working capital financing

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Chapter – I

Introduction

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1.1 Background of Study

In a perfect world, there would be no necessity for current assets and liabilities because

there would be no uncertainty, no transaction cost, information search costs, scheduling

costs, or production and technology constraints. The unit cost of production would not

vary with the quantity produced. Borrowing and lending rates shall be same. Capital,

labour, and product market shall be perfectly competitive and would reflect all available

information, thus in such an environment, there would be no advantage for investing in

short term assets.

However the world we live is not perfect. It is characterized by considerable amount of

uncertainty regarding the demand, market price, quality and availability of own products

and those of suppliers.

The real world circumstances introduce problems which require the necessity of

maintaining working capital. For example, an organization may be faced with an

uncertainty regarding availability of certain crucial inputs/raw material in future at

reasonable price. This necessitates the holding of inventory, i.e. current assets. Similarly

an organization may be faced with an uncertainty regarding the level of its future cash

flows. Moreover insufficient amount of cash may incur substantial costs. This may

necessitate the reserve of short term marketable securities, again a short term capital

asset.

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1.2 Background of Topic

1.1 What Is Working Capital?

orking capital refers to the cash a business requires for day-to-day operations, or,

more specifically, for financing the conversion of raw materials into finished goods,

which the company sells for payment. Among the most important items of working

capital are levels of inventory, accounts receivable, and accounts payable.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's

ability to fund operations, reinvest and meet capital requirements and payments. A good

way to judge a company's cash flow prospects and its overall efficiency is to look at its

working capital management (WCM).

In simple words Working capital is the excess of Current assets and the Current

Liabilities. Working capital is the heart of the business. If it is week the business cannot

prosper and survive. Therefore it is said that fate of large scale investment in fixed assets

is often determined by a relatively small amount of current assets. The company must

have adequate working capital as much as needed by the company. Excessive working

capital leads to funds lying idle with the firm without earning any profit where as

inadequate working capital shows the company doesn’t have sufficient funds for

financing its daily needs.

1.2 Need for Working capital…

The Prime object of the Company is to obtain maximum profit through its business. The

amount of profit largely depends upon the magnitude of Sales. However the sale does not

get converted to cash instantaneously. Some companies are inherently better placed than

others. Insurance companies, for instance, receive premium payments up front before

having to make any payments; however, insurance companies do have unpredictable

outgoings as claims come in. Normally a big retailer like Wal-Mart has little to worry

w

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about when it comes to accounts receivable: customers pay for goods on the spot.

Inventories represent the biggest problem for retailers. Manufacturing companies, for

example, incur substantial up-front costs for materials and labor before receiving

payment. Much of the time they eat more cash than they generate. There is generally a

time gap between sale of goods and receipt of cash. This Time gap is technically termed

as Operating Cycle/ Working capital cycle.

The working capital cycle can be defined as:

The period of time which elapses between the point at which cash begins to be

expended on the production of a product and the collection of cash from a customer

The diagram below illustrates the working capital cycle for a manufacturing firm (Fig.1)

1)

Each component of working capital (namely inventory, receivables and payables) has two

dimensions TIME and MONEY. When managing Working capital, “TIME IS MONEY”.

If you can get money to move faster around the cycle (collect monies due from the

debtors more quickly) or reduce the money tied up (reduce inventory level relative to

sales). The business will generate more cash or it will need to borrow less money to fund

working capital. As a result the cost of Bank interest can be reduced or additional money

will be available to support additional sales or investment. Similarly if one negotiates

improved terms with suppliers e.g. getting longer credit or an increased credit limit, one

festively create freed finance to fund future sales.

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A perusal of Operating cycle reveals that the cash invested in operations are recycled

back into cash. However it takes sometime to get converted and this leads to need of

Working capital. Cash being the lifeblood of a Company, the manager’s primary task is

to keep the cash flowing and use this cash flow to generate profits. The shorter the period

of operating cycle, larger will be the turnover of funds invested in the operations.

1.3 Determination of Working Capital.

The working capital needs of a firm are influenced by various factors. The important ones

are:

1. Nature of business. 2. Seasonality of operations 3. Production policy 4. Market conditions 5. Conditions of supply

Nature of Business The working capital requirement of a firm are closely relate to the

nature of its business. A service firm, like an electricity undertaking or a transport

corporation, which has a short operating cycle and which sells predominantly on cash

basis, has modest working capital requirements. On the other hand, manufacturing

concern like Kalpataru Power Transmission Ltd, which has a long operating cycle and

which sells largely on credit, has very substantial working capital requirements. It is

largely dependent on the products specifications, technology and production policy.

(Source: Financial Management, Theory & Practice (7th ed) …by Prasana Chandra)

Current Asset (%) Fixed Asset (%) Industries

10-20 80-90 Hotel and Restaurants 20-30 70-80 Electricity Generation and Distribution 30-40 60-70 Aluminum, Shipping 40-50 50-60 Iron and Steel, Basic Industrial Chemicals 50-60 40-50 Tea Plantation 60-70 30-40 Cotton Textile, Sugar 70-80 20-30 Edible Oils, Tobacco 80-90 10-20 Trading, Construction

Table: 1 Distribution of Current and Fixed Asset.

Seasonality of Operations Firms which have marked seasonality in their operations

usually have highly fluctuating working capital requirements. Their operations would be

season specific and thus this increases the need of working capital during that specific

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Production Policy Firms may acquire different policy of production as per their

management’s decision. If their management finds the year long production to be more

profitable and less risky than the seasonal specific production then the requirement of

working capital will be spread all over the year than in particular period of seasonal

production. At, Kalpataru Power Transmission the Production is carried out through

out the year as per the contracts won by the company. So the Working capital is need

through out the year.

Conditions of Supply Firms with irregular and intermittent supplies need to maintain

large working capital to meet market demand. These firms will be required to maintain

large inventory even at high cost if the supplies are limited or irregular. Thus the cost of

working capital increases and that further place pressure to increase sales turnover. At

KPTL, the supplies are regularly available and the working capital is maintained at the

regular level.

Market Conditions Firms which face cutthroat competition from other firms in the

industry need to maintain the level of the inventory at such a position that they are able to

meet their customer requirement in time and with consistency. This will require the firm

to maintain the working capital at the level which is most profitable but at the same time

feasible. KPTL faces competition from several players like Jyoti Constructions and KEC

International ltd.

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1.3 Economic Scenario

The Indian economy has shown great resilience in face of global recession, due to the

policy intervention and stimulus of Government of India. Though it was not able to

sustain average growth rate of over 8% from FY 2004-05 to FY 2006-07 but it has grown

at a healthy rate of 6.6% in 2008-09. In 2009-10 the economy is expected to grow at

6.7% supported by higher domestic consumption and lower inflation.

The global economy was truly on a roller coaster ride last year, we saw prices of all

assets and commodities attaining peaks in the first half of the year and then falling to

unprecedented lows in the later half of the year. While the overall recovery is likely to be

slow, emerging economies like china and India might see an upturn in economy sooner

than later.

OUT LOOK & OPPORTUNITIES.

Transmission & Distribution Division

Indian Outlook Company primarily works with PGCIL, SEBs and a few private sector clients. Our

largest client, PGCIL has announced investments plans of Rs. 55,000 crores during the

XI Plan period - about Rs. 10,000 - 11,000 crores worth of investments annually. For FY

08-09, PGCIL has achieved targets in the range of Rs. 8,000 crores and their targets for

the next two years are in the range of Rs. 12,000 crores and Rs. 16,000 crores. The

investment planned by Central and State during 11th Five year Plan can be summarized

as under:

Sector Rs. In Crores

Central Utilities 55,000

State Utilities 65,000

TOTAL 1,20,000

Table: 2 Sectoral Investment plan of Govt.

The Government thrust on re-structured APDRP Programme with allocation of Rs.

50,000 crores in 11th 5 year plan to reduce distribution losses also offers lot of

opportunities to the Company in the distribution sector.

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Company has completed 5,000 Kms of 765/400 KV Transmission Lines in India.

Its success in securing the first ever 800 KV Transmission Line Project and 1200 KV

Tower testing orders from PGCIL, conforms company’s strong capability to execute and

deliver job on time.

The Company is presently executing projects for RRVPNL, MPSEB, WBSEB, etc. and

enjoying good creditability with them. The Company is equipped enough to grab

opportunities for developing Transmission network with SEBs available from time to

time.

It has also seen opportunities from private sector customers who are building

Transmission Lines for evacuation of power from their own generation or working with

PGCIL for specific requirements.

The Company has plans to grab PPP opportunities for development of Transmission

network which have emerged in the recent past.

International Outlook

Emerging markets such as Africa and Middle East continue to offer immense

opportunities on account of need of better power transmission network, funding support

from multilateral agencies, power generation plans and spending by oil producing

countries. The North American and Australian market are also opening up for

strengthening their transmission network, where Indian value proposition will be more

beneficial on account of cost and competent technical resources.

Our international operations have grown from Rs. 40 crores to over Rs. 500 crores in the

past 5 years with EPC and supplies projects in 28 countries.

Company continues to expand its footprint in the existing markets and to consolidate its

presence which is evident from our consistent success in Algeria - Secured 10 contracts

worth over Rs. 1,000 crores ( USD 200 million), USA & Canada -successfully supplied

over 6,700MTs to this far away markets, UAE - secured 2 contracts worth Rs. 250 crores

and Zambia - Completed 2 projects worth over Rs. 90 crores in shortest time.

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Company has secured largest ever power transmission turnkey jobs of over USD 250

million from Ministry of Energy and Water, Kuwait, which is to be completed in 24

months.

Company continues to see growth in the overseas market with lots of opportunities in

GCC countries and Africa

Company may adopt a route of forming subsidiaries/JV overseas to enter into newer

markets and/or territories.

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1.4 Company Profile

KALPATARU POWER TRANSMISSION LTD.

Founded in 1969 by Mr. Mofatraj P. Munot, the first generation entrepreneur, Kalpataru

group has today forayed into diverse arenas, setting unmatched benchmarks for quality

and ingenuity in its ambit of operation. Like the mythological tree “Kalpavriksh”, it has

spread its roots far and wide, encompassing multilpe areas starting from Power

Transmission Towers to Real Estate and Property Development, Agricultural Logistic

parks and Warehousing, construction of Multi Product SEZ, , Oil and Gas pipeline sector

and Power generation through non-conventional sources of energy “Bio-mass”. (Fig. 2)

KPTL

JMC Projects

(India) Ltd

(JMC)

Shree

Shubham

Logistics Ltd

(SSLL)

Amber Reak

Estate Ltd.

(Amber)

Subsidiaries

Abroad

Energylink

(India) Ltd.

