Project Financing in India

Ajeeb J.

No. 2, 5th Sem., MBA (PT)

School of Management Studies, CUSAT

Project Planning,

Analysis & Management

Project Financing

Project financing refers to the means of finance employed for meeting the cost of project. - Prasanna Chandra

Project finance is a method of financing very large capital intensive projects, with long gestation period, where the lenders rely on the assets created for the project as security and the cash flow generated by the project as source of funds for repaying their dues.

Project Financing contd…

Project finance is essentially financing on the security of the project itself, with limited or no recourse against the sponsors of the project or other parties involved in the development and implementation of the project.

Due to such characteristics of project finance, the loans sought by the borrowers are always approved by the lenders on the basis of strong in-house appraisal of the cost and viability of the ventures as well as the credit standing of project promoters.

Special Purpose Vehicle

Private Participation Schemes

• Build Own and Operate (‘BOO’)• Build Operate and Transfer (‘BOT’)• Build and Transfer (‘BT’)• Build Lease and Transfer (‘BLT’)• Build Transfer and Operate (‘BTO’)• Develop Operate and Transfer (‘DOT’)• Rehabilitate Operate and Transfer (‘ROT’)• Rehabilitate Own and Operate (‘ROO’)• Lease Renovate Operate and Transfer (‘LROT’)

Means of Finance

• The long term source of finance for meeting the cost of project– Equity Capital

– Preference Capital

– Non convertible Debentures

– Convertible Debentures

– Rupee Term Loans

– Foreign currency Term Loans

– Euroissues

Means of Finance contd…

– Deferred credit– Billing rediscounting scheme– Suppliers line of credit– Seed capital assistance– Government Subsidies– Sales tax deferment and exemption– Unsecured loans & deposits– Lease and hire purchase finance

Equity Capital

• Contribution made by the owners of business, equity share holders

• Enjoys the rewards & bears the risk of ownership

• Liabilities limited to capital contribution

• Permanent capital

• Does not involve any fixed obligation for payment of dividend

• Cost of equity capital is high (dividend are not tax deductible )

• Cost of issuing equity capital is high

• .

Preference Capital• Has characteristics of equity capital and some attributes of

debt

• Dividend is not a tax deductible payment

• Rate of preference dividend in fixed

TYPES

• Cumulative & non cumulative PS

• Participating & non participating PS

• Redeemable & non redeemable PS

• Convertible & non convertible PS

Debentures

• Emerged as an important source of project financing

TYPES

• Non convertible Debentures

• Partially convertible Debentures

• Fully convertible Debentures

Rupee Term Loans

• Provided by financial institutions & commercial banks

• Secured borrowing for new projects, expansion, modernization & renovation scheme of existing units

• Repayable over a period of 8-10 years

• Rate of interest is fixed

Foreign currency Term Loans

• Financial institutions provide foreign currency term loans for meeting the foreign expenditure import of plant, machinery and equipment and also towards payment of foreign technical know-how fees.

Deferred credit

• Suppliers of machinery provide deferred credit facility under which the payment of machinery is made over a period of time.

• Normally issued with a bank guarantee furnished by buyer.

Government Subsidies

• Subsidies provided by central and state govt. to industrial units located in backward areas

• State subsidies varies between 5% to 25% of the fixed capital investment of project

• Central subsidies has been discontinued

Unsecured loans

• Provided by promoters to fill the gap between the promoters contribution required by FI and the equity capital subscribed to by the promoters

• Subsidiary to Institutional loans

• Rate of interest is less than rate of interest on the Institutional loans

Bank credit

• Commercial banks in the country serve as the single largest source to business firms

Public Deposit

• Companies have been receiving public deposits for a long time to meet the medium term & short term financial requirements

• Rate of interest offered is more than that offered by banks

• Cost of deposit to company is less that cost of borrowing from the bank

SEBI

• Capital issues control Act 1947 repealed in May 1992

• Capital issues brought under the purview of the Securities Exchange Board of India (SEBI)

• SEBI Act passed in June 12,1992

• SEBI does away with product & price control, lays stress on adequate disclosure, seeks to safe guard the interest of investors, and emphasises prudential

controls.

Keys Aspects

• Key to any project finance is to use a right mix of debt and equity

• There should be a right mix of foreign currency and rupee loans

• There should be flexibility in respect of switching from foreign currency to rupee loan and vice versa

• It is important that due care is taken in drafting the documents concerning the financing of the project

Thank You