839 113%

Reserves & Surplus

140% 120%

% of Growth

100% 80% 60% 40% 20% 0%

2006-07

2007-08 Year

2008-09

Analysis:The Reserves & Surplus accounts consist of Security Premium reserves, Revaluation Reserve and General Reserve.

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Security Premium Reserves: A statement of movement in the security premium account is given below:
Security Premium Account Rs.in Million 31st Mar'2009 31st Mar'2008 10622.79 9630.53 822.62 5.3 (25.26) 126.6 48.14

Balance -Beginning of the year Add: Preimum on conversion of FCCB's Premium on allotment under ESOP Redmumption on converted FCCBs Reserved / Premium provided on balance (Net) Total Less: Expenses incurred on issue of shares to QIBs* Balance - end of the year
*QIB: Qualified Ins titutional Buye rs

10602.83

10627.89

0 10602.83

5.1 10622.79

General Reserve:Out of the profits of the year Rs.600 million has been transferred to general reserve, Rs.735 million to a special reserve created for the purpose of adjustment of disputed tax liability that may arise in case of disallowance of deduction claimed under Sec IA of the Income tax Act 1961, Rs.100 million to debenture redemption reserve and balance of Rs.995.15 million (after providing for dividend and tax thereon) has been retained in the Profit & Loss account. Revaluation Reserve: The revaluation reserve amount of Rs.28.45 million as on March 31, 2009 represents the reserve arising due to revaluation of some freehold lands & building done during the year 2001 & 2002 as reduced by the depreciation on revalued portion of the assets till Mar 31 2009.

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Inference:-From the above table we infer that the growth rate of Reserves & Surplus is 13%.

Table showing Secured loans

(Rs.in million) 2006-07 Secured Loans Growth % 3,888 100% 2007-08 5,788 149% 2008-09 10,185 176%

Secured Loans

180% 160% 140% 120% 100% 80% 60% 40% 20% 0%

% of Growth

2006-07

2007-08
Year

2008-09

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Analysis:During the year the company raised secured non-convertible debentures of Rs.2000 million for payment of some high cost debts and to meet the long term working capital margin. The NCDs were fully sub-scribed by Life Insurance Corporation of India. The company has taken term loans to finance purchase of plant, machinery, equipment and vehicles specific to certain projects and for the company as a whole. The of loan availed as on March 31, 2009 stood at Rs.539.40 million as against Rs.572.75 million , the amount of loan availed as on March 31, 2008. However, additions to these assets during the year were Rs.1824.13 million. The company has availed project specific working capital loans for certain major projects to the meet the working capital requirements of those specific projects. The company has also availed working capital loans from a 10 member consortium banks to finance infrastructure projects where no project specific funding has been done. The limits are optimally operated with all the member banks in the consortium duly meeting the requirement of these banks in compliance with the terms of the loan agreements with them.

Inference:From the above table we infer that the growth rate of Secured Loans is 76%.

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Table showing Un-secured Loans

Rs.in Millions 2006-07 Un-Secured Loans % of Growth 1,665 100% 2007-08 4,891 294% 2008-09 3,795 78%

Un-Secured Loans
350% 300%

% of Growth

250% 200% 150% 100% 50% 0%

2006-07

2007-08 Year

2008-09

Analysis: Unsecured loans comprises of Public Deposits, Loans from Bank& Others and Foreign Currency convertible bonds. During 2006-07 the company has paid entire public deposits. No fresh deposits were accepted.

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The company has also availed short term unsecured loan of Rs. 3409.94 millions from some of the banks & financial institutions during 2008-09 to bridge the temporary needs in the ordinary course of business. All these loans are due for repayment with in the current financial year ending 2010. During the year the none of the holders of Foreign Currency Convertible Bonds (FCCB) have exercised the option for conversion into equity shares. The amount of FCCB outstanding as on 31-Mar-2009 unchanged at $ 7.60 million the increase in the value of INR is only because of the exchange difference accounted. The overall long-term and short-term borrowings of the company (other than FCCB) stood at Rs.13,594.76 million as on 31st Mar 2009.representing an increase of 31.1% due to increased operations.

Inference:From the above table we infer that the growth rate of Un-Secured Loans has declined to 22%.compared to previous year 2006-07.

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Table showing Current Liabilities

Rs.in millions Year Current Liabilities % of Growth 2006-07 12,895 100% 2007-08 8,780 68% 2008-09 14,787 168%

Current Liabilities

180% 160% 140% 120% % of Growth 100% 80% 60% 40% 20% 0%

2006-07

2007-08 Year

2008-09

Analysis: Current Liabilities comprises of Advances received from Contractee clients, Trade Deposits, Sundry Creditors and Other Liabilities.

