A STUDY ON

Project
Finance
(A Case Study with Reference to Installation of Expansion
Project 3MT to 6.3MT)

WITH REFERENCE TO
RASHTRIYA ISPAT NIGAM LTD,
VISAKHAPTNAM

A Project report submitted to international institute of

planning and management, Hyderabad in partial fulfilments
for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

SUBMITTED BY

CH.SATISH KUMAR, IIPM

Under esteemed
guidance of
S. Ramprasad
Dy. Deputy finance Manager
(Finance)
Visakhapatnam Steel Plant

1
 BANJARA HILS,
HYDERABAD

ACKNOWLEDGEMENT
I express my profound sense of gratitude for the administration of
VISAKHAPATNAM STEEL PLANT, for giving me an opportunity to take up the
project wok in organization.

My sincere thanks to Mr.K.RAJA, Asst.Manager, HRD

VISAKHAPATNAM STEEL PLANT for accepting my request of doing the project
in this esteemed organization.

I also wish to thank all the staff of the HRD for their co-operation and help
extended to me during my project.

I take this opportunity to express my countless gratitude to my project

guide Sri.S.R.Prasad, Deputy Finance Manager, also I record my special
thanks to sri K.V RAO ,Manager, HRD, VISAKHAPATNAM STEEL PLANT who
have given kind assistance in my project work.

Last but not least but though I could not find words to express my gratitude
to my family members who have rendered great support and encouragement to
bring out this project a grand success.

2
INDEX

CHAPTER – I

INTRODUCTION

 NEED FOR THE STUDY

 OBJECTIVES OF THE STUDY

 SCOPE OF THE STUDY

 METHODOLOGY

 LIMITATIONS

CHAPTER – II

 INDUSTRIAL PROFILE

CHAPTER – III

 COMPANY PROFILE

CHAPTER – IV

 PROJECT PLANNING

 PROJECT ANALYSIS & APPRAISAL

3
  PROJECT SELECTION

CHAPTER – V

 PROJECT FINANCING

CHAPTER – VI

 PROJECT IMPLEMENTATION

 PROJECT REVIEW & CONTROL

CHAPTER – VII

 EVALUATION OF THE PROJECT

CHAPTER - VIII

 FINDINGS

 SUGGESTIONS

 CONCLUSION

ANNEXURE

 BIBILOGRAPHY

4
5
 INTRODUCTION

A project is an activity sufficiently self-contained to permit financial and

commercial analysis .In most cases projects represent expenditure of capital
funds by pre-existing entities which want to expand or improve their operation.

In general a project is an activity in which, we will spend money in expectation

of returns and which logically seems to lead itself to planning. Financing and
implementation as a unit, is a specific activity with a specific starting point and a
specific ending point intended to accomplish a specific objective.

To take up a new project, involves a capital investment decision and it is the

Top management’s duty to make a situation and feasibility analysis of that
particular project and means of financing and implementing it. Financing a project
involves a good deal of risk. Project finance is a rapidly expanding field, which
focuses not on the credit status of a company, but on cash flows that will be
generated by a specific project

Project finance has its origins in the natural resource and infrastructure
sectors. The current demand for infrastructure and capital investments is being
fuelled by deregulation in the power, telecommunications, and transportation
sectors; by the globalization of product markets and the need for manufacturing
scale; and by the privatization of government-owned entities in developed and
developing countries.

6
 The concept of private finance is a new method based on the use of private-
sector resources to build, maintain, manage and operate public infrastructure.
Interest in this approach has grown steadily as fiscal resources become more
constrained. One key advantage is the potential to use the management skills and
other resources of private enterprise to provide better public services at a lower
cost. Another benefit is economic revitalization through the creation of business
opportunities for private enterprise. In addition, it is possible to form new public-
private partnerships based on the appropriate sharing of roles between the
Government And Private Enterprise.

The advantage of the project finance method is that the various parties,
(including financial institutions) which are able to control these risks most
appropriately can share the various risk factors inherent to projects. In this way,
project risk can be both spread and reduced. In recent years there has been a
rapid increase in the number of companies opting for project finance. There are
three basic reasons for this trend. First, companies have become aware of their
own credit ratings. Second, improved risk control is needed for large-scale
projects. Third, access to finance can be facilitated by isolating good projects from
the reduced credit status of business corporations.

Project Finance can be defined in many ways and there does not exist any
single definition for it.

Finnerty ‘s definition is that,

Project financing is the raising of funds to finance an economically separable
capital investment project in which the providers of the funds look primarily to the
cash flow from the project as the source of funds to service their loans and
provide the return of and a return on their equity invested in the project.

7
While Nevitt and Fabozzi define it as:

A financing of a particular economic unit in which a lender is satisfied to look

initially to the cash flow and earnings of that economic unit as the source of funds
from which a loan will be repaid and to the assets of the economic unit as
collateral for the loan.

The International Project Finance Association (IPFA) defines project finance

as:

The financing of long-term infrastructure, industrial projects and public services

based upon non-recourse or limited recourse financial structure where project
debt and equity used to finance the project are paid back from the cash flow
generated by the project.

Need for the study:

Now-a-days the Project Finance is necessary to study because to learn how

the allocation of financial resource in the implementation of new project or
expansion of existing project of any company.

To study the financial planning for ongoing expansion project at

Visakhapatnam Steel Plant, it tells about the allocation of financial resources for
the project.

A proposal for expansion of units at Visakhapatnam steel plant was made to

combat to the increasing demand for steel in order to cater the needs of domestic
market. The overall cost of the completion cost is Rs 8,692 Crores as expansion
project-up gradation to 6.3 MT.

8
Objectives of the study:

The main objectives of the study i.e. The Project Financing of the expansion
plans are,( 3.0 MT to 6.3 MT),
To study the cost incurred in developing a project.
To know the sources of financing the project.
To study how the project serves the company as a long-term Asset.
To study the feasibility analysis of the project (expansion project)
To study project appraisal of ongoing expansion plan.

Scope of the study:

The study of the project finance will helpful to know the allocation of the
financial resources and know how it is applicable to individual projects that
any Organization takes up. The scope of our study ‘The project finance of
“ongoing expansion plan” in steel plant is confined to that particular
project(3.0 MT TO 6.3 MT). If the management wants to go further future
plans it needs to conduct project appraisal again. They can not rely upon
this report of the expansion plan and should make an exclusively new
study for it.

Methodology:

Methodology is a systematic procedure of collecting information in order

to analyze and verify a phenomenon. The collection of information is done
through two principal sources.

1. Primary Data.

9
2. Secondary Data.

Primary Data

It is the information collected directly from financial department for

further studies, it was mainly through interviews with concerned officers
and staff, either individually or collectively, sum of the information has been
verified or supplemented with personal observation.

The data collection includes:

Conducting group seminars and with the concerned managers and

officers of finance department of V.S.P.

Secondary Data

This is taken from the annual reports, websites, company journals,

magazines and other sources of information of steel plant.

Limitations:

Though the project is completed successfully a few limitations may be

there.

1. Since the procedure and policies of the company will not allow to
disclose confidential financial information, the project has to be completed
with the available data given to us.

2. The period of study that is 6 weeks is not enough to conduct detailed

study of the project.

3. The study is carried basing on the information and documents provided

by the Organization and based on the interaction with the various
employees of the respective departments.

10
Frame work of the study

The study is organized into 8 Chapters.

Chapter – I Gives the introduction, need, objective and methodology

of study.

Chapter –II Focuses on the Indian Steel Industries.

Chapter –III Profile of Visakhapatnam Steel Plant.

Chapter –IV Project Evaluation

Chapter –V Project Finance

Chapter –VI Contain the summary Findings Suggestions.

Chapter –VII Annexure

Chapter –VIII Bibliography

11
 Steel Industry
Steel is a versatile, constantly developing material that underpins all

manufacturing activity. If a product is not made from steel, then it is certainly

made using steel at some point in the manufacturing process.

OVERVIEW OF IRON AND STEEL INDUSTRY

HISTORICAL PERSPECTIVE

The finished steel production in India has grown from a mere 1.1 million

tonnes in 1951 to 29.27 million tonnes in 2000-2001. During the first two decades

of planned economic development, i.e. 1950-60 and 1960-70, the average annual

growth rate of steel production exceeded 8%. However, this growth rate could not

be maintained in the following decades. During 1970-80, the growth rate in steel

production came down to 5.7% per annum and picked up marginally to 6.4% per

annum during 1980-90, which increased to 6.65% per annum during 1990-2000.

Though India started steel production in 1911, steel exports from India began only

in 1964. Exports in the first five years were mainly due to recession in the

domestic iron and steel market. Once domestic demand revived, exports declined.

India once again started exporting steel only in 1975 touching a figure of 1 million

tonnes of pig iron export and 1.4 million tonnes of steel export in 1976-77.

Thereafter, exports again declined to pick up only in 1991-92, when the main

producers exported 3.87 lakhs tonnes, which rose to 2.79 million tonnes in 1995-

12
96. The steel exports in 1999-2000 were 2.36 million tonnes and in 2000-01 it was

2.57 million tonnes. The growth in the steel sector in the earlier decades since

Independence was mainly in the public sector units set up during this period. The

situation has changed dramatically in the decade 1990-2000 with most of the

growth originating in the private sector. The share of public sector and private

sector in the production of steel during 1990-91 was 46% and 54% respectively,

while during 2000-01 the same was 32% and 68% respectively. This change was

brought about by deregulation and decontrol of the Indian iron and steel sector in

1991. A number of policy measures have been taken since 1991 for the growth

and development of the Indian iron & steel sector. Some of the important steps

are

Removal of iron & steel industry from the list of industries reserved for the

public sector and also exemption from the provisions of compulsory licensing

under the Industries (Development & Regulation) Act, 1951, deregulation of price

and distribution of iron & steel, inclusion of iron and steel industry in the list of high

priority industries for automatic approval for foreign equity investments up to 74%,

lowering of import duty on capital goods and raw materials etc.

THE INDIAN STEEL SECTOR AFTER LIBERALISATION

The Indian steel sector was the first core sector to be completely freed from

the licensing regime and the pricing and distribution controls. This was done

primarily because of the inherent strengths and capabilities demonstrated by the

13
Indian iron and steel industry. During 1996-97, finished steel production shot up to

a record 22.72 million tonnes with a growth rate of 6.2%, while in 1997-98, the

finished steel production increased to 23.37 million tonnes, which was 2.8% more

than the previous year. The growth rate has drastically decreased in 1997-98 and

1998-99 being 2.8% and 1.9% respectively as compared to 20% in 1995-96 and

6.2% in 1996-97. The growth rate in 2000-2001 has improved to a healthy 9.60%

with the total production touching 29.27 million tonnes. The production of finished

steel during 2001-02 has been 30.61 million tonnes, which means a lower growth

rate of about 4.5% compared to the previous year. This fall in the growth rate of

steel production has been brought about by several factors that, inter-alia, include

general slow down in the industrial production and construction activities in the

country coupled with lack of growth in major steel consuming sectors. The total

production of finished steel and the share of main and secondary producers

during 90's and up to 2002-03 are given in the annexure.

APPARENT CONSUMPTION OF STEEL

Apparent consumption of steel is arrived at by subtracting export of steel

from the total of domestic production and import of steel in the country. Change in

stock is also adjusted in arriving at the consumption figures. It is also treated as

the actual domestic demand of steel in the country. The year-wise apparent

consumption of finished steel since 1990-91, is given in the table in the annexure.

14
PROJECTIONS OF FINISHED STEEL

In order to have a long-term perspective and planning, a Sub-Group on

Steel and Ferro Alloys was constituted for steel sector under the aegis of Planning

Commission. The Sub-Group deliberated upon all aspects including supply-

demand projections for finished steel during the period 2001-02 to 2011-12.

Considering a GDP growth rate of 6.5% as realistic during the 10th Plan, the Sub-

Group has projected the demand for finished carbon steel in the country. The

figures are given in enclosed chart.

The iron and steel sector has experienced slow down from the year 1997 to

2001. The growth of the steel sector is dependent upon the growth of the

economy in general and the growth of industrial production and infrastructure

sectors in particular. The major reasons for the slow growth in the steel sector

during the last few years include: -

(a) Sluggish demand in the steel consuming sectors Steel being the basic raw
material for the construction industry, the capital goods and engineering
goods industry, as also the auto sector and white goods sector, its growth
is dependent upon the demand for steel by these segments of the industry.
Since no major infrastructure or construction projects have been
implemented in the last few years, demand for steel has remained low. No
major projects in the oil sector, power sector, fertilizer sector, where
intensity of steel consumption is high, have come up in the recent past.
(b) Overall economic slow down in the country. All major core sectors of the
economy have been facing an economic slow down. These include, power,

15
 coal, cement, industry, mining and steel. The slow down phenomenon is
not restricted to the steel sector alone. Only when the overall economy of
the country picks up, the steel sector would also show signs of revival.
(c ) Lack of investment by Government/private sector in major infrastructure
projects Due to budgetary constraints, no major construction activity in
mega projects including fertilizer, power, coal, railways etc. have been
planned by the Government. Despite liberalization of the economy and
relaxation in the investment norms, private sector investment is yet to
materialize in the core sectors of the economy. This has also contributed to
slowing down demand for steel.
(d) Cost escalation in the input materials for iron and steel Power tariff, freight
rates, coal prices etc. have been under the administered price regime.
These rates have been frequently enhanced, thereby contributing to the
rise in input costs for steel making.
(e) Continuous reduction in import duty on iron and steel. After liberalization,
import duty rates on iron and steel items have been gradually reduced over
the years. This has opened up the domestic iron and steel sector to
international competition. Due to rationalization in the import duty structure
in 1999- 2000, the rates of basic custom duty have generally gone up to
about 35% average.

