INTRODUCTION
Introduction Of Topic
Project appraisal is the process, which brings to bear an independent and objective assessment of the various aspects of an investment proposition for arriving at a financing decision. Appraisal exercise is basically aimed at determining the financial & technical viability of a project. This is also designed to reshape a project so as to upgrade its viability. Appraisal is a comprehensive and systematic review of all aspects of project. It would not be possible to have a cut and dry formula with the help of which a project could be judged straight way as acceptable or unacceptable, appraisal highlights weak areas in the project with the ultimate objective of strengthening them adequately so as to ensure final success to the project. The main objective of appraisal is to improve and revamp the project with the cooperation of the promoters. An appraisal is essentially a composition of assumptions and projection in a volatile economic and social environment. The projection of project pre-requisite based on the assumptions has necessarily been considered as an indicator of appraisal. Secondly, this also calls for keen intuitive qualities in addition to a high degree of expertise, in quality appraisal techniques. Further, all aspects of project lend themselves to a qualitative measurement and in the evaluation of all aspects, the quantitative projections, need to be reinforced by qualitative assessments. In the process of project appraisal, it is necessary to recognize the inborn interrelationship underlying various aspects of projects. For example, the size of the initial market and the estimate of demand, build up would determine the plant capacity and production phasing; these together influence the profitability, which, in turn, determines the means of financing; location has an important bearing on projection cost as also cost of production. Above all, the management behind the project has decisive influence on the most of these projects.
The use of non-recourse project financing has grown steadily in emerging markets, especially in basic infrastructure, natural resources and the energy sector. Because of its cost and
complexity, project finance is aimed at large-scale investments. The key is in the precise estimation of cash flows and risk analysis and allocation, which enables high leverage, and in ensuring that the project can be easily separated from the sponsors involved. Project finance is more difficult in emerging countries, which tend to pose unpredictable risks with unfavorably biased results. This study investigates the role of project finance as a driver of economic growth. It is hypothesized that project finance is beneficial for the developing economies as it compensates for any lack of domestic financial development. The contractual structure unique to project finance should lead to better investment management and governance. financing involves nonrecourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Eurotunnel. 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 appraisal is the process, which brings to bear an independent and objective assessment of the various aspects of an investment proposition for arriving at a financing decision.
The types of project for which project finance is commonly used include the following:
• • infrastructure projects, such as government buildings and transport systems; oil and gas exploration projects;
• •
sports stadia; and liquefied natural gas development projects.
In the UK, most project financings have been carried out under the Government's private finance initiative (PFI) and are known as Public Private Partnerships (PPPs). PFI was introduced in the early 1990s and aimed to introduce private sector skills and finance into the provision of public sector services. PFI is structured so that the private sector obtains finance - usually from a bank - to design, build and operate a facility for the benefit of the public. In return, the public sector grants this private sector partner a long-term contract to run the facility - usually for 25-30 years. Once the facility has been built, the public sector pays the private sector a monthly fee over the life of the project which is used to service the bank loan which financed the project which is used to service the bank loan which financed the project.
Key parties to a project financing
Private sector partner/owner: Usually a corporation or a limited partnership created for the sole purpose of the particular project. This party is at the centre of all contracts, borrowings and the construction and operation of the project. For simplicity, we refer to this party as 'Projectco'. •
Project sponsor: The person who takes on the active role in managing the project.
The project sponsor owns Projectco and will receive profit, either as a result of the ownership of Projectco or via management contracts, if the project succeeds. The project sponsor often has to cover certain liabilities or risks of the project by providing guarantees or by entering into management or service agreements.
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Lenders: Commercial banks, investment banks or other institutional investors who
provide the debt portion of the project financing. The sheer scale of a typical project financing means that most lending cannot be undertaken by a single lender. Instead, group of lenders form a syndicate.
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Agent: one of the lenders will be appointed as the agent and will act on behalf of the
other lenders to administer the loan.
• Account bank: a single lender will hold the accounts through which all the cash
generated by the project will pass. •
Equity investors: lenders or project sponsors who do not expect to have an active role
in the project. In the case of lenders, they will have a shareholding in addition to lending by way of debt, as a way of receiving an enhanced return if the project is successful. In most cases any investment by way of shares is coupled with an agreement to allow the equity investor to sell its shares to the project sponsor if the equity investor wishes to exit the project. Similarly, the project sponsor may have the option to repurchase the shares.
• Suppliers, contractors and customers: these include the suppliers of materials
for the project, the contractors responsible for designing and building the project and the customers of the project. •
Construction company: the construction contractor is one of the key project parties
during the construction phase of the project.
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Multilateral credit agencies: some projects - particularly in developing countries are co-financed by the World Bank or its investment bank division, the International Finance Corporation, or regional development banks such as the European Bank for Reconstruction and Development or the Asian Development Banks. Multilateral agencies such as these are able to ensure the bankability of a project by providing commercial banks with a degree of protection against political risks, such as the failure of a government to make agreed payments or provide the necessary regulatory approvals.
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Host governments/awarding authorities: the government of the country where
the project is based is likely to be involved in issuing consents and permits both at the start and throughout the life of a project. The awarding authority is the contracting local authority which enters into the project agreement with Projectco.
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Purchasers: in infrastructure projects, Projectco will normally contract in advance
with a purchaser who will purchase the project's output on a long-term basis.
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Insurers: insurers are vital to a project. If there is a catastrophe affecting the project,
then the sponsors and the lenders will look to the insurers to cover the losses.
The Project Cycle
The appraisal and evaluation of projects, programmes and policies is best seen in the context of the project cycle, the stages of which are shown in Figure 1.1. The process begins with project identification and ends with project evaluation. To ensure that projects meet their original objectives, it is usual to set up an evaluation framework, which allows project finance agencies, policy makers and other stakeholders to assess the success of the project through the monitoring and evaluation process. The project cycle consists of the following stages: • • • • • project identification project preparation ex ante project appraisal implementation and monitoring ex post project evaluation.
Figure 1.1 The Project Cycle Identification
Evaluation (ex post) Preparation
Implementation & Monitoring Apprasial (ex ante)
9(
The idea behind the project cycle is that there are a number of sequential processes from the identification of a project through to the completion of the project. It is important that ex-post project evaluation is carried out in order to assess the impacts of the project and whether it achieved its original objectives. There are a number of different tools you will learn later in this
course which are used at different stages in the project cycle. They include: • • • financial and economic analysis (ex ante project appraisal) impact analysis (monitoring and evaluation and ex-post project evaluation) risk analysis (project preparation, ex ante project appraisal)
LIST OF ITEMS CONSIDERED WHILE DOING APPRAISAL
1) 2) • • • • • • • 3) • • • • 4) • • • Amount of capital to be raised from public Appraisal in brief Company?s Name Certificate of incorporation Product Production Capacity Company?s proposal of raising finance Promoters contribution Debt/Equity ratio Brief particulars of the company: Name Location of Registered Office & Plant Date of Incorporation Small/Medium/Large Sector Promoters: Names Ages Qualification
• • 5) 6) • • • • 7) • • 8) • • • • 9) • • 10) • • 11) 12) •
Experience Presently working with, if any Income tax & Wealth tax positions Details of sister/associate concerns: Income tax and wealth tax position Product Sales turnover & profits Net worth Credit worthiness of the company: Current account with (Name of the Bank) Reputation of promoters Capital Structure (Proposed share holding) Promoter share Family members share Relatives shares Associates shares Management and Organization: Board of Directors Management set-up Project Proposal to produce Installed capacity Project and its uses Technical appraisal: Sites & Location
• • • • • • • •
Building Plant & Machinery Misc. fixed assets Manufacturing process Raw Material Packaging Material Utilities like power, water, manpower, effluent disposal etc. Implementation schedule covering: Acquisition of land, construction of building, placement of order of machinery, installation, trial production, commercial production. Etc.
13) • • • • • • • • 14) • • • 15) 16)
Financial Appraisal: Land and Site development Building Plant & Machinery Technology transfer fee Misc. fixed assets Preliminary & Pre-operative expenses. Contingencies Margin money for working capital Means of Finance: Equity share Capital Long Term Loans (Interest Free) Term Loan From HSIIDC Marketing and selling arrangement Cost comparison with other similar units:
17) • • • • 18) 19) 20)
Present status of Government and other statutory approvals: Registration Permission from Water and Pollution Control Board, Approval of Building plan HSEB sanction of power Security margins and permissible finance form HSIIDC Views of Screening Committee Conclusion and recommendations
ASPECTS OF PROJECT APPRAISAL
1) 2) 3) 4) 5) Promoters competence and capability Market appraisal Technical appraisal Financial appraisal Socio-economic factor
PROMOTERS COMPETENCE AND CAPABILITY
Man behind the project is most important aspect of appraisal. Weak project can be improved Upon but not the promoters lacking business acumen. The project report should, therefore, highlight the most favorable factors of the promoters out of the following:
1) 2)
Traits and overall background of the promoters. Academic qualifications and other exposure in finance, legal or other that can be useful to the project. Business and industrial experience. Integrity and credit worthiness. Proven administrative and managerial ability in the exiting business. Dynamism initiative and resourcefulness. Their financial status and resources. technical field
3) 4) 5) 6) 7)
Market and Demand Analysis
Two question need to be answered in a market analysis • What would be the aggregate demand of the proposed project/service in future?
2) What would be the market share of the project under appraisal? Market and demand analysis should be carried out in an orderly and Systematic manner. Key steps in such analysis are:
Situational Analysis and Specification of Objective:
In order to get a „feel? of the market. Analyst may informally talk to customers, competitors, suppliers, middlemen and others in the industry. Objectives are set based on analyst?s research. A helpful approach to spell out objectives is to structure them in form of questions.
Collection of Secondary Information
Secondary information is the information, which has been gathered from some other context and is already available. It indicates what is known and often provides leads and sues for gathering primary information required for further analysis. Secondary information can be gathered form plan reports, census of India, Annual survey of industries, CMIE, various govt./industry bulletins, journals and other publications.
Conduct of Market Survey:
Secondary information needs to be supplemented with primary information (market surveys) in order to provide a comprehensive basis for market and demand analysis, various govt./industry bulletins, journal and other publication.
Demand Forecasting:
A wide range of forecasting methods is available to estimate future demand such as trend projection method, method of least squares, exponential smoothing, moving average method & econometric method etc.
The project report should also highlight the following:
1) That while projecting the sales, the existing demand of the product, the demand growth rate, share of competitors and likely new industries coming up in the trade have been studied; 2) That while fixing the price of the goods, the consumer?s capacity to buy and the price, which other competitors can offer, has been looked into;
3) That while selecting product mix or quality of the product, the quality desired by the consumers, the quality of goods being produced or likely to be produced in future have been taken into consideration; 4) That while selecting the market, proper channels of distribution have been studied and sales strategies decided; 5) That the margin of profit on sales would be reasonable as compared to the capital investment in stocks and debtors; 6) That the future of the product is reasonably bright.
Technical Viability of the Project:
A project is considered to be technical viable, if all the relevant technical aspects have been considered and planned implementation therefore conforms to the accepted engineering standards and practices. Thus technical analysis is primarily concerned with:• Studying in detail and specifying the material inputs and utilities required. Material can
be raw material, processed industrial material and auxiliary material utilities include power, fuel water etc. • Analyzing the various alternative technologies available and selecting the best one based
on plant capacity, principal inputs required investment outlay and production cost, ease of absorption etc. • The technology for the project should be appropriate and its process should suit Indian
conditions. • A firm should allow flexibility with respect to product mix, which enables the firm to
alter its product mix in response to changing market conditions and enhances the power of the firm to survive and grow under different situations. • Plant capacity should be decided by keeping in mind technological requirement, input
constraints, investment cost, market conditions, governmental policies etc.
•
And capacity works to great deal depend upon other technical factors such as process
structures, machineries etc. these may be divided into three categories; a) b) c) • Site preparation and development. Buildings and Structures. Outdoor works. After all the data which is available on the principal dimensions of the above discusses
thing project charts and layouts may be designed on the basis of the above data. • Location and site for the project should be decided after analyzing availability of
infrastructure, proximity to raw materials and markets, transportation costs, govt. police etc. • Type of machinery and equipment is dependent upon the production technology and plant
capacity. For selection of machinery factors to be borne in mind are supplies of equipment, levels of production, expected overtime, type of process etc. These define scope of the project and provide basis for detailed project engineering and estimation of investment and production costs.
FINANCIAL VIABILITY OF THE PROJECT
Financial analyses is one the most critical aspects in a project appraisal. A project is considered to be financially viable if its expected earnings are sufficient to cover the costs, the operating and
maintenance cost, returning of loans and in additions yield reasonable returns. For this we require information about the following and need to study them in detail. 1) 2) 3) 4) 5) 6) 7) Analysis of past working results in case of existing concerns. Cost of the project. Means of finance and financial structure Sales and production estimates Working capital requirements and its financing Profitability, Balance sheet and Cash flow projection Sensitivity Analyses
1)
ANALYSIS OF THE PAST WORKING RESULTS
In case of a going concern, it is also desirable to make an assessment of its past and latest financial position. The latest balance sheet and profit and loss account may be analyzed with a view of ascertaining. • Whether the concern is under/over capitalized
• Whether the borrowings raised are not out of proportion to its paid up capital and reserves. • • How the current liabilities stand in relation to the current assets. Whether there is any inter locking of funds with associate concern and
• Whether the concern has been plugging back profit into the business and building up reserves.
2)
COST OF THE PROJECT
Cost of project represents total of all items of outlay associated with a project, which are supported by long term funds. These items include land and site development. Plant and
machinery, building, technical know how and engineering expenses, margin money for wording capital, misc. fixed assets, preliminary and pre operative expenses, contingencies etc.
3)
MEANS OF FINANCING
While considering means of finance two consideration have to be born is mind? • • Norms of regulatory bodies and financial institutions. Key business considerations.
Means of finance available are • • • • • • Share capital Term loans Debenture Deferred credit Incentive source such as State and Central Government. Other sources
4)
FINANCIAL STRUCTURE
The financing of the capital structure i.e. the promoters contribution to the total project cost and the debt equity ratio should be as per accepted norms of financial institutions to ensure promoters continued interest in the successful implementation and operation of the project. Financial institutions generally require the promoters to contribute about 30% of the project cost. The debt equity ratio generally accepted is 2:1 for small-scale sector projects & 1:5:1 for medium & large sector. High value addition projects, which have a higher rate of return, can go for a higher debt. Where as low value addition projects with low returns should have a high equity and lower debt and equity, which shall very with the project.
5)
SALES AND PRODUCTION ESTIMATES
Sales and production should be estimated for a period of 5-8 years. It should be reasonable and selling price and raw material cost should be assumed to be constant. After estimating level of
production the cost of production has to be worked out which includes cost of material, labour utilities and factory overheads.
6)
PROFITABILITY, BALANCE SHEET AND CASH FLOW
PROJECTIONS
The next step in financial analysis is profitability projection from the already estimated sales revenue and cost of production. Many points have to be kept in mind while calculating the interest and depreciation.
SENSITIVITY ANALYSIS
Sensitivity analysis helps us in finding the affect on one variable due to the change in other variable. It is also known as “WHAT IF” analysis. It force the management to identify the under lying variables and their interrelationships. It also shows how robust or vulnerable a project is to changes in the underlying variable. It indicate the need for further work if required. If the net present value or IRR is highly sensitive to changes in some variable it is desirable to gather further information about that variable.
SOCIO-ECONOMIC APPRASIAL
Socio-economic appraisal deals with the impact of projects on people, society and environment. If the management is incompetent, even a good project may fail. It is rightly pointed out that if the project is weak, it can be improved upon, but if the promoter is weak and lack in business acumen, it is difficult to reverse the situation. It is therefore, natural that financial institutions very carefully appraise the managerial aspects before sanctioning assistance for a project. While doing a proper appraisal of the managerial aspect, it is necessary that the overall background of the promoters, their academic qualifications, business and industrial experience, their past performance etc. are looked into a greater detail to assess their capabilities for implementing the project.
LITERATURE REVIEW
LITERATURE REVIEW • Modules of Professor Benjamin Esty's Modern Project Finance:
• • • •
Structuring Project Valuing projects Managing projects Risk Financing Projects
The approach taken in this research is exploratory and therefore it is more appropriate to cover a wide range of areas within project finance, rather than exploring the depth of each area.
• An article in the wall street journal cited by pacelle et al., in 2001
Define project finance as “a term that typically refers to money lent to built power plant and oil refineries” (Esty,2004)
• As such, the definition and principle of project finance has been written on since 1980
and are set out in essential element of project finance. (Wynant,1980),project
Financing: tools and techniques,(frame,2003) and principles of finance (Yescombe,2002). • Structuring projects
The structure of projects has been looked at by penrose (1996) in terms of Specialpurpose Entities and in terms of the debt-equity levels by Scheinkestel(1997). Principles of managing project risk are covered in Beenhakker?s book Risk Management in Project Finance and Implementation as well as in Delmon?s Project Finance. The corporate governs of large projects has been researched by Jensen(1993),cited by Esty(2003i), in terms of board size. Yermack as looked at board composition in terms of the independence of the board members(1996).These issues have also been looked at by Barclay and smith (1996 &1999).
• Project valuation
There is a considerable amount that has been written on the theory of valuation. However the purpose this section is to review only the literature on valuation that is specifically related to the project Finance. The most common ways of valuing projects is using Discounted Cash Flows (DCF), either using the free cash Flows(FCF) or equity Cash Flows (ECF). However, these are “simple tools that were designed for simple application”(Esty,1999).In response to this, more complex valuation techniques developed regarding projects. Due to the large nature of investment required, a great deal of work has been done on refining valuation. These con be done by using valuation methodologies such as Real Option Analysis, montecarlo simulation and Neural Network Metamodels (Balcombe and smith,1999;Esty,1999).
• Managing project risk
Risk is also an area that is well developed in finance theory and is not specific to project finance. As such this will not be dealt with in depth. Concerning managing project risk, this has been dealt with by the international finance corporation (1999), miller & Lessard (2000) and zenner (2001).