Advances received from contractee clients are the advances provided to the company in the nature of short-term liabilities, which are recovered from client bills. Some of the

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advances bear interest cost and others are interest free. The company has also provided bank guarantees for some of these advances.

Sundry creditors represents amount due to suppliers, sub-contractors, labour contractors, back-to-back contractors and other service providers. Through confirmation of account balances and system of reconciliation of supplies and services to the company all known liabilities incurred to earn the gross revenue have been fully captured and accounted for during the year under discussion.

Other Liabilities represents all statutory dues such as PF, ESI, TDS, Sales Tax etc; payable by the company relating to the month of March 2009.

Inference:From the above table we infer that the growth rate of Current Liabilities is increased to 68%.compared to previous years.

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Table showing Fixed Assets

( Rs. in million) Year Fixed Assets % of Growth 2006-07 1,929 100% 2007-08 3,192 165% 2008-09 5,207 163%

FIXED ASSETS

200% 150%
% Growth 100%

50% 0% 2006-07 2007-08

YEAR

2008-09

Analysis:
During the year 2008-09, the company has invested Rs.2447.54 million (net) towards the additions to fixed assets as compared to addition of Rs. 1582.61 million during the previous year 2007-08. The increase in capital expenditure is mainly to cater the need of fixed assets requirement in roads and building sectors.. Inference: - From the above table we infer that the growth rate of Fixed Assets has increased to 63%.compared to previous years.

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TABLE SHOWING INVESTMENTS (Rs. in million) Year Investments % of Growth 2006-07 2,829 100% 2007-08 3,40 9 121% 2008-09 3,89 2 114%

INV ES TMENTS
114% 3,892 121% 3,409 100% 2,829

2008-09

2007-08

2006-07

Analysis:The company has created holding companies which would undertake and invest in specific sectors, like Water, Transportation and Urban Infrastructure areas. Total Investment as at March 31, 2009 is stood at Rs.3867.46 millions as compared to Rs.3382.60 millions during the previous year of March 31, 2008.

Inference: - From the above table we infer that the growth rate of Investments is increased to 21%.

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Table showing status of Sundry Debtors.

( Rs. in million) Year Sundry Debtors % of Growth 2006-07 6,332 100% 2007-08 6,585 104% 2008-09 11,430 174%

Sundry Debtors

2006-07, 100% 2008-09, 174%

2007-08, 104%

Analysis:Sundry Debtors amount to Rs.11,430.31 million as at March 31, 2009, as compared with amount of Rs.6584.88 million as at March 31, 2008. These debtors are considered good and realizable. Debtors including un-billed revenue amount to Rs.18,229.29 million as at 31st Mar 2009 as compared to Rs.12,793.42 as at 31st Mar 2008. Debtors and un-billed revenue are at 36.6% of revenue for the year ended 31 st Mar2009 as compared to 34.36% for the previous year representing an outstanding of 134 days and 126 days of revenues for the respective years.

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Inference: - From the above table we infer that the growth rate of Sundry Debtors is 74%.

Table showing Current Assets

(Rs.in million) Year Current Assets % of Growth 2006-07 20,351 100% 2007-08 22,242 109% 2008-09 26,705 120%

Current Assets
120% 2008-09 Yea r 109%

2007-08 100%

2006-07 0% 50% 100%

150% %G rowth

200%

250%

300%

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Analysis:Current assets mainly comprising of Un-Billed Revenue, Retention Money, Other deposits. Un-billed Revenue: Rs.6798.98 million represents amounts to be billed to some of the contractee clients in respect of revenue earned under the percentage completion method, followed by the company, as reduced by that portion of such revenue already billed and receivable from those clients. Retention Money Rs.4283.55 million represents the amounts retained by the clients towards performance security as a guarantee for satisfactory performance of the infrastructure projects developed by the company. The company has not received any demand for claim from any of the client and hence all these amounts are treated as good.

Other Deposits Rs.2661.25 millions mainly consist of deposits lying with Government departments like Sales Tax, Electricity Board, Telephones etc and Earnest Money Deposit (EMD) with the clients.

Inference: - From the above table we infer that the growth rate of Current Assets is 20%.

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Profit & Loss Account: The following table sets forth the income statement for the financial year ended March 31, 2009, 2008 and 2007. The components of expenses have been expressed as a percentage of total income for the years indicated.

