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8/3/2019 Project & Finance Decisions & Source of Finance 011009
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
DECISION ABOUTDECISION ABOUT
PROJECT & FINANCEPROJECT & FINANCEA PRESENATIONA PRESENATION
BYBYCA. R.C. AGARWALCA. R.C. AGARWAL
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Capital Investments
Importance
Long term effects
Irreversibility Substantial outlays
Difficulties
Measurement problems
Uncertainty
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Types of Investments
Mandatory Investments
Replacement investments
Expansion investments
Diversification investments
R & D investmentsMiscellaneous investments
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Capital Budgeting Process
Financing
Implementation
Selection
Analysis
Review
Planning
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Key Issues in Project Analysis
Market Analysis
Technical Analysis
Potential Market
Market Share
Technical Viability
Sensible Choices
Financial AnalysisRisk
Return
Economic Analysis
Benefits and Costs in Shadow
PricesOther Impacts
Ecological AnalysisEnvironmental Damage
Restoration Measures
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Feasibility Study : A Schematic Diagram
Generation of Ideas
Initial Screening
Is the Idea Prima Facie Promising
Plan Feasibility Analysis
Conduct Market Analysis Conduct Technical Analysis
Conduct Financial Analysis
Conduct Economic and Ecological Analysis
Is the Project Worthwhile ?
Prepare Funding Proposal Terminate
Terminate
Yes No
NoYes
P
r
e
l
i
m
i
n
a
r
y
W
o
r
k
A
n
a
l
y
s
i
s
E
v
a
l
u
a
t
i
o
n
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Key Issues in Major Investment
DecisionsInvestment story
RisksDiscounted Cash Flow Value
Financing
Options
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Basic Considerations : Risk and Return
Investment
decisions
Financing
decisions
Return
Risk
Market value
of the firm
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Identification of Investment opportunityIdentification of Investment opportunity
Monitoring the environmentMonitoring the environment
Corporate appraisalCorporate appraisal
Identifying investment opportunitiesIdentifying investment opportunities
Preliminary screeningPreliminary screening
Sources of Net Present Value (NPV)Sources of Net Present Value (NPV)
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Monitoring the environmentMonitoring the environment
Important aspectsImportant aspects Economic sectorEconomic sector
State of economyState of economy Overall growthOverall growth
Cyclical fluctuationsCyclical fluctuations
Linkage with world economyLinkage with world economy
Trade surplus deficitTrade surplus deficit
Balance of payment situationBalance of payment situation
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Monitoring the environmentMonitoring the environment
Governmental sectorGovernmental sector
Industrial policyIndustrial policy
Government programmes and projectsGovernment programmes and projects
Tax frameworkTax framework
Subsidies, incentives and concessionsSubsidies, incentives and concessions
Import and export policiesImport and export policies
Financing normsFinancing norms
Lending conditions of financial institutions andLending conditions of financial institutions andcommercial bankscommercial banks
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Monitoring the environmentMonitoring the environment
Technological sectorTechnological sector
Emergence of new technologyEmergence of new technology
Access to foreign and domestic technicalAccess to foreign and domestic technicalknowknow--howhow
Acceptability by industryAcceptability by industry
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Monitoring the environmentMonitoring the environment
SocioSocio--Demographic sectorDemographic sector
Population trendsPopulation trends
Age shifts in populationAge shifts in population Income distributionIncome distribution
Educational profileEducational profile
Employment of womenEmployment of women Attitude towards consumption andAttitude towards consumption and
investmentinvestment
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Monitoring the environmentMonitoring the environment
Supplier sectorSupplier sector
Cost and availability of raw materialsCost and availability of raw materials
Cost and availability of energyCost and availability of energy
Cost and availability of moneyCost and availability of money
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Corporate appraisalCorporate appraisal
Marketing and distributionMarketing and distribution
Market image of firmMarket image of firm
Product lineProduct line Market shareMarket share
Distribution networkDistribution network
Customer loyaltyCustomer loyalty Marketing and distribution costsMarketing and distribution costs
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Corporate appraisalCorporate appraisal
Production and operationProduction and operation
Condition and capacity of plant andCondition and capacity of plant and
machinerymachinery Availability of raw material and powerAvailability of raw material and power
Locational advantageLocational advantage
Cost structureCost structure
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Corporate appraisalCorporate appraisal
Research and developmentResearch and development
Research capability of firmResearch capability of firm
Track record of new productTrack record of new productdevelopmentdevelopment
Laboratories and testing facilitiesLaboratories and testing facilities
CoCo--ordination between research andordination between research andoperationsoperations
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Corporate appraisalCorporate appraisal
Corporate resources and personnelCorporate resources and personnel
Corporate imageCorporate image
Clout with government and regulatoryClout with government and regulatoryagenciesagencies
Type of top managementType of top management
State of industrial relationsState of industrial relations
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Corporate appraisalCorporate appraisal
Finance and accountingFinance and accounting
Financial leverage and borrowing capacityFinancial leverage and borrowing capacity
Cost of capitalCost of capital Tax situationTax situation
Relations with shareholders and creditorsRelations with shareholders and creditors
Accounting and control systemsAccounting and control systems Cash flow and liquidityCash flow and liquidity
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Identifying investment opportunitiesIdentifying investment opportunities
Profit potential of industriesProfit potential of industries--Porter ModelPorter Model
As per Michael Porter profitability potentialAs per Michael Porter profitability potential
depends on combined strength of 5depends on combined strength of 5
componentscomponents
Threat of new entrantsThreat of new entrants
Rivalry among existing firmsRivalry among existing firms
Pressure from substitute productsPressure from substitute products Bargaining power of buyersBargaining power of buyers
Bargaining power of sellersBargaining power of sellers
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Porter Model
According to Michael Porter the profit potential of an industry
depends on the combined strength of the five basic competitive forces
as shown below
Forces Driving Industry Competition
Potential
Entrants
Suppliers
THE INDUSTRY
Rivalry Among
Existing Firms
Buyers
Substitutes
Threat of New
Entrants
Bargaining
Power of Buyers
Bargaining
Power of
Suppliers
Threat of
Substitute
Products
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Identifying investment opportunitiesIdentifying investment opportunities
Analyse performance of existing industriesAnalyse performance of existing industries
Review imports and exports policiesReview imports and exports policies
Study plan outlays and Government guidelinesStudy plan outlays and Government guidelines
Find out local materials and resourcesFind out local materials and resources
Analyse Economic and Social trendsAnalyse Economic and Social trends
New technological developmentsNew technological developments
Trends of consumptions abroadTrends of consumptions abroad
Possibility of reviving Sick unitsPossibility of reviving Sick units
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Preliminary screeningPreliminary screening
