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Proj fin

Proj fin

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11/29/2012

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RAISING OF FINANCE AND PRO1ECT FINANCING

RAISING OF FINANCE

Finance Ior a Proiect in India can be raised by way oI

(A) Share Capital
(B) Long-term borrowings
(C) Short-term borrowings

Both share capital and long-term borrowings are used to Iinance Iixed assets plus the margin money required to
obtain bank borrowings Ior working capital. Working capital is Iinanced mainly Irom bank borrowings and Irom
unsecured loans and deposits.

Share Capital consists oI two broad categories oI capital namely equity and preIerence. Equity shares have a Iixed
par value and can be issued at par or at a premium on the par value. Shares cannot normally be issued at a discount.
However. in exceptional circumstances issue oI shares at a discount is permitted provided (a) the shares are oI a
class already existing. (b) the discount is authorised by the shareholders. and (c) the issue .is sanctioned by the
Central Government. Normally the Central Government will not sanction a discount exceeding 10°.

The corporates are now allowed to raise resources Ior expansion plans. by issuing equity shares with diIIerential
voting rights. The main advantages oI such category oI shares are :
1. Equity can be raised without diluting stake oI the promoters.
2. Companies can reduce gearing-ratios.
3. The risk oI hostile-takeovers is reduced to a considerable extent.
4. The passing oI yield in the Iorm oI high dividends to the investors can be ensured

The Iollowing are the general disadvantages

1. The cost oI servicing equity capital will increase.
2. Poor corporate governance may be encouraged.
3. II issued at discount. they may raise the equity burden.

PreIerence shares carry a Iixed rate oI dividend (which can be cumulative). These shares carry a preIerential right to
be paid on winding up oI the company. PreIerence shares can be made convertible into equity shares. Issue oI
preIerence is not a popular Iorm oI capital issue.

The issue oI capital by companies is governed by guidelines issued by the Securities and Exchange Board oI India
(SEBI) and the listing requirements oI the stock exchanges.

Apart. Irom equity. there can also be various Iorms oI pseudo equity. The most common Iorms are Iully or partly
convertible debentures and debentures. issued with warrants entitling the holder to subscribe Ior equity. There can
also be an issue oI non-convertible debentures.

Term Iinance is mainly provided by the various All India Development Banks (IDBI. IFCI. SIDBI. IIBI etc.).
specialised Iinancial institutions (RCTC. TDICI. TFCI) and investment institutions (LIC. UTI and GIC). In
addition. term Iinance is also provided by the State Iinancial corporations. the State industrial development
corporations and commercial banks. Debt instruments issued by companies are also subscribed Ior by mutual Iunds
and Iinancing activities are also done by Iinance companies.


Term Lending Institutions

Term lending institutions may be categorised on the basis oI their area oI operations as under:
All India Iinancial institutions consisting oI.
Industrial Development Bank oI India (IDB1) ( proposed to be converted into a Commercial Bank).
Industrial Finance Corporation oI India (IFCI).
EXIM Bank
National Bank Ior Agriculture and Rural Development (NABARD).
Industrial Investment Bank oI India (HBI).
Tourism Finance Corporation oI India (TFCI).
Indian Railway Finance Corporation (IRFC).
Commercial Banks.
Risk Capital & Technology Finance Corporation Ltd.
Small Industries Development Bank oI India (SIDBI).
LiIe Insurance Corporation (LIC)
General Insurance Corporation oI India (GIC) and its Iour subsidiaries
Unit Trust oI India
Power Finance Corporation Ltd.
National Housing Bank
Rural ElectriIication Corporation Ltd.
InIrastructure Development Finance Corporation
Housing and Urban Development Corporation Ltd. (HUDC0)
Indian Renewable Energy Development Agency Ltd. (IREDA).

The institutions like LIC & GIC may not be very much associated with the proiect appraisal but lend their Iunds in
consortium with other all India Iinancial institutions.
State level Iinancial institutions consisting oI :
• • State Financial Corporations (SFCs).
• • State Industrial Development Corporations (SIDCs).
• • Regional Rural Banks & Co-operative Banks.

State level institutions conIine their activities within the concerned States and generally extend Iinancial
accommodation to small and medium scale sectors.

Non Fund Facilities

The role oI the Iinancial and banking institutions is not merely conIined to lending oI Iunds. They render non Iund
based Iacilities as well like opening oI letters oI credit. issue oI bank guarantees. etc. Besides. there are private
investment companies involved in direct and indirect Iinancing oI the proiects and also extending lease Iinancing.

PRO1ECT FINANCING

BeIore implementing a new proiect or undertaking expansion. diversiIication. modernisation or rehabilitation
scheme ascertaining the cost oI proiect and the means oI Iinance is one oI the most important considerations. For
this purpose the Company has to prepare a Ieasibility study covering various aspects oI a proiect including its cost
and means oI Iinance. It enables the Company to anticipate the problems likely to be encountered in the execution
oI the proiect and places it in a better position to respond to all the queries that may be raised by the Iinancial
institutionsand others concerned with the proiect.

Cost of project

It constitutes a crucial step in proiect planning. The aggregate cost indicates the quantum oI Iunds needed Ior
bringing the proiect into existence. ThereIore. cost oI proiect should be Iixed with great care and caution. It Iorms
the basis on which the Means oI Finance' is worked out. The calculation oI the promoter's contribution is also done
on the basis oI the cost oI proiect. Hence. all items which are necessary Ior the proiect should be included at this
stage itselI. The omission ' iI subsequently detected. would have to be Iinanced by the promoters themselves.
Although. request can be made to the Iinancial institution Ior additional assistance. but it would result in delaying oI
the suction leading to time and cost overruns. Besides. it would also aIIect the credibility oI the promoters.

The evaluation oI plant and machinery should also be made with extreme care and caution as there is a possibility
oI some items oI plant and machinery being not included and it is at the time oI implementation oI the proiect that
the lapse is detected and the promoter is Iorced to Iinance the omitted items Irom his own resources.

