Professional Documents
Culture Documents
Introduction
Project financing is an innovative and timely financing technique that has been used on many
high-profile corporate projects. Employing a carefully engineered financing mix, it has long
been used to fund large-scale natural resource projects, from pipelines and refineries to
electric-generating facilities and hydro-electric projects. Increasingly, project financing is
emerging as the preferred alternative to conventional methods of financing infrastructure and
other large-scale projects worldwide.
Project Financing discipline includes understanding the rationale for project financing, how
to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In
addition, one must understand the cogent analyses of why some project financing plans have
succeeded while others have failed. A knowledge-base is required regarding the design of
contractual arrangements to support project financing; issues for the host government
legislative provisions, public/private infrastructure partnerships, public/private financing
structures; credit requirements of lenders, and how to determine the project's borrowing
capacity; how to prepare cash flow projections and use them to measure expected rates of
return; tax and accounting considerations; and analytical techniques to validate the project's
feasibility
Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline,
power station, ship, hospital or prison, which is repaid from the cash-flow of that project.
SOURCES OF FINANCE
Introduction
As we are aware finance is the life blood of business. It is of vital significance for modern
business which requires huge capital. Funds required for a business may be classified as long
term and short term. Finance is required for a long period also. It is required for purchasing
fixed assets like land and building, machinery etc. Even a portion of working capital, which is
required to meet day to day expenses, is of a permanent nature. To finance it we require long
term capital. The amount of long term capital depends upon the scale of business and nature
of business.
Retained Profit
Like an individual, companies also set aside a part of their profits to meet future requirements
of capital. Companies keep these savings in various accounts such as General Reserve,
Debenture Redemption Reserve and Dividend Equalization Reserve etc. These reserves can
be used to meet long term financial requirements. The portion of the profits which is not
distributed among the shareholders but is retained and is used in business is called retained
earnings or plugging back of profits. As per Indian Companies Act., companies are required
to transfer a part of their profits in reserves. The amount so kept in reserve may be used to
buy fixed assets. This is called internal financing.
Sale of Assets
The business can finance new activities or pay-off debts by selling its assets such as property,
fixtures & fittings, machinery, vehicles etc. It is often used as a short term source of finance
(e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets
being sold are very valuable (e.g. land or buildings)
Trade Credit
Unlike you and me, a business does not normally pay for things before it takes possession of
them. Instead, it will usually place an order for supplies / inputs and will pay after receiving
the items. It is good practice to pay quickly (often within one month) as this will help the
business develop a good relationship with its suppliers.
This source of finance appears on the balance sheet as trade credit. This method of deferring
(delaying) payment to a future date is a form of very short term borrowing and helps with
the problems of the cash cycle identified in the work on liquidity.
Personal Savings
This mainly applies to sole traders and partnerships. Owners may use some of their own
money as capital to invest in the business.
Commercial Banks
We tend to consider two types of finance that banks offer to businesses, overdrafts and
loans. If a business spends more money than it has in its bank account, we say that it has
become overdrawn. Businesses will often have an arrangement with the bank whereby the
bank will pay the extra money provided the business will pay them back in a fairly short
period of time, with interest. This is a short term source of finance and is useful for small
amounts. It is often used for buying supplies / inputs.
A bank loan is a long term source of finance and will often be for much larger sums of
money. A loan is useful for a business that is starting up or looking to grow. Loans are often
used to buy fixed assets (see balance sheets) such as machinery and vehicles. A business will
pay the bank back each month in installments and will also pay an interest charge.
Factoring Services
Businesses are often owed money. If you supplied car parts to local garages, you would often
deliver the products to the garages and receive payment within a few weeks. The garages
would be paying by trade credit and are in debt to you.
A business may have difficulty in collecting its debts from its customers but may need to get
its hands on money very quickly. A special factoring company may offer to handle the debt
collection process for a charge. The factoring company pays the business most of the value of
the debt first and would then collect the money from the debtor. This is a short term source
of finance.