31-Mar-09 31-Mar-08 31-Mar-07 Income from Operations 49830.92 36981.14 23464.57 Other Income 299.13 45.29 73.80 Total Income 50130.05 37026.43 23538.37 Less : Indirect Tax 1012.06 375.19 405.71 Net Total Income 49117.99 36651.24 23132.66 Construction Expenses (Incl. indirect tax) 41772.13 30965.12 19497.28 Administration and Other Expenses 2828.91 2026.42 1260.14 EBITDA 4516.95 3659.7 2375.24 Interest & Finance Charges 1306.14 478.22 308.4 Depreciation 473.05 328.18 215.88 Profit before tax (PBT) 2737.76 2853.3 1850.96 Provision for taxation 478.07 748.53 436.33 Profit after tax (PAT) 2259.69 2104.77 1414.63

Table showing Income from Operations (Rs. in millions) Mar/2007 Income from Operations % of Growth 23464.57 100% Mar/2008 36981.14 158% Mar/2009 49830.92 135%

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INCOME FROM OPERATIONS

Analysis: Gross work bills represent revenue earned till end of March 2009, on long term construction contract, where revenue is recognizable over time as the work progresses rather than at the completion of such contracts. It is an established principle that the contractee client has the legal right to require specific performance from the contractor to the effect the client acquire ownership claim to the contractors work-in-progress. In turn

The contractor acquires legally enforceable rights to require the client to make payments progressively against the work executed/cost incurred in due performance of those contracts. Hence, the substance of the business activity is that revenue is earned continuously as the project progress.

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The company continues to earn its major contract revenue from water and water related projects, which account for 49% of the total revenue. The other projects such as building and industrial structures accounted for 17%, Transport infrastructures like roads, rail tracks and bridges 16% and power infrastructure like transmission lines, substation etc.18%.

Inference: - From the above table we infer that the growth rate of Income from Operation is increased to 35%.

Table showing Construction Expenses

( Rs. in millions) Year Construction & Other Materials % of Growth Mar/2007 19497.28 100% Mar/2008 30965.12 159% Mar/2009 41772.13 135%

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Analysis
The increase in prime cost i.e. construction materials, sub-contractors work bills and masonry & other works are in line with the increase in gross work bills. The major items of construction materials are steel, cement, pipes, oil and fuel etc. The increase in the repairs and maintenance expenses is relatable to increase in the fixed asset base. Increase in Machinery Hire charges is due to increase in the number of road projects undertaken by the company where the requirement of machinery and equipment utilization is high. Inference: - From the above table we infer that the growth rate of Construction expenses is increased to 35%.

Table showing Administration Expenses

( Rs. in millions) Year Administration and Other Expenses % of Growth Mar/2007 1260.14 100% Mar/2008 2026.42 161% Mar/2009 2828.91 140%

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Employee cost The increase in employee cost during 2009 is by 35.41% when compared corresponding previous period is due to increase in the employee strength to around 5800 employees in year 2009 from 5000 employees in 2008 in view of increased operations and annual incremental salaries.

Insurance- The increase is due to taking proper insurance coverage for the existing sites and increase in the number of new sites during the financial year.

Increase in other heads of expenditure such as Traveling & Conveyance, Printing&Stationery, Communication, Business promotion, Office maintenance and Rent are because of the increase in the number of project sites during the year.

Inference: - From the above table we infer that the growth rate of Administration & Other Expenses increased to 40%.

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Table showing Operating Profit

( Rs. in millions) Year EBITDA Profit before Tax (PBT) Profit After Tax (PAT) % growth of Net Profit after Tax 2007 2375.24 1850.96 1414.63 100% 2008 3659.7 2853.3 2104.77 149% 2009 4516.95 2737.76 2259.69 107%

Analysis:The company earned an operating profit (EBITDA) of Rs.4516.95 million, representing 9.01% of the total income as compared to Rs.3659.70 million, representing 9.88% of the total income compared to corresponding previous year.

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Profit before tax (PBT) as a percentage to Total Income works out to 5.46% for the year 20008-09 when compared to 7.71% for the previous year. The reduction in the PBT is mainly due to increase in Interest and Finance cost.

The company has made provision for income tax for the year 2009 is 478.07 million as against Rs.748.53 during the previous year.