Practically speaking. there is always a diIIerence between the actual cost and original estimated cost. Leaving aside
exceptional cases. the diIIerence in the actual cost and the original assessed cost may be ¹5 per cent. II it is so h can
be taken Ior granted that the original exercise was done with due care. In a small proiect say oI the order oI Rs. 1
crore. or so this diIIerence can be adiusted deIerring certain expenses oI the proiect which am not necessary prior to
the commencement oI commercial production. Yet in the larger sized proiects say oI Rs. 10 crores or more. a
diIIerence oI 5-10 per cent becomes signiIicant so Iar as the absolute quantum oI Iunds ' is concerned. This
necessarily leads to the possibility oI overruns in the proiect right Irom the beginning. ThereIore it is. imperative to
arrive at realistic Iigure oI the cost oI proiect.

Time schedule Ior implementation & the proiect is equally important as h has direct bearing on the cost oI proiect.
Longer the time schedule higher will be the cost. Hence. every eIIort should be made to reduce the period oI
implementation to the maximum possible extent. In this direction use m be made oI control charts like bar charts.
PERT and CPM techniques. It should be remembered every delay has a cog and this will result in increase in the
cost oI proiect. which in turn will aIIect the proIitability oI the proiect.

It is also important to quote realistic price oI diIIerent Iixed/movable assets. The Iinancial institutions are very well
versed in assessing the cost oI any proiect. Hence. promoters should avoid over quoting or under quoting while.
Iixing the. cost oI proiect.

The cost oI proiect will usually comprise oI the Iollowing items:

(i) Land and site development
(ii) (ii) Factory building
(iii) (iii) Plant and machinery.
(iv) (iv) Escalation and contingencies
(v) (v) Other Iixed assets or miscellaneous Iixed assets.
(vi) (vi) Technical know-how
(vii) (vii) Interest during construction.
(viii) (viii) Preliminary and pre-operative expenses.
(ix) (ix) Margin money Ior working capital.

Means of Finance

Having established the total cost oI proiect. promoters should work out the means oI Iinance which will-enable
timely implementation oI the proiect. Finance will ' be available Irom several sources and it is Ior the promoters to
select the most suitable sources aIter taking into account all the relevant Iactors.

Financial Structure

The Iinancial structure reIers to the sources Irom which .the Iunds Ior meeting the proiect cost can be obtained. as
also the quantum which each source will contribute towards the proiect cost. For this purpose it would be advisable
to keep in view the Iollowing aspects.

(i) (i) The structure should be simple to operate in practice.
(ii) (ii) The plan should have a practical bias and should serve as a working guideline Ior all proiect
Iorecasts.
(iii) (iii) While deciding the structure. the environmental constraints should be kept in view. For example.
the conditions prevailing in the capital market. Iuture prospects Ior earnings. term-lending institutional rules
and policies in operation. government guidelines. etc.
(iv) (iv) The Iinancial structure should have an in-built Ilexibility which can take care oI circumstances not
envisaged initially. This is because. howsoever well devised a plan way be. the overruns. changes in the
proiect cost and term lending institutions suggestions way necessitate a change in the Iinancial plan
originally envisaged. The promoters should ' thereIore. prepare a number oI alternative models on the basis
oI diIIerent presumptions.
(v) (v) The Iinancial structure should be such as to make optimum use oI all available resources. As use
oI every resource involves costs. it is imperative that the resources are put to me in the most eIIicient
manner.
(vi) (vi) The availability oI Iunds and the period. required Ior raising them are important while determining
the Iinancial structure.

Preparation of Financial Plan

In order to work out the capital structure it is necessary to prepare a Iinancial plan. The methodology to be Iollowed
in working out a Iinancial plan requires consideration. oI the Iollowing important Iactors

(1) Debt Equity gearing
(2) Owned Iunds
(3) Cost oI capital
(4) (4) Availability oI Iinance Irom various sources.

(i) Debit: Equity gearing -The Iinance required Ior meeting the cost oI proiects. can be divided into two
categories namely. (i) owned Iunds i.e. capital.; and (ii) borrowed Iunds i.e. loans. capital usually called
'equity'. consist oI equity and preIerence share capital as well as retained earnings i.e. reserves. Borrowed
capital also called 'debt'. consist oI term loans. deterred payments. debentures. deposits Irom the public. etc.
The mutual relationship between debt and equity is oI` greater importance while deciding about the Iunding
oI a proiect.
(ii) Owned Funds - Owned Iunds mainly comprise oI equity and preIerence capital. However. equity capital
plays much signiIicant role and Iorms the. maior chunk oI owned Iunds. As the equity capital bears no Iixed
obligation oI return. it is considered to be 'high risk bearing capital'. Dividend on such capital is payable
only iI the company makes suIIicient proIits and has adequate disposable Iunds. While preIerence capital as
is known. carries a Iixed return and may be cumulative or non-cumulative. in character. preIerence
shareholders cannot expect to reap Iruits oI success oI the company while on the other band they may be
aIIected by the bad perIormance oI the company.

Compared to equity. the borrowings we usually Iixed income bearing. Whether it is term loan or
debentures. secured/unsecured convertible/nonconvertible. they carry a Iixed obligation Ior the company.

ThereIore. it 375 important Ior the company/promoters to work out various combinations oI debt-equity Ior
a given cost oI proiect. Although. theoretically to alternatives may be inIinite there are certain institutional
norms which have to be reckoned while arriving at a proper or optimum debt-equity gearing. These norms
are given in Chapter 3.

(iii) Cost of capital - It includes all types oI Iunds procured/to be procured by a company to meet the cost oI
proiect and it includes equity and preIerence capital. debentures. term loans. deposits. borrowings and
retained earnings. It depends upon several Iactors particularly the availability oI Iinance. For obtaining he
desired amount oI capital the company has to compensate the supplier by tying dividend or interest.
depending upon the nature oI capital. i.e.. owned Iunds or borrowings. Hence. the cost oI capital is charged
periodically. payable D the suppliers in the Iorm oI dividend or interest Ior hiring the capital. Normally.
every proiect has to be Iunded out oI owned Iunds and borrowings. It will be extremely rare to Iind proiects
that are totally selI-Iinanced or wholly Iinanced out oI borrowed Iunds. Hence. usually every proiect will
have a mix I owned Iunds and borrowings; thereIore. the important question that arises in this context is
what should be the proportion oI owned Iunds and borrowings. It has to be the endeavour oI the proiect
planners to work out the most beneIicial structure oI capital Ior the company that is cost eIIective and at the
same time meets with the requirements oI Iinancial institutions.