MARKET SCENARIO

After liberalization, with huge scale addition to steel making capacity, there

is no shortage of iron and steel materials in the country. Apparent consumption of

16
steel increased from 14.84 million tonnes in 1991-92 to 27 million tonnes in 2001-

02. During 2001-2002, due to economic slow down, certain sector like power and

fertilizer projects, auto sector and white goods sector have shown a slump in

demand for steel. Steel Industry has been facing a slow down in the level of

demand due to slow down of the domestic economy and that of the major steel-

consuming sector. Efforts are being made to boost demand particularly in rural

areas and also to increase exports. Prices of iron and steel have declined in 2001-

02 in tune with global trends, while input cost have gone up. However, of late,

there has been resurgence in the price level mainly of flats and demand has also

witnessed an upward trend. In 2003-2004 steel sector market demand increased

mainly because of massive construction activity taken up in China.

PRODUCTION

Steel industry was de-licensed and decontrolled in 1991 and 1992

respectively. India is 8th largest producer of steel in the world. In 2001-02, finished

steel production was 30.61 million tonnes. Pig iron production in 2001-02 was

3.95 million tonnes. Sponge iron production was 5.66 million tonnes in 1999-2000.

In 2001-02, nearly 51% of crude steel production was by public sector the

remaining 49% was by private sector. In 2001-02, the integrated steel plants

produced 42% of finished steel and the remaining 58% was by the secondary

producers. Interface with consumers by way of Steel Consumer Council exists,

17
which is conducted on regular basis. Interface helps in redressing availability

problems, complaints related to quality.

PRICING & DISTRIBUTION

Price regulation of iron & steel was abolished on 16.1.1992. Distribution

controls on iron & steel removed except 5 priority sectors, viz. Defence, Railways,

Small Scale Industries Corporations, Exporters of Engineering Goods and North

Eastern Region. Development Commissioner for Iron & Steel makes allocation to

priority sectors. Government has no control over prices of iron & steel. Open

Market Prices have been generally stable, though fluctuations have been noticed.

Price increases of late have taken place mostly in long products than flat

products. In the current financial year the long product prices have increased by

about 20% because of raise in demand internationally.

IMPORT AND EXPORT OF IRON AND STEEL

India was importing about 10 to 15 lakh tonnes of steel, annually. Due to a

rise in domestic demand, the import of saleable steel in 1996-97 reached a level

of 1.80 million tonnes. The incidence of import was mainly in hot rolled coils, cold

rolled coils and semis. Import of carbon steel during 2000-01 was about 1.41

million tonnes, which was about 12% less than the import in 1999-2000. The total

imports of carbon steel during six years up to 2001-02 are given in enclosed chart.

18
 The Industry has been able to maintain its net exporter status from the last

two years in the trading of finished steel. In fact exports of non-flat products

recorded a growth rate of 5.7% over 2000-01. The quantity of carbon steel

exported from the year 1996-97 is as given in enclosed chart.

Earlier, exports consisted mainly of plates, structural’s, bars and rods,

whereas now additional items like semis, hot rolled coils, cold rolled coils, colour

coated sheets, GP/GC sheets and pig iron are also being exported. In future, it is

expected that the quantum of exports of more value added items would further

increase.

MEASURES ON IMPORTS

Iron & Steel are freely importable as per the Exim Policy. India has been

annually importing around 1.5 Million Tonnes of steel. Imports have largely

dropped, partly an indication of greater self-sufficiency and partly the ability to

control inflow of seconds and defectives. To check unbridled imports of

cheap/seconds & defective steel, several measures have been put in place, like;

The Government has fixed floor prices for seven items of finished steel viz. HR

coils, HR sheets, CR coils, Tinplates.

The other notable measure in this regard is that imports of certain types of

steel have been subject to mandatory compliance of quality standards as

specified by the Bureau of Indian Standards (BIS). Adherence to BIS norms imply

19
supplying information like name and address of the importer, generic or common

name of the commodity, net quantity in terms of standard units of weights and

measures, month and year of packaging and maximum retail sale price. Moreover

all manufacturers/exporters of the listed products shall be required to register

themselves with the BIS.

Further protection in this regard has been the issuance of the Government

notification to 3 major ports – Kolkata, Mumbai and Chennai to monitor the flow of

foreign steel into the country. The customs duty on second and defective HR Coils

has been raised to the bound rate of 40 per cent. Anti dumping duty has been

levied on import of HR coils from Russia and Ukraine.

MEASURES FOR EXPORT OF IRON & STEEL

Iron & Steel are freely exportable and India is a net exporter of steel.

Advance Licensing Scheme allows duty free import of raw materials for exports.

Duty Exemption Pass Book Scheme also facilitates exports. Indian steel exports

have been subject to anti-dumping/anti-subsidy duties actions by the stronger

economies over the last few years. These include:

Anti dumping duty on cut–to–size plate exports from Bhilai Steel Plant of

SAIL with a total duty of 72.48 per cent, and an anti subsidy component of 14.82

per cent. India however, has been exempted from the safeguard duties under

Section 201 of the US Trade Laws on almost all steel products except carbon

20
flanges. This is on account of the country’s status as a developing nation. EU has

also taken AD/CVD actions on import of HR coils. However, a Suspension

Agreement with exporters like SAIL allows the company to sell at a price not lower

than the agreed one. The EU has also imposed safeguard duties for India; such

measures apply on electrical steel sheets and stainless steel wire rods.

Canada has covered pipes, hot rolled, cold rolled and galvanized products

in the AD/CVD actions. China has recently imposed a safeguard duty on the

import of steel, which ranges from 7-26%. The country-wise details are yet to be

worked out. The rising trend in Indian steel exports that was being witnessed in

the last couple of years was halted due to these anti dumping actions initiated by

the advanced, developed nations of the world, which led to the loss of major

markets for the Indian steel exporters. Despite the initial setbacks Indian exports

have recovered - largely due to the ability to find out alternative export markets

where selling steel has been profitable. Steel Exporters’ Forum has been recently

set up to boost steel exports.

An Anti dumping Directorate has been set up under the Ministry of

Commerce & Industry with adequate power to fight trade actions while remaining

within the WTO framework.

DUTIES & LEVIES ON IRON & STEEL

21
Custom Duties

Peak rate of Custom Duty has been reduced sharply during last 5 years. In

the Union Budget 2002-03 it has been further reduced to 30%. This has forced

domestic industry to become internationally competitive. Custom Duty on seconds

and defectives has been raised to the bound rate of 40%. Custom Duty has been

reduced on a wide range of inputs, which would bring down the cost of production

for the domestic steel industry. Custom Duty on Met Coke has been reduced to

5% for integrated steel plants using blast furnace, pig iron units and steel plants

using Corex technology.

Excise Duty

Excise Duty on iron & steel has not been reduced in successive budgets.

At present excise duty on all iron and steel products is 16% ad valorem called

CENVAT. High excise duty has made domestic industry unviable.

LEVIES ON IRON & STEEL

SDF- (Steel Development Fund)

This was a levy started for funding modernization, expansion and development

of steel sector. The Fund, inter-alia, supports:

• Capital expenditure for modernization, rehabilitation, diversification,

renewal & replacement of Integrated Steel Plants.

22
 • Research & Development
• Rebates to SSI Corporations
• Expenditure on ERU of JPC

Fund was abolished on 21.4.94. Cabinet decided that Corpus could be

recycled for loans to Main producers. Interest on loans to Main Producers be set

aside for promotion of R&D. An Empowered Committee has been recently set up

to guide the R&D effort in this sector.

EGEAF

This was a levy started for reimbursing the price differential cost of inputs

used for engineering exporters. Fund was discontinued on 19.2.96.

OPPORTUNITIES FOR GROWTH OF IRON AND STEEL

The New Industrial Policy Regime

The New Industrial policy has opened up the iron and steel sector for private

investment by

(a) Removing it from the list of industries reserved for public sector and

(b) Exempting it from compulsory licensing. Imports of foreign

technology as well as foreign direct investment are freely permitted
up to certain limits under an automatic route. Ministry of Steel plays
the role of facilitator, providing broad directions and assistance to
new and existing steel plants, in the liberalized scenario.
GLOBAL SCENARIO

23
 The global production of crude steel increased from 777 million tonnes in

1998 to 785 in 1999. The world steel consumption has also increased by 1%. The

international steel trade constituted around 279.6 million tonnes or 39.8% of the

production. World steel industry witnessed major ups and downs in the last two

decades and especially over the past five years. The pattern of trade has been

upset by two important developments. These are the collapse of the Soviet Union

and the severe financial crisis in most South East Asian countries as well as in

Korea and Japan. The Asian crisis and the collapse of USSR have transformed

importers of steel into exporters. Till the recent financial crisis, the Asian countries

were large importers of steel. In 1996, eight of the ten largest steel producing

nations were in Asia and import by the region in the mid 1990’s was around 80-90

million tonnes of finished and semi finished steel per year, which is equivalent of a

third of total steel trade. After the Asian crisis, the region got transformed into a

net exporter of steel. The world steel industry is today characterized by excess

capacity and poor demand. This scenario has led to an undesirable impact in the

form of increasing protectionism within the developed countries and large scale

dumping in the international markets. During this year, Indian exports have been

subjected to Anti- dumping/Counter-veiling duties investigations in EU, USA and

Canada. There have also been instances of dumping of steel in our country. It is

in this global context that the Indian steel industry will have to cast its future role.

World production of crude steel in March 2003 rose by 8.2% to 79.6 million

24
tonnes, the highest monthly total in over a decade. The total of the 3 months to

date was 226.8 million tonnes, 8.8% higher than the January to March period in

2002.

World production of crude steel in March 2003 rose by 8.2% to 79.6 million

tonnes, the highest monthly total in over a decade. The total of the 3 months to

date was 226.8 million tonnes, 8.8% higher than the January to March period in

2002.

In the former USSR, both Russia and the Ukraine showed an increase in

steel production, up by 4.5% in Russia and 7.5% in the Ukraine. The 3 months

total was up 6.3% in Russia to 14.7 million tonnes, while Ukrainian production

increased by 10.5% to 8.7 million tonnes. Production in Kazakhstan, on the other

hand, fell by 4.3% in March and by 0.3% in the three months to 1.2 million tonnes.

Crude steel production in the USA is still rising, up by 5.4% in March 2003,

bringing the first quarter total up by 6.5% to 23.1 million tonnes. Mexican

production is also improving with March production up 21.4% and the 3 months

total up 29.6% to 3.8 million tonnes, almost equal to the Spanish first quarter total.

Canadian steel production, on the other hand, fell by 3.6% in March and by 3.5%

in the year to date to 4.0 million tonnes.

25
 Steel imports by the USA have been falling with the total for the first two

months of 2003 30% below the same period in 2002. In fact the February total

was half the February 2002 total. Imports of blooms, billets and slabs were less

than half what they were in the first two months of 2002. Total exports, on the

other hand, have risen, with the year to date 17% higher than in 2002. One of the

largest rises was in hot rolled wide coil, which more than doubled in the first two

months of 2003. Exports of hot rolled wide coil to Canada almost doubled in the

first two months, and there was a very large tonnage exported to both China and

Singapore in February 2003. Net shipments of steel reported by the AISI were

7.5% up in the two months at almost 16.5 million tonnes, with most of the increase

going to the home market.

In March 2002 the US President announced imposition of temporary

safeguard measures on import of key steel products into USA. In retaliation to the

US action EU has also imposed provisional safeguard measures against import

certain steel products. China, Canada and Thailand are some of the other

countries that have initiated safeguard investigations against import of steel

products into their countries. On the pricing front the steel prices have been

spiralling up especially since mid 2002 mainly due to the shortfall in supply. This

can be attributed to the facts.

• Cessation of gas supply in Venezuela stopped about 6 million

tonnes of annualized production of steel.

26
 • Ukraine has imposed export duty on scrap steel, which is a raw
material.
• There has been series of blast furnace outages in USA.
• Shut down of many coking coalmines in China due to safety
reasons.
• Internal consumption of China has increased.
• Global scrap prices increased
• Capacity addition is not significant except in China.
• US Dollar is weakening
• The fascination for cheap steel has come down.

THE GROWTH PROFILE AFTER LIBERALISATION

The liberalization of industrial policy and other initiatives taken by the

Government have given a definite impetus for entry, participation and growth of

the private sector in the steel industry. While the existing units are being

modernized/expanded, a large number of new/Greenfield steel plants have also

come up in different parts of the country based on modern, cost effective, state of-

the-art technologies.

Increasing role of private sector in total production can be seen from the

fact that its share has increased from 51.4% in 1991-92 to approximately 67% in

1998-99. This trend is likely to continue. At present, total (crude) steel making

capacity is over 34 million tonnes and India, the 8 th largest producer of steel in the

world, has to its credit, the capability to produce a variety of grades and that too,

of international quality standards. As per the ratings of the prestigious " World
27
Steel Dynamics", Indian HR Products are classified in the Tier II category quality

products – a major reason behind their acceptance in the world market. EU,

Japan have qualified for the top slot, while countries like South Korea, USA share

the same class as India.