(ELL)

Kalpataru SA

(Proprietary)

Ltd.

Invested Rs 95.30 Cr (53.02 % stake) Turnover Rs1312 Cr

Invested Rs. 28.5 Cr (80% Stake) TN Rs 55.96 Crs

Invested Rs 1 Cr

(100% Stake)

Invested Rs 0.99 Cr

(100 % Stake)

Kalpataru (SA) Rs 0.27 Crs

(25.1% Stake)

Kalpataru

Power

Transmission

Mauritius Ltd.

Kalpataru

power

Transmission

Nigeria Ltd

(100% Stake) Work not commenced

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alpataru Power Transmission is one of World's leading companies in the design,

procurement, manufacturing, fabrication, testing, construction, commissioning,

erection and operation & maintenance of transmission lines and substation structures on a

turnkey basis across India and Overseas.

KPTL today has one of the largest integrated tower manufacturing plants, with a strong

team and the vision to scale newer heights. Their diversified order book exceeding

$1billion along with their presence across the globe provides them the momentum and

boost for future growth.

Kalpataru Power Transmission Limited is one of the leading companies in the field of

Turnkey projects for EHV Transmission Lines up to and including 800 KV in India and

Overseas. As an EPC contractor, company’s scope of work includes design, testing,

fabrication, galvanizing of towers and construction activities from survey, civil works/

foundation, erection to stringing and commissioning of EHV lines, besides procurement

of items such as conductors, insulators, hardware accessories etc. It also participates in

Substation projects on a partnership basis. It also provide EPC services for Distribution

Projects of 11/33 kV and also construct cross country Pipelines, besides Telecom Towers.

Located at Gandhinagar Gujarat, in Western India, Kalpataru Power transmission is a

public listed company with a turnover of USD 350 Million (Rs. 17.5 Billion) and annual

production of 80,000 MTs till 2007-08. The company has a net worth of over USD 200

Million and an order booking of Rs.30 Billion.

Kalpataru Power has two large Fabrication Plants with an annual installed capacity of

108,000 MTs ( with a cspacity additin of 24000 MTs in Oct, 2008) one of the largest in

the world and is equipped with modern machineries (including 16 CNC machines) and

automated temperature controlled Galvanizing Baths, besides its own state-of-the-art

Testing Station and R & D Centre. It was the first company in 1994 in the Indian

transmission industry to be ISO 9001 certified.

Its Construction division has completed over 8,000+kms of turnkey projects in India for

various clients such as the Power Grid Corporation of India and various State Electricity

Boards (SEBs) of Gujarat, Karnataka, Maharashtra, Rajasthan, Andhra Pradesh,

K

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Rajasthan, Orissa, TamilNadu and Madhya Pradesh.

With a strong thrust on Overseas markets, the Company is/has already exported

Towers or is executing/has completed Turnkey projects in :

Transmission Line Experience

Construction of lines

Also the Company has worked closely with reputed International EPC contractors

like

> ABB SAE (Italy) > Downer (Australia)

> Alstom / Cegelec (France) > Enel Power (Italy)

> Cobra (Spain) > Sumitomo Electric (Japan)

> ETA (UAE) > Siemens

Major part of the business is either from physical exports or deemed exports (i.e domestic projects funded by multilateral funding agencies like World Bank, Asian Development Bank, JBIC/OECF, Arab Fund etc). The company is also keen to participate in Infrastructure projects under BOT/ BOOM or deferred credit financing basis.

Asia

Philippines

Malaysia

Vietnam

Indonesia

Thailand

Bangladesh

Nepal

Middle East

Kuwait

UAE

Qatar

Syria

Turkey

Iraq

Africa

Algeria

Ethopia

Zambia

Nigeria

Kenya

Tanzania

Mozambique

Djibouti

Uganda

South Africa

America

USA

Canada

Mexico

Peru

Australia

Tasmania

Total supplies Over 6,00,000 MTs

Total physical exports Over 2,00,000 MTs

Tested Over 250 Towers (including over 125 at own Testing Station)

Total lines from 130kv to 765KV HVDC over 8,000 kms

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A Snap Shot of Company’s position in Stock market and Owner’s worth.

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FINANCIAL REVIEW

Gross sales and service revenue of the company for 2008-09 was at Rs. 1,914 crores. This

represents a growth of 8% over 2007-08. Revenue of Power Transmission and

Distribution segment grew by 10%, Infrastructure segment shows downfall by 6% and

Bio-mass Energy segment grew by 25%.

Exports revenue (including overseas projects) earnings during this year were at Rs. 519

crores representing approx. 27% of company's gross revenue.

Company's profit before tax has decreased to Rs. 121 crores from Rs. 202 crores. Profit

after tax stood at Rs. 94 crores as against Rs. 150 crores in 2007-08. Profit has been

impacted by higher commodity prices, increased working capital cycle and adverse

foreign currency movement.

Net fixed assets (including capital work in progress) as at March 31, 2009 was Rs. 269

crores as compared to Rs. 225 crores in previous year, indicating increase of Rs.44

crores, mainly for purchase of pipe laying equipments for Infrastructure Division,

capacity addition 24,000 MTs and integrated system implementation.

Net current assets as at March 31, 2009 were at Rs. 1, 109 crores as against Rs. 731

crores over previous year. Current assets level of company has gone up on account of

back-ended payment terms of certain projects under execution. Sundry debtors over 6

months are standing at Rs. 343 crores as against Rs. 30 crores in previous year. This

increase is mainly on account supplies made under rural distribution MSEDCL - GFSS-II

project, of which payment terms are back ended linked to completion and

commencement of feeders.

During this year, company has issued 12.5% Non-Convertible Debentures (NCD) of

Rs. 80 crores for on going capex and general corporate purposes.

The total Debt/Equity ratio is at 0.79 and Long Term Debt / Equity ratio is at 0.16.

Company enjoys PR1+ and AA rating for its short term and long term borrowing

from CARE Ltd.

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Company’s Internal Advancement:

Company has an adequate system of internal controls implemented by management

towards achieving efficiency in operations, optimum utilization of company's resources

and effective monitoring thereof and compliance with applicable laws and regulations.

Company's internal audit department and Independent Internal Auditors conduct regular

audits to ensure adequacy of internal control systems, adherence to management

instructions and compliance with laws and regulations of the country as well as to suggest

improvements.

Audit plans, internal/external auditors' observations and recommendations, significant

risk area assessments and adequacy of internal controls are also periodically reviewed by

Audit Committee.

Company has to adhere to stringent rules and regulations of ISO guideline also.

In record period of 7.5 months, Company has implemented SAP - ERP system,

which achieved Go-Live on April 7, 2009.

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CSR Initiatives:

• Safety

Company gives utmost importance to safety standards at all working locations of

company. At manufacturing units, power plants and all project-sites, necessary

procedures are in place to ensure safety of personnel and equipments. Especially to

ensure safety and health of work force and create awareness, company undertakes the

following activities:

a. Internal safety audits b. Safety week celebration to create awareness about safety

c. Mock drills are conducted to assess emergency / disaster management preparedness, etc.

• Environment

Preservation and promotion of environment is of fundamental concern in all business

activities of KPTL. Company has installed flux regeneration plant, acid and white fume

extractors, eco-ventilator fans, etc at its manufacturing facilities to maintain good

working condition and to make it more environmental friendly. As specific requirement

of customer, Company has started fumigation of its export supplies, dull finishing of

products to avoid reflection when it is installed at site, etc. Company does a lot of

plantation and green area development for GIDC and GUDA.

Company has been accredited with ISO 14001 for Environment Management

System by Intertek Quality Registrar, PLC, U.K., for its EOU Division.

• Community Development

Company exhibits concern for society in order to be good corporate citizen, undertakes

various community welfare measures and environment-friendly initiatives. Primary focus

of social welfare and community development measures of your company is focused on

healthcare, child development, and promoting cultural activities.

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Company undertakes community development programmes by way of sponsoring the

programme of government and non-government organisations like Rotary Club of

Gandhinagar, Gandhinagar Cultural Forum, Kalrav etc. in field of healthcare, child

development programme, cultural activities, women empowerment programme etc.

Company is very much committed to improving quality of life in communities in which it

operates and to contribute the overall development of society. In line with CSR initiative

a Dispensary for medical check up for the Society at concessional fees is under

construction at its Learning Center “Kalpa-Vriksha”.

• Human Resources

"Making People Our Most Important & Valuable Asset"

As Success of a business is directly linked to performance of those who work for that

business, Human Resource of every progressing company has to be properly managed.

However managing a workforce is a lot more complicated than, maintenance of a

company's material capital such as machinery, computer systems, etc. Indeed,

mechanistic approach to employee relations has often failed.

Employee loyalty to the company is seen in low employee turnover. The Company has

succeeded in retaining the talent while adding 500+ new family members. The Company

has an Employee Welfare Trust, which is operational and supports their employees in

need.

Kalpa-Vriksha a dedicated Learning Centre of KPTL, situated at Sec 25 Gandhinagar,

provides support in all development activities of employees. It conducts a 35-day

induction for introducing company to freshers and thereby nurtures their competencies.

A demo area - a virtual site - has been created to give them the practical knowledge

before they go to the site. Here they conduct several personality development, events,

seminars for betterment and advancement of their workforce. Also encourage its

employee to involve in self improvement through Yoga seminars. In this era of constant

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change every individual has to get adapted to change in order to sustain competition.

Thus a platform is provided to its employees to upgrade their competencies, knowledge,

skills and attitudes through various courses at the Learning Center.

“Kalpa-Vriksha” surrounded with green lush garden, also support accommodation to

their employees. It has all the facilities starting from clean and well maintained rooms,

canteen, recreation area, common TV area, Seminar room, Library, etc.

Several other initiatives are:

� Annual Day Celebrations with employees an d their Kids

� Rewarding long service associates

� Annual Picnics and gatherings.

� Periodic Medical Checkup for Employees.

� Tree Plantation Camp

� Health Camps

� Carbon Emission Reduction

� Blood Donation Camp

� Corporate Tournaments in aid of various NGOs

� Youth / Women Empowerment Programme

� Promoting Cultural Activities.

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LOCATION:

Factory & Registered Office Kalpa- Vriksha Learning Centre Plot No. 101, Part III, GIDC Estate, A – 1 & A – 2, Sector 28 GIDC Electronic Estate, Gandhinagar 380 028, Sector 25, Gujarat, India. Gandhinagar Tel: 91-79 2321 4000 Fax: 91-79 2321 1966, 2321 1971 E-mail: [email protected]

Corporate Office & Real Estate Division 101, Kalpataru synergy, Opp. Grand Hyatt, Santacruz (E), Mumbai 400 055. India. Tel: 91 - 22 - 3064 5000 Fax: 91 - 22 - 3064 3131 E-mail: [email protected]

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1.5 Objective of the Study

� To understand the concept of Working capital and its practical application on the

basis of theoretical learning at Institute.