Compatibility with promoterCompatibility with promoter
Consistency with Government prioritiesConsistency with Government priorities
Availability of inputsAvailability of inputs Adequacy of marketsAdequacy of markets
Reasonableness of costReasonableness of cost
Acceptability of risk levelAcceptability of risk level
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Sources of Net Present Value (NPV)Sources of Net Present Value (NPV)
Choosing positive NPV projects is like selectingChoosing positive NPV projects is like selectingunder valued securitiesunder valued securities
Six factors result in positive NPV projectsSix factors result in positive NPV projects
Economies of scaleEconomies of scale
Product differentiationProduct differentiation
Cost advantageCost advantage
Marketing reachMarketing reach Technological edgeTechnological edge
Government policyGovernment policy
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
AnalysisAnalysis
Market and demand analysis by expertsMarket and demand analysis by experts
Technical analysis by technical expertsTechnical analysis by technical experts
Necessity for financial estimationNecessity for financial estimationbecausebecause
Project cost will depend on these analysisProject cost will depend on these analysis
and decisionsand decisions Variations and changes in decisions willVariations and changes in decisions will
affect the cost of projectaffect the cost of project
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Collection ofSecondary
Information
Situational
Analysis and
Specification
of Objectives
Conduct of
Market Survey
Characterisation
of the Market
DemandForecasting
Market
Planning
Key Steps in Market and Demand Analysis and their Inter-relationships
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Market and demand analysisMarket and demand analysis
Experts will study mainly:Experts will study mainly:
Situational analysisSituational analysis
Project analyst will conductProject analyst will conductsituational analysis which willsituational analysis which willprovide basis for formal study`provide basis for formal study`
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Market and demand analysisMarket and demand analysis
Collection of informationCollection of information
Secondary information which has beenSecondary information which has been
collected in some other contextcollected in some other context Its accuracy, relevance for the project toIts accuracy, relevance for the project to
be examinedbe examined
To have comprehensive analysis, primaryTo have comprehensive analysis, primaryinformation to be gathered throughinformation to be gathered throughmarket surveymarket survey
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Market and demand analysisMarket and demand analysis
Conduct of market surveyConduct of market survey
To conduct sample surveyTo conduct sample survey
Define target populationDefine target population Select sample sizeSelect sample size
Develop questionnaireDevelop questionnaire
Verify the information collectedVerify the information collected Analyse the informationAnalyse the information
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Market and demand analysisMarket and demand analysis
Characterization of marketCharacterization of market
Based on information, market of theBased on information, market of the
product to be defined in terms ofproduct to be defined in terms of
Effective demandEffective demand
PricePrice
Method of distributionMethod of distribution
ConsumersConsumers Supply and competitionSupply and competition
Government policyGovernment policy
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Market and demand analysisMarket and demand analysis
Demand forecastingDemand forecasting
Based on the above informationBased on the above information
future demand to be projectedfuture demand to be projected Based on this and other factors theBased on this and other factors the
sales forecasting will be donesales forecasting will be done
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Market and demand analysisMarket and demand analysis
Market planningMarket planning
To have the product reach desired level ofTo have the product reach desired level of
marketmarket
Workout marketing planWorkout marketing plan
PricingPricing
DistributionDistribution
Promotion of productPromotion of product Servicing of productServicing of product
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Technical analysisTechnical analysis
For choosing technology forFor choosing technology for
manufacturing/service themanufacturing/service the
consideration may beconsideration may be
Plant capacityPlant capacity
Investment outlayInvestment outlay
Production costProduction cost Use of technology by other units of firmUse of technology by other units of firm
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Technical analysisTechnical analysis
Satisfactory arrangement to be made toSatisfactory arrangement to be made toobtain technical knowobtain technical know--how needed forhow needed for
proposed manufacturing processproposed manufacturing process Define materials and input requiredDefine materials and input required
Setting up supply programmeSetting up supply programme
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Technical analysisTechnical analysis
Acquisition of technology may beAcquisition of technology may be
throughthrough
Technology licensingTechnology licensing Outright purchaseOutright purchase
Joint venture arrangementJoint venture arrangement
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Technical analysisTechnical analysis
Factors which affect plant capacityFactors which affect plant capacity
decisiondecision
Technology requirementTechnology requirement Input constraintsInput constraints
Investment costInvestment cost
Market conditionsMarket conditions Resources of firmResources of firm
Government policyGovernment policy
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Technical analysisTechnical analysis
Choice of location will mainlyChoice of location will mainly
depend ondepend on
Proximity to raw materials andProximity to raw materials andmarketmarket
Availability of infrastructure facilitiesAvailability of infrastructure facilities
Specific piece of land is to beSpecific piece of land is to beidentified for the projectidentified for the project
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Technical analysisTechnical analysis
Requirement of plant andRequirement of plant and
machinery depends onmachinery depends on
Production technologyProduction technology Plant capacityPlant capacity
Type of productType of product
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Technical analysisTechnical analysis
Structure and civil works to be dividedStructure and civil works to be divided
inin
Site preparation and developmentSite preparation and development Building and structuresBuilding and structures
Outdoor worksOutdoor works
Environmental aspects to be examinedEnvironmental aspects to be examinedand taken careand taken care
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Technical analysisTechnical analysis
Important project charts and layout to be preparedImportant project charts and layout to be prepared
General functional layoutGeneral functional layout
Material flow diagramMaterial flow diagram
Production line diagramProduction line diagram Transport layoutTransport layout
Utility consumption layoutUtility consumption layout
Communication layoutCommunication layout
Organizational layoutOrganizational layout
Plant layoutPlant layout
Prepare project implementation planPrepare project implementation plan
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Financial estimation and projectionsFinancial estimation and projections
Cost of projectCost of project
Means of financingMeans of financing
Estimates of sales and productionEstimates of sales and production
Cost of productionCost of production
Working capital requirement and its financingWorking capital requirement and its financing
Profitability projectionsProfitability projections
Projected cash flow statementsProjected cash flow statements
Projected balance sheetsProjected balance sheets
Fi i l P j i
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Balance Sheet
Cash FlowStatement
Means of Finance
and Time Phasing
Interest and Loan
Repayment
Estimate of