• FINANCING PROJECTS
Capital structure is a definitive characteristic of project finance and is a main feature of the lessons & principals .Various techniques and instruments for financing projects have been looked at including: syndicated loans (Bavaria,2002), project bonds ( Dailamil & Hauswald,2003) and dept equity structures (Harvin, Hermans, Mc Dermott, &
Monnier,2006).Financing has also been looked at from different points of view including the institutional investor (Devapriya and alfen 2003), private financing (Fishdein and Baber 1996) and commercial bank (Forrester,1995).
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According to the Modigilani & Miller capital structure is irrelevant while prof. Esty (2003) demonstrate that in project finance capital structure is an integral part of a project
and certainly does matter. Another agency based theory, static Trade-Off theory, looks at taxes and financial distress costs as determinants of capital structure.
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Asymmetric information theories include Myers Packing order theory which says that firm prefer the least information intensive form of capital available and therefore private debt precedes public debt; And Ross, Signalling Theory, which says that firms issue debt to signal their quality.
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As such project companies provide evidence for the incomplete contracting Theory of capital structure developed by Jensen & Meckling.
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Hart & Moore show that there is an optimal debt equity ratio and an optimal level of senior vs. junior debt (Esty, 2003i).
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Research has also been done n the types of debt that are used, namely bank debt or bond and within bank debt .senior junior or other types of debt (Gilson, John and Lang,1990;Sahlman, 1990 ;Gompers, 1995)
• Project financing versus corporate financing under asymmetric information Anton Migloy(February 28, 2007)
Existing literature studies the effect of asymmetric information on many aspects of debt financing including debt maturity and seniority, collateral, liquidation rights, convertible debt, income bonds and sinking funds. Less is known about the effect of asymmetric information on firms? incentive to issue non-recourse debt. The intention of this paper is to shed new light on this issue.
Project financing (non-recourse debt) differs from corporate financing in two ways: 1) the creditors do not have a claim on the profit from other projects if the project fails while corporate financing gives this right to the investors and; 2) it typically has priority on the cash flows from the project over any corporate claims. In recent years financing through the creation of an independent project company or financing by non-recourse debt has become an important part of corporate financing decisions. For example, Esty (2003, 2004) reports that total project-financed investments have grown from less than $10 billion per year in the late 1980s to more than $100 billion per year in 2001-2003. Within the United States, firms financed $68 billion in capital expenditures through project companies in 2001, approximately twice the amount raised in initial public offerings (IPOs) or invested by venture capital firms. Existing literature suggests several explanations for project financing. Most of this literature is based on agency or moral hazard problems.2 This literature usually assumes that a firms insiders and investors have the same information at the beginning of the project. However, Flyvbjerg, Holm and Buhl (2002) found that the costs of most large infrastructure projects are underestimated. The authors argue that project initiators almost always provide misinformation. This suggest that there exists asymmetric infor-mation between insiders and outsiders. Similar conclusions can be found in Mao (1982), Merrow, McDonnell and Arguden (1988) and Miller and Lessard (2000). Also, the free cash flow and underinvestment
problem arguments usually predict that project financing enhances performance. Some authors show that large projects often fail and argue that this is not consis-tent with "pure" agency explanations (see, among others, Flyvbjerg et al. (2002) and Vilanova (2006)). Recent examples include Euro Disney and Eurotunnel which appeared to be structured to mitigate agency problems. Many other large projects have experienced financial distress (Iridium, Globalstar,Passi.c Crossing Cables etc.). Shah and Thakor (1987) analyze optimal financing in the presence of corporate taxation. In their model projects have the same mean of return, the owners have private information about risk and investors may acquire (costly) information about the parameters of firms risks. If the benefits From information production are relatively high project financing is optimal Because the cost of screening a separately incorporated project is low. Alternatively, project financing can result in higher leverage and provide greater tax benefits. This is because, under corporate financing, leverage is below the optimal level. In the absence of bankruptcy costs the first-best financing method is "pure" debt. However, firms reduce leverage in order to provide a credible signal about risk.
INDUSTRY PROFILE
INDUSTRAIL PROFILE SCENARIO (INTERNATIONAL & DOMESTIC)
The financial industry, or financial services industry, includes a wide range of companies and institutions involved with money, including businesses providing money management, lending, investing, insuring and securities issuance and trading services. The following institutions are a part of the financial industry:
• • • • • • •
Banks Credit card issuers Insurance companies Investment bankers Securities traders Financial planners Security exchanges
The Great Depression (1929): The Great Depression originated in the US with the Wall
Street crash in October 1929. The effects of the depression spread across the world, especially in the heavy industries. Capital requirements regulation, financial industry oversights and the insurance of deposit accounts sprang out of this tumultuous period.
Black Monday (1987): On October 19, the stock markets across the world witnessed a
huge crash. This was the largest one day decline in the stock market history. The crash started in Hong Kong, spreading to Europe and the US. Analysts blamed computer trading systems for magnifying the losses.
Asian Financial Crisis (1990s): The Asian Financial Crisis was triggered by the collapse
of Thai baht as the government of Thailand decided to float the national currency. The nation had a huge foreign debt at that point, driving it to the verge of bankruptcy. The crisis rippled across the whole of Southeast Asia and has led to many emerging market countries to reduce debts and build up foreign currency reserves.
Stock Market Downturn (2002): Stock exchanges around the world witnessed a
significant decline in March 2002. It was attributed to the bursting of the „Dot-com Bubble?, which saw major Internet companies going bankrupt.
Sub-prime Crisis (2007): Credit markets faced major crunch due to large scale default on
loans. It led to the Financial Crisis of 2008 – 2009 and resulted in the bankruptcy, fire-sale acquisition and government bailouts of finance industry giants such as Lehman Brothers, Bear Stearns, AIG, Fannie Mae, Freddie Mac, Merrill Lynch, Wachovia, Northern Rock, Lloyds TSB, HBOS, RBS and the entire banking system of Iceland. The world economy can expect reduced growth rates and tighter regulations as a result of this crisis. According to the Global 2000 (annual report by Forbes), seven of the world?s top 10 companies belonged to the financial industry. These included Citigroup, Bank of America, HSBC Holdings and JPMorgan Chase. Their combined revenues in 2007 were worth $645 billion, down from the 2006 high of $785 billion.
According to the Fortune 500 rankings, in 2006 financial services generated $257 billion in profits, a third of total Fortune 500 profits. In 2008, however, they lost a staggering $213 billion, a total swing of $470 billion. Big players on the list, such as Citigroup and Bank of America, may only be alive today thanks to government money.
All India Financial Institutions (AIFI) is a group composed of Development Finance Institutions (DFI) and Investment Institutions that play a pivotal role in the financial markets. Also known as
"financial instruments", the financial institutions assist in the proper allocation of resources, sourcing from businesses that have a surplus and distributing to others who have deficits - this also assists with ensuring the continued circulation of money in the economy. Possibly of greatest significance, the financial institutions act as an intermediary between borrowers and final lenders, providing safety and liquidity. This process subsequently ensures earnings on the investments and savings involved [citation needed].
In Post-Independence India, people were encouraged to increase savings, a tactic intended to provide funds for investment by the Indian government. However, there was a huge gap between the supply of savings and demand for the investment opportunities in the country.
List of AIFIs
• Industrial Development Bank of India (IDBI):IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arena through its large network of Branches and ATMs, spread across length and breadth of India. it also set up an overseas branch at Dubai and have plans to open representative offices in various other parts of the Globe, for encashing emerging global opportunities.
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Industrial Finance Corporation of India (IFCI):At the time of independence in 1947, India's capital market was relatively underdeveloped. 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.It is against this backdrop that the government established The Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the first Development
Financial Institution in the country to cater to the long-term finance needs of the industrial sector.
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Export - Import Bank of India (Exim Bank):Export-Import Bank of India is the premier export finance institution of the country, set up in 1982 under the Export-Import Bank of India Act 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the country?s foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment.
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Industrial Reconstruction Bank of India (IRBI) now (Industrial Investment Bank of India):The Industrial Investment Bank of India is a 100% government of India-owned financial investment institution. It was established in 1971 by resolution of the Parliament of India u/s 617 of the Companies Act. It was said to be a brainchild to be of Pranab Mukherjee, then finance minister. The bank was headquartered at Kolkata and has presence in New Delhi, Mumbai, Chennai, Bengaluru, Ahmedabad and Guwahati.
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National Bank for Agriculture and Rural Development (NABARD):NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator
for rural prosperity NABARD is entrusted with
• •
Providing refinance to lending institutions in rural areas. Bringing about or promoting institutional development .
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Evaluating, monitoring and inspecting the client banks.
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Small Industries Development Bank of India (SIDBI):Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an Act of Indian Parliament, is the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of the functions of the institutions engaged in similar activities.
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National Housing Bank (NHB):The National Housing Bank (NHB) is a state owned bank and regulation authority in India, created on July 8, 1988 under section 6 of the National Housing Bank Act (1987). The headquarters is in New Delhi and its total staff June 30, 2008 was 80.The institution, owned by the Reserve Bank of India, was established to promote private real estate acquisition .The NHB is regulating and re-financing social housing programs and other activities like research and IT-initiatives, too.
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Unit Trust of India (UTI):Unit Trust of India is a financial organization in India, which was created by the UTI Act passed by the Parliament in 1963.For more than two decades it remained the sole vehicle for investment in the capital market by the Indian citizens. In mid- 1980s public sector
banks were allowed to open mutual funds. The real vibrancy and competition in the MF industry came with the setting up of the Regulator SEBI and its laying down the MF Regulations in 1993.
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Life Insurance Corporation of India (LIC):Life Insurance Corporation of India (LICis the largest insurance group and investment companyin India. Its a state-owned where Government of India has 100% stake. LIC also funds close to 24.6% of the Indian Government's expenses. It has assets estimated of 13.25 trillion (US$250.43 billion). It was founded in 1956 with the merger of 243 insurance companies and provident societies. Headquartered in Mumbai, financial and commercial capital of India, the Life Insurance Corporation of India currently has 8 zonal Offices and 113 divisional offices located in different parts of India.
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General Insurance Corporation of India (GIC):The entire general insurance business in India was nationalised by the Government of India (GOI) through the General Insurance Business (Nationalisation) Act (GIBNA) of 1972. The General Insurance Corporation of India (GIC) was formed in pursuance of Section 9(1) of GIBNA. It was incorporated on 22 November 1972 under the Companies Act, 1956 as a private company limited by shares. GIC was formed to control and operate the business of general insurance in India.
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Tourism Finance Corporation of India Ltd. (TFCI):The Government of India had, pursuant to the recommendations of the National Committee on Tourism viz Yunus Committee set up under the aegis of Planning Commission, decided in 1988, to promote a separate All-India Financial Institution for providing financial assistance to tourism-related activities/projects. In accordance with the above decision, the IFCI Ltd. along with other All-India Financial/Investment
Institutions and Nationalised Banks promoted a Public Limited Company under the name of "Tourism Finance Corporation of India Ltd. (TFCI)" to function as a specialised AllIndia Development Financial Institution to cater to the financial needs of tourism industry. TFCI was incorporated as a Public Limited Company under the Companies Act, 1956 on 27th January 1989 and became operational with effect from 1st February 1989 on receipt of Certificate of the Commencement of Business from the Registrar of Companies.
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Power Finance Corporation Ltd.
FC was set up on 16th July 1986 as a Financial Institution (FI) dedicated to Power Sector financing and committed to the integrated development of the power and associated sectors. The Corporation was notified as a Public Financial Institution in 1990 under Companies Act, 1956.The Corporation is registered as a Non Banking Financial Company with the Reserve Bank of India (RBI). RBI, vide its revised Certificate of Registration no. B-14.00004 dated July 28, 2010 classified the company as an „Infrastructure Finance Company (NBFC-ND-IFC)?.
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Indian Railways Finance Corporation Ltd. :RFC is a dedicated financing arm of the Ministry of Railways. Its sole objective is to raise money from the market to part finance the plan outlay of Indian Railways. The money so made available is used for acquisition of rolling stock assets and for meeting other developmental needs of the Indian Railways.The borrowing programme of IRFC is guided by the requirements projected by Ministry of Railways. The company has successfully met the targeted borrowings year after year, through issue of both taxable and tax-free Bonds, term loans from banks/financial institutions and through off shore borrowings. IRFC also makes use of innovative financial instruments to diversify the debt portfolio and to minimize the cost. Its contribution to infrastructure build-up in Railways is very significant.
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Indian Renewable Energy Development Agency Ltd. :Indian Renewable Energy Development Agency Limited (IREDA) was established on 11th March, 1987 as a Public limited Government Company under the Companies Act, 1956 and it promotes, develops and extends financial assistance for Renewable Energy and Energy Efficiency/Conservation Projects.IREDA has been notified as a “Public Financial Institution” under section 4 „A? of the Companies Act, 1956 and registered as Non-Banking Financial Company (NFBC) with Reserve Bank of India (RBI).
COMPANY
PROFILE
COMPANY PROFILE Introduction:The face of India is Changing fast and Haryana represent the perfect picture of a progressive state that really means business. In keeping with the true spirit of liberalization, HARYANA STATE INDUSTRIAL & INFRASTRUCTURE DEVEELOPMENT CORPORATION is geared to leave no stone unturned in its resolve to facilitate indigenous as well as foreign industry and investment .Right from the most modern infrastructure to single window clearances, HSIIDC ensure a smooth start to any enterprise. Haryana State Industrial & Infrastructure Development Corporation {HSIIDC} is one of the leading Contribution to the well being and progress of the Haryana State. It has been
Instrumental in bringing about a major change in the lives of the people of Haryana over the year. The Pioneering zeal of HSIDC has facilitated the transformation of Haryana from a primarily Agrarian society to one of the most highly Industrialized state of India.
Establishment:HSIIDC was established in 1967 for promoting medium and large scale industries so as to ensure balanced regional development of Haryana, by acting as an institutional entrepreneur and a financial institute by the Haryana state government and act as a catalyst for promoting and accelerating the pace of industrialization in the state. HSIDC is a public limited company wholly owned by the government of Haryana and has been set up as a catalyst for promoting and Accelerating the pace of industrialization in the State. The corporation provides a wide spectrum of financial services under one roof. The concept being “TOTAL FINANCIAL SUPPORT” for its clientele.Being an intrinsically customer-oriented Organization, HSIIDC as often gone beyond the call of duty in helping to give concrete shape to the destine and Vision of thousand of entrepreneurs. It has generally taken on the role of a friend and guide, providing crucial support and most important of all; Creating an environment where nascent project are able to attain their fruition and become vibrant industries. As a result, Haryana produces the largest number of tractor, motorcycles; refrigerators and GI pipes in the Country. About 25% of indians total Sanitary ware are manufactured here .And one out of every four bicycle bears the stamp of Haryana?s factories. Haryanas index of industrial production is for above the all India average. Many large govt. units like national fertilizers, Hindustan machine tool, Maruti Udyog Bharat electronics and other have there Stake in the state. In addition well known private sector group such as Escort, Herp Honda, Maruti, Good year, and whirlpool, amoung other, have a very noticeable presence.it has emerged as a favoured for the multinationals prominent amoung thoes who have set up the Base in Haryana ykk, Svedala, Beckton Dickinson, TDT Copper, Smithkline beecham, Osram, Denso, Norcool,
Silicon graphics, Hughes & Huges bechtel india ,Ascome perfetti, Duracell motorola, Mitsubishi, Elecucals, Vediocon, Johnson mathey,Barco suzuki, Stanley, Pepsi etc. The corporation has obtain the distinction of being the first state level financial Institution to be awarded ISQ 9002 certificate for quality servicing.
The HSIDC corporate HEADQUARTER is situated in panchkula.
ESTATE
Major Buyers & Seller Of HSIIDC :Since HSIIDC has been given the mandate to develop industrial infrastructure and there by facilitate development and growth of industry in the state of Haryana. As such it has developed industrial estate throughout the state and also plan for development of industrial park at various location. The process of development of industrial infrastructure involves acquisition of land, planning, execution of development work. Exp:-Road, water supply, sewage, drainage & electrical infrastructure. Besides this HSIIDC Providing financial assistance by way of Term loan, Equipment refinance, Equipment leasing & working capital performing agency function on behalf of state government/IDBI/SIDBI/entrepreneur capacity/modernization. an establish industry for enhancement of
In view of above we can easily explain term Buyers. HSIIDC allots the plot to allottees for the development of industrial estate as such their buyers are allottees who have allot the land for the development of industry. Some of HSIIDC allottes are as under:M/s Pavitra naturopathy & Health care services Pvt. Ltd., M/s Interpress publishers Pvt. Ltd. (Gurgaon), M/s crew boss products Pvt. Ltd. (manesar), M/s GG Export Pvt. Ltd.(Gurgaon). Since HSIIDC also providing financial assistance for promoting Medium & Large scale industries. As such HSIIDC provides Loans to the Borrowers for setting up the industries in the state of Haryana. So HSIIDC Buyers are allotties & borrowers.
Sellers:- Since HSIIDC acquired the land from the Private Builders/owners of land. As such
HSIIDC sellers are Land owners /land acquisitioners. Further HSIIDC also funding from bank/Refinancing institutions. Exp:- IDBI, SIDBI, Private builders etc.
COMPETITORS
There are many other institutions such as commercial bank IDBI, SIDBI etc. who are financing for the growth of industries, by giving them term loan, working capital loan, equipment finance, LOC etc for setting up industries and expantion/modernization. So HSIIDC competitors are other various financial institutions mentioned above.
TAX STRUCTURE
Silent features of HSIIDC Tax structure are as under :• • HSIIDC is eligible under sec 36(18) to avail the benefit @20% of the net income earned from long term financing. Corporate is also eligible to claim deduction under sec 36(17) of income tax act1961 out of the provision created against the doubtful debts.