� To examine Working capital Financing policy adopted by the Firm.

� To study the application of various financial requirements and norms to finance

current assets and clear current liabilities.

� To study several instruments used by the firm to finance its day-to-day activities.

� To prescribe remedial measures to problems if any observed.

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Chapter – II

Research Methodology

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2.1 Methods of Data collection

i] Primary data:

� Basic information is directly collected from the company employees at Finance

and Accounts department of KPTL, Gandhinagar.

� Moreover information gathered through studying past contracts undertaken by the

Company and several related documents and Materials provide by the staff

members.

ii] Secondary data:

� Annual Report of the company

� Company Website and other related sites from internet.

� Reference Books provided at the firm.

� College Text Book

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2.2 Limitations

� As my training period clashed with the firms quarterly auditing period the

concerned person in Finance and Accounting Department were busy with auditing

work and thus were not able to provide more time to during the training period.

� Moreover the data for the years before 2006-07 where not available and thus

taken in approximate figures.

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Chapter – III

Working Capital Financing

Analysis

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3.1 Background

Running an Industrial unit involves dealing in commodities, goods, cash and various

money instruments. To acquire these, the corporates need to secure finance of different

types. The requirements of the corporates being of two types, namely, short-term and

long-term, the nature of finance required also is of same two types. Securing both types

of funds required by the corporate and their utilisation to an optimal extent to ensure that

the cost of such funds is minimised are the activities which together constitute Corporate

Finance.

Corporates are able to generate only a minor portion (25-35%) of these finances

internally, the rest has to come from external sources, if a corporate has to grow and

remain profitable. Corporate Sector, therefore, has to depend heavily on the market

sources. The present chapter discusses the main sources of finances for working capital.

Although long-term funds partly finance current assets and provide margin money for

working capital, large part (around 65-75%) of working capital is virtually exclusively

supported by short-term sources. The main sources of working capital financing are Fund

based and Non-fund based bank credit, commercial papers and factoring.

As KPTL is largely an EPC Contracting company which provides an integrated solution

to its clients all over the world starting from Designing to Operations and maintenance of

Power Transmission and distribution it requires huge amount of working capital to carry

on its day to day activities smoothly without any interruption. Furthermore, as KPTL, is

also engaged in export of power transmission, it needs huge financial assistance for

export purpose.

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3.2 Market Scenario

Financial Assistance provided by financial institutions & commercial banks mainly are

divided as under (Fig .3)

Today, the market providing financing solutions to corporate is very competitive. The

only difference that the provider can make is the differentiation through its services.

Modifying some of the product features can distinguish the service provider but there is

very less scope in that front as the current products are almost in line with its most

innovative nature. Companies utilize this product according to its nature of business as

well as financial terms agreed with its supplier and customers.

KPTL meets its working capital needs by borrowing Fund based loans and Non-fund

based loans from different banks. Fund based loans include loans like Overdraft / Cash

credit, Working capital term loan, Working capital demand loan, Packing Credit,

Advance against retention money, Foreign Currency Loan, Foreign Discounting Bill

Purchasing, etc. Where as Non-fund based loans include Letter of Credit and Bank

Guarantee. Generally in any company the requirements of Non-fund based loans is more

than Fund based loans.

Financing

Products

Fund Based Non-fund Based

Over Draft/ Cash Credit Line of Credit Bill Discounting / Purchasing Working capital Demand Loan Short-term Corporate loan Packing Credit (export finance) Foreign Bill Purchasing Commercial Papers

Letter of Credit Bank Guarantee

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The Banking and financial institutions grants financing limits based on assessment of the

working capital requirement of individual party. The assessment factors include various

characteristics such as the nature of industry, industry norms, actual level of activity for

the previous year and the projected level of activity for the subsequent year to arrive at

the working capital requirement. The bank financing limit is thereafter decided after

factoring in margins on the different types of current assets forming part of the working

capital.

For borrowers having consortium arrangement: The limit will be fixed by the lead bank

along with the bank having the next largest shares. The individual banks' share will also

be intimated by the lead bank to all the member banks in the

consortium.

The main factors considered in the estimation of working capital requirement

• The nature of business and sector-wise norms • The level of activity of the business

The steps involved in arriving at the level of Working Capital Requirement

• Based on the level of activity decided and the unit cost and sales price projections, the

banks calculate at the annual sales and cost of production.

• The quantum of current assets (CA) in the form of Raw Materials, Work-in-progress,

Finished goods and Receivables is estimated as a multiple of the average daily

turnover. The multiple for each of the current assets is determined generally based on

the industry norms.

• The current liabilities (CL) in the form of credit availed by the business from its

creditors or on its manufacturing expenses are deducted from the current assets (CA)

to arrive at the Working Capital Requirement (WCR).

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Standard Formulae for determination of Working Capital

The issue of computation of working capital requirement has aroused considerable debate

and attention in this country over the past few decades. A directed credit approach was

adopted by the Reserve Bank of ensuring the flow of credit to the priority sectors for

fulfillment of the growth objectives laid down by the planners. Consequently, the

quantum of bank credit required for achieving the requisite growth in Industry was to be

assessed. Various committees such as the Tandon Committee and the Chore Committee

were constituted and studied the problem at length.

Norms were fixed regarding the quantum of various current assets for different industries

(as multiples of the average daily output) and the Maximum Permissible Bank Financing

(MPBF) was capped at a certain percentage of the working capital requirement thus

arrived at.

Working Capital assessment formula prescribed by the Tandon Committee is as under: Working Capital Requirement (WCR) = [Current assets i.e. CA (as per industry norms) – Current Liabilities i.e. CL] Permissible Bank Financing [PBF} = WCR – Promoter’s Margin Money i.e. PMM (to be brought in by the promoter) As per Formula 1: PMM = 25% of [CA – CL] and thereby PBF = 75% of [CA – CL] As per Formula 2: PMM = 25% of CA and thereby PBF = 75% [CA] – CL

The analysis of balance sheet in CMA data is said to give a more detailed and accurate

picture of the affairs of a corporate. The corporates are required by all banks to analyse

their balance sheet in this specific format called CMA (Credit Monitoring Arrangement)

data format and submit to banks. The Maximum permissible Bank Financing Limit under

fund based is fixed on an annual basis. However, since such limit is provided to meet

specific requirements, utilizing the limits is subjected to the DP (Drawing Power), which

is decided on a monthly / quarterly basis.

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The effective bank financing is therefore to the extent of the lower of:

• BANK FINANCING LIMIT: Determined on an annual basis based on an assessment of the current year’s projections and the actual figures for the previous year.

• DRAWING POWER: It is Linked to the quantum of current assets (and current liabilities) owned by the business with appropriate margins. Fixed on a monthly/ quarterly basis depending on the submission of Monthly/Quarterly Information System returns indicating the position of the stock statement, receivables, Work in Progress, payables, etc.

Bank Financing (max. permissible) = Maximum Permissible Bank Financing Limit (MPBF) OR Drawing Power whichever is less How is DP (Drawing Power) Calculation done?

Loan or Limits are being fixed against HYPOTHECATION of particular stock. The

borrower use to submit his stock statement on regular basis say monthly, fortnightly and

quarterly as decided by the bank and the borrower. Bank and borrower both are agreeing

vide an arrangement letter regarding % of the margin on the stock. so after reducing the

margin the bank allow a borrower to draw amount against the stock and fixes the

Drawing power subject to the maximum of his loan.

Condition A: Suppose the Borrower has 10 lacs of Goods. With 50% Margin his limit is

fixed as 5 lacs and also the drawing power

i.e.) Limit = Drawing Power = 5Lacks

Condition B: Suppose if the Borrower is having only 8 lacs of goods with him in the

next month. Now Limit will be the same 5 lacs and DP will be 4 lacs.

i.e.) even though he has a limit of 5 lacks his available

Credit limit allowed to withdraw will be just 4 lacs (50% of 8Lacks).

Condition C: Suppose if the Borrower has now 12 lacs of goods with him in the third

month. Now the limit = 4 lacs and DP = 4 lacs (& not 6 lacs).

i.e.) Limit or DP whichever is lower.

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Illustrative Example of bank finance:

Turnover of a manufacturing unit: Rs. 750 Crores p.a (assumed uniform across the year)

Assumed value addition norm: 50% (i.e. cost of raw material = 50% of Realisation)

XYZ Company Projections

Current Assets Current

Liabilities

- Raw materials Rs. 50

Crores - Payables

Rs. 35

Crores

- Work in

progress Rs. 25

Crores

- Finished Goods Rs. 60

Crores

- Receivables Rs. 125

Crores

Requirement assessed as per norms applicable for the industry:

Industry

Norm (a) Amount as

per Norm

(b)

Promoter

Projection (c) Applicable

norm (d)

Current Asset

- Raw material 1 month Rs. 31.25

Crores Rs. 50 Crores

Rs. 31.25

Crores

- Work in Progress

(assumed at 50%

complete) 10 days

Rs. 15.62


Rs. 15.62

Crores

- Finished Goods 15 days Rs. 31.25


Rs. 31.25

Crores

- Receivables

1.5 months Rs. 112.50


Rs. 112.50

Crores

Rs. 190.62

Crores Rs. 260.0

Crores Rs. 190.62

Crores

Less:Current Liabilities

- Payables 15 days Rs. 18.80

Crores Rs. 35 Crores Rs. 18.80 lakh

Working Capital

Requirement

Rs. 171.82

Crores Rs. 225.0

Crores Rs. 171.82

Crores

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Notes:

• Assumptions here include: No export turnover, uniform working capital requirement through out the year

• Industry norms have been specified in the Tandon Committee Report for all

important industry categories

• Raw materials have been valued at cost of raw material (assumed at 50% of

realization)

• Work in progress has been valued at 50% complete basis

• Applicable norm (d) is the more conservative of (b) or (c) from the bank’s point

of view.

Computation of working capital requirement Working Capital Requirement arrived at therefore is Rs. 171.82 Crores

⇒ Formula 1

PMM (Promoter Margin Money) as per formula-1 = 25% of 171.82 Crores = Rs.

42.95 Crores ~ Rs. 43 Crores

Hence, Permissible Bank Finance 1 = Rs. 129 Crores

⇒ Formula 2

PMM as per formula-2 = 25% of Rs. 190.6 Crores = Rs. 47.65 Crores

Permissible Bank Financing as per formula 2 = [75% of 190.6 Crores – Rs. 18.8

Crores ] = Rs. 124.1 Crores

For Kalpataru Power Transmission Formula 2 is applicable. As per the erstwhile

guidelines of Reserve Bank of India, sanction of aggregate fund based working capital

limits of Rs. 1 crore and above from the banking system would be subject to the second

method of lending so as to ensure maintenance of a minimum current ratio of 1.33:1.