ThereIore. it is necessary that an exercise is conducted to ascertain the cost t diIIerent types oI capital. It is
Iairly easy to calculate the cost oI loans/ debentures. However. a comparative analysis will have to be done
between diIIerent types oI borrowings available to know the cost and advantages/disadvantages oI each
type oI borrowing. Another comparison will have to be done between the cost oI owned Iunds vis-a-vis
borrowed Iunds. In this context it may be stated that ordinarily. the cost oI equity is higher than the cost oI
the borrowed Iunds. The maior reason being that the cost oI borrowed Iunds. i.e.. interest is treated as a
charge on the proIits oI the company. while on the other hand cost oI equity capital i.e.. dividend is paid out
oI the post-tax proIits oI the company. The diIIerence in treatment is due to the prevailing income-tax
policy oI the Government.

Thus the share oI equity capital as one oI the sources oI Iinancing the capital cost oI any proiect has to be
determined at the proiect Iinalisation stage. itselI. While determining this share-oI equity in the Iinancing
pattern. the Iollowing three important Iactors have to be considered.

(i)Debt equity ratio:Debt equity ratio is one oI the most important parameters on which reliance is placed
by the Iinancial institutions while sanctioning loans Ior various proiects. The eIIect oI the D: E ratio on the
means oI Iinance is that lower the D:E ratio. higher is the requirement oI equity contribution oI the
promoter and conversely. higher the D:E ratio lower is the requirement oI equity contribution.

For details refer to Chapter 3

(ii)Promoters' contribution -As stated earlier the debt equity ratio determines the amount oI equity or the
capital to be arranged directly or indirectly by the promoters oI the proiect. The entire amount may be
contributed either by the promoters and their Iamilies or part oI the contribution may come Irom relatives
and Iriends. The Iinancial institutions may also permit the promoters to introduce part oI the contribution by
way oI interest Iree unsecured loans.

For details refer to Chapter 3

(iii)Stock Exchange guidelinesIn case oI listed companies or those intending to be listed. they have to
Iollow the guidelines issued by the Stock Exchange Division oI the Government oI India Irom time to time.
According to these guidelines certain minimum equity has to be oIIered to the members oI the public so
that the equity shares could be listed on the Stock Exchanges.

Sources of Finance

For every category. oI capital there is a distinct source oI supply in the market. ThereIore. it is necessary Ior the
promoters to identiIy these sources so that they can be approached Ior Iinance at the appropriate time. A proiect will
require two types oI Iunds: - one. to Iinance purchase oI immovable assets such as land. buildings. plant and
machinery. etc.. and two. Ior carrying on day-do-day operations i.e working capital Iunds.

Major Funds of Long- Term Finance

The maior Iorms oI long-term Iinance available are:-

(a) Rupee Term Loans - Mainly Development Banks.
Financial Institutions and
Investment Institutions. Also state
level institutions and banks.
(b) Foreign Currency - Commercial Banks. Development
Term Loan Banks and Financial Institutions
(c) Asset Credit/Hire - Development Banks. Financial
Purchase/Leasing Institutions and Finance
Companies
(d) Suppliers' Credit - Banks and Suppliers
(Foreign Currency)
(c) Suppliers` Credit - Banks in coniunction with
(Local through bill Developments Banks and
discounting) Financial Institutions
(I) Non-convertible - Development Banks. Financial
debentures Institutions. Investment
Institutions and Mutual Funds
(g) Euro Issues/External - Foreign Sources
Commercial Borrowing


Sources of Working Capital Finance

The sources oI working capital Iinance are mainly the Iollowing:

Bank Finance
Commercial Paper
Fixed Deposits
Inter-corporate Deposits

The level and terms oI bank Iinance and commercial papers are governed by the current directives oI the Reserve
Bank oI India (RBI).

The terms on which a company can collect Iixed deposits Irom the public are governed in the case oI Iinance
companies by RBI and in case oI non-Iinance companies by the Companies Act.

Inter-corporate deposits are outside the purview oI the regulations governing acceptance oI deposits. As per new
Section 372A. inserted vide Companies (Amendment) Ordinance. 1999 w.e.I 31st Oct. 1998. the depositing
company is subiect to the limit that the aggregate value oI its loan. guarantee security and investment with other
bodies corporate cannot exceed 60° oI its paid-up capital and Iree reserves or 100° oI its Iree reserves whichever
is more. Further. in respect oI rate oI interest. no loan shall be made at a rate oI interest lower than the prevailing
bank rate oI interest.

Sources for Financing Fixed Assets

The type oI Iunds required Ior acquiring Iixed assets have to be oI longer duration and these would normally
comprise oI borrowed Iunds and own Iunds. There are several types oI long-term loans and credit. Iacilities
available which a company may utilise to acquire the desired Iixed assets. These are brieIly explained as under.
Details are given in respective Chapters.

(1) Term Loan :-

(1) Rupee loan.-Rupee loan is available Irom Iinancial institutions and banks Ior setting up new proiects as. well as
Ior expansion. modernisation or rehabilitation oI existing units. The rupee term loan can be utilised Ior incurring
expenditure in rupees Ior purchase oI land. building. plant and machinery. electric Iittings. etc.

The duration oI such loan varies Irom 5 to 10 years including a moratorium oI up to a period oI 3 years. Proiects
costing up to Rs. 500 lakhs are eligible Ior reIinance Irom all India Iinancial institutions and are Iinanced by the
State level Iinancial institutions in participation with commercial banks.

Proiects with a cost oI over Rs. 500 lakhs are considered Ior Iinancing by all India Iinancial institutions. They
entertain applications Ior Ioreign currency loan assistance Ior smaller amounts also irrespective oI whether the
machinery to be Iinanced is being procured by way oI balancing equipment. modernisation or as a composite part oI
a new proiect.

For the convenience oI entrepreneurs. the Iinancial institutions have devised a standard application Iorm. All
proiects whether in the nature oI new'. expansion. diversiIication. modernisation or rehabilitation with a capital cost
upto 5 crores can be Iinanced by the Iinancial institution either on its own or in participation-with State level
Iinancial institutions and banks.

For details refer to Chapter 3 & 4

(b) Foreign Currency term loan.- Assistance in the nature oI Ioreign currency loan is available Ior incurring Ioreign
currency expenditure towards import oI plant and machinery. Ior payment oI remuneration and expenses in Ioreign
currency to Ioreign technicians Ior obtaining technical know-how.