Working Results
Working Capital
Advance (WCA)
Cost of Project and
Time Phasing
Interest on WCA
Tax Factor
Depreciation
Cost of Production
Working Capital
Needs
Production Plan
Projected Sales
Financial Projections
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of Project
The cost of project represents the total of all items of outlay associated with aproject which are supported by long-term funds. It is the sum of the outlays on
the following: Land and site development
Buildings and civil works
Plant and machinery
Technical know-how and engineering fees
Expenses on foreign technicians and training of Indian technicians abroad
Miscellaneous fixed assets
Preliminary and capital issue expenses Pre-operative expenses
Margin money for working capital
Initial cash losses
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Land and site developmentLand and site development
Cost of LandCost of Land
Premium on leasehold and conveyancePremium on leasehold and conveyancechargescharges
Leveling and developmentLeveling and development
Approach and internal roadsApproach and internal roads Entry gates and tube wellsEntry gates and tube wells
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Building and civil worksBuilding and civil works
Main plantMain plant
Auxiliary services like steam supply, workshops,Auxiliary services like steam supply, workshops,
laboratory, water supply etclaboratory, water supply etc Godowns, warehouses and open yardGodowns, warehouses and open yard
Canteen, time office, excise office, guest house, staffCanteen, time office, excise office, guest house, staffquarters, garagesquarters, garages
Tanks, wells, chests etc. necessary for plant installationTanks, wells, chests etc. necessary for plant installation Sewers, drainage and civil engineering worksSewers, drainage and civil engineering works
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Plant and machineryPlant and machinery
Cost of imported machineryCost of imported machinery
FOB (free on board) valueFOB (free on board) value Shipping, freight, insuranceShipping, freight, insurance
Import dutyImport duty
Clearing, loading/unloading,Clearing, loading/unloading,transportationtransportation
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Plant and machineryPlant and machinery--contcont
Cost of indigenous machineryCost of indigenous machinery
FOR (free on rail) costFOR (free on rail) cost Sales tax, octroi and other taxesSales tax, octroi and other taxes
Transportation to siteTransportation to site
Cost of stores and sparesCost of stores and spares Foundation and installation costFoundation and installation cost
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Technical knowTechnical know--how and engineeringhow and engineering
feesfees
Royalty payable for the knowRoyalty payable for the know--how will behow will beoperating exp.operating exp.
Expenses on foreign techniciansExpenses on foreign technicians
Expenses of training Indian techniciansExpenses of training Indian technicians
abroadabroad
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Miscellaneous fixed assetsMiscellaneous fixed assets
Furniture, vehicles, office machinery andFurniture, vehicles, office machinery andequipmentequipment
Railway siding, diesel generating sets,Railway siding, diesel generating sets,transformerstransformers
Boilers, laboratory and workshop equipmentBoilers, laboratory and workshop equipment
Fire fighting equip., effluent treatment plant etc.Fire fighting equip., effluent treatment plant etc. Exp. incurred for patents, trade marks,Exp. incurred for patents, trade marks,
copyrights etc.copyrights etc.
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Preliminary and capital issuePreliminary and capital issue
expensesexpenses
Identifying project, market survey,Identifying project, market survey,feasibility reportfeasibility report
Memorandum and Articles ofMemorandum and Articles of
associationassociation Issue expensesIssue expenses
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
PrePre--operative expensesoperative expenses
Establishment expensesEstablishment expenses
Rent, rates and taxesRent, rates and taxes
Traveling and conveyanceTraveling and conveyance Interest and commitment chargesInterest and commitment charges
Insurance and mortgage chargesInsurance and mortgage charges
StartStart--up expensesup expenses
These expenses are related to project implementationThese expenses are related to project implementationand hence for expected delay, additional estimation ofand hence for expected delay, additional estimation of
20 to 25% escalation to be taken into account20 to 25% escalation to be taken into account
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Provision for contingenciesProvision for contingencies
Divide project cost in two parts i.e. firmDivide project cost in two parts i.e. firmcost and noncost and non--firm cost (variable cost)firm cost (variable cost)
Provide for 5 to 10% of nonProvide for 5 to 10% of non--firmfirm
(variable) cost as contingency(variable) cost as contingency
If implementation period is more than 1If implementation period is more than 1
year, provide for additional 5% per yearyear, provide for additional 5% per year
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of projectCost of project
Margin money for working capitalMargin money for working capital
To avoid using margin money for overTo avoid using margin money for over--run costrun cost
Banks normally require amount of loanBanks normally require amount of loan
equivalent to margin money be released whenequivalent to margin money be released whenproject is completedproject is completed
Initial cash lossesInitial cash losses
Provision is to be made for expected cashProvision is to be made for expected cashlosses in initial years to avoid liquiditylosses in initial years to avoid liquidityproblemsproblems
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Estimation of Sales and ProductionEstimation of Sales and Production
For estimating profitability these projections areFor estimating profitability these projections arevery essentialvery essential
Following aspects to be consideredFollowing aspects to be considered
Not to assume high capacity utilization in 1st yearNot to assume high capacity utilization in 1st year Even when there is simple technology, firm may faceEven when there is simple technology, firm may face
shortage of Raw material, may get limited power supply,shortage of Raw material, may get limited power supply,face marketing problems etc.face marketing problems etc.
Reasonably assumption should be in the range ofReasonably assumption should be in the range of 4040--50% in first year50% in first year 5050--80% in second year80% in second year
8080--90% in third year and onwards90% in third year and onwards
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Estimation of Sales and ProductionEstimation of Sales and Production
Normally closing stock of finished goods is notNormally closing stock of finished goods is notassumed i.e. production is assumed equal toassumed i.e. production is assumed equal tosalessales
Selling price to include realizable price includingSelling price to include realizable price includingdealers commission and Net of excise dutydealers commission and Net of excise duty
Selling price should be present price as anySelling price should be present price as anyvariation will also affect the cost of productionvariation will also affect the cost of production
If part of finished goods are to be sold atIf part of finished goods are to be sold atcontrolled price (e.g. sugar) take controlledcontrolled price (e.g. sugar) take controlledprice for that part of sale projectionprice for that part of sale projection
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
(Details may be furnished separately for each product and until the plant reaches
maximum capacity utilisation)
Product
1st 2nd 3rd 4th
yr yr yr yr
1. Installed capacity (qty per day per annum)
2. No. of working days
3. No. of shifts
4. Estimated production per day (qty)
5. Estimated annual production(qty)
6. Estimated output as % of plant capacity
7. Sales (qty) (after adjusting stocks)
8. Value of sales (in000 of Rs)
Product
(i)
(ii)
(iii)
Note : Production in the initial period should be assumed at a reasonable level of utilisation of
capacity increasing gradually to attain full capacity in subsequent years.