BRANCH OFFICES
Delhi ,Faridabad, Kundali, Hissar, Gurgaon
FIELD OFFICES
Gurgaon, Manesar, Faridabad, Kalka,Ambala, Yammunanager, Karna, Jind, Tohana, Bawal, Barwala.
HSIDC (QUALITY POLICY)
H S I HIGH PRODUCTIVITY SUCCESS INNOVATION
D C
DYNAMISM COMMITMENT
ACTIVITIES
The role and the scope of Hsidc has widened and adapted it to suit the growing needs of industry.The service now being provided include ; • • • • • • • Infrastructrual Development Project promotion through equity participation Term lending Equipment finance Equipment leasing scheme Merchant Banking Underwriting of public/Right issues
• • • • • • • • •
Apprasial for the purpose of public/Right issues Seed capital scheme Bridge loans against state subsidy/Working Capital. Term loan assistance outside Refinance scheme of IDBI Working Capital Term loans Bill Discounting Forex Advisory Services Investment Banking Bought out deals
Future outlook-: Infrastructural Development
Being an apex institution HSIDC is developing industrial estates at strategic location in Haryana. It has 4205 fully developed industrial plots for small and medium projects spread over 35 estates. Industrial estates assist in the process of expanding strengthening and locating small and medium scale industries both in industrially advanced backward areas. The basic infrastructure provided in these estates comprises internal roads, water, electricity, sewerage, drainage and essential civic amenities. A fully developed industrial plot or a built up shed helps in speedier execution of the project. HSIDC has developed industrial complexes/ancillary estates at a number of location. The corporation is also setting up an ultra modern commercial complex “vanijya nikunj” with a capital cost of around Rs.70 crores at udyog vihar, gurgaon. A part from several commercial buildings, the complex will also house the „Udyog Minar? from where all the state agencies involved in industrial promotion shall work in close coordination with each other.
An Export promotion Industrial Park (EPIP) is being set up kundi with assistance from the Ministry of commerce, government of india. A growth Center „investate? at bawal has also been set up with assistance from the govt of india, where multinational companies and large business house are setting up their hi-tech projects. In addition, mini-industrial estates (Udyog kunj) at selected focal villages in the state are also being established to provide opportunities for self employment to the unemployed rural youth. Allotment procedures have been simplified for faster implementations of industrial estates have also refurbished for smoother functioning.
Industrial estates and parks developed by HSIIDC
Some of the industrial estates, which have been recently developed by the Haryana State Industrial Development Corporation, are as follows: Chowdhary Devi Lal, IMT, Manesar: The industrial estate, which has been built over an area of 1,799 acres, has a total of 1,148 plots. It is an Industrial Model Township having industrial, residential, commercial and recreational facilities that have been developed at par with international standards. Located at Manesar in Gurgaon district, the township is conveniently located on NH-8 and is a 20-25 minute drive from Indira Gandhi International Airport, New Delhi. This estate is equipped with a five-star hotel, golf course, business conference facilities, super specialty hospital and helipad.
Udyog Vihar,Gurgaon: Built over an area of 785 acres, this industrial estate has a total of
1,835 plots. Located 10 minutes from the Indira Gandhi International Airport on NH-8, this estate offers facilities of international standards and is well equipped to house MNCs and big corporate houses.
Bawal Growth Centre: Set up on an area of 1,200 acres in Rewari district, the BGC is not
only close to NH-8 but is only 90 km from the national capital. The social and industrial infrastructure is well built. The estate houses industries belonging to textiles, chemicals, light engineering and electronics among others.
Modern Industrial Park,Rai: This industrial estate is located in the heart of the industrial
belt at Sonepat on around 560 acres of land with an allotment of 1,322 plots. It is a modern industrial park with modern facilities and is developed to primarily cater to the needs of the small sector. It also seeks to decongest the national capital by relocating industrial units from Delhi to Rai.
European Technology Park (Proposed): The Basic motive to set up this park is to
promote development of technology and investment from European companies in this sector in Haryana. Work on the project is still in progress.
Food Parks: Four food parks with modern facilities and amenities are being planned at four
different locations in Dabwali, Narwana, Rai and Saha. These food parks are being set up to promote agro-based and food processing industry in the state. In order to help this sector flourish, the state government is trying to formulate a separate Food Processing Industrial Policy.
Medicity: The Haryana Urban Development Authority has earmarked 53 acres of land in
Sector 38 for the development of Medicity. This industrial estate will be dedicated to an integrated health infrastructure zone with provision for a chain of various super specialty hospitals backed by facilities for medical schooling, R&D and medical auxiliary services. Already, international companies have shown interest in building this park.
Special Economic Zone: The Haryana government is proposing to establish a new SEZ in
New Gurgaon. It will be located close to the Delhi-Jaipur highway or alternatively on NH-8. The project site has already been identified for which 1,200 hectares of land will be acquired in two phases. The total estimated cost of the project would be Rs 948 crore, of which Rs 742.2 crore will be financed through internal accruals. To improve connectivity within industrial units in the SEZ and the various industrial concentrations, a new express highway is being proposed linking highways 1, 8 and 10 bypassing the National Capital Territory of Delhi. This new expressway, which will be a nonstop four-lane high-speed toll road, will be restricted to only very fast moving vehicles. The estimated length of this highway will be 90 km.
Gems and Jewellery Park: The proposed park will be formulated under the cluster
approach. The total area of one block will be 20,122 sq. mt while the area under the workshops will be 9,864 sq. mt. The total cost of the project is Rs 50 crore. According to projections, it would be possible to generate a net surplus of around Rs 20 crore by selling the entire area.
SCHEMES & SERVICES A) • Infrastructural development
Industrial, Estates/parks/townships
•
Institutional and commercial complexes.
B) •
• • • •
Complete range of financial services
Term lending Equipment finance Working capital term loans. Line of Credit Corporate Loan
C)
Project promotion • Financial assistance to industrial units in the state of Haryana by way of term
• Equity participation in assisted sector in the state of Haryana. lending.
FINANCIAL SERVICES
The various financial services provided by the Corporation are as follows: 1) General Term Loan: The term loans are provided for setting up industrial projects in the
State of Haryana. The Service sector entities like Hotels, Hospitals, and Warehousing etc. are also eligible for assistance.
Parameters
i) Maximum assistance Rs. 2500 lacs per proposal
ii) Repayment period 5-8 years depending on the repayment capacity with initial moratorium period of six months to two years.
iii) Rate of interest
12.00% p.a. floating ( 1% timely payment rebate)
iv) Minimum security margin
25%
v) Promoters contribution
30%
vi) Maximum desirable debt equity ratio. vii) Processing fee
1.5:1
0.20% of loan amount.
viii) Upfront fee
0.50% of loan amount
2)
Equipment Finance Scheme:
The financial assistance under this scheme is
available to the existing profit-making concerns for acquiring machinery/ equipment for expansion/ modernization/ balancing of existing operations. The applicant concern should satisfy the following eligibility norms to be covered under the Scheme: The concern should be in operation for the last four years and should be in profit and /or declared dividend in the preceding two financial years. • • • • The current ratio should preferably be 1.33:1 or above. The cost of proposed equipment normally should not be more than 50% of the existing
gross block. The applicant concern should not be in default to the institutions/Banks and The proposed equipments should be separately identifiable
Parameters i) Maximum assistance
Rs. 500 lacs per proposal
ii) Repayment period
2 to 5 ½ years
iii) Rate of interest
11% p.a. floating
iv) Processing fee
0.20% of loan amount.
v) Upfront fee
0.50% of loan amount
2) Equipment Finance Scheme: The financial assistance under this scheme is available to the existing profit-making concerns for acquiring machinery/ equipment for expansion/ modernization/ balancing of existing operations. The applicant concern should satisfy the following eligibility norms to be covered under the Scheme: The concern should be in operation for the last four years and should be in profit and /or declared dividend in the preceding two financial years. • • • • The current ratio should preferably be 1.33:1 or above. The cost of proposed equipment normally should not be more than 50% of the existing
gross block. The applicant concern should not be in default to the institutions/Banks and The proposed equipments should be separately identifiable
Parameters i) Maximum assistance
Rs. 500 lacs per proposal
ii) Repayment period
2 to 5 ½ years
iii) Rate of interest
11% p.a. floating
iv) Processing fee
0.20% of loan amount.
3)
Working Capital Term Loan:
It is a medium term loan provided to existing financed units of the Corporation for meeting the working capital requirement including the short fall in margin money for working capital.
Parameters
i) Repayment period
5-1/2 years including six months moratorium.
ii) Maximum assistance (SSI ) (Non-SSI ) iii) Rate of Interest
Rs.125 lacs Rs. 200 lacs 12% p.a. floating (Before 1% timely payment rebate)
(applicable both for SSI/Non-SSI units) iv) Processing Fee v) Upfront fee 0.20% of loan amount. 0.50% of loan amount.
4) Loan under TUF Scheme:
Under this scheme the loan is provided to the units engaged in Textile and Jute industries for technology Upgradation and modernization. The salient feature of this scheme is rebate of 5% on the interest charged by the financial institution, which is given to the clients in the form of reimbursement of the interest.
5) Line of Credit Scheme:
Under this scheme, a Line of Credit, valid for one year is granted to existing borrowers who have created first charge on its fixed assets in favour of the Corporation, for purchase of separately identifiable machinery/ equipments obviating appraisal procedure and giving flexibility in identifying the machinery/ equipments at a later stage.
Eligibility conditions
• The unit shall be in operation at least for four years and earned net profit for the last two years. • The borrower should not be in default to institutions/banks and should be in „Standard Assets? category. • Existing current ratio should not be less than 1:1. • Average cash accruals during the last two years should be sufficient to service the existing & proposed loan. • Under this scheme, nominal-processing fee of Rs. 5000/- is charged against processing fees of 0.20% under other term loan schemes.
Scheme For Financing Commercial Complexes:
Sensing the needs of borrowers, HSIIDC has introduced a Scheme Commercial complexes. The assistance under the scheme is provided for: a. Acquisition of land and construction of building thereon. for construction of
i. Interior decoration, air conditioning, communication facilities for commercial complexes and shopping malls.
i. Acquisition of racks for storage, weigh bridges, conveyor system, lifts for show rooms, departmental stores, sales outlets etc. Products for sale will not be considered for financing. i. In case of existing functional commercial complexes, renovation cost and cost of acquisition of additional establishment could also be considered for financial assistance. i. Any other required facilities connected with the commercial complexes, can also be considered for financing. i. The land should be in name of company or its promoter and same be mortgaged with the Corporation.
Financing Parameters
• • • • • • Minimum promoter?s contribution Maximum debt equity ratio Minimum Security Margin Processing Fee Upfront fee Repayment Period 30% 1:1 35% 0.20% of loan amount 0.50% of loan amount 8 years with moratorium period of 18 mont vii Rate of Interest 13% p.a floating. (1% timely payment rebate)
7 Scheme for Corporate Loan:
The corporation has recently introduced a scheme of corporate loan under which assistance of Rs. 500 lacs is granted which can be utilized within six months from date of sanction for:
a) Expansion / modernization / balancing equipment / technology tie ups fees along with meeting of working capital requirements, if any.
b) Takeover of loans of other institutions coupled with additional assistance, if any. However, the assistance shall not cover new projects.
c) Meeting the expenses relating to general corporate needs of unforeseen nature such as VRS/Bonus/IT payments etc.
HSIIDC Objectives
• • • • • Identification and promotuion of large and medium sector projects. Providing Financial assistance by way of term loans/direct participation on equity. Facilitating infrastructure development. Performing agency function on behalf of state govt. idbi/sidbi. Providing financial services to entrepreneurs and established industries for enhancement of capacity/modernaisation. • Providing merchant banking service.
RESEARCH METHODOLOGY
PROBLEM IDENTIFICATION AND PROBLEM FORMULATION
The State level Industrial Development Corporation (SIDCs?) were conceived by various State Governments to boost up industrialization of their respective States. These were set up primarily to built infrastructure. However with the passage of time, these organizations are diversifying into financing of the industrial projects. As the banks concentrated mainly to cater the working capital requirements, the financial activity of State level industrial development corporation was considered to be an attractive source for long term financing.
However with increased liquidity in the market, Banks were forced to tap the long term financing activity in lesser clientele for the SIDCs?. With the lesser client based and diminishing overall exposure in the financing market, the quality of loan portfolio became of paramount importance. This in-turn required effective project appraisal. With the rising level of Non Performing Assets (NPA), the most of SIDCs? were forced to curtail the financing activity and SIDCs? were forces to look for good proposal and quality of project appraisal portfolio became of great consequence. Man behind the project is an important aspect of appraisal. Weak project can be improved upon but not promoters lacking business acumen. The project report should, therefore, highlight the most favorable factors of the promoters out of the following: •
Traits and overall background of the promoters other
• Academic/professional qualifications and other exposure in finance, legal or technical field that can be useful to the project. • • • • • Business and industrial experience. Integrity and credit worthiness. Proven administrative and managerial ability in the existing business. Dynamism initiative and resourcefulness. Financial status and resources.
OBJECTIVES OF THE STUDY
Appraisal is a comprehensive and systematic review of all aspects of a project. It can be defined as a second look at the project report by a person who is in no way involved in its preparation. It helps in taking an entirely independent view of the project. Lending institutions/promoters do carry Project appraisal covering all the aspects of the project before arriving at financing /taking up the project for implementation.
There are following objectives of my study :• • • The study aims at listing the tools & techniques used by financial institutions for carrying out project appraisal. It will also study the extent upto which project appraisal and its results are used, for deciding about acceptance/rejection of the project. This study also aims at highlighting the most common faults or areas over-looked by appraising officers. The study also aims at having insight into the usefulness of projects appraisal in terms of variance of actual results from the projected ones. Source & Type of data- Primary Data is basically used in the project appraisal. The following data is the base of study:• • • • • • • • • Initial reports prepared & submitted by promoters. Information supplies in the application form / during appraisal. Appraisal reports of Financial Institutions. Discussion with appraisal officers. Performance results of companies & comparison with projection as appraised. Reason of deviation (if any) Literature of Project Appraisal. Appraising officer. Literature of project appraisal and also the appraised file of the company as provided by financial institution
Financial Viability of the Project
Financial analyses is one the most critical aspects in a project appraisal. A project is considered to be financially viable if its expected earnings is sufficient to cover the costs, the operating and maintenance costs, returning of loans and in addition yield reasonable returns. For this we require information about the following and need to study them in detail: 1) 2) Analysis of past working results in case of existing concerns. Cost of the project
3) 4) 5) 6) 7)
Means of finance and Financial Structure. Sales and Production estimates. Working capital Requirements and its financing. Profitability, Balance sheet and Cash flow projection. Sensitivity Analyse
SCOPE OF THE STUDY
• To study various projects appraisal by HSIIDC and draw comparison between actual and projections. • To establish reasons for major deviations from projections. If any. The study involves the access to the data provided by the Promoters to the Corporation under secret cover. The data, which is publicly published, can be used for any research and analysis by any outside/ other than the Corporation also. These may also involve the funding pattern and the organizational structural plans & related matters, which are also not to be publicly announced.
DATA COLLECTION
During the study, Convenience Sampling method has been used for selection & collection of data. The sampling guided by the guide on the basis of his experience and working trends in the Corporation as well as the easy access to the data required for the purpose of the study.
RESEARCH TOOLS APPLIED
The study involves the review of various projects financed by the corporation. Only the performing and successful projects financed by the corporation has considered for study. The study is based on the data supplied by the promoter to the corporation at the time of appraisal and the latest data available with the corporation and the variance and resultant impacts on the initial data.
The study aims at finding out the Project Appraisal techniques used by financial institutions presently, the seriousness with which Project Appraisal is regarded as a tool for project acceptance/ rejections and usefulness of this tool for projects selection. The study is based on first hand information from companies, which have set-up project in recent past and have carried out Project Appraisal before project implementation. Appraisal reports of financial institutions, discussion with appraising officers in financial institutions and the performance results of companies after implementation of project, Appraising officers is interviewed for having an insight into the aims of the study and reports/performance results are analyzed. Debtequity ratioCurrent ratio • Capital gearing • Return on equity • Internal rate of return • Return on investment etc. • Net present value • DSCR •Pay Back Period • Break-even Point
DATA ANALYSIS & INTERPRETATION
• RATIONALE OF THE STUDY
It is well established & experienced fact that the practical exposure in the working place need not remember but automatically learnt with glimpse of pictures and is supposed to be written in the layers of heart rather than in a piece of paper. The professional qualification in the other term means the meaningful education. The theoretical knowledge of a student of Master of Business Administration is perhaps sufficient to explain and understand the theory illustrations and questions. Since the business is itself a complex activity which requires prompt decision-
making and it can be done only if one has practical knowledge to handle the situations. Business is basically name of encashment of opportunities rather than to wait for the opportunity. There are a lot of opportunities but all not for selling like a market commodities; but the catching of such opportunities is a matter of knowledge and experience in real practical terms. It becomes immense difficult to find out the particular point of time when the opportunity is to mature and important is to understand the point. In order to acquaint oneself of the complexities of business environment it is very important to see the thing from very close and real destinations so that one can understand the same in its real terms whenever there comes a time to show its worth. Hence this study being a part of the master Degree of Business Administration contributes a major chunk of studies. Appraisal is a comprehensive and systematic review of all aspects of a project.
ANALYSIS OF Lumax Automotive Systems Ltd.
CASE STUDY- LUMAX AUTOMOTIVE SYSTEMS LTD. Company Profile
M/s Lumax Automotive Systems Ltd. is ISO/TS: 16949, QS: 9000 and ISO: 9000 accredited Company. Its main products are automotive rear vision systems, filtration systems, blow molding & injection molding parts and sheet metal components. Lumax is the largest tier-I OEM supplier of these products to major automobile manufacturers in India.