Foreign currency loans are sanctioned by term lending institutions and commercial banks under the various lines oI
credits already procured by them Irom the international markets. The liability oI the borrower under the Ioreign
currency loan remains in the Ioreign currency in which the borrowing has been made. The currency allocation is
made by the lending Iinancial institution on the basis the available lines oI credit and the time duration within
which the entire line oI credit has to be. Iully utilised.

For details refer to Chapter 10

(2) Deferred payment guarantee (DPG) - Assistance in the nature oI DeIerred Payment Guarantee is
available Ior purchase oI indigenous as well as imported plant and. machinery. Under this scheme guarantee
is given by concerned bank/Iinancial institutions about repayment oI the principal along with interest and
deIerred instalments. This is a very important type oI assistance particularly useIul Ior existing
proIit-making companies who can acquire additional plant and machinery without much loss time. Even
the banks and Iinancial institutions grant assistance under DeIerred Payment Guarantee more easily than
term loan as there is no immediate outIlow oI cash.

(3) Soft loan. -This is available under special scheme operated through all-India Iinancial institutions. Under
this scheme assistance is granted Ior modernisation and rehabilitation oI industrial units. The loans are
extended at a lower rate oI interest and assistance is also provided in respect oI promoters contribution.
debt-equity ratio. repayment period as well as initial moratorium.

(4) Supplier's line of credit -Under this scheme non-revolving line oI credit is extended to the seller to be
utilised within a stipulated period. Assistance is provided to manuIacturers Ior promoting sale oI their
industrial equipments on deIerred payment basis. While on the other hand this credit Iacility can be availed
oI by actual users Ior purchase oI plant/equipment Ior replacement or modernisation schemes only.

(5) Debentures.- Long-term Iunds can also be raised through debenture with the obiective oI Iinancing new
undertakings. expansion. diversiIication and also Ior augmenting the long-term resources oI the company
Ior working capital requirements.

(6) Leasing.- Leasing is a general contract between the owner and user oI the assets over a speciIied period oI
time. The asset is purchased initially by the lessor (leasing company) and thereaIter leased to the user
(lessee company) which pays a speciIied rent at periodical intervals. The ownership oI the asset lies with
the lessor while the lessee only acquires possession and right to use the assets subiect to the agreement.
Thus. leasing is an alternative to the purchase oI an asset out oI own or borrowed Iunds. Moreover. lease
Iinance can be arranged much Iaster as compared to term loans Irom Iinancial institutions. For details reIer
to Chapter 18.

(7) Public deposits - Deposits Irom public is a valuable source oI Iinance particularly Ior well established large
companies with a huge capital base. As the amount oI deposits that can he accepted by a company is
restricted to 25 per cent oI the paid up share capital and Iree reserves. smaller companies Iind this source
less attractive. Moreover. the period oI deposits is restricted to a maximum oI 3 years at a time.
Consequently. this source can provide Iinance only Ior short to medium term. which could be more useIul
Ior meeting working capital requirements. In other words. public deposits as a source oI Iinance cannot be
utilised Ior proiect Iinancing or Ior buying capital goods unless the pay back period is very short or the
company uses it as a means oI bridge Iinance to be replaced by a regular term loan.

BeIore accepting deposits a company has to comply with the requirements oI section 58A oI the Companies
Act. 1956 and Companies (Acceptance oI Deposits) Rules. 1975 that lay down the various conditions
applicable in this regard.

Own Fund

(1) Equity Promoters oI a proiect have to involve themselves in the Iinancing oI the proiect by providing
adequate equity base. From the bankers/Iinancial institutions' point oI view the level oI equity proposed by
the promoters is an important indicator about the seriousness and capacity oI the promoters.

Moreover. the amount oI equity that ought to be subscribed by the promoters will also depend upon the
debt: equity norms. stock exchange regulations and the level oI investment. which will be adequate to
ensure control oI the company.

The total equity amount may be either contributed by the promoters themselves or theymay partly raise the
equity Iromthe publicSo Iar as the promoters stake in the equity is concerned. it may be raised Irom the
directors. their relatives and Iriends. Equity may also be raised Irom associate companies in the group who
have surplus Iunds available with them. Besides. equity participation may be obtained Irom State Iinancial
corporation/industrial development corporations.

Another important source Ior equity could be the Ioreign collaborations. OI course. the participation oI
Ioreign collaborators will depend upon the terms oI collaboration agreement and the investment would be
subiect to approval Irom Government and Reserve Bank oI India. Normally. the Government has been
granting approvals Ior equity investment by Ioreign collaborators as per the prevailing policy. The equity
participation by Ioreign collaborators may be by way oI direct payment in Ioreign currency or supply oI
technical know-how/ plant and machinery.

Amongst the various participants in the equity. the most important group would be the general investing
public. The existence oI giant corporations would impossible but Ior the investment by small shareholders.
In Iact. it would be mo exaggeration to say that the real Ioundation oI the corporate sector are the small
shareholders who contribute the bulk oI equity Iunds. The equity capital raised Irom the public will depend
upon several Iactors viz. prevailing market conditions. investors' psychology. promoters track record. nature
oI industry. government policy. listing requirements. etc.

The promoters will have to undertake an exercise to ascertain the maximum amount that may have to be
raised by way oI equity Irom the public aIter asking into account the investment in equity by the promoters.
their associates and Irom various sources mentioned earlier. Besides. some equity may also be possible
through private placement. Hence. only the remaining gap will have to Iilled by making an issue to the
public.

(2) Preference share:- Though preIerence shares constitute an independent source oI Iinance. unIortunately.
over the years preIerence shares have lost the ground to equity and as a result today preIerence shares enioy
limited patronage. Due to Iixed dividend. no voting rights except under certain circumstances and lack oI
participation in the proIitability oI the company. Iewer shareholders are interested to invest moneys in
preIerence shares. However. section oI the investors who preIer low risks-Iixed income securities do invest
in preIerence shares. Nevertheless. as a source oI Iinance it is oI limited import and much reliance cannot
be placed on it.

Compliance with Different Laws & Regulations

In this context it would be pertinent to note that while initiating the process Ior making a public issue oI equity
/preIerence shares. the promoters will have to comply with the requirements oI diIIerent laws and regulations
including Securities Contracts (Regulation) Act. 1956. Companies Act. 1956 and SEBI guide-lines etc.. and various
rules. administrative guidelines. circulars. notiIications and clariIications issued there under by the concerned
authorities Irom time to time.