Estimates of Production and Sales
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of productionCost of production
Material costMaterial cost
Price of material input to be defined inPrice of material input to be defined inCIF (cost, insurance and freight) termsCIF (cost, insurance and freight) terms
Present cost of material inputs to bePresent cost of material inputs to be
taken and inflation to be ignoredtaken and inflation to be ignored
If seasonal fluctuation in price is regularIf seasonal fluctuation in price is regular
that should be accounted forthat should be accounted for
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Cost of productionCost of production
Utilities costUtilities cost
Consists power, water and fuelConsists power, water and fuel
Consumption may be assumed at the level suggested byConsumption may be assumed at the level suggested by
consultants or industry average whichever is higherconsultants or industry average whichever is higher Cost of power is assumed for power bought fromCost of power is assumed for power bought from
outside.outside.
Cost of captive power plant is included in fuel costCost of captive power plant is included in fuel cost
Cost payable for water supply to be shown separately.Cost payable for water supply to be shown separately. If water is from own well, not to show water chargesIf water is from own well, not to show water charges
Difficult to estimate fuel cost for furnace oil, coal,Difficult to estimate fuel cost for furnace oil, coal,firewood etc.firewood etc.
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Cost of productionCost of production
Labour costLabour cost Cost of all manpower employed in factoryCost of all manpower employed in factory
Remuneration rates may be on the basis of practiceRemuneration rates may be on the basis of practiceavailable in industryavailable in industry
Remuneration to include salary, allowances, benefits,Remuneration to include salary, allowances, benefits,reimbursements etc. i.e. cost to company basisreimbursements etc. i.e. cost to company basis
Labour cost to be increased @ of 5% p.a. forLabour cost to be increased @ of 5% p.a. forestimationestimation
Cost to be estimated for the highest capacityCost to be estimated for the highest capacityutilization year and reduced to some extent forutilization year and reduced to some extent forearlier yearsearlier years
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Working Capital requirement andWorking Capital requirement and
FinancingFinancing
The working capital requirement consists of
Raw materials and components
Work-in-process
Finished goods
Consumable stores
Debtors
Operating expenses
The principal sources of working capital finance are
Working capital advances provided by commercial banks Trade credit
Accruals and provisions
Long-term sources of financing
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Working Capital requirement andWorking Capital requirement and
FinancingFinancing
Limits to obtain working capital advances from commercialbanks
They relate to the maximum permissible bank finance forworking capital and
Amounts that can be raised against each individual currentasset
Method of financingMethod of financing
Tandon norms method I and IITandon norms method I and II
Turnover methodTurnover methodMaximum permissible finance (MPBF)Maximum permissible finance (MPBF)
Drawing powerDrawing power
Margin for each current assetMargin for each current asset
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Profitability projections orProfitability projections or
Estimation of working resultsEstimation of working results
It is done on following linesIt is done on following lines i. Cost of productioni. Cost of production
ii. Total administrative expensesii. Total administrative expenses
iii. Total sales expensesiii. Total sales expenses iv. Royalty and knowiv. Royalty and know--how payablehow payable
v. Total cost of production (i+ii+iii+iv)v. Total cost of production (i+ii+iii+iv)
vi. Expected sales vi. Expected sales
vii. Gross profit before interest (vivii. Gross profit before interest (vi--v)v)
viii.Total financial expenses including interestviii.Total financial expenses including interest
ix. Depreciationix. Depreciation
x. Operating profit (viix. Operating profit (vii--viiiviii--ix)ix)
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Profitability projections orProfitability projections or
Estimation of working resultsEstimation of working results
It is done on following linesIt is done on following lines--contcont
xi. Other incomexi. Other income
xii. Preliminary expenses written offxii. Preliminary expenses written off
xiii.Profit/loss before tax (x+xixiii.Profit/loss before tax (x+xi--xii)xii) xiv.Provision for taxxiv.Provision for tax
xv. Profit after tax (xiiixv. Profit after tax (xiii--xiv)xiv)
xvi.Dividend on Preference and Equity Capitalxvi.Dividend on Preference and Equity Capital
xvii.Retained earnings (xvxvii.Retained earnings (xv--xvi)xvi)
xviii.Net cash accrual (xvii+ix+xii)xviii.Net cash accrual (xvii+ix+xii)
Cash Flow Statement
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Sources of Funds
1. Share issue
2. Profit before taxation with interest added back3. Depreciation provision for the year
4. Development rebate reserve
5. Increase in secured medium and long-term borrowings for the project
6. Other medium/long-term loans
7. Increase in unsecured loans and deposits
8. Increase in bank borrowings for working capital
9. Increase in liabilities for deferred payment (including interest) to machinery
suppliers
10. Sale of fixed assets
11. Sale of investments
12. Other income (indicate details)
Total (A)
Cash Flow Statement
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Application of Funds
1. Capital expenditure for the project
2. Other normal capital expenditure
3. Increase in working capital*
4. Decrease in secured medium and long-term borrowings
- All India Institutions
- SFCs
- Banks
5. Decrease in unsecured loans and deposits
6. Decrease in bank borrowings for working capital
7. Decrease in liabilities for deferred payments (including interest) to machinery
suppliers
8. Increase in investments in other companies
9. Interest on term loans
Total (B)
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Projected Balance sheetProjected Balance sheet
Following information is need for preparingFollowing information is need for preparing
projected B/Sprojected B/S
Balance sheet at the end of year ABalance sheet at the end of year A
Projected income statement and distribution ofProjected income statement and distribution ofearnings for the year A+1earnings for the year A+1
Proposed external finance to be obtained in theProposed external finance to be obtained in theyear A+1year A+1
Proposed repayment of debt capital (long term,Proposed repayment of debt capital (long term,medium term, short term) during the year A+1medium term, short term) during the year A+1
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Projected Balance sheetProjected Balance sheet
Following information is need for preparingFollowing information is need for preparing