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Illustration of Drawing Power: This Drawing power is applicable for Fund based facility. Company gets Fund based

loans against Stock and Debtors. For e.g. if the company is having stock of 100 crores,

debtors of 260 crores and Creditors of 150 crores then company will get Fund based loan

of 120 crores.

For e.g.

Amt in Crores

Stock 100

Debtors 260

Total 360

Less: - 25% Margin Money (90)

270

Less: - Creditors (150)

Fund Based Loans 120

As illustrated the DP arrived is Rs 120 Crores and the Limit (as per 2 Formula) is

Rs. 124.1 Crores. Thus the MPBF (Maxi. Permissible Bank Finance) arrived at will

be Rs 120 Crores i.e. Lower of DP and Financing Limit.

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3.3. KALPATARU POWER TRANSMISSION AND

ITS CREDIT LIMITS

Figures of Working Capital Limits enjoyed by KPTL are: (Fig.4) KPTL Credit

Limits

The Company has supported its Working capital finance from the Consortium of Bankers

• INDIAN BANK ( lead bank)

• Oriental Bank of Commerce

• Union Bank of Commerce

• State Bank of India

• EXIM Bank

KPTL has shown a continuous growth during past few years. The Company continues to

be among the leading players in transmission sector not only in India but also on the

international front.

KPTL has been able to continuously increase its order book with focus on improving

profitability.

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It continues to deliver on commitments to clients and its focus on creating additional

capacity in terms of resources in the previous year has helped the company to take the

leap forward.

Their client base continues to expand with focus on long-term relationships.

It has continued to diversify using the group's strengths as a whole which is an added

advantage for a lot of Infrastructure projects on PPP basis

Last but not the least their strong financials ensures that it continue to focus on long term

growth and in creating shareholders value.

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3.4 FINANCIAL ANALYSIS

The Company has been amply supported by its bankers and lenders who have shown

enormous trust and confidence in its ability and intention and stood by the company at all

times. Some figures that prove companies calibre are:

1) NET SALES (Total Sales – Excise Duty) (Fig. 5)

NET SALES

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Rs i

n C

rore

s

0

100

200

300

400

500

600

% C

han

ge (

Base'0

4)

Rs (Crores) 342.24 541.32 839.72 1,524.35 1,737.58 1882.49

Growth (%) 100.00 158.17 245.36 445.40 507.71 550.05

Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

⇒ From above Chart, we can say that KPTL had successfully take advantage of increase

in a domestic demand as well as in a international market

⇒ As we can see that, current sales of KPTL is 5.5 Times of a year ended on March -

04. Sales of KPTL were increased from Rs 342.24 in 2003-04 Crores to 1882.49

Crores in year 2008-09.

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2) Net worth (Share Capital + Reserves and Surplus) (Fig. 6)

NET WORTH

0

100

200

300

400

500

600

700

800

900

Year

Rs

. in

Cro

res

0

100

200

300

400

500

600

700

800

900

1000

% (

Ba

se

'0

3-'

04

)

Rs In Crores 91.38 113.8 167.93 642.44 767.77 836.95

Change (%) 100.00 124.53 183.77 703.04 840.19 915.90

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

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3) Order Book (Fig.7)

ORDER BOOK

1100

2000

2300

3400

5000

0

1000

2000

3000

4000

5000

6000

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Rs i

n C

rore

s

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4) Production Capacity (Fig.8)

PRODUCTION CAPACITY

54000

84000 84000 84000

108000

0

20000

40000

60000

80000

100000

120000

2004-05 2005-06 2006-07 2007-08 2008-09

CA

PA

CIY

in

MT

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This Ratio compares assets which will become liquid within approximately twelve

months with liabilities which will be due for payment in the same period and is intended

to indicate whether there are sufficient short term assets to meet the short- term liabilities.

Recommended current ratio is 2:1. Any ratio below indicates that the entity may face

liquidity problem but also Ratio over 2:1 as above indicates over trading, that is the entity

is under utilizing its current assets.

CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES

(Table 3) Rs.In Lakhs

2004-05 2005-06 2006-07 2007-08 2008-09

Current Assets 31694.23 48558.72 134627.27 133041.21 192570.91

Current Liabilities 24511.41 38601.3 68754.63 59920.87 81647.35

Ratio(Times) 1.29 1.26 1.96 2.22 2.36

(Fig 9)

Current Ratio

2.362.22

1.96

1.261.29

0.00

0.50

1.00

1.50

2.00

2.50

2004-05 2005-06 2006-07 2007-08 2008-09

Rati

o

Interpretation: It can be observed that Current Ratio of KPTL varied between 1.26: 1

and 1.95: 1 during the period from 2004-05 to 2006-2007. Later it has increased to 2.36:1

in 2008-09. It is evident that, on an average, per every one rupee of current liability, the

company has been maintaining 1.81 rupee of current assets as a cushion to meet the short

term liabilities. Usually, a Current Ratio of 2:1 is considered to be the standard to

1. CURRENT RATIO

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indicate sound liquidity position and it is observed that the company has attained this

sound position in past two years.

Moreover, as per RBI guidelines the Current ratio should be 1.33:1 for attaining finance

from banks.

This Ratio establishes relationship between the outside total Liabilities (Long Term &

Short term Liabilities/debt) and the Owners fund.

Total Debt Equity Ratio = Total Debts (Long Term = Short Term) / Owners

Fund

(Table 4) Rs in lakhs

2007-08 2008-09

Total Debt 33556.7 66750.46

Owners Fund 76777 83695

Total D/E Ratio (Times) 0.437 0.798

(Fig 10)

Total Debt/Equity Ratio

0.98

1.39

0.520.437

0.798

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2004-05 2005-06 2006-07 2007-08 2008-09

Ratio

Interpretation: The ratio suggests that for every Rs 100 shareholders fund, there is

outsider debt of Rs 79 in 2008-09, and Rs 43.7 in 2007-08.

Higher Ratio means outside creditors have a larger claim than the owners of the Fund.

2. DEBT Equity Ratio (Total)

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This Ratio establishes relationship between the outside Long Term Liabilities/debt and

the Owners fund.

Long Term Debt Equity Ratio = Long term Debts / Owners Fund

(Table 5) Rs.In Lakhs

2007-08 2008-09

Long Term Debt 7038.63 13413.96

Owners Fund 76777 83695

Total D/E Ratio (Times) 0.092 0.16

(Fig. 11)

Long Term Debt/ Equity Ratio

0.21

0.59

0.140.092

0.16

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2004-05 2005-06 2006-07 2007-08 2008-09

Rati

o

Interpretation: The ratio suggests that for every Rs 100 shareholders fund, there is long-

term debt of Rs 16 in 2008-09, and Rs 9.2 in 2007-08.

Higher Ratio means outside creditors have a larger claim than the owners of the Fund.

3. DEBT Equity Ratio (long Term)

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Banks and financial Institution which provide the bulk of Long-term loans judge the debt

capacity of a firm in terms of its (DSCR) Debt Service coverage Ratio.

∑ PAT + ∑ DEP + ∑ INT + ∑Le

DSCR = _____________________________

∑INT +∑ LR +∑Le (Table 6) Rs in Crores

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Profit after tax(PAT) 29 67 159 150 94

Depreciation (DEP) 5 9 17 22 27

Interest on Long term Loan(I) 3 4 6 7 8

Loan Repayment Instalment(LR) * 20 20 20 24.26 16

Lease Rental for Year (Le) Nil Nil Nil Nil Nil

DSCR 1.85 4 9.1 7.38 8.06

• Figures for 2004-05, 2005-06, & 2006-07 are hypothetical

(Fig 12)

DSCR

1.85

4

9.1

7.38

8.06

0

1

2

3

4

5

6

7

8

9

10

2004-05 2005-06 2006-07 2007-08 2008-09

Rati

o

Interpretation:

DSCR for the KPTL has shown a considerable and substantial growth in past 5 years.

This has been due to its consistent & dedicated effort in meeting its customer’s needs in

time and thus increasing its credibility in the market. As per Banks and FIs, a ratio of 1.5

is considered favorable.

4. DEBT Service Coverage Ratio

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The Lenders (Banks and Financial Institutions) evaluate the Credit worthiness of

the Borrower on the basis of the above mentioned ratios and facts and figures of

their past performance.

These details are available from the CMA Reports submitted by the borrower on Annual

basis.

For borrowers having consortium arrangement: The limit will be fixed by the lead bank

along with the bank having the next largest shares. The individual banks' share will also

be intimated by the lead bank to all the member banks in the consortium.

Once the Limits are assigned, the lender (in order to safeguard its money) keeps watch on

the performance on Quarterly basis and the proper utilization of funds by of the unit by

demanding borrower to submit their QIS (Quarterly Information System) reports.

The Key Components of QIS reports are:

1. QIS-Form I this gives (i) the estimates of production and the sales for the current year

and the ensuing quarter. (ii) the estimates of current assets and liabilities for the ensuing

quarter.

2. QIS-Form II This gives (i) The actual production and the sale during the current year

and for the latest completed year, and (ii) the actual current assets and liabilities for the

latest completed quarter.

3. Half yearly Operating Statements-Form III This gives the actual operating

performance of the half year ended against the estimates for the same.

4. Half yearly Funds flow Statement-Form III B This gives the sources and the uses of

funds for the half-year ended against the estimates for the same.

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3.5 FINANCIAL INSTRUMENTS USED AT KPTL

3.5.1. Fund Based Credit from Banks and FIs

3.5.2. Non-Fund Based Credit from Banks and FIs

3.5.1. FUND BASED CREDIT FROM BANKS AND FIs

3.5.1.1 Overdrafts / Cash Credits

3.5.1.2 Packing Credit

3.5.1.3 Packing Credit in Foreign Currency (PCFC)

3.5.1.4 Bills Purchased/Discounted

3.5.1.5 Foreign Currency Non-Resident (Bank) - FCNR (B)

3.5.1.6 Advance against Undrawn Balances

3.5.1.7 Commercial Paper

3.5.1.8 Working Capital Demand Loan

Once the Bank arrives at the Limit “Assessed Bank Finance” earlier known as MPBF,

which is lower of the Drawing Power and the Bank Financing Limit, the company

can utilize multiple numbers of instruments to get finance for supporting their

working capital needs. The Company cannot exceed its borrowing from the limit of

ABF / MPBF.