(3) Retained earnings :-Plough back oI proIits or generated surplus constitutes one oI the maior sources oI
Iinance. However. this source is available only to existing successIul companies with good internal
generation. The quantum and availability oI retained earnings depends upon several Iactors including the
market conditions. dividend distribution policy oI the company. proIitability. Government policy. etc.
Hence. retained earnings as a source plays an important role in expansion. diversiIication or modernisation
oI an existing successIul company. There are several companies who believe in Iinancing growth through
internal generation as this enables them to Iurther consolidate their Iinancial position. In Iact. retained
earnings play a much greater role in the Iinancing oI working capital requirements.

Seed Capital

In consonance with the Government policy which encourages a new class oI entrepreneurs and also intends wider
dispersal oI ownership and control oI manuIacturing units. a special scheme to supplement the resource & oI an
entrepreneur has been introduced by the Government. Assistance under this scheme is available in the nature oI
seed capital which is normally given by way oI long terminterest Iree loan. Seed capital assistance is provided to
small as well as medium scale units promoted by eligible entrepreneurs.

Government subsidies

Subsidies extended by the Central as well as State Government Iorm a very important type oI Iunds available to a
company Ior implementing its proiect. Subsidies may be available in the nature oI outright cash grant or long-term
interest Iree loan. In Iact. while Iinalising the mean oI Iinance. Government subsidy Iorms an important source
having a vital bearing on the implementation oI many a proiect.

Objective of this Book

The obiective oI this. Book is to provide every inIormation on loan schemes and Iacilities available Irom Iinancial
and banking institutions. procedure and precautions to be taken while making loan applications. charging oI
securities and execution oI documents and agreements Ior this purpose.

PRO1ECT APPAISAL FOR TERM LOAN


A proiect report is essential beIore a decision Ior setting & up oI any proiect is taken. An entrepreneur must study
all aspects oI the proiect including the product to be manuIactured. technical process involved in manuIacturing.
availability oI inIrastructure. plant and machinery. technology. skilled labour. marketing arrangements and
prospects oI the product etc. An assessment oI total cost oI the proiect and proposed means oI Iinancing with
emphasis on overall proIitability oI the proiect is also necessary. Proiect report must. thereIore. include all these
inIormation and cover entire aspects oI a proiect to stand scrutiny by Iinancial institutions who shall appraise the
proiect Irom the Iollowing angles beIore taking any decision to grant term loans.

• • Technical Ieasibility.
• • Managerial competency.
• • Financial and commercial viability.
• • Environmental and economic viability.

It is. thereIore. necessary that a proper proiect report is prepared examine all these details. For industrial proiects.
help oI experts/consultants may be commissioned Ior preparation oI a suitable proiect report. which will enable the
promoter to arrive at a correct decision. The proiect report shall cover all the aspects as stated above. We shall now
make an attempt to examine all the above Iactors in details emphasising on important points that are required to be
highlighted while presenting papers to the Iinancial institution Ior its consideration and approval.

TECHNICAL FEASIBILITY

All Iactors relating to inIrastructural needs. technology. availability oI machine. material etc. are required to be
scrutinised under this head. Broadly speaking the Iactors that are covered under this aspect include:
• • Availability oI basic inIrastructure.
• • Licensing/Registration requirements.
• • Selection oI technology/technical process.
• • Availability oI suitable machinery/raw material/skilled labour etc.

Basic Infrastructure

The main points to be examined under this head are:

Land and its location: Land is the most basic requirement Ior setting up oI any proiect. The size oI the
available land should not only meet the present requirement but shall take care oI the Iuture expansion plans as
well. The location oI land is also vital in as much as to determine the transport Iacilities available in the area.
Proiects located in well developed industrial areas enioy the beneIits oI developed basic inIrastructure readily
available to them.

Buildings: Necessary plans Ior Iactory buildings. plant room. workshops. administrative blocks and
residential blocks etc. as considered necessary are to be Iinalised and provided in the proiect cost.

Availability of water and power: Water and power are other two very vital requirements. Some proiects
may consume large quantities oI water. which shall be available either through municipal supply or
underground. Storage tanks oI adequate capacity may also be required and shall be provided Ior in the proiect.
Many proiects have. oI late. suIIered due to erratic supply oI' power in many States. Arrangements Ior getting
the required power load sanctioned Irom Electricity Board and the necessity oI providing alternative captive
power generation capacity need. to be very closely examined ill all the cases.

Availability of labour: The availability oI labour is mainly dependent on the location oI the proiect. The
cheap and abundant supply oI labour makes much diIIerence to the proiect implementation. For proiects to be
set up ill Iar Ilung areas. special incentives might be necessary to induce the labour to shiIt to that area which
may add to the cost oI' proiect and its implementation

Licensing

Government oI India has recently liberalised provisions relating to licensing oI industries to a great extent. As per
the Industrial Policy Statement. only 6 industries are subiect to licensing by Govt. oI India. viz.

1. Distillation and brewing oI alcoholic drinks.
2. Cigars and cigarettes oI tobacco and manuIactured tobacco substitutes.
3. Electronic Aerospace and deIence equipment; all types.
4. Industrial explosives including detonating Iuses. saIety Iuses. gunpowder. nitrocellulose and matches.
5. Hazardous chemicals.
6. Drugs and Pharmaceuticals (according to modiIied Drug Policy September. 1994).

A Iew manuIacturing industries where more than adequate capacity has already cell created in the country are
discouraged by Govt. oI India and are put in the negative list. This list is amended Irom time to time and industries
included in the list are generally not extended any Iinancial assistance by Iinancial institutions. Special eIIorts
would. thereIore. be necessary and some cogent reasons will have to he given iustiIy setting up oI such proiects

Technology/Technical Process

An important aspect oI proiect evaluation is critical examination oI' the technology/technical process selected Ior
the proiect. The. main points to he considered in this regard are as under:

Availability: The technical process/technology selected Ior the proiect must be readily available either
indigenously or necessary arrangements Ior Ioreign collaboration must be Iinalised. Foreign collaboration. iI
not covered under automatic route oI RBI. requires prior permission Irom Govt oI India and is generally
permitted in the Iollowing cases:
(a) Where indigenous technology is too closely held in India and is not available. or
(b) Where Ioreign collaboration is necessary Ior updation oI existing industry and modernisation
thereoI. or
(c) Where the proiect is Ior import substitution or Ior setting up oI an export oriented unit.