The company is having technical collaboration with M/s Toyo Roki Manufacturing Co. Ltd. of Japan for manufacturing of Air cleaner. For manufacturing of Mirrors (Inside and Outside) for higher segment vehicles like Mercedes, BMW, General Motors etc, the company has entered into a technical tie up with M/s Magna Donnelly of USA. The company is one of the largest OE supplier of its products to nearly all major vehicle manufacturers like GM, Maruti Suzuki, Tata Motors, Bajaj Auto, Mitsubishi, Honda Scooters and Motor-cycles, Honda Siel, Honda, Hyundai, M&M, Eicher, Yamaha and many more. Apart from it the company is also catering to the replacement market for all of its products. The company is selling products for replacement market to M/s Lumax Industries Ltd., which is having a strong dealer network all over the India. The brand name for both of these companies is still the same, that is, „Lumax?. Present Directors of the company are Sh. U.K. Jain, Sh. Nitin Jain, and Smt. Kamlesh Jain. All the directors of the company are family members and experienced in the line. Beside this, the company is having three more independent directors, which are all professionals.
The Lumax group was established in 1945 in the name of M/s Globe Auto industries as a trading concern by Mr. S.C. Jain (founder of the company). In 1965, M/s Globe Auto started the manufacturing activities in the name of M/s Globe Auto Industries (p) Ltd. Later on, it commenced manufacturing of automotive components, mainly, Lighting and Filters. In 1981, the name of the company was changed to Lumax Industries (P) Ltd. and later on it became a public limited company and name was changed to Lumax Industries Ltd. In October 2003, Lumax Industries were demerged into two companies namely Lumax Industries Ltd. and Lumax Air Cleaner Ltd. under the orders of the Hon?ble High Court of Delhi. As per the demerger plan, entire assets and liabilities of Mirror and Filter Business located at Faridabad, Pune, Aurangabd and part of Dharuhera transferred to Lumax Air Cleaner Ltd which is controlled by Sh. U.K. Jain (younger son of Sh. S.C. Jain) and lighting business retained with existing Company thst is Lumax Industries Ltd which is controlled by Sh. D.K. Jain (elder son of Sh. S.C. Jain). In Nov 2003, after taking over the business from Lumax Industries Ltd, the name of the M/s Lumax Air Cleaner Limited was changed to M/s Lumax Automotive Systems Ltd. This company is engaged in the manufacturing of wide range of automotive Rear View Mirrors, Filters and Air cleaner at its different plants located at the following locations:
Mirror manufacturing Units -Plot No. 78, Sector 6, Faridabad -C-10, MIDC, Waluj, Aurangabad Filter/Aircleaner manufacturing Units -29, DLF Industrial Estate, Phase II, Faridabad -D-2/44, MIDC, Chinchwad, Pune Plot No, 46, Sector 3, IMT, Manesar (Shifted from Dharuhera) In February 2005, two other group companies M/s Toshi Auto Industries (P) Ltd and Metal Pressing Industries (P) Ltd were merged into Lumax Automotive Systems Ltd as per the orders of the Hon?ble High Court of Delhi which took effect retrospectively from 01 April 2004. M/s Metal Processing Industries (P) Ltd was incorporated in the year 1974 and engaged into manufacturing of sheet metal components for the Automobiles. The company is having one manufacturing unit at D-2/29, MIDC Industrial Area, Chinchwad, Pune. M/s Toshi Auto Industries (P) Ltd. was incorporated in the year 1982 and engaged in to manufacturing of plastics molded components for Automobile Industries. The Company is having three manufacturing units which are located at the following locationslot No. 99, Udyog Vihar, Ph.-IV, Gurgaon -10, Indraprastha Estate, 12/2, Mathura Road, Faridabad -Plot No. 46, Sector-3, IMT, Manesar
The account position of the company as on date is (Rs. in Lacs) Sanctioned 1365.00 Disbursed 1254.19 Outstanding 1049.25 Default Nil
For the year 2007-2008, the company is having sanction of fund based limits of Rs. 10 crores and non-fund based limits of Rs. 5 crores which is utilized fully. Apart from the same it has been
sanctioned a short term loan of Rs. 4 crores and temporary overdraft limits of Rs. 2 crores (utilized fully). For the increased exposure of Rs 2 crores, over and above the sanctioned limit of Rs. 10 crores the company is paying extra interest of 2% p.a. over and above the normal rate of interest of 13% p.a. and for the short term loan it is paying interest rate of 14% p.a. Further the sale (net of excise and other income) of the company is also increasing from Rs. 92.07 crores in the year 2006 to Rs. 99.16 crores in the year 2007 and for the nine months ending 31.12.2007, the company has already achieved a turnover of Rs. 75.17 crores and it is expected to achieve a turnover of approx. Rs. 105.31 crores for the complete year ending 31.03.2008. It has been informed by the promoters that a fresh business of approx. Rs. 1 crore/month have been generated by the company for export of rear view mirror to M/s Britax Pmg Ltd., Britain. With the increase in sales, the need for the working capital is also increasing but the margin available with the company and the bank limits that the company is availing is not sufficient enough to cater the overall requirement of the working capital of the company. The margins that the company is generating from its operations are being utilized for the expansion scheme. From the above it is clear that the net increase in the fixed assets and investments of the company from the year 2006 to year 2008(till 31.12.2007) is Rs. 10.25 crores (Rs. 7.85 crores + Rs. 2.40 crores) where as the net increase in the term loan liability of the company is of Rs. 0.14 crores only for the same period and for the balance requirement of funding for the long term fixed assets, the company has utilized its margin money for working capital resulting in tight liquidity position. Its current ratio is marginally above 1:1 as on 31.03.2007. In the year 2006, the current ratio was 0.99:1, which has slightly improved to 1.07:1 in 2007 and remain the same during nine months ending 31.12.2007. Keeping in view of the shortfall in the working capital requirements and expansion schemes of the company, (investment in joint venture company with M/s Magna Donnelly and Project for Uttaranchal and Jamshedpur, the company planned for the private placement of equity during 2006-2007(30 lac shares at the tentative premium of Rs. 60/share) and also approached the corporation (HSIIDC) for the corporate loan of Rs. 500 lacs to meet out the shortfall in its margin for working capital. But due to adverse market conditions, the private placement of shares could not matured, affecting the sales as projected for the year 2006-07 onwards. Now again the company is proposing to raise funds through private placement (by floating 25 lac shares at the
tentative premium of Rs. 50/share). The funds raised through private placement will be used for working capital requirements and capital expansion. As per the audited balance sheet dated 31.03.2006, the working capital gap is Rs. 871.95 lacs with the actual available negative working capital margin of Rs.54.19 lacs. For the period, there is excess borrowing with the current ratio of 0.99:1. Similarly for the period ending 31.03.2007 the working capital gap comes to Rs. 1517.21 lacs with actual available margin of Rs. 335.46 lacs. For this period also there is an excess borrowing with a current ratio of 1.07:1. The reason for the excess borrowing in the year 2006 and 2007 is due to inadequate promoter?s margin for availing working capital limits. Now to improve the current ratio and to fund the margin money for working capital the company requested for the WCTL of Rs. 200 lacs to improve its liquidity position. It has been explained by the compared to the rate of interest from corporation. Further the actual available margin without considering the proposed WCTL is not sufficient to get the limits increased from its existing Banker (from Rs. 10 crores to Rs. 12 crores). The brief of the financial results of the company from year 2006 to 2008 are detailed as under: Year 2008 2007 2006 Sales 75.03 99.65 92.12 PBDIT 7.91 10.10 10.17 Net Profit 1.68 1.31 1.96 Dividend 0.00 0.88 0.88 (Rs. in lacs) Gross Block* 37.87 55.62 50.01
The Scheme under study: The Company approached the corporation in March 2005 for financing expansion of its existing in house capacity to cater to requirement of M/s Hero Honda at Manesar. The company had 25 numbers of injection molding machines and 13 numbers of Blow Molding Machines apart from Tool Room facility and Assembly line for all its products at different sites. M/s Honda Motorcycle and Scooters increased their production for two wheelers resulting into increased demand for Air cleaner and other plastic injection molding components like ; Mud Flaps, Airfilter case and cover, Inner Box, Fan Comp cooling. Since the company was an existing supplier
to M/s Honda, it received the increased orders for supply of the said items, which was almost threefold of its existing supply. Apart from it, the company got bulk orders from M/s A.G. Industries Ltd., Manesar (Gurgaon) a supplier of Air cleaner to M/s Hero Honda. The company was to supply Plastic components and elements with Filter Paper to M/s A.G. Industries for onward supply to M/s Hero Honda after assembly. This tie up was particularly for “Passion” and “Karizma” models of Hero Honda. Since the company was not having sufficient in-house installed capacity to execute the increased demand of its products, it proposed expansion in its installed capacity for manufacturing of Air Cleaner and Plastic Molded Components at its existing site at plot No. 46, Sector-3, IMT Manesar. The existing installed capacity of the company was 185 lac pieces comprising of 12 lac pieces of Air/Oil filter, 5 lac pieces of Air cleaners, 38 lac pieces of Mirrors and 130 lac pieces of different plastic molded components like whether strips, instruments, Mud Flaps, instrument panel, clusters, Air filter case and cap, all types of air ducts, coolant bottles, petrol tanks etc. After the proposed expansion, the company was to increase its capacity by 2.32 lac pieces of Air Cleaners and 10.45 lac pieces of different plastic molded components. The capacity was calculated taking 330 working days in a year with 3 shifts. The total cost of expansion scheme appraised was Rs. 775.74 lacs, which was funded by way of Additional Term Loan from the corporation to the extent of Rs. 465 lacs and internal accrual of Rs. 310.74 lacs. The debt-equity ratio for the proposed scheme was kept at 1.5:1 with promoter contribution of 40.60%. The project was appraised by HSIIDC and a term loan of Rs. 465 lacs was sanctioned to M/s Lumax Automotive Systems Ltd. on 22.07.2005. This appraisal was examined and compared with the actual results achieved during 2004-05, 2005-06 and 2006-07.
FINDINGS
Following was observed:For the year 2005-06, the company has achieved a turnover of Rs. 9211.95 lacs (net of excise) with a net profit of Rs. 195.84 lacs and cash profit of Rs. 554.72 lacs. For the year 2006-07, it has achieved a turnover of Rs. 1010.04 lacs (net of excise) with a net profit of Rs. 130.84 lacs and cash profit of Rs. 467.34 lacs. Further the net worth of company has also increased from Rs. 1355.95 lacs in 2006 to Rs. 1470.25 lacs in 2007. Further the gross block of the company was Rs. 5001.43 lacs (net of revaluation) in the year 2006, which has increased to Rs. 5562.40 lacs (net of revaluation) in the year 2007. There is an increasing trend in the sales but there is reduction in the
net profit of the company. The reason for the same was discussed with the promoters and it was informed that due to the following reasons there is some reduction in the net profit: •
The average cost of raw material to sales during 2005-06 was 57.07%, which has increased to 59.09% during 2006-07. The company is in the process of negotiating with its customers for the price increase in raw material for the year 2006-07 and already a sum of Rs. 37.28 lacs has been received from M/s Honda Motor Cycles and Scooters Pvt. Ltd. and Rs. 60 lacs yet to be received from M/s Misubia Sical Ltd. Both of these amounts will be reflecting in the balance sheet of the company for the year 2007-08.
•
The income tax (including tax on dividend and FBT) for the year 2005-06 was Rs. 137.23 lacs, which has increased to Rs. 168.00 lacs during 2006-07. The interest cost of the company for the year 2005-06 was Rs. 236.86 lacs, which has increased to Rs. 285.85 lacs.
•
The current ratio of the company was 0.99:1 in the year 2005-06 which was slightly improved to 1.07:1 in the year 2007. The reason for low current ratio was discussed with the promoters and it was submitted that the main reason for decrease in current ratio is increase in sales from Rs. 92.12 crores in 2006 to Rs. 99.64 crores in 2007 and investment of margin money generated (in the business) in fixed assets which has increased from Rs. 50.01 crores in 2006 to Rs. 55.62 crores in 2007.
•
The company could not achieve the projected turnover on account of market competition.
•
There is variation in the profit, which was primarily on account of lesser turnover. However, the profit margin was better than those projected.
The objective which i have set in Project, I have tried to cover it and find out after using tools and techniques such as Ratio analysis , DSCR ,IRR capital Budgeting Fund Flow statement BEP etc that since the Net worth /Gross block of the company is in increasing trend and profit will also
be increased as the company is in process of negotiating with its customers for the price increase in raw material for the year 2006-07 as such as a whole project seems to be viable and we should accept the Project for financing.
SUGGESTIONS
Project appraisal is such a vast exercise that a lot of subjectivity often creeps in if there is absence of objective guidelines. That way the dependence of appraisal officer?s is also more. Thus, there is scope for difference of opinion amongst various appraising officer/agencies some measure which can help make/project appraisal more objective can be discussed as follows
• Objective guidelines for appraisal of promoters and Management.
A project which is considered technically feasible, economically viable and financially sound may run into difficulties if it is not backed by sound and efficient management. Man behind the project is very important. It can be rightly said that a second rate project in the hands of first rate Management is better than a first Rate Project in the hands of second rate Management. Therefore, proper evaluation of Management is highly essential part of appraisal. However, it is often difficult to form a judgment regarding future management at the time of the project appraisal, evaluation of Management at the time of project appraisal. Evaluation of Management is an art and no set formula as well recognized steps exist for it, easy solution. While appraising existing entrepreneurs, there past record can be studied. A judgment can be made in the basis if past balance sheet and profit and loss statement credit records with the bankers and financial institutions adherence to sound business policies and evidence of professionalism is mgt. while appraising expansion/modernization /diversification projects it should also be ensured whether present project it should also be ensured whether present mgt. is flexible enough to change all to the new circumstances. An effort has been made to design such a scale, which can be used as it is with some modifications base on experience of the using agency. The relative weightage is also given. Although the above assessment is sub future to some enter to still it much better than a few vague statements. It gives an idea about the qualities of promoters. Adoption of such a checklist also results in standardization after which can prove very beneficial in long run. Promoter is able to get about 60% marks, he may be considered as a good promoter and the appraising officer can be confident of his/her ability of undertaking the project successfully.
Although the above assessment is subjective to some extent, still it is much better than a few vague statements (which is the general practice). It gives an idea about the qualities of the promoters. Adoption of such a checklist also results in standardization which can prove very beneficial in the long run.
2. Security Margin:
The current practice is of taking a fixed security margin (generally 25-30%) for all assets, though for old assets a slightly higher security margin is taken. This practice could backfire in certain special cases e.g. some industries have a very high obsolescence rates (electronics, computers, etc.). Also in chemicals, pharmaceuticals, industries gases and other such industries, the rate of deterioration of the plant and machinery might be very high even the slight negligence. In all such cases, they may be a drastic fall in the realizable value of the assets although on paper, they may be worth a lot more (even after depreciation as stipulated). In such cases, generally a smaller security period is considered (say 3-4 years instead of the usual 7-8 years). Still a range of security margins may be adopted for various assets in different industries. This would lead to be better security of the blent finances and better chances of full recovery in case of default .
3. Sensitivity Analysis
Sensitivity analysis should be made mandatory so as to have an idea about the feasibility of the project under adverse circumstances. More & more liberalization means more & more completion which can lead to price-cutting. Under such circumstances, only the fittest would survive. Also there is every possibility of increase in raw material costs. The profitability of the project under such circumstances should be studied to determine the extent of unfavorable circumstances which the project can absorb safely. For this purpose, guidelines could be issued regarding the extent of sensitivity analysis to be carried out e.g.
1 2 3
For R.M. cost variations of 5.25 %( in steps of 5 i.e. for 5, 10, 15, 20, and 25%). For decrease in sales price (5-25% in steps of 5%). For decrease in capacity utilization by 10% points etc.
4. Adoption of NPV Method:
NPV method should be used adopted since IRR has certain limitations such as: 1. IRR may not be uniquely defined in case there is more than one change in sign of cash flows
allowing over project life. 2. When the cash flows are not evenly spread Int, NPV is more dependable as it is based on the
guiding principle of maximization of shareholders wealth. 3. Results in Myopic view on the part of Promoters. They are only interested in maximizing
the IRR; there is tendency to do away with expenses on such important issues such as for repair & maintenance. This may IRR in short run, but in long run it results it lower returns.
SUGGESTED MODEL FOR RISK MANAGEMENT
The following chart describes a series of four management activities that provides a systematic and integrated approach to risk management at the corporate level:
Evaluate/ Quantify External Risk Management Risk
Develop Strategic Response
Design process Response
Evaluate Corporate Performance
This efficient and timely management of risk calls for: • • • • A perception of risks as they crop up. Understanding the sources of risk. Restraining them by using appropriate techniques. Designing a structured response in terms of alternative plans, solution and contingencies. All this is attributable to some such factors as: • Culture of the project team. • • • Attitude of the project team. The perceptions of the project team. The cause and effect of the project in terms of scope.
However, the logical process of risk management may be as follows: • • • • Identification of risks or uncertainties. Analysis of the implications (individual and collective). Response to minimize risk. Allocation of appropriate contingencies.
BIBLIOGRAPHY
BIBLIOGRAPHY
BOOKS REFFERED
•
“Project Managemnt and Control”, P.C.K. Rao publist by Elsevier ltd.