In pig iron also, the growth has been substantial. Prior to 1991, there was

only one unit in the secondary sector. Post liberalization, the AIFIs have

sanctioned 21 new projects with a total capacity of approx 3.9 million tonnes. Of

these, 16 units have already been commissioned. The production of pig iron has

also increased from 1.6 million tonnes in 1991-92 to 3.94 million tonnes in 2001-

02. The share of Private/secondary sector has increased over time and is

currently around 74% of total production.

Considering the facts of current low levels of per-capita consumption in

India, the huge potential for its increase and the estimated GDP growth, the steel

industry is likely to have substantial growth in the medium to long term

perspective.

Chapter-4

Profile of

Visakhapatnam Steel Plant

INTRODUCTION

28
 Steel occupies the foremost place among the materials in use today and

pervades all walks of life. All the key discoveries of the human genesis, for

instance, steam engine, railway, means of communication, automobile, aeroplane

and computers are in one way or other, fastened together with steel and with its

sagacious and multifarious application steel is a versatile material with multitude

of useful properties, making its indispensable for furthering and achieving

continual growth of the economy be it construction, manufacturing, infrastructure

or consumables. The level of steel consumption has long been regarded as an

index on industrialisation and economic maturity attained by a country. At the time

of independence India had only three integrated Steel Plants-Iron $ Steel

Company at Burnpur, Tata Iron And Steel Company at Jamshedpur, Iron $ Steel

Company in the erstwhile princely state of My sore. Keeping in view the

importance of steel, the following integrated steel plants with foreign

collaborations were set up in the public sector in the post-independence era.

1 Durgapur Steel Plant British

2 Bhilai Steel Plant Erstwhile USSR

3 Bokaro Steel Plant Erstwhile USSR

4 Rourkela Steel Plant German

BACKGROUND

29
 To meet the growing domestic needs of steel Government of India decided

to set up an integrated steel plant at Vishakhapatnam. An agreement was signed

with erstwhile USSR in 1979 for cooperation in setting up 3.4 MT integrated steel

plant at Vishakhapatnam. The foundation stone for the plant was laid by the then

prime Minister on 20th January 1971.

The project was estimated to cost Rs. 3897.22 Crores based on prices as

on 4th quarter of 1981. However on completion of construction and

commissioning of the whole plant in 1992, the cost escalated to around 8500

Cores. Visakhapatnam Steel Plant is one of the most modern steel plants in the

country. The plant was dedicated to the nation on 1st August 1992 by the then

Prime Minister Sri P.V. Narasimha Rao.

New technology, large scale computerisation and automation etc are

incorporated in the plant. To operate the plant at international levels and attain

such labour productivity, the organisational manpower has been rationalised. The

plant has a capacity of producing 3.0 MT of liquid steel and 2.656 MT of saleable

steel.

VSP TECHNOLOGY: STATE-OF-THE-ART

 7 Metre tall Coke oven batteries with coke dry quenching

 Biggest Blast furnaces in the country

30
  Bell less top charging system in Blast furnace

 100% slag granulation at the BF cast house.

 Suppressed combustion – LD gas recovery system.

 100% continuous casting of liquid steel.

 “Tempcore” and “Stelmor” cooling process in LMMM & WRM.

 Extensive waste heat recovery systems.

 Comprehensive pollution control measures.

MAJOR SOURCE OF RAW MATERIALS

Iron ore lumps and fines Bailadilla, MP

BF lime stone Jagayyapeta, AP
SMS lime stone Jaisalmer, Rajasthan
BF Dolomite Dubai
SMS Dolomite Madharam, AP
Manganese Ore Chipurupalli, AP
Boiler coal Talcher, Orissa
Coking coal Australia

WATER SUPPLY

31
 Operational water requirement of 36 Mgd is being met from the Yeleru

Supply scheme.

POWER SUPPLY

Operational power requirement of 180 to 200 MW is being met through

Captive Power Plant. The capacity of the Power plant is 286.5 MW. VSP is

exporting 60 MW power to APTRANSCO.

MAJOR UNITS

Department Annual cap ‘000 T Units (3.0 MT stage)

3 Batteries each of 67 ovens and 7

Coke ovens 2261
Meter height
2 Sinter machines of 213 m2 grate area
Sinter Plant 5256
each
Blast furnace 3400 2 Furnaces of 3200 m3 volume each
3 LD converters each of 150 m3
Steel melt shop 3000
volume and strand bloom casters
LMMM 710 3 Stand finishing mill

WRM 850 2 x 10 stand finishing mill

MMSM 860 6 stand finishing mill

MAIN PRODUCTS OF VSP

Steel Products By products

32
Angles Granulate slag
Billets Lime fines
Channels Coal tar
Beams Anthracene acid
Squares HP Naphthalene
Flats Benzene
Round Toluene
Rebars Zylene
Wire rods Wash oil
Ammonium sulphate

THE VISION OF VSP

CORPORATE PLAN OF VSP

VISION

To establish as an excellent corporate citizen and ensure optimal return on

investment.

MISSION

To become a 10 million tonne world class integrated steel plant by 2019-20.

OBJECTIVES

33
  Towards growth – Expand the plant capacity to 6 MT by 2009-10, 8

MT by 2014-15 and 10 MT by 2018-19.

 Towards Profitability – Achieve net profits continuously from 2002-

03.

 Towards Stakeholders – Make VSP the company of choice.

 Towards Technology – Continuously upgrade technology to

operate at international efficiency levels.

 Towards Safety, Environment and Society – Continue efforts

towards safety of employees, conservation of environment and be

socially responsive.

CORE VALUES

Value foresight is crucial in today’s competitive businesses climate VSP

values

 Commitment
 Customer satisfaction
 Continuous improvement
 Concern for environment

MARKETING NETWORK

The Company markets its products through headquarters marketing office

and a network of regional offices, branch offices and stockyards located all over

34
the country. It also takes the help of consignment agents and consignment sales

agents for the marketing of its products. The exports are carried out by the export

wing of marketing division with the help of different agencies. The Company is

recognised as “Star Trading House” by the Director General of Foreign Trade,

Ministry of commerce, Government of India.

The end users of the steel products manufactured at the plant include

amongst other construction industry, automobile industry, engineering industry,

re-rolling industry, forging industry, cable industry, wire drawing industry, fastener

industry, electrode manufacturers and railways. The Company is ideally located

to serve the southern Indian market. Regional Mangers/Branch managers meet

at Head quarters regularly to assess the market situation and decide market

strategies.

FINANCIAL PERFORMANCE OF VSP

a) HISTORY

35
 In the industrial horizon of India, Rashtriya Ispat Nigam Ltd., (VSP),

Visakhapatnam Steel Plant (VSP) stands as a monument of advanced

technology. VSP is the first shore based integrated Steel Plant in the country.

The decision of Government of India to set up an integrated steel plant at

Visakhapatnam was announced by the Prime Minister Smt. Indira Gandhi in

Parliament on 17th April, 1970 followed by foundation stone laying by her. The

initial project cost was sanctioned at Rs. 2256 Crores with an Internal Rate of

Return (IRR) 4.20%. The Indian government and USSR signed an agreement on

12th June 1979 for cooperation in setting up the 3.4 million tonne integrated steel

plant at Visakhapatnam.

Thereafter the project has undergone three revisions as detailed below.

First revision Second revision Third revision

Date of sanction by GOI 30.07.1982 24.06.1988 12.07.1995
Capital asset. Rs. 3897.28 Cr. Rs. 6849.70 Cr. Rs. 8593.29 Cr.
Financial IRR 5.40% 6.56% 5.30%
Liquid steel capacity (in
3.40 3.00 3.00
MT per annum)

The broad reasons for revisions were:

(1) Non-availability of funds on time

36
 (2) Price escalation
(3) Enhanced currency exchange rates
(4) Revision in taxes and duties
(5) Change in ocean freight.

REASONS FOR TIME OVER RUN

(1) Inadequate fund flow & its delay

(2) Midway revision of project concept

(3) Dislocation of Soviet equipment suppliers

(4) Delay in supplies made by major PSUs.

(5) Delay in providing water by AP Government

b) RATIONALISED CONCEPT

The construction of the plant started in 1981 and scheduled to be

completed in 4 to 6 years in two stages. However, due to inadequate funds

availability, there was a threat to project continuance. In order to contain project

cost, a Rationalised Project Concept was evolved where while retaining the Hot

Metal capacity, the liquid steel capacity was brought down to 3.0 MT from 3.4 MT

by dropping one SMS converter and up rating the capacity of other converter.

Further on the finishing line, Universal Beam Mill was dropped. The Rationalised

Concept helped in reducing the project cost by Rs. 1497 Crores. Details of major

production facilities under original concept and revised concept are given at

annexure.

37
 The plant was commissioned in two stages. The 1st BF viz., ‘Godavari’ was

commissioned in March 1990. The 2nd BF viz ‘Krishna’ was commissioned in

March 1992 and finally the plant was dedicated to the Nation by the then

Honourable Prime Minister Sri PV Narasimha Rao in August 1992.

c) CAPITAL RESTRUCTURING

FIRST CAPITAL RESTRUCTURE

Long gestation period in commissioning the plant and escalation of the

project cost to Rs. 8593.29 Crores (3.8 times over the original estimate)

necessitated capital restructuring, in order to ensure viability and to prevent from

becoming potentially sick under Sick Industrial Company (Special Provisions) Act

1985. Action was taken for restructuring the capital base even before the

Company became totally commercially operational. The first capital restructuring

took place in July 1993.

SALIENT FEATURES

 Conversion of Rs. 1184 Crores Government of India loans into

Equity Capital.

 Conversion of Rs. 1185 Crores Government of India loans into 7%

non-cumulative preference shares redeemable at the end of 10
years.

38
  Conversion of Rs. 791 Crores interest due on Government of India

loans into interest free loans for a period of 7 years.

 Conversion of GOI loans receivable in 1992-93 into 7% non-

cumulative preference shares redeemable at the end of 10 years

from the date of allotment (Rs. 419 Crores released after 31st July

1992).

 Conversion of GOI loans receivable in 1993-94 into Preference

Shares to be decided after review.

 Waiver of penal interest that becomes due up to July 1992 (Rs.

149.40 Crores).

 Government of India ensures funds (RS. 1507 Crores) in the plan

period for the project.

BENEFITS FROM CAPITAL RESTRUCTURING

• Reduction of loss by Rs. 432.47 Crores annually on account of

interest saving due to conversion of loans to equity capital,

Preference Capital and Interest free loan.

• Reduction of loss by Rs. 149.40 Crores on account of interest

saving due to waiver of penal interest.

39
d) SECOND CAPITAL RESTRUCTURE

Owing to historical capital burden, long gestation period in the

commissioning of the plant, the accumulated net losses before total

commissioning, the general recession set in Steel Industry from mid 1996, the

Company continued to incur net loses and getting close to erosion of 50% of net-

worth of the Company. At this stage, to avoid a situation of reporting a technically

viable integrated steel plant to BIFR, a second capital restructuring was

sanctioned by the Government.

The second capital restructuring was approved in May 1998, whereby Rs.

542.47 Crores of Government loan was converted into 7% non-cumulative

preference share capital redeemable after ten years from the date of release of

these loans. Further, conversion of Rs. 791 Crores interest free loan to 7% non-

cumulative preference capital was also agreed to. Benefits from this capital

restructuring was a reduction of loss by Rs. 235.85 Crores on account of interest

saving and an annual interest saving of Rs. 88.47 Crores. While approving

second capital restructure, government of India-Inter-alia desired to appoint a

financial consultant of repute to suggest a turnaround strategy for the

organisation.

e) FINANCIAL AND PHYSICAL PERFORMANCE

FINANCIAL PERFORMANCE

40
 The financial performance of the organisation against the set targets right

from 1990-91 to 2002-03 is placed at Annexure. From this table it can be seen

that the Company was gaining considerable gross margin which reflects the

satisfactory performance of the plant for all the years except during the year 1998-

99 and 1999-2000 when there was a major set back to Coke ovens. Further it

had also secured reasonable cash profits barring those two years and initial

period up to 1992-94.

The Company had again gained its momentum during 2000-01 when it

made cash profit of Rs. 153 Crores and turned around during the year 2002-03

making a Net Profit of around Rs. 520crores for the first time. During the last few

years, the Company had taken a number of steps like major capital repairs to

Coke ovens, BF capital repairs, austerity measures to cut down the cost,

restrictions on capital expenditure etc. It may need a special mention that a

special drive took place to cut down the interest cost on term loans and working

capital arrangements.

PHYSICAL PERFORMANCE

The details of physical performance as against the targets set right from

1990-91 to 2002-03 are placed at annexure. From the table it can be seen that

41
the targets set were reasonably met by the organisation, up to 1999-2000 and far

exceeded the targets from the year 2000-01 onwards.

PRESENT PERFORMANCE

The Company turned around during the year 2002-03, making for first time

Net Profit of Rs. 520 Crores, achieving Gross sales/turnover of Rs. 5059 Crores.

The financial year 2002-03 is a happy note in VSP’s diary because of its

remarkable performance in all fronts. On the production front, the Company far

exceeded the targets set. The performance of the Company for the year 2002-03

is placed at Annexure.