The provisions regarding Ioreign technical collaboration with or without Iinancial collaboration have also been
liberalised recently. Many oI Ioreign collaborations can be now approved by Reserve Bank oI India and
approval Irom Government oI India is not necessary. Full provisions in this regard must be elaborated and Iorm
subiect matter oI proiect report.

The technical process selected is to be brieIly stated in the proiect report and is to be critically compared with
other technical processes in operation Ior manuIacture oI similar products to establish its superiority over other
processes.

Application: The selected technology must Iind a successIul application in Indian environment and the
management (promoter) shall be capable oI Iully absorbing the technology. This is an important Iactor and
many proiects have Iailed because oI the wrong selection oI technology which could not be successIully
implemented in Indian environments.

Continuous updating: The selected technology shall not only be modem but the underlying technical
arrangement must provide Ior its constant updation as a necessary saIe-guard against the process becoming
obsolete. The R & D (Research and Development) Iacilities required to be created Ior complete absorption and
continuous updation oI technology need to be very closely examined to ensure good long-term prospects Ior the
proiect.

Availability of skilled technical personnel/training facilities: The Ioreign technical collaboration shall
provide necessary training Iacilities to Indian. personnel who shall be involved in proiect implementation and
subsequent running oI the proiect. The availability oI technically trained persons Ior the selected technical
process. indigenous or Ioreign. has to be ensured in any case.

Plant size & production capacity: The selection oI plant size and production capacity is mainly
dependent on the total capital outlay by the promoter and also on the available market Ior the product. This
aspect is. however. very important in selecting the right technology which shall be suitable Ior the envisaged
scale oI production. Creation oI capacity Ior over production may increase the capital cost with consequent
interest load. which may ultimately eIIect the working oI the proiect. The proiect may Iail solely on this ground
despite the selection oI the best technology.

Availability of machinery: The availability oI plant and machinery required Ior setting up oI the proiect
aIter selection oI technology is to be ensured. Some plants may require a long lead time which may result in
delay and consequent cost overrun upsetting the Iinancial planning in the beginning itselI. It is also desirable
that the suppliers oI plant must give a suitable guarantee Ior its perIormance up to the rated capacity. Necessary
arrangements Ior servicing oI the machinery. supply oI spare parts and consumables are also to be examined so
that there are no production bottlenecks due to Iailure oI plant and machinery in the long run.

Availability of raw material and consumables: The easy availability oI raw material and consumables is
a precondition Ior successIul operation oI any proiect. This aspect. thereIore. needs considerable attention at the
planning stage itselI. Tie up arrangements with the suppliers oI raw material may be necessary iI the suppliers
are Iew.

Import oI raw material may be necessary in a bunch requiring storing oI excess inventory Ior a long time
Iorcing the unit to arrange Ior additional working Capital thus increasing the proiect cost. Import oI a particular
type oI raw material may also be subiect to licensing by Import Trade Control Authorities; thus bringing into a
sense oI uncertainty on its availability due to change in Govt`s policy. All these Iactors are very important and
detailed planning to ensure easy availability oI required raw material is necessary. Financial institutions.
lending Ior the proiect. have to be satisIied on this score as it may prove vital Ior successIul implementation oI
the proiect and its running.

MANAGERIAL COMPETENCE

The ultimate success oI even a very well conceived and viable proiect may depend on how' competently it is
managed. Besides proiect implementation. other important Iunctions required to be controlled can broadly be
classiIied as under:
Production
Finance
Marketing
Personnel.

A complete integration oI all these Iunctions within an organisation may be the Iirst step towards an eIIective
management.

The promoter oI the proiect is to provide necessary leadership and his qualiIication. experience and track record
will be closely examined by the lending institutions. The details oI other proiects successIully implemented-by the
same promoter may provide the necessary conIidence to these institutions and help Iinal approval oI the proiect.

It is also necessary to provide an organisation chart clearly deIining the responsibility and decision-making levels
and the details oI the arrangements already made/to be made to man these positions by well qualiIied proIessionals.
Proper planning and budgeting. participation oI workers in the management. decentralising decision-making.
developing eIIective internal control system etc. are some oI the Iactors which would help in better management oI
any proiect.

COMMERCIAL VIABILITY

Any proiect can be commercially viable only iI it is able to sell its production at a proIit. For this purpose it would
be necessary to study demand and supply pattern oI that particular product to determine its marketability.

Various methods such as trend method. regression method Ior estimation oI demand are employed which is then to
be matched with the available supply oI a particular product. The prospects oI exporting the product may also be
examined while assessing the demand. II the selling oI the product has already' been tied up with Ioreign
collaborators or with some other users. the Iact need to be highlighted. This Iactor shall deIinitely have a positive
inIluence on the commercial viability oI a proiect. Necessary Iactors which may inIluence the supply position such
as licensing oI new proiects. introduction oI new products. change in import policy etc. shall also be taken into
cognisance while estimating the marketing potential oI any product. This exercise shall be. conducted Ior a
suIIiciently long period say 5 to 10 years to determine the continued demand oI the product during the currency oI
the loan granted by Iinancial institutions.

This Iactor will also help the promoter to take a right decision in selecting the size oI the plant and determining the
capacity utilization.

FINANCIAL VIABILITY

Various steps are involved to determine the Iinancial viability oI a proiect as under:

Determination of Project Cost

A realistic assessment oI proiect cost is necessary to determine the source Ior its availability and to properly
evaluate the Iinancial viability oI the proiect. For this purpose. the various items oI cost may be sub-divided to as
many sub-heads as possible so that all Iactors are taken into account while arriving at the total cost. SuIIicient
cushions may also be provided Ior any inIlationary increase expected during the course oI proiect implementation.
The maior items oI cost are as under.

Land and Site development: The various sub-heads Ior estimation oI cost oI land and its development
which are to be taken into consideration include:
(i) (i) Cost oI land or premium payable on leasehold land.
(ii) (ii) Registration and other conveyancing charges.
(iii) (iii) Cost oI levelling and development. iI any.
(iv) (iv) Cost oI laying approach road connecting the Iactory site to main road.
(v) (v) Cost oI internal roads in the Iactory.
(vi) (vi) Cost oI Iencing/compound wall.
(vii) (vii) Cost oI gates etc.