Fifth edition 2001
•
“ Project Planning and Appraisal”, Publish, ,Tata Mc Graw Hill, 7th edition , Prasanna Chandra
•
“ Financial Management” – Khan and Jain – Tata McGraw Hill
WEDSITES
•
“Evaluation of an Investment Project”, UNIDO Guidelineshttp://www.unido.org/fileadmin/import/20036_0388381.pdf
•
Website of HSIIDC- www.hsiidc.gov.inhttp://www.banknetindia.com/finance/fi.htm
• •
List of all india Financial Institutions. Retrieved fromhttp://www.banknetindia.com/finance/fi.htm
Literature review Retrieved fromhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=966680 &http://econpapers.repec.org/article/eeejfinec/default28.htm
COMPANY REFERANCES • • Balance Sheet and other financial reports”, HSIIDC “Appraisal files of Lumax Automotive Systems Ltd.”
doc_153058253.docx
Introduction Of Topic
Project appraisal is the process, which brings to bear an independent and objective assessment of the various aspects of an investment proposition for arriving at a financing decision. Appraisal exercise is basically aimed at determining the financial & technical viability of a project. This is also designed to reshape a project so as to upgrade its viability. Appraisal is a comprehensive and systematic review of all aspects of project. It would not be possible to have a cut and dry formula with the help of which a project could be judged straight way as acceptable or unacceptable, appraisal highlights weak areas in the project with the ultimate objective of strengthening them adequately so as to ensure final success to the project. The main objective of appraisal is to improve and revamp the project with the cooperation of the promoters. An appraisal is essentially a composition of assumptions and projection in a volatile economic and social environment. The projection of project pre-requisite based on the assumptions has necessarily been considered as an indicator of appraisal. Secondly, this also calls for keen intuitive qualities in addition to a high degree of expertise, in quality appraisal techniques. Further, all aspects of project lend themselves to a qualitative measurement and in the evaluation of all aspects, the quantitative projections, need to be reinforced by qualitative assessments. In the process of project appraisal, it is necessary to recognize the inborn interrelationship underlying various aspects of projects. For example, the size of the initial market and the estimate of demand, build up would determine the plant capacity and production phasing; these together influence the profitability, which, in turn, determines the means of financing; location has an important bearing on projection cost as also cost of production. Above all, the management behind the project has decisive influence on the most of these projects.
The use of non-recourse project financing has grown steadily in emerging markets, especially in basic infrastructure, natural resources and the energy sector. Because of its cost and
complexity, project finance is aimed at large-scale investments. The key is in the precise estimation of cash flows and risk analysis and allocation, which enables high leverage, and in ensuring that the project can be easily separated from the sponsors involved. Project finance is more difficult in emerging countries, which tend to pose unpredictable risks with unfavorably biased results. This study investigates the role of project finance as a driver of economic growth. It is hypothesized that project finance is beneficial for the developing economies as it compensates for any lack of domestic financial development. The contractual structure unique to project finance should lead to better investment management and governance. financing involves nonrecourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Eurotunnel. 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 appraisal is the process, which brings to bear an independent and objective assessment of the various aspects of an investment proposition for arriving at a financing decision.
The types of project for which project finance is commonly used include the following:
• • infrastructure projects, such as government buildings and transport systems; oil and gas exploration projects;
• •
sports stadia; and liquefied natural gas development projects.
In the UK, most project financings have been carried out under the Government's private finance initiative (PFI) and are known as Public Private Partnerships (PPPs). PFI was introduced in the early 1990s and aimed to introduce private sector skills and finance into the provision of public sector services. PFI is structured so that the private sector obtains finance - usually from a bank - to design, build and operate a facility for the benefit of the public. In return, the public sector grants this private sector partner a long-term contract to run the facility - usually for 25-30 years. Once the facility has been built, the public sector pays the private sector a monthly fee over the life of the project which is used to service the bank loan which financed the project which is used to service the bank loan which financed the project.
Key parties to a project financing
Private sector partner/owner: Usually a corporation or a limited partnership created for the sole purpose of the particular project. This party is at the centre of all contracts, borrowings and the construction and operation of the project. For simplicity, we refer to this party as 'Projectco'. •
Project sponsor: The person who takes on the active role in managing the project.
The project sponsor owns Projectco and will receive profit, either as a result of the ownership of Projectco or via management contracts, if the project succeeds. The project sponsor often has to cover certain liabilities or risks of the project by providing guarantees or by entering into management or service agreements.
•
Lenders: Commercial banks, investment banks or other institutional investors who
provide the debt portion of the project financing. The sheer scale of a typical project financing means that most lending cannot be undertaken by a single lender. Instead, group of lenders form a syndicate.
•
Agent: one of the lenders will be appointed as the agent and will act on behalf of the
other lenders to administer the loan.
• Account bank: a single lender will hold the accounts through which all the cash
generated by the project will pass. •
Equity investors: lenders or project sponsors who do not expect to have an active role
in the project. In the case of lenders, they will have a shareholding in addition to lending by way of debt, as a way of receiving an enhanced return if the project is successful. In most cases any investment by way of shares is coupled with an agreement to allow the equity investor to sell its shares to the project sponsor if the equity investor wishes to exit the project. Similarly, the project sponsor may have the option to repurchase the shares.
• Suppliers, contractors and customers: these include the suppliers of materials
for the project, the contractors responsible for designing and building the project and the customers of the project. •
Construction company: the construction contractor is one of the key project parties
during the construction phase of the project.
•
Multilateral credit agencies: some projects - particularly in developing countries are co-financed by the World Bank or its investment bank division, the International Finance Corporation, or regional development banks such as the European Bank for Reconstruction and Development or the Asian Development Banks. Multilateral agencies such as these are able to ensure the bankability of a project by providing commercial banks with a degree of protection against political risks, such as the failure of a government to make agreed payments or provide the necessary regulatory approvals.
•
Host governments/awarding authorities: the government of the country where
the project is based is likely to be involved in issuing consents and permits both at the start and throughout the life of a project. The awarding authority is the contracting local authority which enters into the project agreement with Projectco.
•
Purchasers: in infrastructure projects, Projectco will normally contract in advance
with a purchaser who will purchase the project's output on a long-term basis.
•
Insurers: insurers are vital to a project. If there is a catastrophe affecting the project,
then the sponsors and the lenders will look to the insurers to cover the losses.
The Project Cycle
The appraisal and evaluation of projects, programmes and policies is best seen in the context of the project cycle, the stages of which are shown in Figure 1.1. The process begins with project identification and ends with project evaluation. To ensure that projects meet their original objectives, it is usual to set up an evaluation framework, which allows project finance agencies, policy makers and other stakeholders to assess the success of the project through the monitoring and evaluation process. The project cycle consists of the following stages: • • • • • project identification project preparation ex ante project appraisal implementation and monitoring ex post project evaluation.
Figure 1.1 The Project Cycle Identification
Evaluation (ex post) Preparation
Implementation & Monitoring Apprasial (ex ante)
9(
The idea behind the project cycle is that there are a number of sequential processes from the identification of a project through to the completion of the project. It is important that ex-post project evaluation is carried out in order to assess the impacts of the project and whether it achieved its original objectives. There are a number of different tools you will learn later in this
course which are used at different stages in the project cycle. They include: • • • financial and economic analysis (ex ante project appraisal) impact analysis (monitoring and evaluation and ex-post project evaluation) risk analysis (project preparation, ex ante project appraisal)
LIST OF ITEMS CONSIDERED WHILE DOING APPRAISAL
1) 2) • • • • • • • 3) • • • • 4) • • • Amount of capital to be raised from public Appraisal in brief Company?s Name Certificate of incorporation Product Production Capacity Company?s proposal of raising finance Promoters contribution Debt/Equity ratio Brief particulars of the company: Name Location of Registered Office & Plant Date of Incorporation Small/Medium/Large Sector Promoters: Names Ages Qualification
• • 5) 6) • • • • 7) • • 8) • • • • 9) • • 10) • • 11) 12) •
Experience Presently working with, if any Income tax & Wealth tax positions Details of sister/associate concerns: Income tax and wealth tax position Product Sales turnover & profits Net worth Credit worthiness of the company: Current account with (Name of the Bank) Reputation of promoters Capital Structure (Proposed share holding) Promoter share Family members share Relatives shares Associates shares Management and Organization: Board of Directors Management set-up Project Proposal to produce Installed capacity Project and its uses Technical appraisal: Sites & Location
• • • • • • • •
Building Plant & Machinery Misc. fixed assets Manufacturing process Raw Material Packaging Material Utilities like power, water, manpower, effluent disposal etc. Implementation schedule covering: Acquisition of land, construction of building, placement of order of machinery, installation, trial production, commercial production. Etc.
13) • • • • • • • • 14) • • • 15) 16)
Financial Appraisal: Land and Site development Building Plant & Machinery Technology transfer fee Misc. fixed assets Preliminary & Pre-operative expenses. Contingencies Margin money for working capital Means of Finance: Equity share Capital Long Term Loans (Interest Free) Term Loan From HSIIDC Marketing and selling arrangement Cost comparison with other similar units:
17) • • • • 18) 19) 20)
Present status of Government and other statutory approvals: Registration Permission from Water and Pollution Control Board, Approval of Building plan HSEB sanction of power Security margins and permissible finance form HSIIDC Views of Screening Committee Conclusion and recommendations
ASPECTS OF PROJECT APPRAISAL
1) 2) 3) 4) 5) Promoters competence and capability Market appraisal Technical appraisal Financial appraisal Socio-economic factor
PROMOTERS COMPETENCE AND CAPABILITY
Man behind the project is most important aspect of appraisal. Weak project can be improved Upon but not the promoters lacking business acumen. The project report should, therefore, highlight the most favorable factors of the promoters out of the following:
1) 2)
Traits and overall background of the promoters. Academic qualifications and other exposure in finance, legal or other that can be useful to the project. Business and industrial experience. Integrity and credit worthiness. Proven administrative and managerial ability in the exiting business. Dynamism initiative and resourcefulness. Their financial status and resources. technical field
3) 4) 5) 6) 7)
Market and Demand Analysis
Two question need to be answered in a market analysis • What would be the aggregate demand of the proposed project/service in future?
2) What would be the market share of the project under appraisal? Market and demand analysis should be carried out in an orderly and Systematic manner. Key steps in such analysis are:
Situational Analysis and Specification of Objective:
In order to get a „feel? of the market. Analyst may informally talk to customers, competitors, suppliers, middlemen and others in the industry. Objectives are set based on analyst?s research. A helpful approach to spell out objectives is to structure them in form of questions.
Collection of Secondary Information
Secondary information is the information, which has been gathered from some other context and is already available. It indicates what is known and often provides leads and sues for gathering primary information required for further analysis. Secondary information can be gathered form plan reports, census of India, Annual survey of industries, CMIE, various govt./industry bulletins, journals and other publications.
Conduct of Market Survey:
Secondary information needs to be supplemented with primary information (market surveys) in order to provide a comprehensive basis for market and demand analysis, various govt./industry bulletins, journal and other publication.
Demand Forecasting:
A wide range of forecasting methods is available to estimate future demand such as trend projection method, method of least squares, exponential smoothing, moving average method & econometric method etc.
The project report should also highlight the following:
1) That while projecting the sales, the existing demand of the product, the demand growth rate, share of competitors and likely new industries coming up in the trade have been studied; 2) That while fixing the price of the goods, the consumer?s capacity to buy and the price, which other competitors can offer, has been looked into;
3) That while selecting product mix or quality of the product, the quality desired by the consumers, the quality of goods being produced or likely to be produced in future have been taken into consideration; 4) That while selecting the market, proper channels of distribution have been studied and sales strategies decided; 5) That the margin of profit on sales would be reasonable as compared to the capital investment in stocks and debtors; 6) That the future of the product is reasonably bright.
Technical Viability of the Project:
A project is considered to be technical viable, if all the relevant technical aspects have been considered and planned implementation therefore conforms to the accepted engineering standards and practices. Thus technical analysis is primarily concerned with:• Studying in detail and specifying the material inputs and utilities required. Material can
be raw material, processed industrial material and auxiliary material utilities include power, fuel water etc. • Analyzing the various alternative technologies available and selecting the best one based
on plant capacity, principal inputs required investment outlay and production cost, ease of absorption etc. • The technology for the project should be appropriate and its process should suit Indian
conditions. • A firm should allow flexibility with respect to product mix, which enables the firm to
alter its product mix in response to changing market conditions and enhances the power of the firm to survive and grow under different situations. • Plant capacity should be decided by keeping in mind technological requirement, input
constraints, investment cost, market conditions, governmental policies etc.
•
And capacity works to great deal depend upon other technical factors such as process
structures, machineries etc. these may be divided into three categories; a) b) c) • Site preparation and development. Buildings and Structures. Outdoor works. After all the data which is available on the principal dimensions of the above discusses
thing project charts and layouts may be designed on the basis of the above data. • Location and site for the project should be decided after analyzing availability of
infrastructure, proximity to raw materials and markets, transportation costs, govt. police etc. • Type of machinery and equipment is dependent upon the production technology and plant
capacity. For selection of machinery factors to be borne in mind are supplies of equipment, levels of production, expected overtime, type of process etc. These define scope of the project and provide basis for detailed project engineering and estimation of investment and production costs.
FINANCIAL VIABILITY OF THE PROJECT
Financial analyses is one the most critical aspects in a project appraisal. A project is considered to be financially viable if its expected earnings are sufficient to cover the costs, the operating and
maintenance cost, returning of loans and in additions yield reasonable returns. For this we require information about the following and need to study them in detail. 1) 2) 3) 4) 5) 6) 7) Analysis of past working results in case of existing concerns. Cost of the project. Means of finance and financial structure Sales and production estimates Working capital requirements and its financing Profitability, Balance sheet and Cash flow projection Sensitivity Analyses
1)
ANALYSIS OF THE PAST WORKING RESULTS
In case of a going concern, it is also desirable to make an assessment of its past and latest financial position. The latest balance sheet and profit and loss account may be analyzed with a view of ascertaining. • Whether the concern is under/over capitalized
• Whether the borrowings raised are not out of proportion to its paid up capital and reserves. • • How the current liabilities stand in relation to the current assets. Whether there is any inter locking of funds with associate concern and
• Whether the concern has been plugging back profit into the business and building up reserves.
2)
COST OF THE PROJECT
Cost of project represents total of all items of outlay associated with a project, which are supported by long term funds. These items include land and site development. Plant and
machinery, building, technical know how and engineering expenses, margin money for wording capital, misc. fixed assets, preliminary and pre operative expenses, contingencies etc.
3)
MEANS OF FINANCING
While considering means of finance two consideration have to be born is mind? • • Norms of regulatory bodies and financial institutions. Key business considerations.
Means of finance available are • • • • • • Share capital Term loans Debenture Deferred credit Incentive source such as State and Central Government. Other sources
4)
FINANCIAL STRUCTURE
The financing of the capital structure i.e. the promoters contribution to the total project cost and the debt equity ratio should be as per accepted norms of financial institutions to ensure promoters continued interest in the successful implementation and operation of the project. Financial institutions generally require the promoters to contribute about 30% of the project cost. The debt equity ratio generally accepted is 2:1 for small-scale sector projects & 1:5:1 for medium & large sector. High value addition projects, which have a higher rate of return, can go for a higher debt. Where as low value addition projects with low returns should have a high equity and lower debt and equity, which shall very with the project.
5)
SALES AND PRODUCTION ESTIMATES
Sales and production should be estimated for a period of 5-8 years. It should be reasonable and selling price and raw material cost should be assumed to be constant. After estimating level of
production the cost of production has to be worked out which includes cost of material, labour utilities and factory overheads.
6)
PROFITABILITY, BALANCE SHEET AND CASH FLOW
PROJECTIONS
The next step in financial analysis is profitability projection from the already estimated sales revenue and cost of production. Many points have to be kept in mind while calculating the interest and depreciation.
SENSITIVITY ANALYSIS
Sensitivity analysis helps us in finding the affect on one variable due to the change in other variable. It is also known as “WHAT IF” analysis. It force the management to identify the under lying variables and their interrelationships. It also shows how robust or vulnerable a project is to changes in the underlying variable. It indicate the need for further work if required. If the net present value or IRR is highly sensitive to changes in some variable it is desirable to gather further information about that variable.
SOCIO-ECONOMIC APPRASIAL
Socio-economic appraisal deals with the impact of projects on people, society and environment. If the management is incompetent, even a good project may fail. It is rightly pointed out that if the project is weak, it can be improved upon, but if the promoter is weak and lack in business acumen, it is difficult to reverse the situation. It is therefore, natural that financial institutions very carefully appraise the managerial aspects before sanctioning assistance for a project. While doing a proper appraisal of the managerial aspect, it is necessary that the overall background of the promoters, their academic qualifications, business and industrial experience, their past performance etc. are looked into a greater detail to assess their capabilities for implementing the project.
LITERATURE REVIEW
LITERATURE REVIEW • Modules of Professor Benjamin Esty's Modern Project Finance:
• • • •
Structuring Project Valuing projects Managing projects Risk Financing Projects
The approach taken in this research is exploratory and therefore it is more appropriate to cover a wide range of areas within project finance, rather than exploring the depth of each area.
• An article in the wall street journal cited by pacelle et al., in 2001
Define project finance as “a term that typically refers to money lent to built power plant and oil refineries” (Esty,2004)
• As such, the definition and principle of project finance has been written on since 1980
and are set out in essential element of project finance. (Wynant,1980),project
Financing: tools and techniques,(frame,2003) and principles of finance (Yescombe,2002). • Structuring projects
The structure of projects has been looked at by penrose (1996) in terms of Specialpurpose Entities and in terms of the debt-equity levels by Scheinkestel(1997). Principles of managing project risk are covered in Beenhakker?s book Risk Management in Project Finance and Implementation as well as in Delmon?s Project Finance. The corporate governs of large projects has been researched by Jensen(1993),cited by Esty(2003i), in terms of board size. Yermack as looked at board composition in terms of the independence of the board members(1996).These issues have also been looked at by Barclay and smith (1996 &1999).
• Project valuation
There is a considerable amount that has been written on the theory of valuation. However the purpose this section is to review only the literature on valuation that is specifically related to the project Finance. The most common ways of valuing projects is using Discounted Cash Flows (DCF), either using the free cash Flows(FCF) or equity Cash Flows (ECF). However, these are “simple tools that were designed for simple application”(Esty,1999).In response to this, more complex valuation techniques developed regarding projects. Due to the large nature of investment required, a great deal of work has been done on refining valuation. These con be done by using valuation methodologies such as Real Option Analysis, montecarlo simulation and Neural Network Metamodels (Balcombe and smith,1999;Esty,1999).
• Managing project risk
Risk is also an area that is well developed in finance theory and is not specific to project finance. As such this will not be dealt with in depth. Concerning managing project risk, this has been dealt with by the international finance corporation (1999), miller & Lessard (2000) and zenner (2001).