Share Issue
An important source of finance for limited companies. A share issue involves a business
selling new shares that entitle the shareholders to share in the control of the business. Each
share gives the shareholder a vote on the direction of the company. This usually means that
the shareholder can elect the board of directors of the company each year. If the shareholder
doesn't like the way the directors are running the business, they can elect new directors. This
is a good incentive to the directors to run the business well and make a profit which will be
paid to the shareholders in the form of dividends.
The more shares a person holds, the more control they have over a company. If one company
wanted to take another company over, it could arrange to buy over 50% of that company's
shares. This would give it a majority of control and, therefore, ownership.
Issuing new shares can raise a lot of capital that can be used for expansion (buying more
fixed assets, etc). It is a long term source of finance. If the total number of shares rises, the
votes of existing shareholders will have slightly less significance and they will have less
control. The business will also have to pay dividends on a larger number of shares.
Debentures
This is a form of long term loan that can be taken out by a public limited company for a large
sum and it will be paid back over several years. It is usually borrowed from specialist
financial institutions.
Venture capital
Some individuals join together to provide finance for new businesses that are just starting-up.
They look for promising businesses and invest in them, hoping that the businesses will grow
and that they will make a profit. This is similar to issuing shares.
Hire purchase involves paying for equipment in installments. The business will not own the
item until all the payments have been made. It usually works out more expensive to buy an
item on hire purchase than paying all at once but it does mean that the business doesn't have
to spend a large amount of money at once.
THE INDUSTRIAL FINANCE CORPORATION OF INDIA
(IFCI)
Introduction:
At the time of independence in 1947, India's capital
market was relatively under-developed. Although there
was significant demand for new capital, there was a
dearth of providers. Merchant bankers and underwriting
firms were almost non-existent. And commercial banks
were not equipped to provide long-term industrial
finance in any significant manner.
Financial Products
IFCI offers a wide range of products to the target customer segments to satisfy their specific
financial needs. The product range includes following credit products:
Short-term Loans (upto two years) for different short term requirements including
bridge loan, Corporate Loan etc.
Medium-term Loans (more than two years to eight years) for business expansion,
technology up-gradation, R&D expenditure, implementing early retirement scheme,
Corporate Loan, supplementing working capital and repaying high cost debt.
Long-term Loans (more than eight years to upto 15 years) - Project Finance for new
industrial/ infrastructure projects Takeout Finance, acquisition financing (as per extant
RBI guidelines / Board approved policy), Corporate Loan, Securitisation of debt.
Structured Products: acquisition finance, pre-IPO investment, IPO finance, promoter
funding, etc.
Lease Financing.
Takeover of accounts from Banks / Financial Institutions / NBFCs.
Financing promoters contribution (private equity participation)/subscription to
convertible warrants.
Purchase of Standard Assets and NPAs.
The product mix offering varies from one business/ industry segment to another. IFCI
customizes the product-mix to maximize customer satisfaction. Its domain knowledge and
innovativeness make the product-mix a key differentiator for building enduring and
sustaining relationship with the borrowers.
Ramesh Goyal the M.D. of the company is a Delhi/NCR based entrepreneur has got over 11
years of experience in retail finance product. He has over worked with various banks and
finance institute in Delhi India selling mortgages and has handle a team of 50 sales executive
under him . In 2005, he started his own company A.R. Enterprises at Delhi and Jaipur for
distribution of complete range of retail finance products including car finance, home finance,
etc in Delhi and got tied up with various Banks and NBFC’s. With more range of products
such as term loan, project loan, cash credit, over draft, Lease Rent Discounting, Bill
Discount, LC Discount, Packing Credit, and Post Shipment Finance, Heavy Vehicle Loan etc
the portal allows consumer to get information of the product and apply online
A.R. Enterprises arranges and processes loans keeping in mind the financial needs of the
customers. So, anyone in need for monetary help is welcome to avail our help. All you have
to do is fill up the simple and hassle-free application form that is available on their website.
One of their loan officers will get in touch with you with a range of loan quotes. You can go
through them and choose the one that suits your financial requirements best.