Any other expenditure Ior development oI land to make it suitable Ior the proiect is also to be speciIically
provided to arrive at the Iinal cost under this item.

Buildings: Various sub-heads Ior estimation oI expenditure under this item include:

(i) (i) Factory building Ior the main plant and machinery.
(ii) (ii) Factory building Ior auxiliary services like steam supply. water. supply. laboratory. workshop
etc.
(iii) (iii) Godowns. warehouses and open yard Iacilities.
(iv) (iv) Administrative buildings and other miscellaneous non-Iactory buildings such as canteen. guest
house. time oIIice etc.
(v) (v) Silos. tanks. basin. cisterns and such other structures which are necessary Ior installation oI
plant and equipment and other civil engineering work.
(vi) (vi) Garages.
(vii) (vii) Cost oI sever. drainage etc
(viii) (viii) Residential quarters Ior essential staII.
(ix) (ix) Architects' Iee.

The cost oI construction will mainly depend on the type oI construction envisaged and also. to some extent. on
the type oI soil and its load bearing capacity. The construction oI residential quarters Ior workers and other key
staII may be permitted only iI the proiect is situated in the less developed area. Detailed estimation oI cost
under various sub-heads given above may preIerably be obtained Irom a reputed Iirm oI civil
engineers/architects to avoid any cost overrun at a later stage.

Plant & Machinery: The cost oI plant and machinery must include the transportation and other charges up
to the site and also the erection charges. Full details with broad speciIication and number oI equipments to be
purchased in respect oI imported as well as indigenous machinery are to be given separately. The name oI the
manuIacturer and whether orders have already been placed or not is also to be speciIied. The various sub-heads
under this maior head include:
(i) (i) Cost oI imported machinery including Ireight. insurance. loading and unloading charges.
customs duty and transportation charges up to site.
(ii) (ii) Cost oI indigenous machinery including transportation charges upto the site oI the proiect.
(iii) (iii) Machinery stores and spares.
(iv) (iv) Foundation and erection charges.

Technical know-how fees which shall also include ally expenses on drawings etc. payable to Ioreign
collaborator.

Expenses on foreign: technicians and training oI Indian technicians abroad.

Miscellaneous : Iixed assets which include:

(i) (i) Furniture.
(ii) (ii) OIIice machinery and equipment.
(iii) (iii) Vehicles such as cars and trucks.
(iv) (iv) Railway siding.
(v) (v) Laboratory. workshop and Iire-Iighting equipment.
(vi) (vi) Equipment Ior supply oI power. supply and treatment oI water etc.

This is not an exhaustive list oI miscellaneous assets; the requirement oI which will diIIer Irom proiect to
proiect. A reasonable assessment oI all the miscellaneous Iixed assets essentially required shall be made to
determine the actual cost under this head.

It is important to note here that expenses may sometimes be incurred to acquire patents. trade marks. copyrights
etc.; the cost oI which is to be included n the proiect cost under this head.

Preliminary and capital issue expenses: Some expenditure is to be incurred by the promoter Ior
Iloatation oI the company. preparation oI the proiect report etc. Initial disbursement by way oI advertising and
publicity. printing oI stationery and also as underwriting commission and brokerage etc. towards capital issue
would be necessary and as such will Iorm a part oI proiect cost. Reasonable estimation oI such expenses would.
thereIore. be necessary and shall be shown under this head.

Pre-operative Expenses: A Iew expenses will have to be incurred in the pre-operative stage during the
course oI proiect implementation and shall Iorm part oI proiect cost. Such expenses include outlay on:

(i) (i) Establishment including salary to staII.
(ii) (ii) Rent. rates and taxes
(iii) (iii) Travelling expenses.
(iv) (iv) Insurance during construction.
(v) (v) Mortgage charges. iI any.
(vi) (vi) Interest on deIerred payments and commitment charges on borrowings. iI any.
(vii) (vii) Other miscellaneous start up expenses.

Provisions for contingencies: No estimation oI cost even iI done aIter a very detailed examination oI all
the relevant aspects may be perIect and it is necessary that a reasonable cushion in estimation oI total cost oI the
proiect may be provided to meet any contingencies in Iuture and avoid over-run. Estimates oI cost under
various heads as already discussed might have been made either on the basis oI Iirm contracts already entered
or on the basis oI available market rates which may change due to inIlation or otherwise at the time oI
placement oI Iirm orders. Some items oI expenditure might have been overlooked at the time oI estimation oI
preliminary and pre-operative expenses.

Suitable provisions Ior such contingencies supported by valid reasons must be made. The basis Ior calculation
oI provision need also be clariIied to iustiIy the overall cost oI proiect.

Margin Money for Working Capital: Working capital requirements oI any proiect are met by
commercial banks. The part oI working capital is. however. required to be Iinanced Irom long-term resources.
This part is generally reIerred to as margin Ior working capital and is included in the cost oI proiect. Banks now
generally require that 25° oI the total current assets (working capital) shall be the margin to be provided Irom
the long-term. resources and 75° shall be Iinanced by them. Detailed discussion on this aspect has been given
in the subsequent chapters. It will be suIIicient here to add that necessary estimation Ior margin money required
Ior working capital shall. be made and included in the cost oI proiect.

Sources of Funds/Means of Financing

AIter estimation oI the cost oI a proiect. the next step obviously will be to Iind out the sources oI Iunds by means oI
which the proiect will be Iinanced. The proiect will be Iinanced by contribution oI the Iunds by the promoter
himselI and also raising loans Irom others including terms loans Irom Iinancial institutions. The means oI Iinancing
will include:

Issue oI share capital including ordinary/preIerence shares.
Issue oI secured debentures.
Secured long-term and medium-term loan's (including the loans Ior which the application is being put up to
the term lending institutions).
Unsecured loans and deposits Irom promoters. directors-etc.
DeIerred payments.
Capital subsidy Irom Central/State Government.

II any additional Iunds are to be raised Irom an alternative source. the details there oI may also be provided. The
promoters contribution by way oI share capital and/or loans is required to be shown separately.

Profitability Analysis

AIter determining the cost oI proiect and means oI Iinancing. the viability oI the proiect will depend on its capacity
to earn proIits to service the debt and capital. To undertake the proIitability analysis. it will be necessary to ra
estimates oI the cost oI production and working results. These estimation nor made Ior a period oI 10 years and
proiected proIit and loss account Ior 10 year is prepared to draw inIerence Ior the expected proIit.