• FINANCING PROJECTS
Capital structure is a definitive characteristic of project finance and is a main feature of the lessons & principals .Various techniques and instruments for financing projects have been looked at including: syndicated loans (Bavaria,2002), project bonds ( Dailamil & Hauswald,2003) and dept equity structures (Harvin, Hermans, Mc Dermott, &
Monnier,2006).Financing has also been looked at from different points of view including the institutional investor (Devapriya and alfen 2003), private financing (Fishdein and Baber 1996) and commercial bank (Forrester,1995).
•
According to the Modigilani & Miller capital structure is irrelevant while prof. Esty (2003) demonstrate that in project finance capital structure is an integral part of a project
and certainly does matter. Another agency based theory, static Trade-Off theory, looks at taxes and financial distress costs as determinants of capital structure.
•
Asymmetric information theories include Myers Packing order theory which says that firm prefer the least information intensive form of capital available and therefore private debt precedes public debt; And Ross, Signalling Theory, which says that firms issue debt to signal their quality.
•
As such project companies provide evidence for the incomplete contracting Theory of capital structure developed by Jensen & Meckling.
•
Hart & Moore show that there is an optimal debt equity ratio and an optimal level of senior vs. junior debt (Esty, 2003i).
•
Research has also been done n the types of debt that are used, namely bank debt or bond and within bank debt .senior junior or other types of debt (Gilson, John and Lang,1990;Sahlman, 1990 ;Gompers, 1995)
• Project financing versus corporate financing under asymmetric information Anton Migloy(February 28, 2007)
Existing literature studies the effect of asymmetric information on many aspects of debt financing including debt maturity and seniority, collateral, liquidation rights, convertible debt, income bonds and sinking funds. Less is known about the effect of asymmetric information on firms? incentive to issue non-recourse debt. The intention of this paper is to shed new light on this issue.
Project financing (non-recourse debt) differs from corporate financing in two ways: 1) the creditors do not have a claim on the profit from other projects if the project fails while corporate financing gives this right to the investors and; 2) it typically has priority on the cash flows from the project over any corporate claims. In recent years financing through the creation of an independent project company or financing by non-recourse debt has become an important part of corporate financing decisions. For example, Esty (2003, 2004) reports that total project-financed investments have grown from less than $10 billion per year in the late 1980s to more than $100 billion per year in 2001-2003. Within the United States, firms financed $68 billion in capital expenditures through project companies in 2001, approximately twice the amount raised in initial public offerings (IPOs) or invested by venture capital firms. Existing literature suggests several explanations for project financing. Most of this literature is based on agency or moral hazard problems.2 This literature usually assumes that a firms insiders and investors have the same information at the beginning of the project. However, Flyvbjerg, Holm and Buhl (2002) found that the costs of most large infrastructure projects are underestimated. The authors argue that project initiators almost always provide misinformation. This suggest that there exists asymmetric infor-mation between insiders and outsiders. Similar conclusions can be found in Mao (1982), Merrow, McDonnell and Arguden (1988) and Miller and Lessard (2000). Also, the free cash flow and underinvestment
problem arguments usually predict that project financing enhances performance. Some authors show that large projects often fail and argue that this is not consis-tent with "pure" agency explanations (see, among others, Flyvbjerg et al. (2002) and Vilanova (2006)). Recent examples include Euro Disney and Eurotunnel which appeared to be structured to mitigate agency problems. Many other large projects have experienced financial distress (Iridium, Globalstar,Passi.c Crossing Cables etc.). Shah and Thakor (1987) analyze optimal financing in the presence of corporate taxation. In their model projects have the same mean of return, the owners have private information about risk and investors may acquire (costly) information about the parameters of firms risks. If the benefits From information production are relatively high project financing is optimal Because the cost of screening a separately incorporated project is low. Alternatively, project financing can result in higher leverage and provide greater tax benefits. This is because, under corporate financing, leverage is below the optimal level. In the absence of bankruptcy costs the first-best financing method is "pure" debt. However, firms reduce leverage in order to provide a credible signal about risk.
INDUSTRY PROFILE
INDUSTRAIL PROFILE SCENARIO (INTERNATIONAL & DOMESTIC)
The financial industry, or financial services industry, includes a wide range of companies and institutions involved with money, including businesses providing money management, lending, investing, insuring and securities issuance and trading services. The following institutions are a part of the financial industry:
• • • • • • •
Banks Credit card issuers Insurance companies Investment bankers Securities traders Financial planners Security exchanges
The Great Depression (1929): The Great Depression originated in the US with the Wall
Street crash in October 1929. The effects of the depression spread across the world, especially in the heavy industries. Capital requirements regulation, financial industry oversights and the insurance of deposit accounts sprang out of this tumultuous period.
Black Monday (1987): On October 19, the stock markets across the world witnessed a
huge crash. This was the largest one day decline in the stock market history. The crash started in Hong Kong, spreading to Europe and the US. Analysts blamed computer trading systems for magnifying the losses.
Asian Financial Crisis (1990s): The Asian Financial Crisis was triggered by the collapse
of Thai baht as the government of Thailand decided to float the national currency. The nation had a huge foreign debt at that point, driving it to the verge of bankruptcy. The crisis rippled across the whole of Southeast Asia and has led to many emerging market countries to reduce debts and build up foreign currency reserves.
Stock Market Downturn (2002): Stock exchanges around the world witnessed a
significant decline in March 2002. It was attributed to the bursting of the „Dot-com Bubble?, which saw major Internet companies going bankrupt.
Sub-prime Crisis (2007): Credit markets faced major crunch due to large scale default on
loans. It led to the Financial Crisis of 2008 – 2009 and resulted in the bankruptcy, fire-sale acquisition and government bailouts of finance industry giants such as Lehman Brothers, Bear Stearns, AIG, Fannie Mae, Freddie Mac, Merrill Lynch, Wachovia, Northern Rock, Lloyds TSB, HBOS, RBS and the entire banking system of Iceland. The world economy can expect reduced growth rates and tighter regulations as a result of this crisis. According to the Global 2000 (annual report by Forbes), seven of the world?s top 10 companies belonged to the financial industry. These included Citigroup, Bank of America, HSBC Holdings and JPMorgan Chase. Their combined revenues in 2007 were worth $645 billion, down from the 2006 high of $785 billion.
According to the Fortune 500 rankings, in 2006 financial services generated $257 billion in profits, a third of total Fortune 500 profits. In 2008, however, they lost a staggering $213 billion, a total swing of $470 billion. Big players on the list, such as Citigroup and Bank of America, may only be alive today thanks to government money.
All India Financial Institutions (AIFI) is a group composed of Development Finance Institutions (DFI) and Investment Institutions that play a pivotal role in the financial markets. Also known as
"financial instruments", the financial institutions assist in the proper allocation of resources, sourcing from businesses that have a surplus and distributing to others who have deficits - this also assists with ensuring the continued circulation of money in the economy. Possibly of greatest significance, the financial institutions act as an intermediary between borrowers and final lenders, providing safety and liquidity. This process subsequently ensures earnings on the investments and savings involved [citation needed].
In Post-Independence India, people were encouraged to increase savings, a tactic intended to provide funds for investment by the Indian government. However, there was a huge gap between the supply of savings and demand for the investment opportunities in the country.
List of AIFIs
• Industrial Development Bank of India (IDBI):IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arena through its large network of Branches and ATMs, spread across length and breadth of India. it also set up an overseas branch at Dubai and have plans to open representative offices in various other parts of the Globe, for encashing emerging global opportunities.
•
Industrial Finance Corporation of India (IFCI):At the time of independence in 1947, India's capital market was relatively underdeveloped. 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.It is against this backdrop that the government established The Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the first Development
Financial Institution in the country to cater to the long-term finance needs of the industrial sector.
•
Export - Import Bank of India (Exim Bank):Export-Import Bank of India is the premier export finance institution of the country, set up in 1982 under the Export-Import Bank of India Act 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the country?s foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment.
•
Industrial Reconstruction Bank of India (IRBI) now (Industrial Investment Bank of India):The Industrial Investment Bank of India is a 100% government of India-owned financial investment institution. It was established in 1971 by resolution of the Parliament of India u/s 617 of the Companies Act. It was said to be a brainchild to be of Pranab Mukherjee, then finance minister. The bank was headquartered at Kolkata and has presence in New Delhi, Mumbai, Chennai, Bengaluru, Ahmedabad and Guwahati.
•
National Bank for Agriculture and Rural Development (NABARD):NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator
for rural prosperity NABARD is entrusted with
• •
Providing refinance to lending institutions in rural areas. Bringing about or promoting institutional development .
•
Evaluating, monitoring and inspecting the client banks.
•
Small Industries Development Bank of India (SIDBI):Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an Act of Indian Parliament, is the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of the functions of the institutions engaged in similar activities.
•
National Housing Bank (NHB):The National Housing Bank (NHB) is a state owned bank and regulation authority in India, created on July 8, 1988 under section 6 of the National Housing Bank Act (1987). The headquarters is in New Delhi and its total staff June 30, 2008 was 80.The institution, owned by the Reserve Bank of India, was established to promote private real estate acquisition .The NHB is regulating and re-financing social housing programs and other activities like research and IT-initiatives, too.
•
Unit Trust of India (UTI):Unit Trust of India is a financial organization in India, which was created by the UTI Act passed by the Parliament in 1963.For more than two decades it remained the sole vehicle for investment in the capital market by the Indian citizens. In mid- 1980s public sector
banks were allowed to open mutual funds. The real vibrancy and competition in the MF industry came with the setting up of the Regulator SEBI and its laying down the MF Regulations in 1993.
•
Life Insurance Corporation of India (LIC):Life Insurance Corporation of India (LICis the largest insurance group and investment companyin India. Its a state-owned where Government of India has 100% stake. LIC also funds close to 24.6% of the Indian Government's expenses. It has assets estimated of 13.25 trillion (US$250.43 billion). It was founded in 1956 with the merger of 243 insurance companies and provident societies. Headquartered in Mumbai, financial and commercial capital of India, the Life Insurance Corporation of India currently has 8 zonal Offices and 113 divisional offices located in different parts of India.
•
General Insurance Corporation of India (GIC):The entire general insurance business in India was nationalised by the Government of India (GOI) through the General Insurance Business (Nationalisation) Act (GIBNA) of 1972. The General Insurance Corporation of India (GIC) was formed in pursuance of Section 9(1) of GIBNA. It was incorporated on 22 November 1972 under the Companies Act, 1956 as a private company limited by shares. GIC was formed to control and operate the business of general insurance in India.
•
Tourism Finance Corporation of India Ltd. (TFCI):The Government of India had, pursuant to the recommendations of the National Committee on Tourism viz Yunus Committee set up under the aegis of Planning Commission, decided in 1988, to promote a separate All-India Financial Institution for providing financial assistance to tourism-related activities/projects. In accordance with the above decision, the IFCI Ltd. along with other All-India Financial/Investment
Institutions and Nationalised Banks promoted a Public Limited Company under the name of "Tourism Finance Corporation of India Ltd. (TFCI)" to function as a specialised AllIndia Development Financial Institution to cater to the financial needs of tourism industry. TFCI was incorporated as a Public Limited Company under the Companies Act, 1956 on 27th January 1989 and became operational with effect from 1st February 1989 on receipt of Certificate of the Commencement of Business from the Registrar of Companies.
•
Power Finance Corporation Ltd.
FC was set up on 16th July 1986 as a Financial Institution (FI) dedicated to Power Sector financing and committed to the integrated development of the power and associated sectors. The Corporation was notified as a Public Financial Institution in 1990 under Companies Act, 1956.The Corporation is registered as a Non Banking Financial Company with the Reserve Bank of India (RBI). RBI, vide its revised Certificate of Registration no. B-14.00004 dated July 28, 2010 classified the company as an „Infrastructure Finance Company (NBFC-ND-IFC)?.•
Indian Railways Finance Corporation Ltd. :RFC is a dedicated financing arm of the Ministry of Railways. Its sole objective is to raise money from the market to part finance the plan outlay of Indian Railways. The money so made available is used for acquisition of rolling stock assets and for meeting other developmental needs of the Indian Railways.The borrowing programme of IRFC is guided by the requirements projected by Ministry of Railways. The company has successfully met the targeted borrowings year after year, through issue of both taxable and tax-free Bonds, term loans from banks/financial institutions and through off shore borrowings. IRFC also makes use of innovative financial instruments to diversify the debt portfolio and to minimize the cost. Its contribution to infrastructure build-up in Railways is very significant.
•
Indian Renewable Energy Development Agency Ltd. :Indian Renewable Energy Development Agency Limited (IREDA) was established on 11th March, 1987 as a Public limited Government Company under the Companies Act, 1956 and it promotes, develops and extends financial assistance for Renewable Energy and Energy Efficiency/Conservation Projects.IREDA has been notified as a “Public Financial Institution” under section 4 „A? of the Companies Act, 1956 and registered as Non-Banking Financial Company (NFBC) with Reserve Bank of India (RBI).
COMPANY
PROFILE
COMPANY PROFILE Introduction:The face of India is Changing fast and Haryana represent the perfect picture of a progressive state that really means business. In keeping with the true spirit of liberalization, HARYANA STATE INDUSTRIAL & INFRASTRUCTURE DEVEELOPMENT CORPORATION is geared to leave no stone unturned in its resolve to facilitate indigenous as well as foreign industry and investment .Right from the most modern infrastructure to single window clearances, HSIIDC ensure a smooth start to any enterprise. Haryana State Industrial & Infrastructure Development Corporation {HSIIDC} is one of the leading Contribution to the well being and progress of the Haryana State. It has been
Instrumental in bringing about a major change in the lives of the people of Haryana over the year. The Pioneering zeal of HSIDC has facilitated the transformation of Haryana from a primarily Agrarian society to one of the most highly Industrialized state of India.
Establishment:HSIIDC was established in 1967 for promoting medium and large scale industries so as to ensure balanced regional development of Haryana, by acting as an institutional entrepreneur and a financial institute by the Haryana state government and act as a catalyst for promoting and accelerating the pace of industrialization in the state. HSIDC is a public limited company wholly owned by the government of Haryana and has been set up as a catalyst for promoting and Accelerating the pace of industrialization in the State. The corporation provides a wide spectrum of financial services under one roof. The concept being “TOTAL FINANCIAL SUPPORT” for its clientele.Being an intrinsically customer-oriented Organization, HSIIDC as often gone beyond the call of duty in helping to give concrete shape to the destine and Vision of thousand of entrepreneurs. It has generally taken on the role of a friend and guide, providing crucial support and most important of all; Creating an environment where nascent project are able to attain their fruition and become vibrant industries. As a result, Haryana produces the largest number of tractor, motorcycles; refrigerators and GI pipes in the Country. About 25% of indians total Sanitary ware are manufactured here .And one out of every four bicycle bears the stamp of Haryana?s factories. Haryanas index of industrial production is for above the all India average. Many large govt. units like national fertilizers, Hindustan machine tool, Maruti Udyog Bharat electronics and other have there Stake in the state. In addition well known private sector group such as Escort, Herp Honda, Maruti, Good year, and whirlpool, amoung other, have a very noticeable presence.it has emerged as a favoured for the multinationals prominent amoung thoes who have set up the Base in Haryana ykk, Svedala, Beckton Dickinson, TDT Copper, Smithkline beecham, Osram, Denso, Norcool,
Silicon graphics, Hughes & Huges bechtel india ,Ascome perfetti, Duracell motorola, Mitsubishi, Elecucals, Vediocon, Johnson mathey,Barco suzuki, Stanley, Pepsi etc. The corporation has obtain the distinction of being the first state level financial Institution to be awarded ISQ 9002 certificate for quality servicing.
The HSIDC corporate HEADQUARTER is situated in panchkula.
ESTATE
Major Buyers & Seller Of HSIIDC :Since HSIIDC has been given the mandate to develop industrial infrastructure and there by facilitate development and growth of industry in the state of Haryana. As such it has developed industrial estate throughout the state and also plan for development of industrial park at various location. The process of development of industrial infrastructure involves acquisition of land, planning, execution of development work. Exp:-Road, water supply, sewage, drainage & electrical infrastructure. Besides this HSIIDC Providing financial assistance by way of Term loan, Equipment refinance, Equipment leasing & working capital performing agency function on behalf of state government/IDBI/SIDBI/entrepreneur capacity/modernization. an establish industry for enhancement of
In view of above we can easily explain term Buyers. HSIIDC allots the plot to allottees for the development of industrial estate as such their buyers are allottees who have allot the land for the development of industry. Some of HSIIDC allottes are as under:M/s Pavitra naturopathy & Health care services Pvt. Ltd., M/s Interpress publishers Pvt. Ltd. (Gurgaon), M/s crew boss products Pvt. Ltd. (manesar), M/s GG Export Pvt. Ltd.(Gurgaon). Since HSIIDC also providing financial assistance for promoting Medium & Large scale industries. As such HSIIDC provides Loans to the Borrowers for setting up the industries in the state of Haryana. So HSIIDC Buyers are allotties & borrowers.
Sellers:- Since HSIIDC acquired the land from the Private Builders/owners of land. As such
HSIIDC sellers are Land owners /land acquisitioners. Further HSIIDC also funding from bank/Refinancing institutions. Exp:- IDBI, SIDBI, Private builders etc.
COMPETITORS
There are many other institutions such as commercial bank IDBI, SIDBI etc. who are financing for the growth of industries, by giving them term loan, working capital loan, equipment finance, LOC etc for setting up industries and expantion/modernization. So HSIIDC competitors are other various financial institutions mentioned above.
TAX STRUCTURE
Silent features of HSIIDC Tax structure are as under :• • HSIIDC is eligible under sec 36(18) to avail the benefit @20% of the net income earned from long term financing. Corporate is also eligible to claim deduction under sec 36(17) of income tax act1961 out of the provision created against the doubtful debts.