How fund based working capital loans are divided among different sub- heads:-

Company gets Fund based loans against Stock and Debtors. For e.g. if the company is having stock of 100 crores, debtors of 300 crores and Creditors of 150 crores then company will get Fund based loan of 150 crores. For e.g.

Amt in crores Stock 100 Debtors 300 Total 400 Less: - 25% Margin Money (100) 300 Less: - Creditors (150) Fund Based Loans 150

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These 150 crores amount is also known as Drawing Power of the company. The company

receives these amounts from bank under two heads. They are

⇒ Fund Based Loan

⇒ Packing Credit

First of all the amount of packing credit is deducted from the amount sanctioned by the

bank for Fund based loans. Company gets packing credit against export material.

Company receives Packing Credit for the purchase of the raw materials. Whenever the

bank receives the payment from the party then the amount of packing credit is reversed

by the bank.

After the amount of Packing Credit is deducted from the amount sanctioned, the

remaining amount is divided among various components. These components are

⇒ Cash Credit

⇒ Working Capital Demand Loan

⇒ Foreign Discounting Bill Purchase

⇒ Foreign Currency Non-Resident loan

The amount is divided among various components as per the decision of Bank. Generally

the bank gives Cash Credit equal to 20% of the remaining amount. The company can ask

the bank to transfer funds from Working Capital Direct Loan to Cash Credit loan. For e.g.

if the company is having 20 crores in Cash Credit a/c and it has to make payment of 30

crores then the company can ask bank to release 10 crores from Working Capital Direct

Loan to Cash Credit a/c. The company can ask bank to release funds from the Working

Capital Direct Loan as and when need arises. The bank charges interest on the amount

utilized by the company.

It is not necessary for the company to raise Foreign Currency Non-resident Loan.

Company raises this type of loan when it is required to make payment in currency other

than Rupee.

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Fund based short term bank credit working capital requirement is projected by a bank is

given below. Rs. In Lacs

PARTICULARS 2004-2005 2005-2006 2006-2007

A. Gross Annual Sales for the period 49000.70 82565.57 147661.48

B. Total Current assets on the above date

1. 65 % of A or Projected current assets

whichever is low.

29257.91 48046.03 76224.91

2. Highest level in the past 3 years in terms

of sales 85% 60% 60%

3. B2 X A 41650.60 49539.34 88596.89

4. B1 or B3 whichever is lower 29257.91 48046.03 76224.91

C. Net working capital on projected date

1. 25% of B4 – maturing term liabilities 6943.66 11057.77 18173.09

2. 16.66% of B4 4874.37 8004.47 12699.07

3. Projected as per Balance sheet 6147.63 10443.12 18435.44

4. Projections of NWC

( C1, C2 or C3 whichever is higher) 6943.66 11057.77 18435.44

D. Other Current liabilities projected 16736.70 26752.44 30789.47

E. Fund based Short Term Bank Credit 5577.55 10235.82 27000.01

SAY 5600.00 10250.00 27000.00

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Under cash credit/overdrafts form/ arrangement of bank finance, the bank specifies a

predetermined borrowings/credit limits. The borrower can draw/ borrow up to the

stipulated credit/overdraft limit. Within the specified limit/line of credit, any number or

drawings are possible to the extent of his requirement periodically. Similarly, repayments

can be made whenever desired during the period. The interest is determined on the basis

of the running balance/amount actually utilized by the borrower and not on the

sanctioned limit. . A minimum charge may be payable irrespective of the level of

borrowing, for availing o this facility.

This form of advance is highly attractive from the borrower’s point of view because

while the borrower has the freedom of drawing the amount in installments as and when

required, interest is payable only on the amount actually outstanding. Also, it is flexible

in that borrowed funds are repayable on demand, banks usually do not recall cash

advances. KPTL has to keep margin of 25% for cash credit/overdraft. Rate of interest on

OCC is not exceeding 9% for company irrespective of BPLR (Banking Prime Lending

Rate).

Packing credit is also known as “Pre-shipment Credit”. Financial assistance provided

by the commercial banks to exporters before the shipment of goods is called pre-

shipment finance. Pre-shipment finance is given for working capital for purchase of raw

material, processing, packaging, transportation, ware-housing etc. of goods meant for

export. Pre-shipment finance is presently given to Indian exporters at a concessional rate

of 10% for a period of 180 days. Pre-shipment credit for a further period of 180 days to

270 days is given at 12%.

3.5.1.2 Packing Credit

3.5.1.1 Cash Credit/Overdrafts

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→ Packing Credit Finance Categories:

Packing credit falls in following categories.

� Rupee Pre-shipment credit or Packing Credit

� Packing credit on deemed exports

� Rupee export packing credit to manufacturer-supplier for export routed through

export houses.

� Rupee packing credit to sub-suppliers

� Rupee pre-shipment credit to specific sectors/segments.

→ Eligibility:

The packing credit is given on the strength of letter of credit opened in favor of exporters

or in favor of some other person by foreign buyer or against a confirmed and revocable

export order received by company. The applicant should, however, hold an importer-

exporter code number from the licensing authority concerned.

→ Company can avail any loan or advance on the basis of:

Letter of Credit opened in your favor or in favor of some other person, by an overseas

buyer;

(a) A confirmed and irrevocable order for the export of goods from India;

(b) Any other evidence of an order or export from India having been placed on the

exporter or some other person, unless lodgments of export order or Letter of

Credit with the bank has been waived.

Packing Credit is granted for a period depending upon the circumstances of the individual

case, such as the time required for procuring, manufacturing or processing (where

necessary) and shipping the relative goods. Packing credit is released in one lump sum or

in stages, as per the requirement for executing the orders/LC.

The pre-shipment / packing credit granted has to be liquidated out of the proceeds of the

bill dawn for the exported commodities, once the bill is purchased/discounted etc.,

thereby converting pre-shipment credit into post-shipment credit. KPTL has to keep

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margin of 10% for packing credit. Rate of interest on Packing credit is not exceeding 7%

irrespective of BPLR.

It is granted to the clients for making advance payment to the suppliers for acquiring

goods to be exported. Thus, it is clean in nature and usually extended to the parties, who

are rated as first class, for a very short duration. However, bank should assess the

procurement period and once the goods are acquired and are in the custody of the

company’s client.

→ There are three broad types of packing credit:

A. CLEAN PACKING CREDIT

� This represents an advance made to the exporter on the basis of a firm export

order or a letter of credit, without any control over raw materials or goods.

� Each proposal is decided on the basis of particular requirement of the trade and

the creditworthiness of the exporter.

B. PACKING CREDIT AGAINST HYPOTHECATION OF GOODS

� Under this arrangement, the goods meant for export are hypothecated to the bank

as security.

� When the bank advance is to be utilized, the exporter is required to furnish stock

statements and continue to do so whenever there is stock movement.

C. PACKING CREDIT AGAINST PLEDGE OF GOODS

� Under this arrangement, the goods meant for export are pledged to the bank with

an approved clearing agent who ships the same on the advice of the exporter.

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The packing credit or pre-shipment credit that was spoken earlier was disbursement of

rupee funds, that is, advancing money in rupee to the exporter for the purpose of

procuring, processing or manufacturing the goods for exports. Under this scheme the pre-

shipment credit is disbursed in foreign convertible currency at interest rates linked with

LIBOR (London Inter Bank Offered Rate). This credit is again self-liquidating in nature

and is adjusted by the discounting or purchase or negotiation of the export bills.

The banks change Earners Foreign Currency (EEFC), resident foreign currency accounts,

foreign currency non-resident account bank scheme accounts and foreign currency

available in escrow account. For all practical purposes this resembles the packing credit

advance disbursed in rupees, except that the interest charged is based on LIBOR and the

disbursement is made in foreign convertible currency. The advantage of this scheme is

lower rate of interest and covering of foreign exchange risk where goods are imported for

the purposes of export.

For instance, if export order is for US$ 20,000 and the import component is say 60

percent, assuming that the exporter avails PCFC of US$ 12,000, the liability would be

adjusted against the submission of the export documents. Under the PCFC of US$ 12,000

no exchange conversion is involved. The exporter saves the difference between buying

and selling exchange rates. If PCFC is availed by the exporter against an export order, the

bills drawn under the said export order will be discontinued at LIBPR plus the loading

factor of the bank.

Indian exporters can avail both pre and post shipment finance in foreign currency.

Interest rates under the scheme are linked to LIBOR and the rates charged by Indian

Banks over LIBOR for such credits would not exceed 1.5%. Export credit in foreign

currency is available in US Dollar, Euro, Pound Sterling and Japanese Yen. Export credit

is available without exchange risk and at internationally competitive rates. Banks extend

credit on "need basis" of exporters and collateral security is not insisted. Banks also

3.5.1.3 Packing Credit in Foreign Currency (PCFC)

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provide lines of credit for longer periods say three years, to exporters with satisfactory

track records without insisting on the submission of export order/Letter of Credit.

� Packing Credit Foreign Currency (PCFC)

Interest charged at LIBOR + 1.5% (Max.)

A 90 days Dollar Packing Credit can be availed at 3m LIBOR + 1.5%.

6.10% + 1.50% = 7.60%.

PCFC drawls in cross currencies are allowed, subject to the exporter bearing the risk in

currency fluctuations. However, cross currency drawls are restricted to the US Dollar.

For instance, for an export order in a non-designated currency like the Swiss Franc,

PCFC will be given only in USD.

Bank credit is being made available through discounting of usance bills by banks. The

RBI envisaged the progressive use of bills as an instrument of credit as against the

prevailing practice of using the widely-prevalent cash credit arrangement for financing

working capital. The amount made available under this arrangement is covered by the

cash credit and overdraft limit. Before discounting the bill, the bank satisfies itself about

the credit-worthiness of the drawer and the genuineness of the bill. To popularize the

scheme, the discount rates are fixed at lower rates than those of cash credit, the difference

being about 1-1.5 percent.

The modus oprendi of bill finance as a source of working capital financing is that bill

arises out of a trade sale-purchase transaction on credit. The seller of goods draws the bill

on the purchaser of goods, payable on demand or after a usance period not exceeding 90

days. On acceptance of the bill the bank releases the funds to the seller. The bill is

3.5.1.4 Bills Purchased/Discounted

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presented by the bank to the purchaser/acceptor of the bill on due date for payment. The

bills can also be rediscounted with the other banks.

PCFC will be liquidated with the discounting of bills under export bill rediscounting

(EBR). All export bills, demand and usance, are eligible for EBR scheme. All exporters

are eligible to cover their bills drawn under letters of credit, non-credit bills under

sanctioned limits in the bill rediscounting scheme. The bank offers export bill

rediscounting for a maximum period of 180 days, inclusive of grace and transit periods.