Services:
Unsecured Business Loans
Loans Against property
Personal loans
Equipment/Machinery Term Loan
Home Loans
Project Finance
Working Capital Loans
Project Finance
"We have a vast experience (about 12 years) of arranging Finances for our Client on best
Terms and Conditions since we have deep knowledge and strong face value in various Banks
so you be rest assured for the best deal. Please note that we deals with anything above 2 Cr
only to upto any amount on professional terms,
Project Cost:
Minimum assistance: Mudra Finance ordinarily arranges finances for projects with loan
component of Rs.1 Crore and above. However smaller projects in innovative fields and in the
hill states are also considered.
The product mix offering varies from one business/ industry segment to another. IFCI
customizes the product-mix to maximize customer satisfaction. Its domain knowledge and
innovativeness make the product-mix a key differentiator for building enduring and
sustaining relationship with the borrowers.
L&T Infrastructure Finance Company Limited (LT Infra) is a wholly owned subsidiary of
Larsen & Toubro Limited. LT Infra is a Non Banking Financial Company (NBFC) registered
under Reserve Bank of India (RBI) Act 1934. The company has commenced operations in
January 2007. It leverages L&T’s expertise in the infrastructure sector to offer turnkey
financial solutions.
About L&T Group: Larsen & Toubro Limited (L&T) is a Technology, Engineering,
Construction and Manufacturing Company. It is one of the largest and most respected
companies in India's private sector.
Larsen & Toubro Infrastructure Finance was set up as a 100% subsidiary of L&T with an
initial capital of Rs. 500 crore (USD 125 million). It commenced its business in January 2007
upon obtaining Non-Banking Financial Company (NBFC) license from the Reserve Bank of
India (RBI).
As of March 31, 2008, L&T Infrastructure Finance has approved financing of more than one
billion USD to select projects in the infrastructure sector.
Project Finance
The Project Finance Group (PFG) is responsible for business development, project appraisal
and client relationship management in infrastructure lending. The project finance segment of
our Company provides customized debt financing products to infrastructure projects and their
sponsor companies. PFG provides efficient transaction processing and management
capabilities and acts as a single point of contact for our customers’ entire project financing
requirements.
In order to provide our customers with an optimal capital structure for the customized
solutions that we offer, we typically make use of the following types of products:
• Term loans
• Debentures
• Securitized debt
• Subordinated debt
• Convertible debentures
• Preference shares
Our Company has provided financial products and services encompassing various
infrastructure sectors, including power, roads, telecommunications, oil and gas, ports, urban
infrastructure, water and sanitation, rail container and logistics operations, agricultural
infrastructure, industrial parks, SEZs, etc.
Risk Management
As part of the appraisal process undertaken by the PFG, a risk analysis for the projects is
carried out by the Risk Management department. Based on the risk analysis, PFG
designs/recommends the appropriate risk mitigation structures to enhance the viability. After
the project feasibility is established by PFG, the proposal is put forward for approval.
Project Development
The project development group has been set up as a distinct group to explore business
opportunities in infrastructure projects, particularly energy and transportation sectors. The
objective of the group is to identify and work on projects where LT Infra can participate in
development of infrastructure projects as co-developer by taking equity/equity linked
positions in the Developer Company.
Project Financing:
Finance is the life blood of any organisation, having too less of
blood leads to anemia in human beings, similarly paucity of finance
leads to decrease in activities or shelving of future expansion plans
of any organisation and may even lead to failure of business. We
offer services for arranging finance for businesses to meet its
various needs.
Our range of services covers debt funding, PE (Private Equity) Funding, Project Financing
through banks and other financial institutions etc. Brief details of our services are provided
below.
We provide funding advisory services for various requirements of our clients like Project
Financing, Term Loan, Working Capital Limits, CC Limits, Packing Credit, and
Overdraft etc. We provide end to end services starting from assessment of client
requirements, preparation of project reports / financial statements till finalization of
funding and disbursement. We have liaison with various banks, financial institutions and
other funding agencies and have expertise in the procedures adopted by them for the
funding process.
ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81
billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the
year ended March 31, 2010. The Bank has a network of 2,528 branches and 5,808 ATMs
in India, and has a presence in 19 countries, including India. ICICI Bank offers a wide
range of banking products and financial services to corporate and retail customers
through a variety of delivery channels and through its specialized subsidiaries in the
areas of investment banking, life and non-life insurance, venture capital and asset
management. The Bank currently has subsidiaries in the United Kingdom, Russia and
Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar
and Dubai International Finance Centre and representative offices in United Arab
Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK
subsidiary has established branches in Belgium and Germany.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National
Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are
listed on the New York Stock Exchange (NYSE).
Group structure
PFG is the “One Stop Shop” fulfilling the funding requirements of Greenfield & Brownfield
projects in infrastructure & manufacturing sector. It comprises of three sub-groups as
follows:
Infrastructure Finance Group (IFG): IFG caters to the funding requirement in the
infrastructure sector like Power, Telecom, Roads, Ports, Airports, Railways and
Urban infrastructure.
Manufacturing Projects group (MPG): MPG caters to the funding requirement in
the manufacturing sector like Oil & Gas, Steel, Aluminum, Cement, Auto, and
Mining
The project finance team of ICICI Bank has developed substantial insight in the dynamics
and trends in the infrastructure sector, having assisted the Government of India in formulating
policies relating to various segments of the infrastructure sector. The unique insight and
understanding thus derived from the exercise has not only enabled ICICI Bank to provide
optimum solutions to its clients, but has also provided ICICI Bank with an appropriate
decision support for strategic measures, going forward.
Service Offerings
PFG provide a wide range of services including the following:
Rupee term loans
Foreign currency term loans
External Commercial Borrowings
Subordinated debt and mezzanine financing
Export Credit Agency backed funding
Non fund based facilities like Letter of Credit, Bank Guarantee, Supplier’s Credit,
Buyer’s Credit etc.
Equity funding
RBI’s Guidelines for Financing of Infrastructure Projects
Inter-Institutional Guarantees
In terms of the extant RBI instructions, banks are precluded from issuing guarantees
favouring other banks/lending institutions for the loans extended by the latter, as the primary
lender is expected to assume the credit risk and not pass on the same by securing itself with a
guarantee i.e. separation of credit risk and funding is not allowed. These instructions are
presently not applicable to FIs. While Reserve Bank is not in favour of a general relaxation in
this regard, keeping in view the special features of lending to infrastructure projects viz., high
degree of appraisal skills on the part of lenders and availability of resources of a maturity
matching with the project period, banks are permitted to issue guarantees favouring other
lending institutions in respect of infrastructure projects, provided the bank issuing the
guarantee takes a funded share in the project at least to the extent of 5 per cent of the project
cost and undertakes normal credit appraisal, monitoring and follow up of the project.
4. Appraisal
(i) In respect of financing of infrastructure projects undertaken by Government owned
entities, banks/Financial Institutions should undertake due diligence on the viability of the
projects. Banks should ensure that the individual components of financing and returns on the
project are well defined and assessed. State Government guarantees may not be taken as a
substitute for satisfactory credit appraisal and such appraisal requirements should not be
diluted on the basis of any reported arrangement with the Reserve Bank of India or any bank
for regular standing instructions/periodic payment instructions for servicing the loans/bonds.
(ii) Infrastructure projects are often financed through Special Purpose Vehicles. Financing of
these projects would, therefore, call for special appraisal skills on the part of lending
agencies. Identification of various project risks, evaluation of risk mitigation through
appraisal of project contracts and evaluation of creditworthiness of the contracting entities
and their abilities to fulfil contractual obligations will be an integral part of the appraisal
exercise. In this connection, banks/FIs may consider constituting appropriate screening
committees/special cells for appraisal of credit proposals and monitoring the
progress/performance of the projects. Often, the size of the funding requirement would
necessitate joint financing by banks/FIs or financing by more than one bank under
consortium or syndication arrangements. In such cases, participating banks/ FIs may, for the
purpose of their own assessment, refer to the appraisal report prepared by the lead bank/FI or
have the project appraised jointly.