BRANCH OFFICES
Delhi ,Faridabad, Kundali, Hissar, Gurgaon
FIELD OFFICES
Gurgaon, Manesar, Faridabad, Kalka,Ambala, Yammunanager, Karna, Jind, Tohana, Bawal, Barwala.
HSIDC (QUALITY POLICY)
H S I HIGH PRODUCTIVITY SUCCESS INNOVATION
D C
DYNAMISM COMMITMENT
ACTIVITIES
The role and the scope of Hsidc has widened and adapted it to suit the growing needs of industry.The service now being provided include ; • • • • • • • Infrastructrual Development Project promotion through equity participation Term lending Equipment finance Equipment leasing scheme Merchant Banking Underwriting of public/Right issues
• • • • • • • • •
Apprasial for the purpose of public/Right issues Seed capital scheme Bridge loans against state subsidy/Working Capital. Term loan assistance outside Refinance scheme of IDBI Working Capital Term loans Bill Discounting Forex Advisory Services Investment Banking Bought out deals
Future outlook-: Infrastructural Development
Being an apex institution HSIDC is developing industrial estates at strategic location in Haryana. It has 4205 fully developed industrial plots for small and medium projects spread over 35 estates. Industrial estates assist in the process of expanding strengthening and locating small and medium scale industries both in industrially advanced backward areas. The basic infrastructure provided in these estates comprises internal roads, water, electricity, sewerage, drainage and essential civic amenities. A fully developed industrial plot or a built up shed helps in speedier execution of the project. HSIDC has developed industrial complexes/ancillary estates at a number of location. The corporation is also setting up an ultra modern commercial complex “vanijya nikunj” with a capital cost of around Rs.70 crores at udyog vihar, gurgaon. A part from several commercial buildings, the complex will also house the „Udyog Minar? from where all the state agencies involved in industrial promotion shall work in close coordination with each other.
An Export promotion Industrial Park (EPIP) is being set up kundi with assistance from the Ministry of commerce, government of india. A growth Center „investate? at bawal has also been set up with assistance from the govt of india, where multinational companies and large business house are setting up their hi-tech projects. In addition, mini-industrial estates (Udyog kunj) at selected focal villages in the state are also being established to provide opportunities for self employment to the unemployed rural youth. Allotment procedures have been simplified for faster implementations of industrial estates have also refurbished for smoother functioning.
Industrial estates and parks developed by HSIIDC
Some of the industrial estates, which have been recently developed by the Haryana State Industrial Development Corporation, are as follows: Chowdhary Devi Lal, IMT, Manesar: The industrial estate, which has been built over an area of 1,799 acres, has a total of 1,148 plots. It is an Industrial Model Township having industrial, residential, commercial and recreational facilities that have been developed at par with international standards. Located at Manesar in Gurgaon district, the township is conveniently located on NH-8 and is a 20-25 minute drive from Indira Gandhi International Airport, New Delhi. This estate is equipped with a five-star hotel, golf course, business conference facilities, super specialty hospital and helipad.
Udyog Vihar,Gurgaon: Built over an area of 785 acres, this industrial estate has a total of
1,835 plots. Located 10 minutes from the Indira Gandhi International Airport on NH-8, this estate offers facilities of international standards and is well equipped to house MNCs and big corporate houses.
Bawal Growth Centre: Set up on an area of 1,200 acres in Rewari district, the BGC is not
only close to NH-8 but is only 90 km from the national capital. The social and industrial infrastructure is well built. The estate houses industries belonging to textiles, chemicals, light engineering and electronics among others.
Modern Industrial Park,Rai: This industrial estate is located in the heart of the industrial
belt at Sonepat on around 560 acres of land with an allotment of 1,322 plots. It is a modern industrial park with modern facilities and is developed to primarily cater to the needs of the small sector. It also seeks to decongest the national capital by relocating industrial units from Delhi to Rai.
European Technology Park (Proposed): The Basic motive to set up this park is to
promote development of technology and investment from European companies in this sector in Haryana. Work on the project is still in progress.
Food Parks: Four food parks with modern facilities and amenities are being planned at four
different locations in Dabwali, Narwana, Rai and Saha. These food parks are being set up to promote agro-based and food processing industry in the state. In order to help this sector flourish, the state government is trying to formulate a separate Food Processing Industrial Policy.
Medicity: The Haryana Urban Development Authority has earmarked 53 acres of land in
Sector 38 for the development of Medicity. This industrial estate will be dedicated to an integrated health infrastructure zone with provision for a chain of various super specialty hospitals backed by facilities for medical schooling, R&D and medical auxiliary services. Already, international companies have shown interest in building this park.
Special Economic Zone: The Haryana government is proposing to establish a new SEZ in
New Gurgaon. It will be located close to the Delhi-Jaipur highway or alternatively on NH-8. The project site has already been identified for which 1,200 hectares of land will be acquired in two phases. The total estimated cost of the project would be Rs 948 crore, of which Rs 742.2 crore will be financed through internal accruals. To improve connectivity within industrial units in the SEZ and the various industrial concentrations, a new express highway is being proposed linking highways 1, 8 and 10 bypassing the National Capital Territory of Delhi. This new expressway, which will be a nonstop four-lane high-speed toll road, will be restricted to only very fast moving vehicles. The estimated length of this highway will be 90 km.
Gems and Jewellery Park: The proposed park will be formulated under the cluster
approach. The total area of one block will be 20,122 sq. mt while the area under the workshops will be 9,864 sq. mt. The total cost of the project is Rs 50 crore. According to projections, it would be possible to generate a net surplus of around Rs 20 crore by selling the entire area.
SCHEMES & SERVICES A) • Infrastructural development
Industrial, Estates/parks/townships
•
Institutional and commercial complexes.
B) •
• • • •
Complete range of financial services
Term lending Equipment finance Working capital term loans. Line of Credit Corporate Loan
C)
Project promotion • Financial assistance to industrial units in the state of Haryana by way of term
• Equity participation in assisted sector in the state of Haryana. lending.
FINANCIAL SERVICES
The various financial services provided by the Corporation are as follows: 1) General Term Loan: The term loans are provided for setting up industrial projects in the
State of Haryana. The Service sector entities like Hotels, Hospitals, and Warehousing etc. are also eligible for assistance.
Parameters
i) Maximum assistance Rs. 2500 lacs per proposal
ii) Repayment period 5-8 years depending on the repayment capacity with initial moratorium period of six months to two years.
iii) Rate of interest
12.00% p.a. floating ( 1% timely payment rebate)
iv) Minimum security margin
25%
v) Promoters contribution
30%
vi) Maximum desirable debt equity ratio. vii) Processing fee
1.5:1
0.20% of loan amount.
viii) Upfront fee
0.50% of loan amount
2)
Equipment Finance Scheme:
The financial assistance under this scheme is
available to the existing profit-making concerns for acquiring machinery/ equipment for expansion/ modernization/ balancing of existing operations. The applicant concern should satisfy the following eligibility norms to be covered under the Scheme: The concern should be in operation for the last four years and should be in profit and /or declared dividend in the preceding two financial years. • • • • The current ratio should preferably be 1.33:1 or above. The cost of proposed equipment normally should not be more than 50% of the existing
gross block. The applicant concern should not be in default to the institutions/Banks and The proposed equipments should be separately identifiable
Parameters i) Maximum assistance
Rs. 500 lacs per proposal
ii) Repayment period
2 to 5 ½ years
iii) Rate of interest
11% p.a. floating
iv) Processing fee
0.20% of loan amount.
v) Upfront fee
0.50% of loan amount
2) Equipment Finance Scheme: The financial assistance under this scheme is available to the existing profit-making concerns for acquiring machinery/ equipment for expansion/ modernization/ balancing of existing operations. The applicant concern should satisfy the following eligibility norms to be covered under the Scheme: The concern should be in operation for the last four years and should be in profit and /or declared dividend in the preceding two financial years. • • • • The current ratio should preferably be 1.33:1 or above. The cost of proposed equipment normally should not be more than 50% of the existing
gross block. The applicant concern should not be in default to the institutions/Banks and The proposed equipments should be separately identifiable
Parameters i) Maximum assistance
Rs. 500 lacs per proposal
ii) Repayment period
2 to 5 ½ years
iii) Rate of interest
11% p.a. floating
iv) Processing fee
0.20% of loan amount.
3)
Working Capital Term Loan:
It is a medium term loan provided to existing financed units of the Corporation for meeting the working capital requirement including the short fall in margin money for working capital.
Parameters
i) Repayment period
5-1/2 years including six months moratorium.
ii) Maximum assistance (SSI ) (Non-SSI ) iii) Rate of Interest
Rs.125 lacs Rs. 200 lacs 12% p.a. floating (Before 1% timely payment rebate)
(applicable both for SSI/Non-SSI units) iv) Processing Fee v) Upfront fee 0.20% of loan amount. 0.50% of loan amount.
4) Loan under TUF Scheme:
Under this scheme the loan is provided to the units engaged in Textile and Jute industries for technology Upgradation and modernization. The salient feature of this scheme is rebate of 5% on the interest charged by the financial institution, which is given to the clients in the form of reimbursement of the interest.
5) Line of Credit Scheme:
Under this scheme, a Line of Credit, valid for one year is granted to existing borrowers who have created first charge on its fixed assets in favour of the Corporation, for purchase of separately identifiable machinery/ equipments obviating appraisal procedure and giving flexibility in identifying the machinery/ equipments at a later stage.
Eligibility conditions
• The unit shall be in operation at least for four years and earned net profit for the last two years. • The borrower should not be in default to institutions/banks and should be in „Standard Assets? category. • Existing current ratio should not be less than 1:1. • Average cash accruals during the last two years should be sufficient to service the existing & proposed loan. • Under this scheme, nominal-processing fee of Rs. 5000/- is charged against processing fees of 0.20% under other term loan schemes.
Scheme For Financing Commercial Complexes:
Sensing the needs of borrowers, HSIIDC has introduced a Scheme Commercial complexes. The assistance under the scheme is provided for: a. Acquisition of land and construction of building thereon. for construction of
i. Interior decoration, air conditioning, communication facilities for commercial complexes and shopping malls.
i. Acquisition of racks for storage, weigh bridges, conveyor system, lifts for show rooms, departmental stores, sales outlets etc. Products for sale will not be considered for financing. i. In case of existing functional commercial complexes, renovation cost and cost of acquisition of additional establishment could also be considered for financial assistance. i. Any other required facilities connected with the commercial complexes, can also be considered for financing. i. The land should be in name of company or its promoter and same be mortgaged with the Corporation.
Financing Parameters
• • • • • • Minimum promoter?s contribution Maximum debt equity ratio Minimum Security Margin Processing Fee Upfront fee Repayment Period 30% 1:1 35% 0.20% of loan amount 0.50% of loan amount 8 years with moratorium period of 18 mont vii Rate of Interest 13% p.a floating. (1% timely payment rebate)
7 Scheme for Corporate Loan:
The corporation has recently introduced a scheme of corporate loan under which assistance of Rs. 500 lacs is granted which can be utilized within six months from date of sanction for:
a) Expansion / modernization / balancing equipment / technology tie ups fees along with meeting of working capital requirements, if any.
b) Takeover of loans of other institutions coupled with additional assistance, if any. However, the assistance shall not cover new projects.
c) Meeting the expenses relating to general corporate needs of unforeseen nature such as VRS/Bonus/IT payments etc.
HSIIDC Objectives
• • • • • Identification and promotuion of large and medium sector projects. Providing Financial assistance by way of term loans/direct participation on equity. Facilitating infrastructure development. Performing agency function on behalf of state govt. idbi/sidbi. Providing financial services to entrepreneurs and established industries for enhancement of capacity/modernaisation. • Providing merchant banking service.
RESEARCH METHODOLOGY
PROBLEM IDENTIFICATION AND PROBLEM FORMULATION
The State level Industrial Development Corporation (SIDCs?) were conceived by various State Governments to boost up industrialization of their respective States. These were set up primarily to built infrastructure. However with the passage of time, these organizations are diversifying into financing of the industrial projects. As the banks concentrated mainly to cater the working capital requirements, the financial activity of State level industrial development corporation was considered to be an attractive source for long term financing.
However with increased liquidity in the market, Banks were forced to tap the long term financing activity in lesser clientele for the SIDCs?. With the lesser client based and diminishing overall exposure in the financing market, the quality of loan portfolio became of paramount importance. This in-turn required effective project appraisal. With the rising level of Non Performing Assets (NPA), the most of SIDCs? were forced to curtail the financing activity and SIDCs? were forces to look for good proposal and quality of project appraisal portfolio became of great consequence. Man behind the project is an important aspect of appraisal. Weak project can be improved upon but not promoters lacking business acumen. The project report should, therefore, highlight the most favorable factors of the promoters out of the following: •
Traits and overall background of the promoters other
• Academic/professional qualifications and other exposure in finance, legal or technical field that can be useful to the project. • • • • • Business and industrial experience. Integrity and credit worthiness. Proven administrative and managerial ability in the existing business. Dynamism initiative and resourcefulness. Financial status and resources.
OBJECTIVES OF THE STUDY
Appraisal is a comprehensive and systematic review of all aspects of a project. It can be defined as a second look at the project report by a person who is in no way involved in its preparation. It helps in taking an entirely independent view of the project. Lending institutions/promoters do carry Project appraisal covering all the aspects of the project before arriving at financing /taking up the project for implementation.
There are following objectives of my study :• • • The study aims at listing the tools & techniques used by financial institutions for carrying out project appraisal. It will also study the extent upto which project appraisal and its results are used, for deciding about acceptance/rejection of the project. This study also aims at highlighting the most common faults or areas over-looked by appraising officers. The study also aims at having insight into the usefulness of projects appraisal in terms of variance of actual results from the projected ones. Source & Type of data- Primary Data is basically used in the project appraisal. The following data is the base of study:• • • • • • • • • Initial reports prepared & submitted by promoters. Information supplies in the application form / during appraisal. Appraisal reports of Financial Institutions. Discussion with appraisal officers. Performance results of companies & comparison with projection as appraised. Reason of deviation (if any) Literature of Project Appraisal. Appraising officer. Literature of project appraisal and also the appraised file of the company as provided by financial institution
Financial Viability of the Project
Financial analyses is one the most critical aspects in a project appraisal. A project is considered to be financially viable if its expected earnings is sufficient to cover the costs, the operating and maintenance costs, returning of loans and in addition yield reasonable returns. For this we require information about the following and need to study them in detail: 1) 2) Analysis of past working results in case of existing concerns. Cost of the project
3) 4) 5) 6) 7)
Means of finance and Financial Structure. Sales and Production estimates. Working capital Requirements and its financing. Profitability, Balance sheet and Cash flow projection. Sensitivity Analyse
SCOPE OF THE STUDY
• To study various projects appraisal by HSIIDC and draw comparison between actual and projections. • To establish reasons for major deviations from projections. If any. The study involves the access to the data provided by the Promoters to the Corporation under secret cover. The data, which is publicly published, can be used for any research and analysis by any outside/ other than the Corporation also. These may also involve the funding pattern and the organizational structural plans & related matters, which are also not to be publicly announced.
DATA COLLECTION
During the study, Convenience Sampling method has been used for selection & collection of data. The sampling guided by the guide on the basis of his experience and working trends in the Corporation as well as the easy access to the data required for the purpose of the study.
RESEARCH TOOLS APPLIED
The study involves the review of various projects financed by the corporation. Only the performing and successful projects financed by the corporation has considered for study. The study is based on the data supplied by the promoter to the corporation at the time of appraisal and the latest data available with the corporation and the variance and resultant impacts on the initial data.
The study aims at finding out the Project Appraisal techniques used by financial institutions presently, the seriousness with which Project Appraisal is regarded as a tool for project acceptance/ rejections and usefulness of this tool for projects selection. The study is based on first hand information from companies, which have set-up project in recent past and have carried out Project Appraisal before project implementation. Appraisal reports of financial institutions, discussion with appraising officers in financial institutions and the performance results of companies after implementation of project, Appraising officers is interviewed for having an insight into the aims of the study and reports/performance results are analyzed. Debtequity ratioCurrent ratio • Capital gearing • Return on equity • Internal rate of return • Return on investment etc. • Net present value • DSCR •Pay Back Period • Break-even Point
DATA ANALYSIS & INTERPRETATION
• RATIONALE OF THE STUDY
It is well established & experienced fact that the practical exposure in the working place need not remember but automatically learnt with glimpse of pictures and is supposed to be written in the layers of heart rather than in a piece of paper. The professional qualification in the other term means the meaningful education. The theoretical knowledge of a student of Master of Business Administration is perhaps sufficient to explain and understand the theory illustrations and questions. Since the business is itself a complex activity which requires prompt decision-
making and it can be done only if one has practical knowledge to handle the situations. Business is basically name of encashment of opportunities rather than to wait for the opportunity. There are a lot of opportunities but all not for selling like a market commodities; but the catching of such opportunities is a matter of knowledge and experience in real practical terms. It becomes immense difficult to find out the particular point of time when the opportunity is to mature and important is to understand the point. In order to acquaint oneself of the complexities of business environment it is very important to see the thing from very close and real destinations so that one can understand the same in its real terms whenever there comes a time to show its worth. Hence this study being a part of the master Degree of Business Administration contributes a major chunk of studies. Appraisal is a comprehensive and systematic review of all aspects of a project.
ANALYSIS OF Lumax Automotive Systems Ltd.
CASE STUDY- LUMAX AUTOMOTIVE SYSTEMS LTD. Company Profile
M/s Lumax Automotive Systems Ltd. is ISO/TS: 16949, QS: 9000 and ISO: 9000 accredited Company. Its main products are automotive rear vision systems, filtration systems, blow molding & injection molding parts and sheet metal components. Lumax is the largest tier-I OEM supplier of these products to major automobile manufacturers in India.