projected B/Sprojected B/S--contcont
Additions and disposal of Fixed assets during the yearAdditions and disposal of Fixed assets during the year
A+1A+1 Changes in level of Current assets during the year A+1Changes in level of Current assets during the year A+1
Changes in other assets and certain additions likeChanges in other assets and certain additions like
preoperative and preliminary expenses (which arepreoperative and preliminary expenses (which arecapitalized) during the year A+1capitalized) during the year A+1
Cash balance at the end of year A+1Cash balance at the end of year A+1
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Projected Balance sheetProjected Balance sheet
ExampleExample
ParticularsParticulars OpBlOpBl ChangesChanges ClBlClBl
LiabilitiesLiabilities
Share capitalShare capital 100100 ---- 100100
Reserve & surplus 20Reserve & surplus 20 +20 retained earnings+20 retained earnings 4040
Secured loansSecured loans 8080 +20 add. TL+20 add. TL 5 Repay 955 Repay 95
Unsecured loansUnsecured loans 5050 +10 proposed increase 60+10 proposed increase 60
Current liabilitiesCurrent liabilities 9090 ---- 9090
ProvisionsProvisions 2020 ---- 2020---------------- --------------
360360 405405
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Projected Balance sheetProjected Balance sheet
ExampleExample--contcont
AssetsAssetsFixed assetsFixed assets 180180 +30Add.+30Add. 20 Depre20 Depre 190190InvestmentsInvestments ---- ----Current assetsCurrent assets 180180 215215CashCash 2020 (balancing A/c)(balancing A/c) 3030InventoriesInventories 8080 +10 proposed increase+10 proposed increase 9090ReceivablesReceivables 8080 +15 Proposed increase+15 Proposed increase 9595
------------------------ --------------360360 405405
-------------------------- --------------
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Projected Balance sheetProjected Balance sheet
Multi year projectionMulti year projection
Like one year projections are made, multi yearLike one year projections are made, multi yearprojections can be madeprojections can be made
In projections certain assumptions are made e.g.In projections certain assumptions are made e.g. What will be tax rateWhat will be tax rate
How much preliminary and preHow much preliminary and pre--operative exp. are to be writtenoperative exp. are to be writtenoff (Amortized) or capitalizedoff (Amortized) or capitalized
When dividend payment is expected to start and how muchWhen dividend payment is expected to start and how much
Other assumptions like interest rates, market credit, turnoverOther assumptions like interest rates, market credit, turnoveretc. are to be madeetc. are to be made
Above assumptions are required for estimating projectedAbove assumptions are required for estimating projectedrevenue and costsrevenue and costs
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Financing OptionFinancing Option
Primarily funded by Equity, Debt & Govt GrantPrimarily funded by Equity, Debt & Govt Grant
Debt Financing can be in Local Currency & ForeignDebt Financing can be in Local Currency & ForeignCurrency.Currency.
Foreign Currency Debt (ECB) can be arranged fromForeign Currency Debt (ECB) can be arranged fromIndian Bank, Foreign banks, MLAsIndian Bank, Foreign banks, MLAs IFC, ADB, Etc,IFC, ADB, Etc,ECA, Bonds.ECA, Bonds.
ECB raising should be in compliance with RBI Policy.ECB raising should be in compliance with RBI Policy.
Project to comply with Equator Principles in case ECBProject to comply with Equator Principles in case ECBto be raised from Foreign Banks & MLAs.to be raised from Foreign Banks & MLAs.
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Project FinanceProject Finance Key TermsKey Terms
Security : Project Assets and assignment of contracts & InsuranceSecurity : Project Assets and assignment of contracts & Insurance
Upfront equity contribution atleast 50%Upfront equity contribution atleast 50%
2 qtr of Interest and Term Loan repayment liability2 qtr of Interest and Term Loan repayment liability
DSCR : Average 1.50 and minDSCR : Average 1.50 and min 1.251.25
M
ax Debt to Equity : 75:25/ 80:20M
ax Debt to Equity : 75:25/ 80:20 Interest Reset ClauseInterest Reset Clause
Escrow Account for Financial disciplineEscrow Account for Financial discipline
Repair & maintenance Reserve accountRepair & maintenance Reserve account
Lenders approval compulsory for addl borrowing or diversion ofLenders approval compulsory for addl borrowing or diversion ofsurplus cash for other opportunities.surplus cash for other opportunities.
Step in ProvisionStep in Provision
Pledge of at least 51% of Promoters share.Pledge of at least 51% of Promoters share.
Availability periodAvailability period Construction period + 6/12 months.Construction period + 6/12 months.
Financial and Investment Decisions
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Financing Decisions Investment Decisions
Financing decisions take place incapital markets which are
approximately perfect.
Investment decisions take placein real markets which tend to be
imperfect.
While making financial
decisions, you can observe thevalue of similar financial assets
While making investment
decisions, you have to estimatethe value of the capital projects.
There are very few opportunities
in the realm of financing that
have an NPV that is significantly
different from zero
There are many opportunities in
the realm of capital budgeting
that have an NPV that is
significantly different from zero.
Financial economists feel that securities are fairly priced i.e. capital market is efficient.
Basic Differences between Equity and Debt
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q y
Equity Debt
Equity shareholders have aresidual claim on the income
and the wealth of the firm.
Creditors (suppliers of debt) have afixed claim in the form of interest
and principal payment.
Dividend paid to equity
shareholders is not a tax
deductible payment.
Interest paid to creditors is a tax
deductible payment.
Equity ordinarily has indefinite
life.
Debt has a fixed maturity.
Equity investors enjoy the
prerogative to control the
affairs of the firm.
Debt investors play a passive role
of course, they impose certain
restrictions on the way the firm is
run to protect their interest.
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Debt - Equity Ratio
Key factors in determining the debt-equity ratio
for a project are:
Cost
Nature of assets
Business risk
Norms of lenders
Control considerations Market conditions
Ch kli t
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ChecklistUse more equity when Use more debt when
Corporate tax rate applicable isnegligible.
Corporate tax rate applicable ishigh.
Business risk exposure is high. Business risk exposure is low.
Dilution of control is not an
important issue.
Dilution of control is an issue.
Assets of the project are
important issue.
Dilution of control is an issue.
Assets of the project are mostly
intangible.
Assets of the project are mostly
tangible.
Project has many valuable growth
options.
Project has few growth options.