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Future Prospects of IVRCL

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IVRCL continues to be a sectorial leader in Infrastructure construction industry with specialization in Water & Irrigation Transportation Building and Industrial Structures Power Transmission

In line with stringent pre-qualification requirements to bid for large and complex projects, IVRL has entered into strategic alliance by way of specific consortium or joint ventures with reputed Indian and Foreign companies. The company has bid for several strategic projects on Lumsum Turnkey Projects (LSTK) basis and also for BOT highway projects and in the emerging business sectors. IVRCL is presently entered into following project specific tie-ups with;-

IRCON CYMI, Dragados Group, Spain Dumas Mining Kubota Corporation Japan Building Construction co-Singapore Trolling GmBH, Germany Parking Technologies, Germany

- BOT Road Projects - Power Transmission Projects - Underground Mining - Water Projects - Micro Tunneling - Sewer Rehabilitation & Lining - Automotive Multi-Level Car Parking

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The significant Milestones of IVRCL sector wise is Sector Water Pipelines Transportation Highways & Roads Railways Tunnels Sky bus Buildings Residential Non-Residential 1,15,11,114 sft 25,61,886 sft Works Undertaken 1500 km 1080 lane Km 50 Km 8.50 Km 1.60 Km

1,40,73,000 sft

Power Transmission 132 KV 220 KV 400 KV

361 Km 124 Km 300 Km

Having firmly established in the four sectors of its core competency, IVRCL is briskly foraying into some selected business sectors which are emerging into major growth areas. These efforts in addition to our focused search for synergic acquisition would go a long way in sustaining its growth in the future.

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Summary of Findings And Recommendations

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SUMMARY OF FINDINGS By examining the financial statements of IVRCL for the past 3 years; the summary of findings are arrived at by using trend analysis / ratio analysis.

The overall capital growth in terms of Paid-up capital was increased by 21% and Reserves & Surplus by 184% after making the provision for Dividend. Also sufficient provisions were allocated in order to meet the borrowings in future.

The company is continuously declaring the dividend at 30% since 1997 -98 and for the past two year it has been further increased to 50%.

Current Assets to Current liabilities are maintained at Rs.2/- for every Re.1/outstanding.

There is tremendous increase in the turnover for the said period and it is very encouraging to the company. The net profit of the company is also at increasing trend.

It is found that Debt was increasing when comparing to Equity, the Debt equity Ratio gradually increased because of the increase in Debt.

Conclusively it can be stated that the present state of IVRCL is very healthy, as the above facts clearly indicate that the future prospects of the IVRCL is positive and bright.

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SUGGESTIONS Though the facts are showing positive sign, still the company can improve further if it implements the following suggestions: Steps should be taken for improvement in Total Income to Total Expenditure Return of Equity (Profit after Tax / Net worth) should maintain in upward trend. The profit percentage will increase further if the expenses are minimized by the company. It is advisable to plan for provisions for taxations carefully. They can raise further low cost capital for the better performance of the company. It is necessary to reduce the percentage of amount invested in other investments to facilitate the financial activities of the company. They can raise the ratio of the loans and advances to facilitate the business activities. Other income has to be increased further, other expenses to be further reduced Recommended that advanced Information Technology methods should be adopted for accounting and for MIS reports which facilitates the top management to take quick decisions in business related process. It is recommended that before awarding a contract to any sub-contractor, care should be taken in evaluating the credit worthiness of the sub-contractor and necessary Bank guarantees shall be taken well in advance to over come the sudden drop from contract by the sub-contractor.

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Steps should be taken in collecting the Earnest Money Deposits deposited at the time of tendering, which will release blocked cash at governments or other agencies that award the contract.

PCAs have to be prepared immediately on awarding of specific contract and it has to be treated as blue print during the execution of the project.

Negotiate with the contract awarding agencies and get Interest free mobilisation advance to avoid interest burden.

Concentration should be made on construction of houses to middle class section who is the major population in India..

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CONCLUSION
From the overall study it can be concluded that IVRCL Infrastructures and Projects Ltd are doing well in all respects. However to improve the further business it is advisable to look into the following facts.

The Infrastructure Finance is a competitive and risk involving business now days, to gain maximum advantage in this business the company should have a perspective view on future and proper caution should be taken while submitting the tender. The tender submitted should cover all taxes and unforeseen expenses which will help the company to sustain its profitability and also help the company to become the roll model among the Infrastructure companies.

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Bibliography

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BOOKS

Nachiket Mor and Sanjeev Sehrawat

:- Source of Infrastructure Finance

I.M.Pandey

:- Financial Management.

Padmalatha Suresh

: - Infrastructure growth in developing Countries

WEB SITES:-

WWW.GOOGLE.COM WWW.MSN.COM WWW.IVRCL.COM

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