FCNR (B) loans are a source of short term funding available to corporate. Out of the

resources mobilized by the banks under the FCNR (B) scheme, banks have been

permitted to provide foreign currency denominated loans to their customers. Banks

decide the purpose, tenor and interest rates on such loans. While the introduction of the

scheme has placed cheap credit at the disposal of Indian corporate (as interest rates are

linked to LIBOR), the foreign exchange risk is borne by the party who has availed the

loan.

The interest rate for the tenor of the loan is fixed on the date of draw down and the

corporate can hedge his exchange rate risk by booking a forward cover. The illustration

given below will provide you with more clarity.

� Corporate A has got a rupee credit at 16% p.a.

� Corporate A can switch this rupee loan to a dollar FCNR (B) loan/take a fresh

FCNR (B) loan. The cost of a 6-month FCNR (B) LOAN is as follows

Date of Draw down 14/2/2007

3.5.1.5 Foreign Currency Non-Resident (Bank) - FCNR (B)

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� 6 Month $ Libor (%)

6.32

� Bank’s Margin (Spread over LIBOR – assumed)

2.00

� Cost of forward cover (annualized %)

3.10

� Other transaction costs

0.58

� Net rate (%)

12.00

The comparative cost advantage is evident as it results in a net saving of 4% over his

rupee cost of funding. The spread over LIBOR would depend on the credit worthiness of

the party involved. Thus, corporate can utilize this opportunity to reduce their interest

burden and thereby minimize costs.

Term deposit can be placed with authorized dealers in India in four specific foreign

currencies (US Dollar, Pound Sterling, Euro or Japanese Yen). These accounts earn fixed

or floating rate of interest within the ceiling rate of LIBOR/SWAP rates for the respective

currency/ corresponding term minus 25 basis points (except on Yen). KPTL has to pay

rate of interest on FCNR loans is LIBOR + 2%.

Usually, in case of certain products exporters are required to draw bills on overseas

buyers upto 90 to 98% of FOB value of the contract, the residuary balances i.e.

“unknown balances” is payable by the overseas buyer after satisfying himself about the

quality/quantity of goods.

3.5.1.6 Advance against Undrawn Balances

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Hence, undrawn balances exist where the overseas buyer makes payment, after making

adjustment for difference in weight quality/quantity of goods. Payment of undrawn

balances is contingent in nature. Banks may consider granting advances against undrawn

balances at concessional rate of interest based on their commercial judgments and the

track record of the buyer. Advance against undrawn balances can be made at a concessive

rate of interest for a maximum period of 90 days. Such advances are, however, eligible

for concessional rate of interest for a maximum period of 90 days only to the extent these

are repaid by actual remittances are from abroad and provided such remittances are

received in 180 days.

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a

promissory note. It is a short-term loan issued by a corporation, typically for financing

accounts receivable and inventories It was introduced in India in 1990.It was introduced

with a view to enabling highly rated corporate borrowers/ to diversify their sources of

short-term borrowings and to provide an additional instrument to investors. Subsequently,

primary dealers and satellite dealers were also permitted to issue CP to enable them to

meet their short-term funding requirements for their operations. The people eligible to

issue commercial paper are corporate, primary dealers (PDs) and the All-India Financial

Institutions (FIs). But there is also a limitation to the corporate that are eligible. Only

those corporate who has:

� the tangible net worth of the company, as per the latest audited balance sheet,

not less than Rs. 4 crore;

� been sanctioned working capital limit by bank/s or all-India financial institution/s;

and

� the borrower account classified as a Standard Asset by the financing bank/s/

institution/s are eligible to issue commercial paper.

Commercial paper is available in a variety of denominations and usually ranges in

maturity from 2 to 270 days. A minimum of 15 days and a maximum of 1 year time

3.5.1.7 COMMERCIAL PAPER

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period have been prescribed for the commercial paper. The aggregate amount of CP from

an issuer shall be within the limit as approved by its Board of Directors or the quantum

indicated by the Credit Rating Agency for the specified rating, whichever is lower.

As regards FIs, they can issue CP within the overall umbrella limit fixed by the RBI i.e.,

issue of CP together with other instruments viz., term money borrowings, term deposits,

certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its

net owned funds, as per the latest audited balance sheet. Usually the CP is issued in the

denominations of Rs.5 Lacs or multiples thereof.

Individuals, banking companies, other corporate bodies registered or incorporated in

India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional

Investors (FIIs) etc. can invest in CPs. However, amount invested by single investor

should not be less than Rs.5 Lacs (face value). However, investment by FIIs would be

within the limits set for their investments by Securities and Exchange Board of India

(SEBI).

There is an Issuance and Paying Agent (IPA) which is usually a scheduled bank. The role

of IPA is an important one when the redemption procedure is to be carried out. Initially

the investor in CP is required to pay only the discounted value of the CP by means of a

crossed account payee cheque to the account of the issuer through IPA. On maturity of

CP,

(a) When the CP is held in physical form, the holder of the CP shall present the

instrument for payment to the issuer through the IPA.

(b) When the CP is held in demat form, the holder of the CP will have to get it redeemed

through the depository and receive payment from the IPA.

The roles and responsibilities as prescribed by the RBI can be briefly stated as: Issuer:

� Every issuer must appoint an IPA for issuance of CP.

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� The issuer should disclose to the potential investors its financial position as per

the standard market practice.

� After the exchange of deal confirmation between the investor and the issuer,

issuing company shall issue physical certificates to the investor or arrange for

crediting the CP to the investor's account with a depository.

� Investors shall be given a copy of IPA certificate to the effect that the issuer has a

valid agreement with the IPA and documents are in order (Schedule

Issuing and Paying Agent:

IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and

amount mobilized through issuance of CP is within the quantum indicated by CRA for

the specified rating. IPA has to verify all the documents submitted by the issuer viz., copy

of board resolution, signatures of authorized executants (when CP in physical form) and

issue a certificate that documents are in order. It should also certify that it has a valid

agreement with the issuer (Schedule III). Certified copies of original documents verified

by the IPA should be held in the custody of IPA.

* of Kalpataru Power Transmission Ltd. for Short

Term and Long Term borrowing are PR1+ and CARE AA.

A borrower may sometimes require ad hoc or temporary accommodation in excess of

sanctioned credit limit to meet unforeseen contingencies. Banks provide such

accommodation through a demand loan account or a separate non-operable cash credit

account. The borrower is required to pay a higher rate of interest above the normal rate of

interest on such additional credit. KPTL has to pay rate of interest on WCDL not

exceeding 9% irrespective of bankers BPLR.

3. 5.1.8 Working Capital Demand Loan

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3.5.2. NON-FUND BASED CREDIT FROM BANKS AND FIS

Credit facilities, which do not involve actual deployment of funds by banks but help the

obligations to obtain certain facilities from third parties, are termed as non-fund based

facilities. These facilities include issuance of letter of credit, issuance of guarantees,

which can be performance guarantee/financial guarantee.

For its export financing purposes as well as for supplying and erection of transmission it

mainly uses non fund based working capital i.e.

3.5.21. Letter of Credit

3.4.2.2. Bank Guarantee

For bid purposes, KPTL uses BG as their transaction instrument.

At KPTL, two types of BG are opened:

1) International bank guarantee which is given to the international bidder and is always in dollar form.

2) Domestic bank guarantee which is used for domestic trade purpose.

A letter of credit, often abbreviated as an LOC or LC, and also referred to as a

documentary credit, is a document issued by a financial institution or any bank which

essentially acts as an irrevocable guarantee of payment to a beneficiary. This means, that

once the beneficiary has presented to the issuing or negotiating bank documents

complying with the LC terms, the bank is obliged to pay irrespective of any instructions

of the applicant to the contrary. In other words, the obligation to pay is shifted from the

applicant to the LC issuing bank.

The LC can also be the source of payment for a transaction, meaning that an exporter will

get paid by redeeming the letter of credit. Letters of credit are used nowadays almost

exclusively in international trade transactions of significant value, for deals between a

supplier in one country and a wholesale customer in another.

3. 5.2.1 letter of credit

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The parties to a letter of credit are usually a beneficiary who is to receive the money

(seller), the issuing bank of whom the applicant is a client, and the advising bank of

whom the beneficiary is a client. Since nowadays almost all letters of credit are

irrevocable, (i.e. cannot be amended or cancelled without prior agreement of the

beneficiary, the issuing bank and the confirming bank, if any), the applicant is not a party

to the letter of credit.

Flow in Letter of Credit Transactions

The procedure as to how the letter of credit is processed can be explained elaborately as below: (Fig 13)

1) A commercial negotiation or purchase order is binding the importer and the exporter.

2) Upon such a request from the exporter, the importer may request the opening of

documentary credit to its issuing bank in favor of the exporter, hence becoming the

beneficiary of the credit.

3) The issuing bank advises the documentary credit to the bank of the exporter.

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4) The bank of the exporter subsequently notifies (and it is called advising bank) or

confirms (and it becomes the confirming bank) the letter of credit.

5) The next step is up to exporter who will have to ship the goods ordered. The

documents of transport required for the completion of the transaction will be remitted to

the exporter typically by the shipping company.

6) The exporter presents the whole set of documents required in the terms of the Letter of

Credit to its bank. This bank will perform some document checking to ensure their

compliance with the terms of the documentary credit. In case the bank had originally

confirmed the credit or if a discount is granted to the exporter, the payment will be done

to the exporter.

7) The bank of the exporter is sending the documents to the issuing bank that performs

the payment or acceptance after a thorough checking of the documents.

8) The issuing bank transfers the documents to the importer and proceeds with the debit

of its account for the principal amount.

9) The importer receives the goods, especially thanks to the document of title (bill of

lading).

Price of LC

The issuer pays the LC fee to the bank, and may in turn charge this on to the beneficiary.

From the bank's point of view, the LC they have issued can be called upon at any time

(subject to the relevant terms and conditions), and the bank then looks to reclaim this

from the issuer.

There is the chance that the issuer goes insolvent, for example, and thus the bank is

unable to claim back the money it has already paid out. This credit risk to the issuer thus

makes up a large portion of the cost of issuing LCs.

Forms of LC

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The various types of letters of credit which are commonly used in the commercial market

are:

Revocable Credit

� This can be amended or cancelled at any time by the importer without the consent

of the exporter. This option is not often used, as there is little protection for the

exporter. By default all credits are irrevocable, unless otherwise stated.

Irrevocable Credit

� Once issued this can only be changed or cancelled with the consent of all the

parties. The seller must merely comply with the terms and conditions of the credit

in order to receive payment.