Sources ofFinance
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Sources of Finance
Internal
AccrualsSecurities Term loans Working capital
advances
Miscellaneous
sources
Sources of Finance
Equity
Preference
Bonds
Equity Debt
Equity
Preference
Internal
accruals
Bonds
Term loans
Working capital advances
Miscellaneous sources
Part B
Part A
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Methods of Offering
There are different ways in which a
company may raise finances in the primary
market
Public offering
Rights issue
Private placement
Preferential allotment
Comparison of the Various Methods
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Public Rights Private Preferential
Issue Issue Placement Allotment
Amount that can Large Moderate Moderate Moderate
be raised
Cost of issue High Negligible Negligible Negligible
Dilution of Yes No Yes Depends
control
Degree of Large Irrelevant Small No
underpricing
Market Negative Neutral Neutral Neutral
perception
Comparison of the Various Methods
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Financing optionsFinancing options
Owned fundsOwned funds
Conventional DebtConventional Debtfinancingfinancing
Unconventional debtUnconventional debtfinancingfinancing
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Owned fundsOwned funds
Equity capitalEquity capital
Ordinary shares with voting rightOrdinary shares with voting right
No compulsion to pay dividendNo compulsion to pay dividend
Affects controlling rightsAffects controlling rights Dividend tax to be paid by firmDividend tax to be paid by firm
Preference capitalPreference capital
Cumulative and nonCumulative and non--cumulativecumulative
Participating and nonParticipating and non--participating in profitsparticipating in profits Redeemable and nonRedeemable and non--redeemableredeemable
Convertible and nonConvertible and non--convertibleconvertible
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Owned fundsOwned funds
Preference capitalPreference capital--contcont
Fixed dividendFixed dividend
No voting rightsNo voting rights
Preference in return of capitalPreference in return of capital
If firm skips dividend for 3 years, votingIf firm skips dividend for 3 years, votingrights for matters affecting preferencerights for matters affecting preferenceshare holdersshare holders
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Owned fundsOwned funds
Venture capitalVenture capital
Normally provided by investor unrelated toNormally provided by investor unrelated topromoter group to finance startpromoter group to finance start--up companiesup companies
Normally take preference shares with right toNormally take preference shares with right toConvertConvert
voting rightvoting right
seat on the boardseat on the board sale share holding to firmsale share holding to firm
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Owned fundsOwned funds
Retained earningsRetained earnings
General reservesGeneral reserves
Share premium accountShare premium account
Un appropriated Credit balance of P&L A/cUn appropriated Credit balance of P&L A/c Unencumbered reserves and not related to a specificUnencumbered reserves and not related to a specific
purposepurpose
Features areFeatures are readily availablereadily available no issue costno issue cost
no dilution of controlno dilution of control
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Owned fundsOwned funds
Government subsidiesGovernment subsidies Incentives by Central Govt.Incentives by Central Govt. Incentives by State Govt.Incentives by State Govt. SubsidiesSubsidies
Infrastructure creationInfrastructure creation Incentives provided by the Government or its agenciesIncentives provided by the Government or its agencies
for setting up project in certain areasfor setting up project in certain areas
Capital assistance at nominal interestCapital assistance at nominal interest Capital subsidyCapital subsidyTax deferment or exemption for certain periodTax deferment or exemption for certain period Power subsidyPower subsidy
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Owned fundsOwned funds
Warrants / OptionsWarrants / Options
Attachments to instruments which culminateAttachments to instruments which culminatethrough conversion or eligibility into shares at futurethrough conversion or eligibility into shares at futuredate with or without additional paymentsdate with or without additional payments
Warrants attached to convertible debentures orWarrants attached to convertible debentures orGlobal Depository receipts to be lodged with issuingGlobal Depository receipts to be lodged with issuingco. on specified date to acquire equity shares of co.co. on specified date to acquire equity shares of co.
In options, holder has the option to acquire sharesIn options, holder has the option to acquire shares
or retain the debt instrument without conversion inor retain the debt instrument without conversion inshares e.g. Essar Oil Optionally Convertibleshares e.g. Essar Oil Optionally ConvertibleDebenturesDebentures
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Owned fundsOwned funds
Foreign Institutional InvestorsForeign Institutional Investors
Registration with RBI for investment in shares of IndianRegistration with RBI for investment in shares of Indiancompaniescompanies
Investment upto 49% of issued capital under general schemeInvestment upto 49% of issued capital under general scheme
on cumulative basison cumulative basis Investment can be throughInvestment can be through
subscription to public offersubscription to public offer
private placementprivate placement
These are usuallyThese are usuallyMutual funds, Institutional investorsMutual funds, Institutional investors
Banks, Venture capital funds registered abroadBanks, Venture capital funds registered abroad
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Owned fundsOwned funds
Foreign Direct Investment (FDI)Foreign Direct Investment (FDI)
Foreign investors invest in IndianForeign investors invest in Indian
company as per prior agreement withcompany as per prior agreement withpromoterspromoters
Usually it is part of deal of technologyUsually it is part of deal of technology
transfer or joint venturetransfer or joint ventureIt can be only for investment alsoIt can be only for investment also
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Conventional Debt financingConventional Debt financing
FeaturesFeatures
Interest tax deductibleInterest tax deductible
No impact on control of companyNo impact on control of company
Debt holders do not participate in remainingDebt holders do not participate in remainingprofitsprofits
Maturity of instrument can be tailored as perMaturity of instrument can be tailored as perrequirementrequirement
Default can result is bankruptcyDefault can result is bankruptcyRestrictive covenantsRestrictive covenants
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Conventional Debt financingConventional Debt financing
Financial institutions, National,Financial institutions, National,InternationalInternational
IDBIIDBI
Asian Development BankAsian Development BankWorld BankWorld Bank
International Finance CorporationInternational Finance Corporation
Tourism Finance CorporationTourism Finance Corporation
Power Finance CorporationPower Finance Corporation
etc.etc.
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Conventional Debt financingConventional Debt financing
BanksBanks--National, InternationalNational, International
Public Sector BanksPublic Sector Banks
Private Sector Banks (Old generation)Private Sector Banks (Old generation)Private Sector Banks (new)Private Sector Banks (new)
Foreign banksForeign banks
CoCo--operative banksoperative banksRegional Rural banksRegional Rural banks
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Conventional Debt financingConventional Debt financing
Banks, National, InternationalBanks, National, International--contcont
FacilitiesFacilities Fund basedFund based
Loans, OverdraftLoans, Overdraft
Cash credit / packing creditCash credit / packing credit
Bills purchased / discountedBills purchased / discounted
NonNon--fund basedfund based L/C DP / DA, Inland / ForeignL/C DP / DA, Inland / Foreign
Letter of guarantee (LG)Letter of guarantee (LG) Performance, FinancialPerformance, Financial
Deferred payment (DPG)Deferred payment (DPG)
Advance payment, BidAdvance payment, Bid--bondbond
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Conventional Debt financingConventional Debt financing
Government loansGovernment loans
Governments form specific fundsGovernments form specific funds
for funding modernization /for funding modernization /expansion of specific industriesexpansion of specific industriese.g.e.g.