The company is having technical collaboration with M/s Toyo Roki Manufacturing Co. Ltd. of Japan for manufacturing of Air cleaner. For manufacturing of Mirrors (Inside and Outside) for higher segment vehicles like Mercedes, BMW, General Motors etc, the company has entered into a technical tie up with M/s Magna Donnelly of USA. The company is one of the largest OE supplier of its products to nearly all major vehicle manufacturers like GM, Maruti Suzuki, Tata Motors, Bajaj Auto, Mitsubishi, Honda Scooters and Motor-cycles, Honda Siel, Honda, Hyundai, M&M, Eicher, Yamaha and many more. Apart from it the company is also catering to the replacement market for all of its products. The company is selling products for replacement market to M/s Lumax Industries Ltd., which is having a strong dealer network all over the India. The brand name for both of these companies is still the same, that is, „Lumax?. Present Directors of the company are Sh. U.K. Jain, Sh. Nitin Jain, and Smt. Kamlesh Jain. All the directors of the company are family members and experienced in the line. Beside this, the company is having three more independent directors, which are all professionals.
The Lumax group was established in 1945 in the name of M/s Globe Auto industries as a trading concern by Mr. S.C. Jain (founder of the company). In 1965, M/s Globe Auto started the manufacturing activities in the name of M/s Globe Auto Industries (p) Ltd. Later on, it commenced manufacturing of automotive components, mainly, Lighting and Filters. In 1981, the name of the company was changed to Lumax Industries (P) Ltd. and later on it became a public limited company and name was changed to Lumax Industries Ltd. In October 2003, Lumax Industries were demerged into two companies namely Lumax Industries Ltd. and Lumax Air Cleaner Ltd. under the orders of the Hon?ble High Court of Delhi. As per the demerger plan, entire assets and liabilities of Mirror and Filter Business located at Faridabad, Pune, Aurangabd and part of Dharuhera transferred to Lumax Air Cleaner Ltd which is controlled by Sh. U.K. Jain (younger son of Sh. S.C. Jain) and lighting business retained with existing Company thst is Lumax Industries Ltd which is controlled by Sh. D.K. Jain (elder son of Sh. S.C. Jain). In Nov 2003, after taking over the business from Lumax Industries Ltd, the name of the M/s Lumax Air Cleaner Limited was changed to M/s Lumax Automotive Systems Ltd. This company is engaged in the manufacturing of wide range of automotive Rear View Mirrors, Filters and Air cleaner at its different plants located at the following locations:
Mirror manufacturing Units -Plot No. 78, Sector 6, Faridabad -C-10, MIDC, Waluj, Aurangabad Filter/Aircleaner manufacturing Units -29, DLF Industrial Estate, Phase II, Faridabad -D-2/44, MIDC, Chinchwad, Pune Plot No, 46, Sector 3, IMT, Manesar (Shifted from Dharuhera) In February 2005, two other group companies M/s Toshi Auto Industries (P) Ltd and Metal Pressing Industries (P) Ltd were merged into Lumax Automotive Systems Ltd as per the orders of the Hon?ble High Court of Delhi which took effect retrospectively from 01 April 2004. M/s Metal Processing Industries (P) Ltd was incorporated in the year 1974 and engaged into manufacturing of sheet metal components for the Automobiles. The company is having one manufacturing unit at D-2/29, MIDC Industrial Area, Chinchwad, Pune. M/s Toshi Auto Industries (P) Ltd. was incorporated in the year 1982 and engaged in to manufacturing of plastics molded components for Automobile Industries. The Company is having three manufacturing units which are located at the following locations
lot No. 99, Udyog Vihar, Ph.-IV, Gurgaon -10, Indraprastha Estate, 12/2, Mathura Road, Faridabad -Plot No. 46, Sector-3, IMT, ManesarThe account position of the company as on date is (Rs. in Lacs) Sanctioned 1365.00 Disbursed 1254.19 Outstanding 1049.25 Default Nil
For the year 2007-2008, the company is having sanction of fund based limits of Rs. 10 crores and non-fund based limits of Rs. 5 crores which is utilized fully. Apart from the same it has been
sanctioned a short term loan of Rs. 4 crores and temporary overdraft limits of Rs. 2 crores (utilized fully). For the increased exposure of Rs 2 crores, over and above the sanctioned limit of Rs. 10 crores the company is paying extra interest of 2% p.a. over and above the normal rate of interest of 13% p.a. and for the short term loan it is paying interest rate of 14% p.a. Further the sale (net of excise and other income) of the company is also increasing from Rs. 92.07 crores in the year 2006 to Rs. 99.16 crores in the year 2007 and for the nine months ending 31.12.2007, the company has already achieved a turnover of Rs. 75.17 crores and it is expected to achieve a turnover of approx. Rs. 105.31 crores for the complete year ending 31.03.2008. It has been informed by the promoters that a fresh business of approx. Rs. 1 crore/month have been generated by the company for export of rear view mirror to M/s Britax Pmg Ltd., Britain. With the increase in sales, the need for the working capital is also increasing but the margin available with the company and the bank limits that the company is availing is not sufficient enough to cater the overall requirement of the working capital of the company. The margins that the company is generating from its operations are being utilized for the expansion scheme. From the above it is clear that the net increase in the fixed assets and investments of the company from the year 2006 to year 2008(till 31.12.2007) is Rs. 10.25 crores (Rs. 7.85 crores + Rs. 2.40 crores) where as the net increase in the term loan liability of the company is of Rs. 0.14 crores only for the same period and for the balance requirement of funding for the long term fixed assets, the company has utilized its margin money for working capital resulting in tight liquidity position. Its current ratio is marginally above 1:1 as on 31.03.2007. In the year 2006, the current ratio was 0.99:1, which has slightly improved to 1.07:1 in 2007 and remain the same during nine months ending 31.12.2007. Keeping in view of the shortfall in the working capital requirements and expansion schemes of the company, (investment in joint venture company with M/s Magna Donnelly and Project for Uttaranchal and Jamshedpur, the company planned for the private placement of equity during 2006-2007(30 lac shares at the tentative premium of Rs. 60/share) and also approached the corporation (HSIIDC) for the corporate loan of Rs. 500 lacs to meet out the shortfall in its margin for working capital. But due to adverse market conditions, the private placement of shares could not matured, affecting the sales as projected for the year 2006-07 onwards. Now again the company is proposing to raise funds through private placement (by floating 25 lac shares at the
tentative premium of Rs. 50/share). The funds raised through private placement will be used for working capital requirements and capital expansion. As per the audited balance sheet dated 31.03.2006, the working capital gap is Rs. 871.95 lacs with the actual available negative working capital margin of Rs.54.19 lacs. For the period, there is excess borrowing with the current ratio of 0.99:1. Similarly for the period ending 31.03.2007 the working capital gap comes to Rs. 1517.21 lacs with actual available margin of Rs. 335.46 lacs. For this period also there is an excess borrowing with a current ratio of 1.07:1. The reason for the excess borrowing in the year 2006 and 2007 is due to inadequate promoter?s margin for availing working capital limits. Now to improve the current ratio and to fund the margin money for working capital the company requested for the WCTL of Rs. 200 lacs to improve its liquidity position. It has been explained by the compared to the rate of interest from corporation. Further the actual available margin without considering the proposed WCTL is not sufficient to get the limits increased from its existing Banker (from Rs. 10 crores to Rs. 12 crores). The brief of the financial results of the company from year 2006 to 2008 are detailed as under: Year 2008 2007 2006 Sales 75.03 99.65 92.12 PBDIT 7.91 10.10 10.17 Net Profit 1.68 1.31 1.96 Dividend 0.00 0.88 0.88 (Rs. in lacs) Gross Block* 37.87 55.62 50.01
The Scheme under study: The Company approached the corporation in March 2005 for financing expansion of its existing in house capacity to cater to requirement of M/s Hero Honda at Manesar. The company had 25 numbers of injection molding machines and 13 numbers of Blow Molding Machines apart from Tool Room facility and Assembly line for all its products at different sites. M/s Honda Motorcycle and Scooters increased their production for two wheelers resulting into increased demand for Air cleaner and other plastic injection molding components like ; Mud Flaps, Airfilter case and cover, Inner Box, Fan Comp cooling. Since the company was an existing supplier
to M/s Honda, it received the increased orders for supply of the said items, which was almost threefold of its existing supply. Apart from it, the company got bulk orders from M/s A.G. Industries Ltd., Manesar (Gurgaon) a supplier of Air cleaner to M/s Hero Honda. The company was to supply Plastic components and elements with Filter Paper to M/s A.G. Industries for onward supply to M/s Hero Honda after assembly. This tie up was particularly for “Passion” and “Karizma” models of Hero Honda. Since the company was not having sufficient in-house installed capacity to execute the increased demand of its products, it proposed expansion in its installed capacity for manufacturing of Air Cleaner and Plastic Molded Components at its existing site at plot No. 46, Sector-3, IMT Manesar. The existing installed capacity of the company was 185 lac pieces comprising of 12 lac pieces of Air/Oil filter, 5 lac pieces of Air cleaners, 38 lac pieces of Mirrors and 130 lac pieces of different plastic molded components like whether strips, instruments, Mud Flaps, instrument panel, clusters, Air filter case and cap, all types of air ducts, coolant bottles, petrol tanks etc. After the proposed expansion, the company was to increase its capacity by 2.32 lac pieces of Air Cleaners and 10.45 lac pieces of different plastic molded components. The capacity was calculated taking 330 working days in a year with 3 shifts. The total cost of expansion scheme appraised was Rs. 775.74 lacs, which was funded by way of Additional Term Loan from the corporation to the extent of Rs. 465 lacs and internal accrual of Rs. 310.74 lacs. The debt-equity ratio for the proposed scheme was kept at 1.5:1 with promoter contribution of 40.60%. The project was appraised by HSIIDC and a term loan of Rs. 465 lacs was sanctioned to M/s Lumax Automotive Systems Ltd. on 22.07.2005. This appraisal was examined and compared with the actual results achieved during 2004-05, 2005-06 and 2006-07.
FINDINGS
Following was observed:For the year 2005-06, the company has achieved a turnover of Rs. 9211.95 lacs (net of excise) with a net profit of Rs. 195.84 lacs and cash profit of Rs. 554.72 lacs. For the year 2006-07, it has achieved a turnover of Rs. 1010.04 lacs (net of excise) with a net profit of Rs. 130.84 lacs and cash profit of Rs. 467.34 lacs. Further the net worth of company has also increased from Rs. 1355.95 lacs in 2006 to Rs. 1470.25 lacs in 2007. Further the gross block of the company was Rs. 5001.43 lacs (net of revaluation) in the year 2006, which has increased to Rs. 5562.40 lacs (net of revaluation) in the year 2007. There is an increasing trend in the sales but there is reduction in the
net profit of the company. The reason for the same was discussed with the promoters and it was informed that due to the following reasons there is some reduction in the net profit: •
The average cost of raw material to sales during 2005-06 was 57.07%, which has increased to 59.09% during 2006-07. The company is in the process of negotiating with its customers for the price increase in raw material for the year 2006-07 and already a sum of Rs. 37.28 lacs has been received from M/s Honda Motor Cycles and Scooters Pvt. Ltd. and Rs. 60 lacs yet to be received from M/s Misubia Sical Ltd. Both of these amounts will be reflecting in the balance sheet of the company for the year 2007-08.
•
The income tax (including tax on dividend and FBT) for the year 2005-06 was Rs. 137.23 lacs, which has increased to Rs. 168.00 lacs during 2006-07. The interest cost of the company for the year 2005-06 was Rs. 236.86 lacs, which has increased to Rs. 285.85 lacs.
•
The current ratio of the company was 0.99:1 in the year 2005-06 which was slightly improved to 1.07:1 in the year 2007. The reason for low current ratio was discussed with the promoters and it was submitted that the main reason for decrease in current ratio is increase in sales from Rs. 92.12 crores in 2006 to Rs. 99.64 crores in 2007 and investment of margin money generated (in the business) in fixed assets which has increased from Rs. 50.01 crores in 2006 to Rs. 55.62 crores in 2007.
•
The company could not achieve the projected turnover on account of market competition.
•
There is variation in the profit, which was primarily on account of lesser turnover. However, the profit margin was better than those projected.
The objective which i have set in Project, I have tried to cover it and find out after using tools and techniques such as Ratio analysis , DSCR ,IRR capital Budgeting Fund Flow statement BEP etc that since the Net worth /Gross block of the company is in increasing trend and profit will also
be increased as the company is in process of negotiating with its customers for the price increase in raw material for the year 2006-07 as such as a whole project seems to be viable and we should accept the Project for financing.
SUGGESTIONS
Project appraisal is such a vast exercise that a lot of subjectivity often creeps in if there is absence of objective guidelines. That way the dependence of appraisal officer?s is also more. Thus, there is scope for difference of opinion amongst various appraising officer/agencies some measure which can help make/project appraisal more objective can be discussed as follows
• Objective guidelines for appraisal of promoters and Management.
A project which is considered technically feasible, economically viable and financially sound may run into difficulties if it is not backed by sound and efficient management. Man behind the project is very important. It can be rightly said that a second rate project in the hands of first rate Management is better than a first Rate Project in the hands of second rate Management. Therefore, proper evaluation of Management is highly essential part of appraisal. However, it is often difficult to form a judgment regarding future management at the time of the project appraisal, evaluation of Management at the time of project appraisal. Evaluation of Management is an art and no set formula as well recognized steps exist for it, easy solution. While appraising existing entrepreneurs, there past record can be studied. A judgment can be made in the basis if past balance sheet and profit and loss statement credit records with the bankers and financial institutions adherence to sound business policies and evidence of professionalism is mgt. while appraising expansion/modernization /diversification projects it should also be ensured whether present project it should also be ensured whether present mgt. is flexible enough to change all to the new circumstances. An effort has been made to design such a scale, which can be used as it is with some modifications base on experience of the using agency. The relative weightage is also given. Although the above assessment is sub future to some enter to still it much better than a few vague statements. It gives an idea about the qualities of promoters. Adoption of such a checklist also results in standardization after which can prove very beneficial in long run. Promoter is able to get about 60% marks, he may be considered as a good promoter and the appraising officer can be confident of his/her ability of undertaking the project successfully.
Although the above assessment is subjective to some extent, still it is much better than a few vague statements (which is the general practice). It gives an idea about the qualities of the promoters. Adoption of such a checklist also results in standardization which can prove very beneficial in the long run.
2. Security Margin:
The current practice is of taking a fixed security margin (generally 25-30%) for all assets, though for old assets a slightly higher security margin is taken. This practice could backfire in certain special cases e.g. some industries have a very high obsolescence rates (electronics, computers, etc.). Also in chemicals, pharmaceuticals, industries gases and other such industries, the rate of deterioration of the plant and machinery might be very high even the slight negligence. In all such cases, they may be a drastic fall in the realizable value of the assets although on paper, they may be worth a lot more (even after depreciation as stipulated). In such cases, generally a smaller security period is considered (say 3-4 years instead of the usual 7-8 years). Still a range of security margins may be adopted for various assets in different industries. This would lead to be better security of the blent finances and better chances of full recovery in case of default .
3. Sensitivity Analysis
Sensitivity analysis should be made mandatory so as to have an idea about the feasibility of the project under adverse circumstances. More & more liberalization means more & more completion which can lead to price-cutting. Under such circumstances, only the fittest would survive. Also there is every possibility of increase in raw material costs. The profitability of the project under such circumstances should be studied to determine the extent of unfavorable circumstances which the project can absorb safely. For this purpose, guidelines could be issued regarding the extent of sensitivity analysis to be carried out e.g.
1 2 3
For R.M. cost variations of 5.25 %( in steps of 5 i.e. for 5, 10, 15, 20, and 25%). For decrease in sales price (5-25% in steps of 5%). For decrease in capacity utilization by 10% points etc.
4. Adoption of NPV Method:
NPV method should be used adopted since IRR has certain limitations such as: 1. IRR may not be uniquely defined in case there is more than one change in sign of cash flows
allowing over project life. 2. When the cash flows are not evenly spread Int, NPV is more dependable as it is based on the
guiding principle of maximization of shareholders wealth. 3. Results in Myopic view on the part of Promoters. They are only interested in maximizing
the IRR; there is tendency to do away with expenses on such important issues such as for repair & maintenance. This may IRR in short run, but in long run it results it lower returns.
SUGGESTED MODEL FOR RISK MANAGEMENT
The following chart describes a series of four management activities that provides a systematic and integrated approach to risk management at the corporate level:
Evaluate/ Quantify External Risk Management Risk
Develop Strategic Response
Design process Response
Evaluate Corporate Performance
This efficient and timely management of risk calls for: • • • • A perception of risks as they crop up. Understanding the sources of risk. Restraining them by using appropriate techniques. Designing a structured response in terms of alternative plans, solution and contingencies. All this is attributable to some such factors as: • Culture of the project team. • • • Attitude of the project team. The perceptions of the project team. The cause and effect of the project in terms of scope.
However, the logical process of risk management may be as follows: • • • • Identification of risks or uncertainties. Analysis of the implications (individual and collective). Response to minimize risk. Allocation of appropriate contingencies.
BIBLIOGRAPHY
BIBLIOGRAPHY
BOOKS REFFERED
•
“Project Managemnt and Control”, P.C.K. Rao publist by Elsevier ltd.
Fifth edition 2001
•
“ Project Planning and Appraisal”, Publish, ,Tata Mc Graw Hill, 7th edition , Prasanna Chandra
•
“ Financial Management” – Khan and Jain – Tata McGraw Hill
WEDSITES
•
“Evaluation of an Investment Project”, UNIDO Guidelineshttp://www.unido.org/fileadmin/import/20036_0388381.pdf
•
Website of HSIIDC- www.hsiidc.gov.inhttp://www.banknetindia.com/finance/fi.htm
• •
List of all india Financial Institutions. Retrieved fromhttp://www.banknetindia.com/finance/fi.htm
Literature review Retrieved fromhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=966680 &http://econpapers.repec.org/article/eeejfinec/default28.htm
COMPANY REFERANCES • • Balance Sheet and other financial reports”, HSIIDC “Appraisal files of Lumax Automotive Systems Ltd.”
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