At the beginning of the financial year 2002-03, the Company was having

total term loans to the tune of Rs. 1373.98 Crores. UTI (Rs. 590.29 Crores, LIC

Rs. 580.80 Crores and Bonds Rs. 175 Crores) are the major outstanding. Apart

from this the utilisation of working capital limits from the banks were Rs. 600

Crores (CC Rs. 96 Crores, WODL Rs. 395 Crores in the form of FCNR (B) DL Rs.

267 cores, DCDL Rs. 128 Crores and EPC Rs. 109 Crores).

Taking advantage of falling interest rates, dynamism prevailing in the

financial market, strong economic factors with reference to country’s strengthened

foreign currency reserves; appreciation of rupee with reference to USD in the later

part of the year, the Company has taken several initiatives to reduce the debt

burden.

42
STEPS TAKEN TO REDUCE DEBT BURDEN

The significant steps taken by the Company to reduce debt burden include

restructuring of dept through prepayment of high interest loans out of internal

resources, swapping of high cost loans with borrowings from banks at lower

interest rates, swapping off high cost working capital demand loans with FCNR

borrowings and commercial paper at cheaper rates of interest.

The Company due to the above initiatives could prepay the entire term

loan of Rs. 590 Crores from UTI during the year 2002-03 from out of internal

resources and by swapping with bank loans. 15% working capital demand loan of

Rs. 400 Crores was also substituted with commercial paper with an average

interest rate of 7% and FCNR demand loan at an average interest rate of 3.4% to

10.09T.

The above steps resulted in brining down outstanding term loans to Rs.

773.37 Crores as at the end of the year 2002-03 (debt free on date) and utilisation

of working capital to the extent of only Rs. 368 Crores. The above steps resulted

in containing the interest expenditure to Rs. 135 Crores for the year 2002-03 as

against the previous year level of Rs. 290 Crores as shown in Annexure.

PERFORMANCE OF VSP

a) PRODUCTION, COMMERCIAL AND FINANCIAL PERFORMANCE

43
 PRODUCTION PERFORMANCE (‘000 Tonnes)

Year Hot metal Liquid steel Saleable steel

1999-2000 2943 2656 2382
2000-01 3165 2909 2507
2001-02 3485 3083 2757
2002-03 3941 3356 3056
2003-04 4055 3508 3169
2004-05 3920 3560 3173
2005-06 4153 3603 3237
2006-07 4046 3606 3290

production performance

4500
4000
3500
3000 Hot metal
values

2500
Liquid steel
2000
1500 Saleable steel
1000
500
0
1999- 2000- 2001- 2002- 2003- 2005- 2006-
2000 01 02 03 04 2004- 06 07
05
years

44
 COMMERCIAL PERFORMANCE (Rs. Crores)

Year Sales turnover Domestic sales Exports

1999-00 3037 2677 295
2000-01 3436 3122 322
2001-02 4081 3710 371
2002-03 5059 4433 626
2003-04 6169 5400 769
2004-05 8181 7933 248
2005-06 8469 8026 443
2006-07 9126 8702 425
2007-08 8881 7412 1469

commercial performance

10000
9000
8000
7000
6000 Sales turnover
values

5000 Domestic sales

4000 Exports
3000
2000
1000
0
19 20 20 20 20 20 20 20 20
99- 00- 01- 02- 03- 04- 05- 06- 07-
00 01 02 03 04 05 06 07 08
years

45
 FINANCIAL PERFORMANCE (rs. In crs)
Year Gross margin Cash profit Net profit
1999-00 252 -130 -562
2000-01 504 153 - 291
2001-02 690 400 -75
2002-03 1049 915 521
2003-04 2073 2024 1547
2004-05 3271 3260 2008
2005-06 2383 2355 1251
2006-07 2632 2584 2222
2007-08 3001 2977 2686

Financial performance

3500
3000
2500
2000
Gross margin
values

1500
Cash profit
1000
Net profit
500
0
-500 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007-
00 01 02 03 04 05 06 07 08
-1000
years

b) POLLUTION CONTROL AND ENVIRONMENTAL PROTECTION

Generally, integrated steel plant is seen as a major contributor to

environmental pollution as it discharges a large volume of waste products.

Elaborate measures have been adopted to combat air and water pollution in VSP.

In order to be eco friendly, VSP has planted more than 3 million trees over an
46
area of 35 square Kms. and incorporated various technologies at a cost of Rs.

460 Crores towards pollution control measures.

c) HUMAN RESOURCE MANAGEMENT

Human resource initiatives at VSP are clearly linked to the corporate

strategy of the organisation. VSP has exemplary industrial relations where the

entire workforce works as a well knit team for the progress of the Company. The

productive environment prevailing in the Company fosters an atmosphere of

growth, both for the employees and for the Company. VSP has introduced multi

skilling concept since inception and the employees are trained as per this

concept. VSP has adopted a system of overlapping shifts, the first of its kind, in

the industry. This system ensures smooth change over of the shifts and

uninterrupted peace of operation of the plant during the shift change over.

Another unique feature followed at VSP is the uniform working hours for the

ministerial employees.

i) TRAINING AND HUMAN RESOURCE DEVELOPMENT

Training and HRD are given due emphasis at VSP. Each year, a minimum

of 1/3rd of the employees undergo various training sessions either at Training and

Development Centre or at Centre for HRD for sharpening their skills on the

technical and management related issues. Training is also given in the area of

safety, fire prevention, occupational health besides on the job at the shop floor.

47
ii) WELFARE AMENITIES

The welfare measures provided for the employees of the Company are the

best in the industry. A modern township with all amenities has been developed

with 8032 quarters to house the plant employees and other government agencies

in 11 sectors. The township is having best facilities in terms of drinking water

supply, drainage system, roads, community centres, crèche, parks, schools,

shopping complexes, medical facilities, recreational facilities, etc to cater to the

needs of the employees and their dependent families. The Company also

provides welfare facilities much beyond the statutory requirements by way of

introduction of a unique superannuation benefit fund and a unique family benefit

scheme.

d) ACHIEVEMENT AND AWARDS

The efforts of VSP have been recognised in various forums. Some of the

major awards received by VSP are in the area of the energy conservation,

environment protection, safety, quality, quality circles, Rajbhasha, MoU, sports

related awards and a number of awards at the individual level.

Some of the important awards received by VSP are indicated below.

 ISO 9001 for SMS and all the downstream units – a unique
distinction in the Indian Steel Industry.
 CII (Southern Region) Energy conservation award in 1995-96.

48
  Gold star award for excellent performance in productivity.
 Best Labour Management award from the government of AP.
 SCOPE award for best turn around from 2001.
 Best Enterprise award from SCOPE, WIPS for 2001-02.
 Prime Minister’s trophy for 2002-03.
 MoU excellence award for 2003-04.

Total quality, latest technology, sophisticated equipment, up to date

knowledge, high skills, cost consciousness, production with less cost and

customer satisfaction have become the hallmark of VSP.

Today, VSP is moving forward with an air of confidence and with pride

amongst its employees who are determined to give their best for the Company

to enable it to reach new heights in organisational excellence.

49
50
 PROJECT EVALUATION

Capital budgeting is a complex process, which may be divided into six broad
phases: Planning, Analysis, Selection, Financing, Implementation, and Review.
The following chart shows the relationship among these phases

Planning

Analysis

Selection

Financing

Implementation

Review

51
Project Planning

The planning of a project is a technically pre-determined set of interrelated

activities involving the effective use of given material, human, technological and
financial resources over a given period of time. Which in association with other
development projects result in the achievement of certain predetermined
objectives such as the production of specified goods & services.
Project planning is spread over a period of time and is not a one shot
activity. The important stages in the life of a project are:
• It’s identification
• It’s initial formulation
• It’s evaluation (whether to select or to reject).
• it’s final formulation
• It’s implementation.
• It’s completion and operation (Management and control to ensure targeted
benefits).
The time taken for the entire process is the gestation period of the project.
Contents of Project report:

1. Market and marketing.

2. Size of the project.
3. Project engineering dealing with technical aspects of the project.
4. Location and layout of the project building.

52
5. Building.
6. Production capacity.
7. Work schedule.

Details of the cost of the Project:

1. Cost of Land.
2. Cost of Building.
3. Cost of Research and Developing.
4. Cost of Plant & Machinery.
5. Cost of Furniture and Fittings.
6. Profitability of Projects.
7. Organisational Structure.
8. Proposed Financing of the Project.

53
 At present Vizag Steel Plant is producing 3.5 million Tonnes of liquid steel.
VSP wants to expand its plant capacity to 10 million Tonnes per year by 2020.
Now it is in ongoing expansion plan by increasing its capacity from 3.0 MT Stage
to 6.3 MT stage in order to cater the needs of the domestic market and inturn
contributing for the growth of gross domestic product rate.VSP aiming to produce
at international standards of cost and quality ; and to meet the aspirations of the
stakeholders. In VSP there are three coke oven batteries they produce the
required coke for steel production in VSP. Due to the expansion of the plant the
three coke oven batteries, existing rolling mills, steel melt shop are not sufficient.
The planning for the expansion project is very essential in order to complete
the project in given time. Without proper planning of the material, human and
technological resources the project cannot be completed efficiently. The detailed
project report helps in estimating requirements of the project and completing the
project systematically.
Project analyzing
After the primary stages of screening, the analysis of the market, technical,
financial, economic and ecological aspects are to be taken up. The focus of this
phase of capital budgeting is on gathering, preparing and summarizing relevant
information about various project proposals. Based on the information developed
in this analysis, the stream of costs and benefits associated with the project can
be defined.

54
Project Appraisal
In the project cycle, preliminary establishment precedes the project appraisal
proposed to be achieved through implementation of a project. The appraisal of an
investment proposal needs to examine the following aspects:
 Demand and supply analysis to determine the gap and whether product
specifications, market plan and delivery system are soundly conceived, for
preferably through market surveys and/or other reliable forecasts of demand
and supply of products/services proposed to be produced by project under
consideration. In the case of an export oriented pr4oject export potential of
products/services would need to be assessed.
 Technical analysis to determine whether the specifications of technical
parameters chosen realistic and optimal.
 Organisational and managerial aspects to determine whether the Organisation
has the managerial capability to implement and operate the project, the
preparedness to execute the project including implementation plans,
“PERT/CPM” chart/activity taking in to account the projects that are already
being implemented by the concerned agency and resources required for
implementing the project.
 Environmental aspects to ensure that the environment related issues such as
protective measures, rehabilitation, resettlement etc as may be required as per
environmental guidelines have been fully covered in the project cost estimates.
 Financial analysis to determine whether financial costs are properly estimated,
funding is assure and the project is financially viable.
 Economic analysis to determine whether the project is worthwhile from the
point of view of the economy as a whole.

55
 Sensitivity / Risk analysis to assess the impact of different variables of input
and output on the viability of the project is carried out which can suggest
potential management activity to reduce overall project risk.

Capital investment decisions are a firm’s decisions to acquire long term assets. They
involve large capital expenditure, and have considerable effect on the firm’s
growth and profitability. The firm’s investment decisions would generally
include expansion, acquisition, modernization and replacement of the long-term
assets.

The three steps involved in the evaluation of an investment or project.

1. Estimation of cash flows.
2. Estimation of required rate of return.
3. Application of a decision rule for making the choice.
An analysis of cash flows is useful for short run planning firm needs sufficient
cash to pay debts maturing in the near future, to pay interest and other expenses
and to pay dividends to shareholders. The firm can make projections of cash
inflows and outflows for the near future to determine the availability of cash. This
balance can be matched with the firm’s need for cash during the period and
accordingly arrangements can be made to meet the deficit or invest the surplus
cash.
The investment decision rules may be referred to as ‘capital budgeting
techniques’ or ‘investment criteria’. A sound appraisal technique should be used
to measure the economic worth of an investment project. The essential property
of a sound technique is that it should maximise the shareholder’s wealth. The
following other characteristics should also be possessed by a sound investment
evaluation criterion.

56
 ♦It should consider all cash flows to determine the time profitability of the
project.
♦It should provide for an objective and unambiguous way of separating good
projects from bad projects.
♦It should help ranking of projects according to their time profitability.
♦It should recognize the fact that bigger cash flows are preferable to smaller
and early cash flow.
♦It should help to choose among mutually exclusive projects, those projects
that maximise the shareholder’s wealth.
♦It should be a criterion, which is applicable to any conceivable investment
project independent of others.
Familiarity with the capital budgeting techniques will facilitate an easier
understanding of costs and benefits risk analysis and cost of capital.
Economists, Accountants, and others have suggested more than thirty criteria
to judge the worthwhileness of the capital project. Some techniques are general
and applicable to wide range of projects and some are specialized and suitable for
certain types of investments and industries.
The investment criteria or techniques are classified into two broad categories-
1.Discounting criteria
a. Net present value
β b. Internal rate of return
c. Profitability index
d. Net operating benefits per unit of investment method

2.Non discounting criteria

a. pay back period
b. Accounting rate of return
c. Debt-service coverage ratio

57
d. Cost effectiveness analysis

1. NET PRESENT VALUE:

N.P.V is a modern method of evaluating investment proposals. This method
takes into account the time value of money and calculates the return on
investment by introducing the factor of time element, i.e. NPV recognizes the
fact that a rupee earned today is worth more than a rupee tomorrow. The net
present value criterion has a sound rationale underlying in it, it represents the
net benefit over and above compensation for time and risk.
The NPV of a project is the sum of the present values of all the cash flows,
which is either positive or negative that are expected to occur over the life of the
project.

n Ct
NPV of a project = ∑ ---------
t=1 (1+r)
Here,
Ct = cash flow at the end of year t
n = life of the project
t = discount rate

2. INTERNAL RATE OF RETURN:

Internal rate of return is also a method that uses the concept of time value of
money.
The internal rate of return of a project is the discounted rate, which
makes It’s NPV equal to zero. IRR equates the present value of future cash
flows with the initial investment. IRR is also known as time adjusted return, trail
& error yield method.
In the NPV calculation we assume that the discount rate is known and
determine the NPV, but in the case of IRR we set the NPV equal to zero and
determine the discount rate that satisfies this condition.