Confirmed Credit

� In some instances, exporters may request a credit to be confirmed by another

bank, (usually a bank in their own country). If a bank adds its confirmation to a

credit, it means that it is obliged to pay if the terms and conditions of the credit

are complied with. This obligation to pay exists even if the issuing bank or

country defaults.

Payment Credit

� This is available for payment at the tellers of the paying bank, as nominated in the

credit. The seller can, therefore, present documents to the paying bank and does

not have to wait for the documents to be forwarded to the issuing bank for

checking and subsequent payment.

Negotiation Credit

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� This is always payable at the counters of the issuing bank. Buyers can use

negotiation credits to delay payment until the documents have been received and

checked by the issuing bank.

Deferred Payment Credit

� Similar to payment credits, except that they are payable at a future date.

Acceptance Credit

� The accepting bank guarantees payment to the holder of the bill of exchange on

maturity date - regardless of whether the credit is confirmed or not. This option

comes with an acceptance fee which can be substantial.

Back-to-Back Credit

� The original letter of credit is used as security to open another credit in favor of

the exporter's own supplier. The bank confirming the original credit may not

necessarily be the issuing bank of the second credit.

Transferable Credit

� This is normally used when the exporter is not supplying the goods and wishes to

transfer all or part of the responsibilities under the credit to the supplier(s).

Red Clause Credit

� This enables the exporter to obtain advance payment before shipment. This is

provided against the exporter's certificate confirming its undertaking to ship the

goods and to present the documents in compliance with the terms and conditions

of the documentary credit.

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Green Clause Credit

� Similar to a Red Clause Credit, but in addition to pre-shipment finance the

exporter also receives storage facilities at the port of shipment at the expense of

the buyer.

Packing Credit

� This offers pre-shipment finance to the seller against warehouse receipts,

forwarding agent's receipts or similar documents that prove the goods are no

longer in the seller's possession.

Standby Credit

� Similar to a normal letter of credit, this method differs in that it is a default

instrument, whereas a normal credit is a payment instrument. A standby credit is

only called upon in the event of failure to perform. Its function is, therefore, that

of a guarantee.

Revolving Credit

� This allows for the credit to be automatically reinstated under certain

circumstances. It is normally used where shipments of the same goods are made

to the same importer.

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Parties to Letter of Credit:-

There may be three to four parties to a Letter of Credit.

� Applicant / Importer :

Importer is the opener* on whose behalf or account Letter of Credit issued by the

bank.

� Applicant Bank :

The bank that issues or opens the Letter of Credit on behalf of the customer /

importer is Applicant Bank.

� Exporter:

Exporter is the “Beneficiary” of the Letter of Credit who is entitled to receive the

payment of his bills according to the terms of Letter of Credit.

� Intermediary bank / Confirming bank :

Intermediary bank is the bank usually a branch or the corresponding of the opening bank

in the exporting country through which the credit without any obligation on its parts, it is

called the “Advising” or “Notifying” bank. If the beneficiary bank adds its own

undertaking to the credit while advising it to the beneficiary, it becomes the “confirming”

bank.

� Paying / Negotiating bank:

The bank which negotiates the beneficiary’s bills under the credit and pays for it

is known as “Paying “Negotiating bank.”

In the international market, the company is executing more & more projects. Projects

worth USD 150 Million are under execution apart from the bids submitted and jobs under

view in the international market. The turnkey international jobs are having three

components which are supply of towers, supply of bought-outs and local construction

work. The bought-outs are supplied internationally qualified supplier only and these

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suppliers don’t agree to supply without L/C, which has resulted into higher requirements

of L/Cs. In the current year company is expected to buy bought out of approx. Rs.150

crores for which the L/Cs will be opened on DA 90/180 days basis.

The availability of raw materials like steel, aluminums and line materials in time has

become very difficult and since there is gap between supply and demand so even certain

domestic suppliers insists for letter of credit or cash payment terms against delivery of

goods. Of course, in oversea market, the suppliers are ready to extend credit upto 360

days under L/C or company can arrange cheaper finance upto 360 days on its financial

strength from overseas branches of Indian banks.

Advantages of the L/C:

� Provides a sort of an assurance to the exporter.

� The exporter does not have to bother about the exchange control regulations of

the importer’s country, since the banks of the importer’s country, since the banks

of the importer’s country open them and these institutions are in the know of the

exchange control regulations of that country.

� Eases the financial position of the exporter since he can get pre-shipment as well

as post-shipment credit.

� If importer takes care of certain safeguards, the quantity and the quality of the

goods are assured.

Discrepancies:

Discrepancies are the mistakes committed either by negotiation or from common errors.

But due to this negotiation importer has to suffer a lot, and also at a same time exporter

has to pay fine for that so one should take precautions for that.

Some common Discrepancies are as under:

� Credit expired.

� Classed Bill of Lading.

� Presented after permitted time from the date of issue of shipping documents.

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� Credit amount exceeds.

� Short shipment.

� Description of goods on invoice differs from that of credit.

� Goods shipped on decks.

� Bill of Lading, Insurance documents, bill of exchange not endorsed correctly.

� Absence of signature, where required on the paper.

� Bill of exchange drawn on wrong party.

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A bank guarantee means the guarantee from a lending institution ensuring that the

liabilities of a debtor will be met.

A letter of guarantee is a written promise issued by the Bank to compensate (pay a sum

of money) to the beneficiary (third party, local or foreign) in the event that the obligor

(customer) fails to honor its obligations in accordance with the terms and conditions of

the guarantee/agreement/contract. In other words, if the debtor fails to settle a debt, the

bank will cover it.

The purpose for which the bank guarantee is usually provided is for two reasons:

� Foreign Bank Guarantee

This guarantee is issued at the request of a correspondent bank in favor of local

companies that organize international bids or foreign suppliers.

� Local Bank Guarantee

This is issued by the Bank at the request of contractors, wholesalers, companies involved

in transaction, etc. for the purpose of handling the guarantee request they receive in their

operation.

“The Guarantee is a unilateral agreement between the Bank and the beneficiary, which is

conducted on behalf of a third, party usually the beneficiary’s business partner.”

Legal Requirements:-

Guarantees are not governed by any particular legal regulations. Issuing Guarantees for

foreign beneficiaries is not subject to approval nor need these Guarantees be reported.

Guarantees can be issued by authorized dealers under their delegated authorities notified

3. 5.2.2 Bank Gaurantee

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vide FEMA 8/2000 date 3rd May 2000. Only in case of revocation of Guarantees

involving US $ 5000/- or more to be reported to Reserve Bank of India along with the

details of claim received or details of claim not honored by the mandatory on revocation.

Elements of Guarantees:-

There are no standard International regulations for Guarantees, so Guarantees may be

worded freely, depending on individual requirements. However Guarantees should at

least contain the following clauses:

i) An introduction referring to the key elements of the underlying transactions.

ii) An abstract undertaking according to which Guaranteeing Bank promises to pay the

Guarantee amount upon receipt of the first written demand from the beneficiary

together with his statement of default.

iii) A clause specifying the expiry date by which any claim amount must have been

received by the Bank indicating specific calendar date or a statement that the

validity of the Guarantee is unlimited.

Direct or Indirect Guarantee:-

� Direct Guarantee:

A Direct Guarantee is one given directly to the beneficiary abroad by the Bank, resulting

in a direct legal relationship between the issuing Bank and the beneficiary. The advantage

of a direct Guarantee is not only that it is less expensive but also that it is subject to the

law of the country in which the Guarantee is issued unless otherwise specified in the

Guarantee. If the Guarantee indicates a specific calendar date on which the Guarantee

will expire, the Bank and consequently the mandatory will be released from their liability

even if the letter of Guarantee is not returned.

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� Indirect Guarantee:

When a beneficiary insists that the Guarantee be issued by a local bank then the

Guarantee will be issued through a correspondent of issuing Bank at the country of the

beneficiary. In such cases the Guarantee is known as Indirect Guarantee. Such

Guarantees will be issued by the correspondent against the counter Guarantee of the

mandatory. Issuing Indirect Guarantee is more time consuming and always more

expensive, because of the cost in addition to the Guarantee commission charged by the

foreign Bank. Commission is charged till final validity of the Guarantee and usually it

will be collected in advance.

Flow of Bank Guarantee:-

The flow for acquiring bank guarantee is as follows: (Fig 14)

1 – Contract

2 - Application to issue of a bank guarantee

3a - Letter of guarantee sent to the beneficiary directly

3b - Letter of guarantee sent through the advising bank

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REQUIREMENT OF BANK GUARANTEE FOR KPTL:

Company secures most of the orders through tenders only. For securing the contract,

company has to submit tenders and based on the rates and technical prequalification, the

contracts will be awarded to the most competitive qualified bidder. Company’s

requirement of guarantee are favoring Power Grid Corporation of India Limited, State

Electricity Boards, Central Electricity Boards of various countries, reputed EPC

contractors overseas and Indian and joint venture partners.

Under the business at every stage, right from the bid stage, when the tenders are

submitted, the company has to submit the guarantees in various forms like Bid Bond

guarantees, Performance guarantees, Advance Money guarantees, Retention Money

guarantees, Security Deposit, Counter guarantee in favor of various overseas banks for

financing arrangement in local currencies.

A. Bid bond guarantee:

This is also known as tender bond guarantee.

An importer invites tender in an international, to be sure that the exporters who are

competing for the contract are willing and able to adhere to the terms of the offer, he

demands a Tender Guarantee in the amount of 1% - 5% of the value of contract. If an

exporter is awarded a contract and withdraws his offer, for whatever reasons, the

importer can obtain compensation for his loss by claiming payment under the tender

Guarantee in order to cover the cost of a new invitation to tender and also loss incurred,

on account of delay in supply.

A tender Guarantee usually runs from three to six months from the tender closing dates,

this being the time, the importer needs to examine the offer received.

Frequently, the tender Guarantee contains the requirement that, when the contract is

awarded subsequent Guarantees such as Performance Guarantee be provided.

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B. Performance guarantee:

After the wardens of the contract, the contractor is required to furnish a guarantee

whereby the execution of the contract as per terms and conditions is guaranteed. This is

known as the performance guarantee. Usually the performance guarantee is for 10

percent of the contracted amount. By this guarantee the importer is assured that the

contract would be executed as per the specifications and terms of the contract and in case

of failure by the contractor to perform as per the contract terms the guarantee is invoked

whereby the bank is compelled to pay the amount of guarantee. The period for which the

performance guarantee is issued is usually for a longer period than the bid bond

guarantee.

C. Advance payment guarantee:

This guarantee is also known as repayment guarantee. Almost all the turnkey project and

construction contracts provide for payment of an advance under the contract by the

importer. In all such cases the importer may require an advance payment guarantee to be

executed by the contractor. This guarantee provides for the repayment of the advance

paid the contractor does not fulfill the contract.