Steel development fundSteel development fundShipping development fundShipping development fund
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Conventional Debt financingConventional Debt financing
Public depositsPublic deposits
RBI permission is necessary for duration,RBI permission is necessary for duration,interest rates, quantum etc.interest rates, quantum etc.
DebenturesDebentures Secured / UnsecuredSecured / UnsecuredRated by rating agenciesRated by rating agencies
Convertible, partially convertible, nonConvertible, partially convertible, non--
convertibleconvertibleDeep discountDeep discount
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Conventional Debt financingConventional Debt financing
DebenturesDebentures
FeaturesFeatures
Debenture trustDebenture trust
Maturity more than 18 months have to beMaturity more than 18 months have to becompulsorily ratedcompulsorily rated
For maturity of more than 18 months DebentureFor maturity of more than 18 months Debenture
redemption reserve (DRR) has to be createdredemption reserve (DRR) has to be createdDRR equal to 50% of issue has to be cratedDRR equal to 50% of issue has to be crated
before redemption startsbefore redemption starts
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Conventional Debt financingConventional Debt financing
DebenturesDebentures--ffeatureseatures--contcont
First charge over fixed assets and secondFirst charge over fixed assets and second
charge over current assetscharge over current assets
Fixed rate / floating rate/ zero rate of interestFixed rate / floating rate/ zero rate of interest
Call option to company to redeem beforeCall option to company to redeem before
maturity at a certain pricematurity at a certain price
Put option to holder to seek redemption at aPut option to holder to seek redemption at a
specified time at pre determined pricespecified time at pre determined price
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Conventional Debt financingConventional Debt financing
Unsecured loansUnsecured loans
Normally by promotersNormally by promoters
By associates and friendsBy associates and friends
No securityNo security
Normally part of covenantsNormally part of covenants
T lT l
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Term loansTerm loans
CurrencyCurrency
Rupee term loanRupee term loan
Foreign currency term loansForeign currency term loansSecuritySecurity
Direct securityDirect security
Collateral securityCollateral securitySecond charge on moveable assetsSecond charge on moveable assets
T lT l
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Term loansTerm loans
Interest payment and principalInterest payment and principalrepaymentrepaymentMoratorium timeMoratorium time
Interest, cumulative periodInterest, cumulative periodCommitment chargesCommitment charges
Prepayment chargesPrepayment charges Penalty for defaultsPenalty for defaults
Processing charge and upfront feeProcessing charge and upfront fee
Duration of installmentsDuration of installments
T lT l
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Term loansTerm loans
Restrictive covenantsRestrictive covenants Representation on the BoardRepresentation on the Board Level of unsecured loansLevel of unsecured loans
Declaration of dividendDeclaration of dividend Restrictions on undertaking new projects orRestrictions on undertaking new projects or
expansionexpansion Repayment of existing loansRepayment of existing loans Restrictions on taking additional loansRestrictions on taking additional loans Restriction on transfer of shareholding by promotersRestriction on transfer of shareholding by promoters
/ Associates/ Associates
i l d b fi ii l d b fi i
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Unconventional debt financingUnconventional debt financing
Mutual fundsMutual funds
Normally invest inNormally invest in
EquitiesEquities
DebenturesDebentures
Hybrid instrumentsHybrid instruments
Inter corporate depositsInter corporate deposits
Through subscription to public issues,Through subscription to public issues,private placementsprivate placements
U i l d b fi iU i l d b fi i
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Unconventional debt financingUnconventional debt financing
Suppliers creditSuppliers credit
Facilities extended by Banks and FinancialFacilities extended by Banks and Financialinstitutions to good companies for supplyinginstitutions to good companies for supplying
plant and machinery or equipment orplant and machinery or equipment orengaged in fabrication and engineeringengaged in fabrication and engineering
Clients of such companies are approved byClients of such companies are approved byfinancers and receive plant and machinery onfinancers and receive plant and machinery on
credit and pay the amount in installmentscredit and pay the amount in installments
U i l d b fi iU i l d b fi i
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Unconventional debt financingUnconventional debt financing
Short term borrowingsShort term borrowings
Inter corporate depositsInter corporate deposits
Loans on basis of promissory notesLoans on basis of promissory notes
Normally repayable within 1 yearNormally repayable within 1 year May be secured / unsecuredMay be secured / unsecured
Commercial paper by rated companiesCommercial paper by rated companies Finance against collateral security ofFinance against collateral security of
Treasury bills and other GovernmentTreasury bills and other Governmentsecuritiessecurities
U i l d b fi iU i l d b fi i
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Unconventional debt financingUnconventional debt financing
Short term borrowingsShort term borrowings--contcont Commercial paperCommercial paper
Short term unsecured promissory noteShort term unsecured promissory note
Maturity period less than 1 year normallyMaturity period less than 1 year normally90 to 180 days90 to 180 days
Normally issued at a discount from itsNormally issued at a discount from itsface valueface value
Normally investors keep the CP tillNormally investors keep the CP tillmaturity therefore, secondary market didmaturity therefore, secondary market didnot developnot develop
U i l d b fi iU i l d b fi i
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Unconventional debt financingUnconventional debt financing
Foreign lines of creditForeign lines of credit
Lines of credit provided by foreign banks orLines of credit provided by foreign banks orFIIs who do not have representation in IndiaFIIs who do not have representation in India
Provided for specified industries/companiesProvided for specified industries/companies Financial institutions or banks in IndiaFinancial institutions or banks in India
provide the funds on the basis of line ofprovide the funds on the basis of line ofcredit received from abroadcredit received from abroad
Mi llMi ll
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Miscellaneous sourcesMiscellaneous sources
Public depositsPublic deposits
Finance LeaseFinance Lease
Hire purchaseHire purchase
Fi LFi L
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Finance LeaseFinance Lease
Long term non cancelable arrangement duringLong term non cancelable arrangement duringprimary lease periodprimary lease period
Lease is fully amortized during primary leaseLease is fully amortized during primary lease
period i.e. during this period lessor recovers hisperiod i.e. during this period lessor recovers hisinvestment along with acceptable returninvestment along with acceptable return