5. Prudential requirements
5.1 Prudential credit exposure limits
Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40 per
cent of the bank's capital funds by an additional 10 per cent (i.e up to 50 per cent), provided
the additional credit exposure is on account of extension of credit to infrastructure projects.
Credit exposure to single borrower may exceed the exposure norm of 15 per cent of the
bank's capital funds by an additional 5 per cent (i.e. up to 20 per cent) provided the additional
credit exposure is on account of infrastructure as defined in paragraph 1 above.
5.2 Assignment of risk weight for capital adequacy purposes
Banks may assign a concessional risk weight of 50 per cent for capital adequacy purposes, on
investment in securitised paper pertaining to an infrastructure facility subject to compliance
with the following :
a. The infrastructure facility should satisfy the conditions stipulated in paragraph 1
above.
b. The infrastructure facility should be generating income/ cash flows which would
ensure servicing/ repayment of the securitised paper.
c. The securitised paper should be rated at least 'AAA' by the rating agencies and the
rating should be current and valid. The rating relied upon will be deemed to be current
and valid if :
i. The rating is not more than one month old on the date of opening of the issue,
and the rating rationale from the rating agency is not more than one year old
on the date of opening of the issue, and the rating letter and the rating rationale
is a part of the offer document.
ii. In the case of secondary market acquisition, the 'AAA' rating of the issue
should be in force and confirmed from the monthly bulletin published by the
respective rating agency.
iii. The securitised paper should be a performing asset on the books of the
investing/ lending institution.
5.3 Asset - Liability Management
The long - term financing of infrastructure projects may lead to asset – liability mismatches,
particularly when such financing is not in conformity with the maturity profile of a bank’s
liabilities. Banks would, therefore, need to exercise due vigil on their asset-liability position
to ensure that they do not run into liquidity mismatches on account of lending to such
projects.
6. Administrative arrangements
Timely and adequate availability of credit is the pre-requisite for successful implementation
of infrastructure projects. Banks/ FIs should, therefore, clearly delineate the procedure for
approval of loan proposals and institute a suitable monitoring mechanism for reviewing
applications pending beyond the specified period. Multiplicity of appraisals by every
institution involved in financing, leading to delays, has to be avoided and banks should be
prepared to broadly accept technical parameters laid down by leading public financial
institutions. Also, setting up a mechanism for an ongoing monitoring of the project
implementation will ensure that the credit disbursed is utilised for the purpose for which it
was sanctioned.
APPENDIX
Take-out financing/liquidity support
a. Take-out financing arrangement
Take-out financing structure is essentially a mechanism designed to enable banks to avoid
asset-liability maturity mismatches that may arise out of extending long tenor loans to
infrastructure projects. Under the arrangements, banks financing the infrastructure projects
will have an arrangement with IDFC or any other financial institution for transferring to the
latter the outstandings in their books on a pre-determined basis. IDFC and SBI have devised
different take-out financing structures to suit the requirements of various banks, addressing
issues such as liquidity, asset-liability mismatches, limited availability of project appraisal
skills, etc. They have also developed a Model Agreement that can be considered for use as a
document for specific projects in conjunction with other project loan documents. The
agreement between SBI and IDFC could provide a reference point for other banks to enter
into somewhat similar arrangements with IDFC or other financial institutions.
b. Liquidity support from IDFC
As an alternative to take-out financing structure, IDFC and SBI have devised a product,
providing liquidity support to banks. Under the scheme, IDFC would commit, at the point of
sanction, to refinance the entire outstanding loan (principal+unrecovered interest) or part of
the loan, to the bank after an agreed period, say, five years. The credit risk on the project will
be taken by the bank concerned and not by IDFC. The bank would repay the amount to IDFC
with interest as per the terms agreed upon. Since IDFC would be taking a credit risk on the
bank, the interest rate to be charged by it on the amount refinanced would depend on the
IDFC’s risk perception of the bank (in most of the cases, it may be close to IDFC’s PLR).
The refinance support from IDFC would particularly benefit the banks which have the
requisite appraisal skills and the initial liquidity to fund the project.