58
 n Ct
IRR = ∑ ---------- = 0.
t=1 (1+r)t
This can also be calculated by knowing the initial investment, cash outflow,

C1 - C0
R= ---------------
C0
Here,
C0 is the initial investment and C1 is the cash outflow,
R is the rate of return.
A project is accepted if IRR is greater than the cost of capital and is rejected
if thee IRR is less than the cost of capital.

3. PROFITABILITY INDEX

Profitability index method is used to evaluate the investment proposal. It is

the ratio of the present value of cash inflows, at the required rate of return, to
the initial cash outflows of the investment.

n Ct

PI = ∑ -----------

t=1 (1+k)t

--------------------------------

59
 C0

4. NET OPERATING BENEFITS PER UNIT OF INVESTMENT METHOD

NPV/IRR methods are quite useful when project resource are unlimited.
When resource constraint that time Net Operating Benefit Method will use.

N Bt N OCt
∑ ---------- - ∑ --------------
t=1 (1+k)t t=1 (1+k)t
PV/K = ------------------------------------------------------

N It

∑ ----------

t=1 (1+k)t

Bt = Benefits in year t

OCt = Operating costs in year t

It = Investment in year t

5. BENEFIT COST RATIO:

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 It is of paramount importance for the finance manager to access the
benefits that the firm will accrue by taking up a certain project and the costs
that are involved. If the benefits are much more than the costs then the
projects are desirable and if the costs are very large with the benefits meager,
the projects become undesirable.

PVB

Benefit cost ratio = -------

Where, PVB is the present value of the benefits.

It is the initial investment.

6. PAYBACK PERIOD:

The payback period is the length of the time required to recover the initial
cash outlay on the project. According to the payback criterion, the shorter the
period of payback, more is the desirability of the project.

Firms using this criterion specify the maximum acceptable payback period.
If ‘n’ is the number of years that is fixed by the firm, the payback period less
than ‘n’ is desirable and the projects with payback period exceeding ‘n’ is
undesirable.

The payback period does not take in to consideration the time value of
money, so this conventional technique is modified as ‘Discounted Payback
Period’, which converts the cash flows in to the present values. The Payback

61
 period is a popular method in practice as it is simple helps to tackle risk and
focuses on liquidity.

The payback period however suffers serious drawbacks,

• It does not recognize the time value of money. It gives equal weight to the
cash flows occurring over different periods of time.

• It is not a measure of profitability. It does not consider all cash flows of the
project.

• It can be misleading since it ignores cash flows after the payback period.
Between two projects, it will accept the project with a shorter period, even if
the excluded project generates larger cash flows after the payback period.

7. ACCOUNTING RATE OF RETURN

The accounting rate of return or average rate of return on investment, is a

measure of profitability, which relates income to investment both measured in
accounting terms.

ARR is calculated on the basis of average income over the life of the
project. If the ARR is calculated for each year using the expected net income
the following generalizations can be made:

1. The accounting rate of return tends to understate the internal rate of return for
earlier years and over state for the later years.

2. The ARR and the IRR can be the same if the depreciation schedule is equal
to the economic depreciation schedule.

3. Inflation and creative accounting tend to create a discrepancy between the

accounting rate of return and internal rate of return.

Average income after tax

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 ARR = ---------------------------------

Initial investment

In this method a project is accepted if the ARR is higher than the minimum
rate established by the management and reject those projects which have
ARR less than the minimum rate. This method would rank a project as number
one if it has highest ARR and lowest rank would be assigned to the project
with lowest ARR.

The ARR can be readily calculated from the accounting data and this rule
incorporates the entire stream of income in calculating the project’s
profitability.

8. DEBT SERVICE COVERAGE RATIO (DSCR)

Projects are generally financed in a certain debt and equity ratio. The equity
is contributed by the promoters of the project and /or by the public if the
Organisation is government owned. While the debt is financed by various
financial institutes and banks. The various evaluation techniques like NPV,
IRR, Payback etc do not give adequate ranking of the project in case it is debt
financed.

“DSCR is the annual net project cash flow after tax divide by the annual
principal plus interest charges”.

The banks/financial institutions would finance the debt portion of the project
cost, if this ratio exceeds 1.5 on the average for the duration of debt
repayment. If the ratio exceeds 3 to 4, the project would be attractive and it
would be financed by venture capitalist

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 Cost Effective Analysis

In the cost effectiveness analysis the project selection or technological

choice, only the costs of two or more alternative choices are considered
treating the benefits as identical. This approach is used when the question of
how to minimize the costs for undertaking an activity at a given discount rates.
In case the benefits and operating costs are given, one can minimize the
capital cost to obtain a given discount.

Project Selection
The selection of a project involves a large number of techniques that judge
whether the project is worthwhile or not. The discounting techniques like NPV,
Internal rate of return and cost benefit ratio are considered. The non-discounting
techniques like payback period and accounting rate of return are also considered.
The management fixes the cut-off values.
The Visakhapatnam Steel Plant has two alternatives in selecting the project.
1. To establish the expansion plant i.e up gradation to 6.3 MT
2. To continue with existing production capacity.
Proper project appraisal to be done for expansion projects otherwise it leads
to problems. In order to accomplish its vision and mission statements and to
meet aspirations of the stake holders, VSP has to go for expansion plans
subsequently.

VSP will enhance the volume of production in long products segment in view of
brand image. In order to diversify the product mix and help reduce the
dependence on import of pipes in oil and gas sector, a seamless pipe mill is
envisaged.

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65
 PROJECT FINANCE

Project financing is considered right from the time of the conception of the
project. The proposal of the project progresses working capital. So, in general a
project is considered as a ‘mini firm’ which is a part and parcel of the
Organisation.
Sources of project financing

Equity capital debt capital

Equity share capital Term loans

Preference share capital Debentures
Internal accruals W.C advances
Misc.sources

EQUITY SHARE CAPITAL:-

Equity shareholders are the real owners of the company whose
ownership is limited only to their capital contributions unlike partnership firms and
sole-trading concerns. They bear the risks of ownership and enjoy rewards
accordingly.
Equity share capital may be Authorized, Issued, Subscribed,Called up &
paid up capital. The amount of capital that a company can issue as per its
Memorandum of Association is called “Authorized capital”. The amount of share

66
capital being offered by the company to investors (public private or both) is called
“Issued capital”. It may be to the full extent of or part of the Authorized capital.
That part of the Subscribed capital for which the company has given a call to the
investors for the payment of the share money is called “Call-up capital”. That part
of the Issued capital which has been subscribed by the investors is called
“Subscribed capital”. That part of the call up capital which has been paid up by the
investors actually is called “Paid up capital”.
The terminology used in the context of share capital is par value, issue
price, book value & market value. Par value is the price of a share mentioned in
the Memorandum of Association and written on the share scrip. Issue price is the
price at which the share are issued. It may be equal to par or Face value or
Higher than premium or lower than discount the part value. The book value of a
share(Equity)is equal to
Paid up equity share capital + Reserves – intangible assets

Number of Outstanding equity shares

Rights of Equity shareholders

 Right to Income
 Right to control
 Pre-emptive Right
 Right in liquidation
Advantages of Equity capital:
1. No compulsion to pay dividends to the Equity shareholders.
2. No obligations on part of the company to redeem as equity shares
have no maturity date.
3. Other things being constant, higher the equity base of the company,
higher is its credit-worthiness.

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Disadvantages of Equity capital :
1. Public issue and private placement leads to the dilution of control of
existing Equity shareholders.
2. Cost of Equity share capital is higher than that of other investors
since Equity shareholders bear the highest risk. The higher the risk,
the larger the return they expect.
3. Cost of issuing Equity shares which includes brokerage,
underwriting commission etc.., is higher than that involve in issuing
the securities.
PREFERENCES SHARE CAPITAL:
Preference shareholders get preference in the form of priority given
to them while making dividend is fixed and the preference shareholders do not
enjoy the voting rights on any resolution places before the company. In any year if
the company is unable to pay preference dividends, The arrears will be carried
forward to the next year. In the next year, cumulative preference dividend is paid.
It is clear that unless the company pays the cumulative preference dividends
along with the arrears the company cannot declare equity dividends. Normally
preference shares are redeemed after 10 to 15 years.
Advantages:
1. Company can skip preference dividend and pay in the next year.
2. Preference capital enhance the credit worthiness of the company.
3. No dilutions of control as preference shareholders do not carry any voting
rights.
4. No collateral pledge in favour of preference shareholders.
Disadvantages:
1. It is costlier sources of financing when compared to debt capital because
unlike interest payments, preference dividends are not deductible.

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 2. As there is skipping of dividends in one year, it can be adversely affect the
reputation of the company. If the company skips the dividends for three
year. it has to give voting right to the preference shareholders.

INTERNAL ACCURALS:
A part from equity share capital and preference share capital, internal
accruals are also one form of long term sources of project financing. Internal
accruals consist of depreciation charges and retained earnings. Since
depreciation is a periodic write off of a capital expenditure of an asset in
beginning, it is also a long term internal sources of financing a product. On the
other hand, retained earnings are that portion of the profit after tax minus
preference dividend which is ploughed back in the company. Retained earnings
are also known as internal Equity. Generally in India, companies retain 30%
to80% profit after tax less preference dividend.
Advantages:
1. This source is readily available for which company need not consult either
shareholders or lenders.
2. No need of any issue cost to be bleared
3. No dilution of control as there will not be any increase
in the number of shareholders.
Disadvantages:
1. Limitation on the funds available by the way of internal accruals.
2. If there is ploughing back of profits through retained earings,there is
opportunity cost of capital by the way of dividends for the by equity share
holders.
TERM LOANS:
Sources of long term project financing, are the long term loans given by
financial institutions and banks to the companies to be repayable in less than 10

69
years. It is a form of debt financing. Term loans are generally used for financing
fixed assets and long term working capital needs. They differ from short term bank
loans which are employed for financing short term assets and short term working
capital needs. Financial institutions grant Rupee term loans as well as foreign
currency term loans. Term loans are secured by first Equitable mortgage of all
immovable properties or assets of the company. Normally in case of default of the
interest and principal payments by the borrower, the borrower has to pay penalty
in the form of additional interest of 2% p.a.for the period of default on the amount
of principal in default. Term loans are subject to the levy of upfront fee of 1% on
the loan amount sanctioned.
DEBENTURES:
Debentures are the debt financing instruments issued by large
companies. These are the long term debt instruments having the similar features
to those of ordinary debt. The company as to pay interest and principal instalment
at the specified regular times without fail. Debentures offer greater flexibility with
respect to date of maturity, rate of interest, repayment etc., when compared to
term loans. In India, generally, debentures are secured by mortgage on the
immovable asset and a floating charge on the other assets of the company.
Debentures may be medium term having the maturity of 1 to 5 years or long term
having the maturity period of 5 to 12 years. Debentures, sometimes, may have the
“Call” or “put” options. As per the companies Act if the debentures are issued, a
trustee, which may be a bank or financial institution or insurance company, is
appointed to ensure that the company fulfils all the contractual obligations.
Contemporary types of debentures:
 Deep discount bonds
 Convertible debentures
 Floating rate bonds
 Secured premium notes

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  Indexed bonds
 Privately placed debentures

Advantages:
1. Interest on debt is tax-deductible.
2. No dilution of control.
3. Cost of issuing debt is lower than that of equity capital.
4. Provides protection against high unanticipated inflation as the interest
charges are once per all fixed in nominal terms.
Disadvantages:
1. Increase financial leverage which in turn raises the cost of Equity as per
CAPM model.
2. Debt imposes restrictions on limit of the company’s borrowings.
3. The real cost of debt will be greater than the expected value in case of low
inflation.
WORKING CAPITAL ADVANCES:
These are the short term advances granted by commercial banks in
three ways namely cash credit, loans, purchase/ discount of bills and letter of
credit.

Cash credit:
Cash credit is the overdraft agreement made by a bank for the purpose of
borrowing by the customer. The borrower can draw the amount as often as
required provided the amount does not exceed cash credit limit. Interest is
charged only on the running balance but not on the limit sanctioned. The
borrower is very much interest in this type of loan as he can withdraw amount
as and when he requires and pays interest only on the amount he has

71
withdrawn. However for availing this facility, the borrower has to pay some
minimum charges irrespective of the level of borrowing.