Lessee is responsible for maintenance, insuranceLessee is responsible for maintenance, insuranceand taxesand taxes
Lessee enjoys option for renewing the leaseLessee enjoys option for renewing the lease
Lessee can not claim depreciationLessee can not claim depreciation
Hi hHi h
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Hire purchaseHire purchase
FeaturesFeaturesHiree purchases the asset and gives on hire toHiree purchases the asset and gives on hire to
hirerhirer
Hirer pays regular installments for interestHirer pays regular installments for interestand principaland principal
Normally hiree charges flat rate of interest onNormally hiree charges flat rate of interest onprincipal without reducing balanceprincipal without reducing balance
Possession of asset is with hirerPossession of asset is with hirerHirer enjoys salvage value being ownerHirer enjoys salvage value being owner
Fi i O iFi i O i
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PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Financing OptionsFinancing Options
Working capital financeWorking capital finance
Fund basedFund based Cash credit / OverdraftCash credit / Overdraft
PrePre--shipmentshipment Packing creditPacking credit Bill purchase / DiscountingBill purchase / Discounting
PostPost--shipmentshipment Bill discountingBill discounting
NonNon--fund basedfund based Letter of guaranteeLetter of guarantee
Letter of creditLetter of credit
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Financing OptionsFinancing Options
Letter of credit (L/C)Letter of credit (L/C)
Guarantee of bank to honour an exporters draft (bill) orGuarantee of bank to honour an exporters draft (bill) orany other claims for payment, which has fulfilled theany other claims for payment, which has fulfilled theconditions of L/Cconditions of L/C
Issuing or Opening bankIssuing or Opening bank
Importers bank who opens the L/CImporters bank who opens the L/C
Advising bankAdvising bank
Correspondent bank in exporters country whoCorrespondent bank in exporters country whoreceives L/C from opening bankreceives L/C from opening bank
Than forwards L/C to exporterThan forwards L/C to exporter
Fi i O tiFi i O ti
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Financing OptionsFinancing Options
Letter of credit (L/C)Letter of credit (L/C)--contcont
BeneficiaryBeneficiary
ExporterExporter
Uniform Customs and Practices for DocumentaryUniform Customs and Practices for Documentary
CreditsCredits
Code evolved by International Chamber ofCode evolved by International Chamber ofCommerce to resolve disputes in documents ofCommerce to resolve disputes in documents of
international tradeinternational trade
Utilisation of L/CUtilisation of L/C -- D/P or D/AD/P or D/A
A bankers acceptanceA bankers acceptance
When L/C opening bank accepts DA BillWhen L/C opening bank accepts DA Bill
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Financing OptionsFinancing Options
Utilisation of L/CUtilisation of L/C -- D/P or D/AD/P or D/A contcont
DiscountingDiscounting
Discounting DA billDiscounting DA bill
Revocable L/CRevocable L/C Right to opening bank to amend or cancel L/CRight to opening bank to amend or cancel L/C
without consent of beneficiarywithout consent of beneficiary
Irrevocable L/CIrrevocable L/C
L/C can not be cancelled or amended withoutL/C can not be cancelled or amended withoutthe consent of exporterthe consent of exporter
Fi i OptiFi i Opti
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Financing OptionsFinancing Options
Utilisation of L/CUtilisation of L/C--contcont
Confirmed irrevocable L/CConfirmed irrevocable L/C
In addition to opening bank an additional bank i.e.In addition to opening bank an additional bank i.e.Confirming bank gives commitment to pay the billConfirming bank gives commitment to pay the bill
if all conditions are metif all conditions are met
It may be advising bank or one more bank is addedIt may be advising bank or one more bank is added
Revolving L/CRevolving L/C
Used when export will take place on continuing basisUsed when export will take place on continuing basis
and single L/C will cover several shipmentsand single L/C will cover several shipments
Fin n in Opti nFin n in Opti n
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Financing OptionsFinancing Options
Utilisation of L/CUtilisation of L/C--contcont
Transferable L/CTransferable L/C
Permits the beneficiary to transfer part or fullPermits the beneficiary to transfer part or fullbenefits of L/C to secondary beneficiarybenefits of L/C to secondary beneficiary
Used when the exporter is middlemanUsed when the exporter is middleman BackBack--toto--Back L/CBack L/C
When exporter asks its own bank to openWhen exporter asks its own bank to openirrevocable L/C in favour of another party on theirrevocable L/C in favour of another party on thebasis of L/C received by him from importerbasis of L/C received by him from importer
Original L/C becomes guarantee against next L/COriginal L/C becomes guarantee against next L/C
Financing OptionsFinancing Options
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Financing OptionsFinancing Options
Utilisation of L/CUtilisation of L/C--contcont
Red clause L/CRed clause L/C
With this red clause, advising bank is authorized toWith this red clause, advising bank is authorized tomake clean advance to exporter to be adjusted frommake clean advance to exporter to be adjusted from
the discounted billsthe discounted bills When invoice is in currency neither of importer norWhen invoice is in currency neither of importer nor
of exporter than importers bank to advise thirdof exporter than importers bank to advise thirdcountry bank to inform exporter that payment willcountry bank to inform exporter that payment willbe made in third country currencybe made in third country currency
Standby L/CStandby L/C Provides a fallback guarantee to supplier if primaryProvides a fallback guarantee to supplier if primary
obligator fails to payobligator fails to pay
Financing OptionsFinancing Options
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Financing OptionsFinancing Options
Other methodsOther methods
Cross border leasingCross border leasing
ForfeitingForfeiting
Importer gives bundle of bills of exchange /Importer gives bundle of bills of exchange /promissory notes for principal and intt. which fallpromissory notes for principal and intt. which falldue say every six monthdue say every six month
Bills are guaranteed by importers bankBills are guaranteed by importers bank
Bills are discounted without recourse by exporterBills are discounted without recourse by exporter
International financing optionsInternational financing options
Will be dealt separatelyWill be dealt separately
Financial closerFinancial closer
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Financial closerFinancial closer
All sources of funds required forAll sources of funds required forproject have been tied upproject have been tied up
It takes a long timeIt takes a long timeAdequate underwriting arrangementsAdequate underwriting arrangements
have been made for market relatedhave been made for market relatedofferingsofferings
Project Financing Decision
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Project Financing Decision
key business considerations relevant for the
project financing decisions are:
Cost
Risk
Control
Flexibility