The advance payment Guarantee in favour of the buyer serves to ensure that the advance

payment will be refunded if the seller fails to meet his obligations. The amount of the

Advance Payment Guarantee is normally 15% -30% of the contract value.

D. Retention money guarantee:

Many of the turnkey contracts/construction contracts provide that a part of the contract

amount be retained by the importer for a certain period of time during which period he

verifies the proper functioning of the work executed by the contractor. Thus, in a typical

contract, the retention money could be five percent of the contract value and the retention

period could be 12 months.

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E. Security deposit:

In some of the orders contractee asks for security deposit to the extent of 5% to 10%.

Accordingly company has estimated Rs. 20 crores for the security deposit guarantee

assuming that company has to give security deposit on 10% of orders booked by them.

F. Guarantees for overseas borrowing:

At present companies are putting thrusts on turnkey jobs overseas with or without joint

venture/s. presently company is executing overseas jobs of over USD 200 Millions in

overseas. In the view of this, company need to borrow locally to bridge the temporary

gap for local work in these countries, hence it proposes to keep guarantee limit to arrange

oversea borrowings.

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For working capital advances, commercial banks seek security either in the form of

hypothecation or in the form of pledge.

Hypothecation:

Under this arrangement, the owner of the goods borrows money against the security of

movable property, usually inventories. The owner does not part with the possession of

property. The rights of the lender (hypothecate) depend upon the arrangement between

the ender and the borrower. Should the borrower default n paying his dues, the lender

(hypothecate) can file a suit to realize his dues by selling the goods hypothecated.

Pledge:

In a pledge arrangement, the owner of the goods (pledgor) deposits the goods with the

lender (pledge) a security for the borrowing. Transfer of possession of goods is a

precondition for pledge. The lender (pledge) is expected to take reasonable care of goods

pledged with him. The pledge contract gives the lender (pledgee) the right to sell goods

and recover dues, should the borrower (pledgor) default in paying debt.

3.5.3 Mode of security

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Chapter – IV

Findings and Conclusions

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Findings and Conclusions

From Two months training at KPTL, on the Topic “Working Capital Financing” I have

gained lot of knowledge as to how the Financing activities at the corporate firms are

carried out.

Keeping in view the tremendous growth that company has attained during past 5 years, it

is quite evident that the activities at all the level have improved and boosted to

company’s overall growth.

The financial Review also states that the financing of Working capital has been very

effectively carried out during past years even during Liquidity Crunch at the Global

Economy level

The Company has dared to stand tall even during the slow down and has gained Goodwill

for their timely order execution and Delivery

Their performance has been commendable and thus the Rating Agency “CARE” has

rated the Firm at PR1+ Level (Highest rating) and CARE AA for acquiring short term

and long term loans.

Working Capital Management should not be treated as an isolated management function

but it is the part and parcel of overall corporate management functions and impact of

corporate management policy and strategy effects working capital management practice

of the firm. It is thus necessary to work out and analyze cause-effect relationship of every

function of the management to assess its impact on the working capital management.

SWOT Analysis can help the company to understand their Strengths on which they can

bank upon and take the leap further. Analyzing their internal Weakness and working on it

to overcome them, being aware and constantly searching for the Opportunities ahead and

standing confident against the external Threats could help the Company to keep the

momentum towards their mission of growth and development like a “Kalpavriksha” – A

wish fulfilling every expanding tree.

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Bibliography

Internet Resources:

www.investopedia.com

www.kalpatarupower.com

www.banknetindia.com

www.basiccollegeaccounting.com

www.wikipedia.com

www.carerating.com

www.wikianswers.com

Reference Books:

� Financial Management … By Prasanna Chandra (7 Ed)

Publication: Tata McGraw-Hill …Chapter 30: Working Capital Financing

� Financial Management…By I. M Pandey, New Delhi

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Annexure

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KALPATARU POWER TRANSMISSION LIMITED BALANCE SHEET AS ON 31st MARCH 2009

Rs. in Lacs

PARTICULARS AS AT 31/3/2009 AS AT 31/3/2008

SOURCES OF FUNDS :

Shareholder's Funds :

Share Capital 2650.00 2650.00

Reserves & Surplus 81045.03 74127.03

83695.03 76777.03

Loan Funds :

Secured Loans 48543.97 29585.07

Unsecured Loans 16926.66 3000.00

65470.62 32585.07

Deferred Tax 1279.84 971.63

TOTAL 150445.49 110333.73

APPLICATION OF FUNDS :

Fixed Assets :

Gross Block 35909.22 29597.34

Less :Depreciation 10069.32 7328.83

Net Block 25839.90 22,268.50

Capital Work-in-Progress 999.50 193.40

29839.40 22461.903

Investments 12682.52 14751.48

Current Assets, Loans & Advances

Inventories 23688.60 15370.22

Accrued value of work done 35532.01 28567.92

Sundry Debtors 97715.65 65068.31

Cash & Bank Balances 4451.89 8917.61

Loans & Advances 31182.77 15117.61

192570.91 133041.21

Less :Current Liabilities & Provisions

Current Liabilities 72142.92 51309.59

Provisions 9504.42 8611.28

81647.35 59920.87

Net Current Assets 110923.57 73120.34

Miscellaneous Expenditure -

TOTAL 150445.49 110333.73

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KALPATARU POWER TRANSMISSION LIMITED PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED ON 31ST MARCH 2009

Rs in Lacs

FOR THE YEAR

ENDED

31/03/2009

FOR THE YEAR

ENDED

31/03/2008

INCOME :

Sales & Services Gross 191362.20 176820.35

Less : Excise Duty 3112.35 3061.96

Sales & Services Net 188249.85 173758.39

Other Income 3075.63 2148.78

Provision for Diminution in value of Investment/Doubtful Debts reversed -

Increase(Decrease)in Stocks

a) Transmission Division 5177.63 (1107.19)

b) Real Estate Division - (6.95)

TOTAL 196503.10 174793.03

EXPENDITURE :

Material Cost 106946.78 85751.71

Employee' Emoluments 10861.79 9058.49

Manufacturing & Operational Expenses 42248.27 38302.52

Administrative, Selling & Other Expenses 11097.16 14134.49

Financial Expenses 10558.82 5210.19

Depreciation 2736.46

Less : Transferred to Revaluation Reserve 4.65 2731.81 2180.41

TOTAL 184444.63 154637.80

PROFIT BEFORE TAX 12058.47 20155.23

Provision for Taxation 2190.00 4796.00

Current Tax 119.17 102.45

Fringe Benefit Tax 308.21 261.56

Deferred Tax

NET PROFIT FOR THE YEAR AFTER

TAX

9441.09

14995.23

Balance brought forward 31991.69 21328.98

Less : Prior Year's Adjustment (4.03) (7.23)

Add : Prior Year's Income Tax (10.94)

AMOUNT AVAILABLE FOR

APROPRIATION

41417.82 36316.97

Appropriations :

Proposed Dividend 1987.50 1987.50

Add : Corporate Tax On Dividend 337.78 2325.28 337.78 2325.28

Transfer to Debentures Red Reserve 300.00 -

Transfer to General Reserve 1200.00 2000.00

Bal C/f to Balance Sheet 37592.54 31991.69

TOTAL 41417.82 36316.57

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CASH FLOW STATEMENT

No. of Equity Shares at the end of the year 26,500,000 26,500,000

Profit for calculation of EPS (Rs.) 9441.09 14995.23

Nominal value of Equity Shares (Rs.) 10.00 10.00

Basic/diluted earning per Share (Rs.) 35.63 56.59

CASH FLOW STATEMENT OF KALPATARU FOR YEAR ENDED 31ST MARCH 2009

INFLOW/(OUTFLOW)-RS.

2008-2009 2007-2008

A. CASH FLOW FROM OPERATING ACTIVITIES:

Net profit before taxation, and extraordinary items 12058.47 20155.23

Adjustments for :

Depreciation 2731.81 2180.41

Interest Paid 6844.09 3971.51

Dividend Received (405.28) (744.97)

Interest Received (1831.86) (812.86)

Amortization of Preliminary and Share Issue Expenses - 5.01

Provision for Diminution in Investments 1.30 (0.16)

Loss/Profit(-) on sale of Assets 5.09 6.43

Foreign Currency Translation Difference (178.19) (20.39)

OPERATING PROFIT BEFORE WORKING

CAPITAL CHARGES 19225.43 24740.21

Adjustment for:

Trade and other Receivables (50594.50) (25605.42)

Inventories (8318.38) 456.77

Margin Deposits with Banks 368.88 134.00

Trade Payables 21740.65 7161.39

CASH GENERATED FROM OPERATIONS (17577.92) 6886.96

Income Tax Paid (2309.17) (4898.45)

Prior Year’s Adjustment (14.87) (7.23)

CASH FLOW BEFORE EXTRAORDINARY ITEMS (19902.06) 1981.27

Extraordinary Items - -

NET CASH FLOW FROM OPERATING ACTIVITIES (19902.06) 1981.27

B. CASH FLOW FROM INVESTING ACTIVITIES:

Purchase of fixed assets (7223.52) (3828.17)

of 80

DIVIDEND Paid

Year Month Dividend (%)

2009 N.A 75

2008 May 75

2007 May 75

2006 May 50

2005 May 50

2004 May 30

2003 May 15

2002 Jul 15

2001 Aug 15

Sale of fixed assets 104.47 90.87

Investment In Shares

- (25.15)

Investments in mutual funds

3506.65 10388.18

Investments in Subsidiary (1438.98) (3222.00)

Loans to subsidiaries & Others (5082.10) 135.60

Interest Received on Loans 1831.86 812.86

Dividend Received

405.28 744.97

Deposits with Banks

5525.25 1222.38

CASH USED IN INVESTING ACTIVITIES (2371.10) 6319.54

C. CASH FLOW FROM FINANCING ACTIVITIES:

Processed from issue of NCDs 8000.00 -

Repayment of Term Loan (1624.67) (1726.75)

Working Capital Finance & Unsecured Loans 26510.22 640.77

Interest Paid (6858.26) (3981.25)

Dividend Paid (1987.50) (1987.50)

Corporate Dividend Tax (337.78) (337.78)

NET CASH SURPLUS IN FINANCING ACTIVITIES 23702.01 (7392.51)

D. NET INCREASE (DECREASE) IN CASH AND

CASH EQUIVALENT 1428.85 908.30

E. Opening Cash and Cash Equivalent 3387.71 2479.41

F. Closing Cash and Cash Equivalent 4427.31 3387.71

working capital financing

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