Loans:
Loans are the short term loans granted by the commercial banks and the
interest is repayable on the whole loan amount sanctioned unlike cash credit
agreement. They are disbursed either on demand or in periodical instalments.
Purchase/discount of Bills:
Discount of bills is the bill of exchange having the maturity period of 90
days. It may be clean bill or documentary bill. The seller of goods draws the
bill and sends it to the purchaser for acceptance. Once it is accepted by the
purchaser, it is to be received back by the seller. The seller, if he needs
money before the maturity date encashes or discounts the bill with any
commercial bank. Later on the purchaser pays the amount of bill to the bank
on the due date. So here the commercial banks finance the bill to the seller on
behalf of the purchaser.
Letter of credit:
Letter of credit is the form of advances granted by a bank in favour of his
customer. Generally it is useful in case of foreign trade. On behalf of importer,
the bank of the importer pays the due amount to the exporter and later on
collects the amount from the customer.
OTHER SOURCES:
I) DEFERRED CREDIT:
It is the credit provided by the supplier of materials to the buyer so
that the latter can make the payment over a period of time.Generally,the
supplier provides these facility if there is bank’s guarantee furnished by the

72
buyer. The rate of interest charged by the supplier will be high. This type of
finance is short term in nature normally.

II) LEASE FINANCE:

It is a type of debt finance wherein two persons have the contractual
agreement stating that one person gives the right to use his asset/machinery
to another person for periodic rental payments. The person who grants the
right is called “Lessor” and the person who uses the asset is called “Lessee”.
The two types of lease are available namely finance lease and operating
lease.
III) HIRE PURCHASE:
It is also a contractual agreement between to persons wherein one
person purchase the asset and gives it on hire to the another person per
some periodic payments of instalments. The instalments cover interest as well
as principal. At the end of the payment of the last instalments to the hirer, the
hirer gets the title of the ownership of the asset. For the calculation of
installments,the hirer follows “the sum of the years digits method” so that the
total interest is allocated over the years fairly.
IV) COMMERCIAL PAPERS:
These are the short term unsecured promissory notes issued by the
highly credit rated companies having a very high financial strength, they are
having the maturity period ranging from 90 to 270 days. They are usually
issued at discount ,reflecting prevailing interest rates in the market.
Commercial paper is not backed by any collateral security. Before issuing
commercial papers ,the company need not register them with
The Securities and Exchange Commission (SEC).These commercial papers
can be issued for financing only current assets but not fixed assets without

73
 SEC’s permission. They are zero coupon debt instruments but have higher
yields than other money market instruments.

V) FACTORING:
It is the process of financing that of a companies arising from credit
sales. The factor takes the responsibility on behalf the company of collection
of outstanding amounts from the customers arising out of credit sales. It
charges some commission of 1 to 2% of the face value of the debt for
providing this service. Generally, factor advances around 70 to 80% of the
book debt to the client company and charges a rate of interest which is
typically higher than the lending rate of commercial banks. In case of recourse
factoring, the client has to bear the loss in case of default by the customers.
On the other hand, in case of non-recourse factoring, the risk is borne by the
factor. In India recourse factoring is prevalent. Factoring is an useful short
term sources of finance.
BRIDGE FINANCE:
This a temporary loan meant for tying up the cost of the project.
The necessity for bridge finance arises in situations where finance from
particular sources is being delayed. However, the availability of finance from
that source is certain.

SOURCES IN INTERNATIONAL MARKETS:

Euro market:
It is a market which is a collection of international banks that help
company’s in different countries to rise capital in the global market. An Indian
company can access Euromarkets to raise Eurocurrency or Eurobond or for
issuing global depository receipts(GDRs).

74
 Eurocurrency Loans
 Eurobonds
 Global Depository Receipts

Foreign Domestic Markets:

Companies can also raise Finance by selling securities in the domestic
capital markets of foreign countries. For example, if an American firm issues
pound-sterling denominated equity stocks in the British capital market is the
foreign domestic market for the U.S.In India, Reliance Industries limited issued
dollar-denominated bonds in the U.S domestic capital market.
Export Credit Schemes:
Export credit schemes have been offering by export credit agencies
like USEXIM,JEXIM etc…These agencies are established by the central
governments of major industrialized countries. These agencies follow some
common guide lines for giving support for exports credit schemes are of two
types namely Buyer’s credit and Suppliers credit.
VENTURE CAPITAL:
It is the capital provide by the institutional investors and high net worth
individuals to the companies for Financing technology related innovative
business ideas .Such ideas are untried before and have high risk
opportunities. It is the long term Finance having the maturity period, the
company redeems the capital to the investors along with some capital
appreciation. So the investors interested in venture capital do not bother about
the short term benefits on their investments like dividends. Interest etc.. They
are very much interested in capital appreciation in the long term. Over the past
20 years, venture capital has become a very famous Financing option in most
of the countries. Before Financing, venture capital firm appraises the

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 innovation project of the company borrower is in different angles. Venture
capital companies are subject to high degrees of risk and uncertainty.

Debt service coverage ratio:

Project is generally financed in a certain debt and equity ratio. The equity is

contributed by the promoters of the project and for by the public if the organization

is government owned. While is financed by various financial institutes and banks.

The various evaluation techniques like net present value, internal rate of return

payback etc. do not give adequate ranking of the project in case it is debt finance.

DSCR is the annual net project cash flow after-tax divide by the annual

principal plus interest charges. The banks financial institutions would finance the

debt portion of the project cost, if this ratio exceeds 1.5 on the overage for the

duration of debt repayment. If the ratio exceeds 3 to 4 , the project would be

attractive and it would be financed by ventures capitalists.

The estimated completion cost of the project expansion is nearly 8,692

Crores according to the estimation made at the time of proposal of the project. In

order to have a proper leverage it will be necessary that the funding should be in a

mix of debt and equity capital. So for the financing pattern adopted in Rhastriya

Ispat Nigam Ltd (RINL) was in the debt equity ration of 1:1 as per Government

76
guide lines. However Government has now decided not to invest heavily in steel

sector. So the Government has decided that respective plant units should meet

their capital funds from their own resources or from market borrowings.

Considering all the above facts the RINL assumed that the debt equity to be in the

ratio of 70:30.

a) Equity Capital:

1. Infusion of Government equity either from budgetary resources or from

Steel Development Funds (SDF).
2. Induction of equity by agencies /companies who are setting up separate
stand alone blast furnaces or blast furnace based steel plant complexes
without captive coke oven plant.
3. Equity by overseas suppliers of coking coal.
4. Equity by overseas buyer of coke, whom may hedge initial capital
invested and assured by buy-back arrangement for limited number of
years.
b) Loan Capital:

1. Loan capital from financial institutions like IDBI, IFCI, ICICI etc.
Guaranteed by the central Government who is the owner of RINL.
2. Surplus credit by major supplier of plant & equipment.
3. Providing loan by agencies that enter into an assured buy-back
arrangement at the terms and condition mutually agreed upon.
When the proposal for COB-4 was made in 1999 the company was in

losses and the souring of funds was decided as debt and equity in the ratio 70:30.

But now the financial position of RINL has changed. The company is in profits for

the last 3 years. The accumulated profits upto 2005 march are approximately

77
4000 Crores. So the RINL has decided to meet the capital funds from their own

resources.

EXTERNAL COMMERCIAL BORROWINGS: AT VISAKHA STEEL PLANT

VSP prefers ECB route

After the Centre's clearance to its expansion project at Visakhapatnam Steel

Plant (VSP) has now launched an exercise to look for banks and financial
institutions to increase its capacity from three million tonnes (MT) to 6.3 MT.

The Cabinet Committee on Economic Affairs (CCEA) okayed VSP's Rs. 8,692
Crores project after a lot of lobbying. The funding requirement will be met on
50:50 basis through external commercial borrowings (ECBs) and internal
accruals.

The employees and the well-wishers of Rhastriya Ispat Nigam Limited — the
corporate entity of VSP — view the clearance as the beginning of the good days
for the country's first shore-based steel plant.

As a prelude to expansion, VSP had received a good response from about 50

banks and financial institutions for loans/debentures through an expression of
interest sought on its website.

Privatization

HSBC, Deutche Bank, ABN Amro, Punjab National Bank, SBI Caps, ICICI, IDBI
and other institutions had responded to the request with offers to fund the project
on liberal terms mainly due to the brand image enjoyed by VSP and the bright
prospects predicted for the steel industry.

One of the highlights of the expansion is to rule out the option of going public.
According to indications, ECB is considered as the best option to meet 50 per
cent of fund requirement.

Moreover, privatization mode is being preferred for augmentation of captive power

plant (2x67 MW capacity with all necessary facilities) under build, own and
operate (BOO) scheme.

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For expanding the air separation plant (2x1200 t/day oxygen), BOO mode will also
be followed.

It is envisaged to complete the first phase in 36 months and the second in less
than four years.

The management is confident of achieving its designed capacity of 10 million

tonnes in the coming years as per the detailed report prepared by M.N. Dastur
and Company.

Turning point

VSP, which was facing a rough weather due to slump in the industry and the
threat of getting referred to Board of Industrial Finance and Reconstruction (BIFR)
could make a spectacular turnaround during the tenure of B.N. Singh as the
Chairman and Managing Director.

Capital base of the company has already crossed the Rs. 8,000-crore mark and
the accumulated loss of Rs. 2,194 reported in 2003-04 was narrowed down to
below Rs.1,000 Crores in the next fiscal. With its impressive track record and the
launching of expansion process, VSP is bound to make a significant dent in both
domestic and overseas market.

The ECB route to raise funds

With high GDP growth and progressive industrialization, the Indian market is
preparing to be one of the stronger economies around the globe. Indian economy
is the 4th largest in the world in terms of purchasing power parity and the tenth
most industrialized. While foreign investment has helped in developing the
industrial sector, the importance of external commercial borrowing cannot be
overlooked. The increase in external commercial borrowing (ECB) reflects a
strong investment demand domestically as well as favourable financing conditions
overseas. In the industrial sector, there is a growing realization of productivity and
efficiency gains. In the face of free access to imports and foreign direct investment
(FDI), and liberalized external commercial borrowing policies, the Indian industry
is increasingly becoming internationally competitive and is aggressively securing
access to international markets on the strength of dynamic competitive
advantage. The policy environment has also played an immense role in this
resurgence of Indian industry.

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External Commercial Borrowing

External Commercial borrowing (ECB) is a term used to refer to commercial loans

availed from non-resident lenders with a minimum average maturity of 3 years in
the form of bank loans, buyers credit, suppliers credit, securitized instruments
(e.g. floating rate notes and fixed rate bonds).A company is free to raise ECB from
any internationally recognized source such as banks, export credit agencies,
suppliers of equipment, foreign collaborators, foreign equity-holders, international
capital markets etc. However, offers from unrecognized sources are not
entertained. ECB can be accessed under two routes, Automatic Route and
Approval Route. Under the Automatic Route, the approval of Reserve Bank of
India (RBI) or the Governments approval are not required. However, in case of
doubt regarding eligibility under the Automatic Route, applicants may take
recourse to the Approval Route. The maximum amount of ECB that can be raised
by an eligible borrower under the Automatic Route during one financial year is
USD 500 million. NGOs engaged in micro finance activities have been permitted
to raise ECB up to USD 5 million during a financial year for permitted end-use.

Benefits

The ECBs route provides an Indian company with the foreign currency funds that
may not be available in India; the cost of funds at times works out to be cheaper
as compared to the cost of rupee funds and the availability of the funds from the
International market is huge compared to the domestic market. Moreover
corporate can raise a large amount of funds depending on the risk perception of
the International market. Corporate (registered under the Companies Act except
financial intermediaries (such as banks, financial institutions (FIs), housing finance
companies and NBFCs) are eligible to raise ECB under the automatic route.
However Individuals, Trusts and Non-Profit making Organizations are not eligible
to raise ECB.

The success of India’s debt management policy is reflected in a perceptible

improvement in various external debt indicators. The external debt to GDP ratio
which is an indicator of an economy’s debt servicing capability, showed a steady
improvement, dropping to 17.4 per cent in March 2005 as compared to 38.7 per
cent in end-March, 1992.It is noteworthy to mention that debt owed to the
International Monetary Fund (IMF) was fully extinguished by 2000-01.ECBs can
be used as a borrowing means for any purpose (rupee-related expenditure as well
as imports) except for investment in stock market and speculation in real estate.
ECB is a source of finance for Indian corporate, small and medium enterprise,
Multi-state cooperative societies and non-governmental organizations for
expansion of existing capacity as well as for fresh investment.

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External Commercial Borrowing can be raised only for investments such as import
of capital goods (as classified by DGFT in the Foreign Trade Policy), new
projects, modernization/expansion of existing production units in the industrial
sector including small and medium enterprises and infrastructure sector - in India.
Infrastructure sector is defined as power, telecommunication, railways, road
including bridges, sea port and airport industrial parks and urban infrastructure
(water supply, sanitation and sewage projects). ECB proceeds can also be utilized
for overseas direct investment in Joint Ventures / Wholly Owned overseas
subsidiaries subject to the existing guidelines on Indian Direct Investment.
Utilization of ECB proceeds is permitted in the first stage acquisition of shares in
the disinvestments process.

Small and medium enterprises (SMEs) are increasingly opting for the external
commercial borrowings (ECB) route to raise funds, a growing trend, given the
current rising interest scenario. Those SMEs that are export-oriented find it
economically more viable to raise funds overseas. Also with a view to provide
Non-Governmental Organizations (NGOs) an additional channel of resource
mobilization and in order to give impetus to the micro-finance movement, the
Government has permitted NGOs to raise ECB up to US $ 5 million during a
financial year.

Recent Trends

The department of Economic Affairs, Ministry of Finance, and Government of

India monitors and regulates Indian firms' access to global capital markets. From
time to time, they announce guidelines on policies and procedures for ECB.The
important aspect of ECB policy is to provide flexibility in borrowings by Indian
corporate, at the same time maintaining prudent limits for total external
borrowings. The guiding principles for ECB Policy are to keep maturities long,
costs low, and encourage infrastructure and export sector financing which are
crucial for overall growth of the economy. The ECB policy focuses on three
aspects: eligibility criteria for accessing external markets, the total volume of
borrowings to be raised and their maturity structure as well as the end use of the
funds raised.

Over the years the RBI and the Indian government have monitored ECBs in
accordance with the needs of the Indian economy and laid down various policies
and guidelines. It is interesting to note that the trend of how ECB has evolved and
played a greater role in the Indian economy under the surveillance of RBI and the
Indian government. In its initial stages, the Government had operationalised the
automatic route for fresh ECB approvals up to USD 50 million and for all
refinancing of existing ECBs with effect from September 1, 2000. However, at

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present the maximum amount of ECB that can be raised by an eligible borrower
under the Automatic Route during one financial year is USD 500 million.

Further, with a view to enable the Indian corporate to become a global player by
facilitating their overseas direct investment, permitted end-use for ECB was
enlarged to include overseas direct investment in Joint Ventures (JV)/Wholly
Owned Subsidiaries (WOS). This would facilitate corporate to undertake fresh
investment or expansion of existing JV/WOS including mergers and acquisitions
abroad by harnessing resources at globally competitive rates. ECB for overseas
direct investment should also be in conformity with other parameters of the ECB
guidelines. Other important aspects being that housing finance companies, with
approval from the Reserve Bank of India, would be allowed to issue foreign
currency convertible bonds. The government also relaxed rules for external
commercial borrowings, allowing non-banking finance companies to raise
overseas loans.

It is pertinent to note, that though external commercial borrowing has been an aid
to the Indian economy, the government has continued to regulate the creation of
debt from overseas. For instance on September 16, 2003, Overseas Corporate
Bodies (OCBs) were derecognized as an eligible 'class of investor' under various
routes / schemes available under the extant Foreign Exchange Management
Regulations. It was also, reiterated that OCBs not being recognized as investors
cannot be recognized lenders.

ECB policies have been modified as recently as on 21st May 2007 regarding the
end-use of ECBs. As per the extant ECB policy, utilisation of ECB proceeds is not
permitted in real estate. Earlier, the term real estate excluded development of
integrated township as defined by Press Note 3 (2002 Series) dated January 4,
2002. However at present, the exemption accorded to the 'development of
integrated township' as a permissible end-use of ECB has been withdrawn. In
accordance with the recent master circular on foreign policy, utilization of ECB
proceeds is not permissible in real estate, without any exemption.

ECB has indeed found its place in the Indian market and the flexibility in
managing the borrowings have been facilitated by the RBI. Indian companies
have been granted general permission for conversion of External Commercial
Borrowings (ECB) into shares/ preference shares, subject to the following
conditions and reporting requirements. Firstly, the activity of the company is
covered under the Automatic Route for FDI or the company has obtained
Government approval for foreign equity in the company. Secondly, the foreign
equity after conversion of ECB into equity is within the sectoral cap, if any. Thirdly,
pricing of shares is as per SEBI regulations /erstwhile CCI guidelines/ in the case

82
of listed/unlisted companies as the case may be. Finally, the need for compliance
with the requirements prescribed under any other statute and regulation in force.

Conclusion

From April to December 2006, ECB flows were USD 9 billion: a billion dollars a
month and from January to March 2007, ECB flows have been close to USD 13
billion, this reflects the rise in commercial borrowing by corporate and other
institutions and the liberalized policy of the Government towards borrowing from
overseas source. The corporate world has begun to rely on ECB as a source for
raising funds and although the government needs to check arbitrage opportunities
for borrowing from overseas yet it has to facilitate commercial borrowing for the
growth of Indian economy.

VSP expansion plan attracts foreign

banks

The Rs 8,250-crore expansion project of the Visakhapatnam Steel Plant (VSP) is

attracting foreign banks such as Citibank, HSBC, France’s Calyon Bank and a
few others.

The company has decided to expand its capacity to 6.3 million tonne by 2007-08
from 3 million tonne and these banks have evinced interest in financing the
project.

Of the total project cost, close to Rs 5,750 Crores would be met from internal
accruals. This includes about Rs 3,000 Crores that VSP has invested in fixed
deposits with various public banks.

The company proposes to raise the remaining Rs 2,500 Crores through debt,
both in Indian rupees and foreign currency. The proposed tenure of the debt is
likely to be five years.

“To raise Rs 2,500 crore, we have invited banks, financial institutions and other
agencies to either lend or arrange the amount on their own or by way of a
consortium,” G N Murty, assistant general manager (finance), VSP, said.

The company needs foreign currency of about Rs 1,500 crore to import

machinery, he added. Many Indian and foreign banks have shown interest in

83
financing the entire Rs 2,500 crore on their own without any consortium, he said.

“We have been getting a lot of enquiries from several foreign banks. Citibank,
HSBC, Calyon Bank, State Bank of India, Canara Bank, Bank of Baroda and
ICICI Bank have already submitted their proposals,” he said.

Due to overwhelming response, VSP expects the funds to come at 5-7 per cent
interest.

84
PROJECT IMPLEMENTATION

85
 The group of activities starting from the techno economic feasibility report
approval or project decision and ending with the commencement of stabilized
production and maintenance would come under implementation.

They include:
Design engineering procurement contacting constrictions start up and
establishment of operation and maintenance. Each of these major activities
should be scheduled in a time frame with perfect integration showing
dependencies of activities and sub activities with starting and finishing dates for
each.
When the scheduling of activities is complete by translating it into cost, budget
should be prepared. Before you are able to prepare the schedule and budget you
have to decide the method of implementation, The size and composition of your
project team, prepare and estimate the total cost on various components of the
project. With the achievable accuracy and ascertain the probable dates of
clearances necessary for starting and proceeding with the project execution,
discussion with prospective manufactures and suppliers of equipment and
material are central to an achievable schedule. Equally important is the indication
about the financial sanction and disbursement. In case of an equity issue for
financing the project early discussions with the merchant bank broker and
underwriter are necessary for ensuring implementation. Funds shortage does not
upset the schedule.
For preparing the project implementation schedule the following information is
needed.
List of all possible activities from project planning to commencement of
production.
The sequence in which various activities have to b e performed.
The time required for performing various activities.

86
 The resources normally required for performing the various activities.
The implications of putting more resources or less resource thus are normally
required.

The Government has approved the decision of Visakhapatnam Steel Plant to

install the Coke Oven Battery 4 and expansion plans. A project implementation
schedule has been prepared and it is workout as the following consideration.
1. The approval of project implementation will be considered as zero date for
the project.
2. The work as detailed survey, basic engineering followed by preparation of
technical specification will start from zero date.
Construction and erection of various plant units, civil, engineering work
structural engineering work, earthwork, road and yard construction etc., constitute
the various facets of project implementation programme.
The implementation work of COB-4 has been given to two companies. The
civil contract is given to Bridge & Roof (B&R). The structural work is given to
Hindustan Steel & Construction Limited (HSCL). Both these companies are also
public sector units. The construction is expected to be completed in 36 months.

The Bridge & Roof which has taken civil engineering work will cover designing,
preparation of drawing and construction of foundation for Battery proper, Coke
Dray Cooling Plant , different equipment and buildings etc., The civil engineering
design will be based as the norms laid down in relevant specification of Bureau of
Indian Standard and National building code. All the works will be as per
technological scheme.
The structural work taken up by the HSCL includes steel structural designs to
meet the technological requirements and general conditions of the project.

87
Project Review & Control
Once the project is launched, control becomes the dominant concern of the
Project Manager. Project control involves a regular comparison of performance
against targets, a search for the causes of deviation and a commitment to check
advance variances. It serves two major facts:
(i) It ensures regular monitoring of performance.
(ii) It motivates project personnel to strive for achieving project objectives.

Human Aspects of Project Management

A satisfactory Human relations system is essential for the successful execution
of a project without such a system. The other systems of project management are
not likely to work well. To achieve satisfactory human relations in the project
selling. The project manager must successfully handle problems and challenges
relating to
1. Authority.
2. Orientation.
3. Motivation.
4. Group Functioning.
Pre-Requisites for successful project implementing.
Time and cost over runs of projects are common in the project implementation.
To these cost over runs. Projects become uneconomical resources are not
available to support other projects and economic development is adversely
affected.
To minimize these time and cost over runs the following precautions have to
be taken.
1. Adequate formulation.
2. Sound project Organisation.
3. Advance action.

88
 4. Timely availability of funds.
5. Proper implementation planning.
6. Judicious equipment tendering and procurement.

HIGHLIGHTS OF EXPANSION TO 6.3 MT LIQUID STEEL CAPACITIES

1. GOVT. of India approval ref: 6(1) 2005-VSP dated 28th October 2005

2. Commencement date: 28th October 2005

3. Main units in expansion

 Raw material handling plant

89
  One sinter plant (1x 1400 sq.m.) 3.25 Mt / year sinter

 One blast furnace (BF- 3800 CUM) 2.50Mt / year hot metal

 Calcining and material plant (CRMP) 2X500 t / day

 One steel melt shop (SMS) 2.60Mt /year liquid steel

Rolling mills
 Wire rod mill 600,000 t / year

 Seamless tube plant 300,000 t / year

 Special bar mill ( in stage II ) 750,000 t/ year

 Light structural mill (LSM-IN STAGE II) 700,000 t/year

 Augmentation of existing TPP 1x 67.5 MW Turbo-

generator with TB

 Power plant (BOO basis) 2x 67.5 MW capacity

with all necessary

Facilities.

 Air separation plant ( BOO basis) 2x1200 t /day oxygen

 Captive mines augmentation of

capacities at madharam,
jaggayyapeta and Garbham mines.

4. PROJECT SCHEDULE

All the above facilities including BOO ( build , own and operate)basis units i.e. power
plant and air separation plant (ASP) Will be commissioned in stage-1, except the special
bar mill and structural mill which are required to be commissioned in stage-II.
i. For stage –I : 36 months

ii. For stage –II : Special bar mill—45 months

structural mill----48 months

90
5. Capacities of production units after expansion:

The combined capacity of various production units is given below:

Unit Present Expansion total

capacity
Blast furnace 4 2.5 6.5
Steel Melt Shop(liquid 3.7 2.6 6.3
steel)
Wire rods 1.05 0.6 1.65
Structural products 1.05 0.7 1.75
Special bar mill 0.9 0.75 1.65
Seamless tube mill - 0.3 0.3
Semis for sale 0.34 0.027 0.367
Saleable steel 0.34 2.377 5.717

6. Product Mix:-
VSP will continue to produce long products in Phase -1 in view of Brand
image and to meet the envisaged demand for long products. The following is
the Product Mix Proposed
Wire Rods (Plain) 5.5mm to 20mm in coils –medium and high carbon, case
hardening, and cold heading quality electrode.
Special Bars(plain) 16mm to 40mm- in coils and straight lengths –medium and
high carbon, case hardening , cold heading quality ,
electrode quality ,spring steel, bearing steel, free cutting
steel etc.,
Structural’s plain and round rebar’s, structural and semis depending on
the market demand.
Seamless pipes 139 mm to 366mm dia pipes- in various grades like
casing pipes, coupling pipes, Liner pipes, Boiler tubes.
Semis Billets.

91
7. Capital Cost:-
Approved Cost : Rs.8692 Crores (base: JUN’05)
Debt Component : Rs.4346 Crores.
FE Component : Rs.1477 Crores
Pay back Period : 5 Years 2 months.
IRR : 23%
Project Cost (Net of Cenvat) Rs.8000 Crores.
8. Financial Peaks:-
Details Rs. Crores Year
 Turnover 14,412 2010-
11
 Gross Margin 7,416 2022-
23
 PAT(Profit After Tax) 4,361 2022-
23
 Retained Reserves 38,494 2022-
23
Up to the Year
 Total Income Tax Payments(approx) 28,950
2022-23
 Total Excise Duty Payments(Approx) 39,800
2022-23
 Total Sales Tax payments 9,950 2022-23
 Total Dividend Payments to Govt 17,500
2022-23

PROJECT APPRAISAL

INTRODUCTION:

92
 Project counselling and preparation of pre-investment studies, feasibility
studies and project reports are undertaken by merchant bankers and private
consultants. Preparation of project report and appraisal are intimately tied up. At
the time of preparation of project report itself, the merchant banker or consultant
has to satisfy himself that the project is viable and meets the requirements of term
lending institutions in case project cost is to be partly financed by borrowing from
term lending institutions. This is to support merchant banker’s statement to SEBI ,
that he has exercised due diligence in regard to claims about the viability of the
project in the prospectus for issue of securities. At the outset, the regulatory frame
work that governs the selection of industries may be noted.

REGULATORY FRAME WORK:

The industrial policy of India has shifted from promoting a regulatory and
protective regime to a free and market oriented environment. the new policy to
regulate the industrial economy was announced on 24-7-1991.the new industrial
policy has deregulated substantially the economy.
If an appraisal of the project for the purpose of public issue is made by a financial
institution, a bank or one of the lead managers, the same may be relied upon to
make adequate disclosures in the offer documents according to the clarification
issued by SEBI on 11-10-1993.key provisions of the policy are stated here.

Dereservation of industries for public sector

Since 1956, seventeen industries which were in the nature of core industries
were reserved for investment technology. the seventeen industries included were
iron and steel, electricity, air transport ,ship building, heavy machinery industries
and telecommunications cables.

• Abolition of industrial licensing

New industrial policy 1991, has abolished all industrial licensing,
irrespective of the level of involvement, expect for certain industries related
to security and strategic concerns, social reasons, concerns related to
safety, overriding environmental issues and manufacture of products of
hazardous nature.

Along with the abolition of industrial licensing for new units, existing
industries have been allowed to expand capacity according to their market
93
 needs without obtaining prior expansion of capacity clearance from the
government of india.existing manufacturers are now free to diversify and to
manufacture any article in response to market demand.

• Removal of investment controls on large business houses

Earlier large firms with assets of above rs 100 Crores, classified under
monopolies and restrictive trade practices act 1969(MRTP ACT) had to
obtain approval for their investment proposals in addition to industrial
license. Now the threshold limit of assets (rs 100 Crores) has been
abolished and large firms are on par with others. They do not require prior
approval from the government for investment in the delicensed industries.

• Foreign investment and technology

Foreign technology agreements relating to high technology and
high investment in priority industries framed within certain guidelines are
now automatically approved. The automatic approval is accorded to
industries if payment is made without resort to free exchange resources.
Firms are free to hire technicians and get their indigenously developed
technology tested abroad. Foreign investment in the form of equity up to
51% is automatically approved in the high priority industries. the facility is
available to industries which are able to finance capital equipment imports
through foreign equity.

The new industrial policy 1991 has eliminated entry restrictions, licensing
requirements and controls on industry.

PROJECT IDENTIFICATION

A Project is a proposal for capital investment to develop facilities to

provide goods and services. The investment proposal may be for setting up a new
unit, expansion or improvement of existing facilities. a project is a specific , finite
task to be accomplished in order to generate cash flows. project idea can be
conceived either from input or output side. The former are material based while
the latter demand oriented. Input based projects are identified on the basis of
information about agricultural raw materials, forest products, animal husbandry,
fishing products, mineral resources, human skills and new technical process
evolved in the country or else where. Out based projects are identified on the

94
basis of needs of population as revealed by family budget studies or industrial
units as found by market studies and statistics relating to imports and exports.
Project identification is a continual process. With the opening up of
economy, demand for sophisticated inputs is continuously rising. The quest for
new combinations of factors for optimizing output and improving productivity to
strengthen the competitive position of Indian industry in the international market
place is an ongoing process. Further , the growing demand for complex,
sophisticated, customized goods and services in international markets has added
a new dimension to project concept.

The stages of project selection

The identification of project ideas is followed by a preliminary selection stage

on the basis of their technical, economic and financial soundness. The objective
at this stage is to decide whether a project idea should be studied in detail and to
determine the scope of further studies. The findings at this stage are embodied in
a prefeasibility study or opportunity study. for the purpose of screening and priority
fixation, project ideas are developed in to prefeasibility studies. Prefeasibility
studies give output of plant of economic size , raw material requirements, sales
realization, total cost of production, capital input /output ratio, labour requirement,
power and infrastructure facilities. The project selection exercise should also
ensure that it confirms to overall economic policy of the government.

FEASIBILITY STUDY

After ensuring that a project idea is suitable for implementation, a detailed

feasibility study giving additional information on financing, break down of cost of
capital and cash flow is prepared. Feasibility study is the final document in the
formulation of project proposal. Feasibility study can be prepared by the
entrepreneur or consultants or experts. The cost of feasibility study can be debited
to project cost and can be counted as part of promoter’s contribution.
The feasibility study should contain all technical and
economic data that are essential for the evaluation of the project. Before dealing
with any specific aspect, feasibility should examine public policy with respect to
industry. after that, it should specify out put and alternative techniques of
production in terms of process choice and ecology friendliness, choice of raw
material and choice of plant size .the feasibility study after listing and describing
alternative locations, should specify a site after necessary investigation. the study
should include a lay out plan along with a list of buildings, structures and yard
facilities by type , size and cost. the study has to identify supply sources and
present estimates, costs for transportation, services, water supply, and power. the
quality and dependence of raw materials and their source of supply have to be

95
investigated and presented in the feasibility report .before presentation of the
financial data, market analysis has to be covered to help in establishing and
determining economic levels of output and plant size.
Financial data should cover preliminary estimates of sales
revenue, capital costs and operating costs for different alternatives along with
their profitability. Feasibility study should present estimates of working capital
requirement to operate the unit at a viable level. an essential part of the feasibility
study is the schedule of implementation and estimates of expenditure during
construction .
The feasibility study is followed by project report firming up all the
technical aspects such as location, factory lay out specification and process
techniques design. In a way , a project report is a detailed plan of follow-up of
project through various stages of implementation.

MARKET APPRAISAL
Analysis of demand for the product proposed to be manufactured requires
collection of data and preparation of estimates. Market appraisal requires a
description of the product, its major uses, scope of the market, possible
competition from substitutes, special features of the product proposed to be
manufactured in regard to quality and price which would result in consumer
preference for the product in relation to competitive products. Estimates have to
be made about existing and future demand and supply of the products proposed
to be manufactured. It is also necessary to identify principal customers and state
particulars of any firm arrangements entered in to with them. Selling
arrangements contemplated in terms of direct sales or through distributors or
dealers have to be classified.
After collection of data , the existing position has to be assessed to
ascertain whether unsatisfied demand exists. Since cash flow projections are to
be made, possible future changes in the volume and pattern of supply and
demand have to be estimated. This would help in assessing the long term
prospects of the unit.
Estimation of demand requires the determination of the total demand for a
product and the share that can be captured by the unit through appropriate
through marketing strategies. the commonly used methods of demand forecasting
are trend, regression and end-use methods.

TECHNICAL APPRAISAL

Technical appraisal is primarily concerned with the project concept covering

technology, design, scope and content of the plan as well as inputs and
infrastructure facilities envisaged for the project. Basically, the project should be
able to deliver marketable product from the resources deployed, at a cost which

96
would leave a margin adequate to service the investment and plough back a
reasonable amount to enable the enterprise to consolidate its position. Technical
appraisal has a bearing on the financial viability of the project as reflected by its
ability to earn satisfactory return on the investment made and to service equity
and debt.
The technical review done by the financial institutions focuses mainly on the
following aspects:
 Product mix

 Capacity

 Process of manufacture

 Engineering know how and technical collaboration

 Raw materials and consumables

 Location and site

 Building

 Plant and equipments

 Man power requirements

 Breakeven point

(The technical review is done by qualified and

experienced personnel available in plant or outside
experts where technologically sophisticated
projects are involved).

FINANCIAL APPRAISAL

Financial appraisal is concerned with assessing the feasibility of a new

proposal for investment for setting up a new project or expansion of existing
productive facilities. This involves an assessment of funds required to implement
the project and the sources of the same. The other aspect of financial appraisal

97
relates to estimation of operating costs and revenues, prospective liquidity and
financial returns in the operating phase. in appraising a project, the project’s direct
benefits and costs are estimated at the prevailing market prices. this analysis is
used to appraise the viability of the project as well as to rank projects on the basis
of their profitability. It may be noted that financial appraisal is concerned with the
measurement of profitability of resources invested in the project with out reference
to their source.
For the purpose of appraisal it is necessary to make estimates relating to
working results of existing concerns, cost of the project and means of financing.
Financial projections for a ten year period have also to be made.

WORKING RESULTS OF EXISTING UNITS:

In case of an existing unit, it is desirable to make an assessment of its

latest financial position. for this, purpose its latest audited balance sheet and profit
and loss statement as well as the balance sheets for the last 5 years have to be
analysed. in case an audited balance sheet as on fairly recent date is not
available, a proforma balance sheet and profit and loss statement certified by the
management may be examined.
 The latest balance sheet and profit and loss account may be analyzed with
a view to ascertaining, whether the concern is under/over capitalized,
whether the borrowings raised are not out of proportion to its paid up
capital and reserves,

 How the current liabilities stand in relation to current assets,

 Whether the gross block has been properly depreciated and has not been
shown at an inflated value,

 Whether there is any inter-locking of funds with associate companies

 Whether the concern has been ploughing back of profits in to the business
and building up reserves.

A balance has to be stuck between debt and equity. a debt equity ratio of
1:1 is considered ideal but it is relaxed up to 2:1 in suitable cases. Further
relaxation in debt equity is made in the case of capital intensive projects.

98
All long term loans/ deferred credit are treated as debt while equity includes
free reserves. Equity is arrived after deducting carried forward losses in the
case of an existing unit.

The norm for promoter’s contribution in the project is 22.5% of project cost
with a lower contribution for projects promoted by technical entrepreneurs .
normally the promoters contribution should be brought in by way of equity
capital. If unsecured loans from promoter’s / director’s form an integral part
of of the means of finance, it should be assumed that they would not be
withdrawn during the currency of the loan and do not carry interest higher
than that payable on institutional loans.

The financial appraisal seeks to assess the following:

 Reasonableness of the estimate of capital cost

 Reasonableness of the estimate of working results

Adequacy of rate of return:

The general norms for financial desirability are as follows:

1. Internal rate of return :15% or 3-5% more than WACC

2. Return on investment: 20-25% profit after tax

3. Debt-service coverage ratio: 1.5 to 1.75

4. Debt –equity ratio: 1: 1

5. Contribution of project cost: 30-50%

6. Stock exchange listing requirements

99
 ECONOMIC APPRAISAL

The economic appraisal looks at the project from the larger

social point of view. The methodology by firms for the purpose of economic
appraisal is labeled as “PARTIAL LITTLE MIRRLEES” approach. In addition to the
calculation of the economic rate of return as per this approach they also look at
two other economic indicators:

1. Effective rate of protection

2. Domestic resource cost

MANAGERIAL APPRAISAL

In order to judge the managerial capability of the promoters, the

following questions are raised:

 How resourceful are the promoters?

 How sound is the understanding of the project by the promoters?
 How committed are the promoters?

CAPITAL PHASING FOR ONGOING EXPANSION PROJECT AT VSP:

S.N PARTICU DEBT:EQUITY YEAR1 YEAR2 YEAR3 YEAR YEAR5 YEA TOTAL
O LARS 4 R6
Start year 2005- 2006-07 2007-08 2008- 2009-10 201 RS
assumed 06 09 0-11 CR
as per
budget

100
A EXPANSI 7.20% 34.48% 34.13% 17.07 5.33% 1.78
ON % %
PROJECT
-UP
GRADATI
ON TO 8692
6.3 MT
TOTAL 50% 313.00 1,499.00 1484.00 232.00 4346
CAPITAL 50% 313.00 1,499.00 1484.00 742.0 232.00 76.0 4346
COST 0 0
- 626.00 2998.00 2968.00 742.0 464.00 76.0 8692
EQUITY( 0 0
RS.CR)
-DEBT 1484 152.
(RS.CR) 00

CONCLUSION

 The Source of financing for the project expansion 6.3 MT is from external
commercial borrowing and internal accruals i.e., the company has allotted
funds from accumulated profits since 2003.

 Total capital phasing for ongoing expansion project at VSP is 8,692 Crores.

 Assumed time for completion of the project is 2010-2011.

 It has been assured that the plant would operate at 90% capacity in 1st year
and 100% in 2nd year after the completion of the project.

101
  Project appraisal for ongoing expansion plan to be done intellectually and
effectively.

BIBLIOGRAPHY

♦ ‘The Financial Management’ by I.M.Pandey

♦ ‘Projects’ (preparation, appraisal, implementation) by Prasanna Chandra.
♦ Successful projects by O.P. Kharbanda & E.A.Stall Worthy.
♦ Project management by Dennis Lock.
♦ Project management by Harvey Maylor.
♦ Project planning and management by M.Shaghil & M. M. M.musterque
♦ Source of finance sharma&guptha
♦ Project management (Techniques appraisal managerial issues) by E.W.Davis.
♦ Total project management by P.K.Joy.

THE JOURNALS:

102
 ♦ Steel Times.
♦ SAIL News.
♦ Iron &Steel technology.
♦ Steel & Metallurgy.

ORGANISATION CHART – FINANCE

DIRECTORATE

DIRECTOR

AGM(F&A)
IA & SV

AGM (F&A) DGM DGM DGM

PF & PAY

AGM
(F&A) AGM(F&A) AGM(F&A AGM(F&A) 4 RFM’S
ACFM
Fin.Admm. Raw ) Central Excise
Mktg.finan
DCFM Materials Budget Insurance
cia
Cash & Corp.A/C

AGM(F&A) DCFM
Purchase Bill Purchase
103Fin
 Jt.GM(F&A)

ORGANISATION CHART
VISAKHAPATNAM STEEL PLANT

CHAIRMAN - CUM – MANAGING

DIRECTOR DIRECTOR DIRECTOR DIRECTOR

(PERSONNE (FINANCE) (COMMERCIAL) (OPERATIO
104

Jt.G Jt.GM ED(Works)I/

AGM(CA)
DGM
DGM
DGM DGM
GM(CORP.PE AGM(F&A ED
Jt.GM
M ED(HRM (F&A)
ADDL.GM
Jt.GM
ED
GM
GM
DGM(sys)
(T &ED(min Jt.GM(Steel
Jt.GM(Mill
Jt.GM(BF
DGM (Insta & & GM(CB
(M&HS)
(Trg)
(MS)I/C RS
(P&A) ) (MKTG.
 CVO

ED

COMM.DT

1. Element.
2. Effective monitorinPHg.

105
106
107