Break-even Analysis

Estimation oI working results pre-supposes a deIinite level oI production and sales and all calculations are based on
that level. It may. however. not be possible to realise those levels at all times. The minimum level oI production and
sale at which the unit will run on 'no proIit no loss' is known as break even point and the Iirst goal oI any proiect
would be to reach that level. The break-even point can be expressed in terms oI volume oI production or as
percentage oI plant capacity utilisation.

The cost oI production may be divided in two parts as under:

Fixed costs: These costs are not related to the volume oI production and remain constant over a period oI time.
Examples oI such costs include rent oI building. depreciation. interest on term loans etc. salaries oI permanent
employees etc.

Variable costs: These costs have a direct relationship with the volume oI production. The costs will increase with
any increase in the level oI production. Examples oI such costs include raw material. Iuel and power. wages.
packaging etc.

The concept oI break even point can w understood by the Iollowing illustration :
Installed capacity : 1.00.000 units
Total Iixed costs : Rs.4.00.000 per year
Sale price : Rs.20 per unit
Variable cost : Rs.12 per unit

The sales revenue is Iirst adiustable towards recovering the variable costs and the excess may then be utilised to
cover the Iixed costs. The diIIerence between the sale price and the variable costs is termed as 'contribution'. The
contribution per unit in the above illustration will be:

Contribution per unit÷ Sale price-Variable costs
÷Rs.20 - Rs.12
÷ Rs.8 per unit

The 'contribution' will be utilised to cover the total Iixed costs and break-even point is reached when the
'contribution' becomes equal to total Iixed cost. The break even point in terms oI volume oI production may thus be
calculated as under:
Total Fixed cost
Break even in terms oI volume ÷
oI production Contribution per unit

÷ 4.00.000 ÷ 50.000 units
8
The break-even point in terms oI plant capacity may now be calculated as under:
Total capacity : 1.00.000 units
Volume oI production Ior break even : 50.000

So Break - even point in terms oI plant capacity ÷ 50.0000
1.00.000 * 100

÷ 50°

This is the most popular method oI expressing the break-even point. It conveys that the unit will reach the 'no proIit
no loss` stage even at 50° capacity utilisation thereby providing a saIety margin oI 50° within which the unit will
earn proIit.

It shall be appreciated Irom the above discussion that lower the break-even point. better it would be to carry out the
proiect. Lower break-even point may be a desirable cushion Ior any unIoreseen circumstances which may Iorce the
unit not to realise the expected level oI production and sale.

Cash Flow

AIter carrying out the proIitability analysis and determining the expected proIits. a proiected cash Ilow statement
Ior a period oI 10 years is drawn. Cash Ilow statement is. in Iact. a narration oI all the sources oI cash available
during the course oI operation within a period oI time (generally one operative year) and its possible use
(development) during that period. This helps to Iind out the total surplus Iunds created during the operational year.
This inIormation helps to determine the capacity oI the proiect to service its debts and Iix the repayment periods oI
loans granted Ior a particular proiect and also to determine the moratorium period Ior repayment oI the loan. The
repayment oI the loan is Irom the surplus cash generated during the operations in a year.

Debt Service Coverage Ratio

Debt service coverage ratio is calculated to Iind out the capacity oI the proiect servicing its debt i.e.. in repayment
oI the term borrowings and interest. The debt-service coverage ratio (DSCR) is worked out in the Iollowing
manner:

D.S.C.R. ÷ Net ProIit aIter tax ¹ Depreciation ¹ Interest on long -term borrowing's
Repayment oI term borrowings during the year ¹ Interest on long-term borrowings

The higher D.S.C.R. would impart intrinsic strength to the proiect to repay its term borrowings and interest as per
the schedule even iI some oI the proiections are not Iully realised. Normally a minimum D.S.C.R. oI 2:1 is insisted
upon by the term lending institutions and repayment is Iixed on that basis.

Sensitivity Analysis

It may also be sometimes necessary to carry out sensitivity analysis which helps in identiIying elements aIIecting
the viability oI a proiect taking into account the diIIerent sets oI assumptions. While evaluating proIitability
proiections. the sensitivity analysis may be carried in relation to changes in the sale price and raw material costs. i.e.
sale price may be reduced by 5° to 10° and raw material costs may be increased by 5° to 10° and the impact oI
these changes on DSCR. II the new DSCR. so calculated aIter changes. still proves that the proiect is viable. the
Iinancial institution may go ahead in Iunding the proiect. An illustration as to how sensitivity analysis works is
given below:

Estimated Profitability Statement

1.Cost of Operations and Income Statement

S.No. Particulars I II III IV V VI VII VIII IX X
I. INCOME:
Income Irom Iees
Income Irom
Hostel Iees
Misc. Income

TOTAL INCOME

II.EXPENDITURE
General
Administration
StaII Salary
Maintenace &
Misc. Expd.
Interest on Loan
Interest on other
Loan
Depreciation
Preliminary
Expenses W/O

TOTAL
EXPENDITURE

III. EXCESS OF
INCOME OVER
EXPD.

IV. TAXATION

V. NET INCOME

VI.DIVIDEND

VII.NET INOCME
C/F TO B/S

VIII.CASH
ACCRUALS

XI. NET CASH
ACCRUALS

X. CASH
RETURN ON
PROMOTERS
INVESTMENT
°

92.52

8.64
4.84

106.0
0



12.72
25.44

4.24
43.20

0.00
12.93

1.50


100.0
3



5.97

0.00

5.97

0.00


5.97


20.40


20.40




40.80

43.20
63.60

1.47
2.82

185.14

17.28
9.68

212.00



25.44
50.88

8.48
72.00

0.00
18.72

1.50


177.02



34.98

0.00

34.98

0.00


34.98


55.20


55.20




55.20

72.00
127.20

1.77


277.56

25.92
9.52

313.00



37.56
75.12

12.52
67.50

0.00
22.65

1.50


216.85



96.15

0.00

96.15

0.00


96.15


120.30


120.30




92.54

117.50
187.80

1.60


370.08

34.56
9.36

414.00



49.68
99.36

16.56
56.25

0.00
27.82

1.50


251.17



162.83

0.00

162.83

0.00


162.83


192.15


192.15




106.75

131.25
248.40

1.89

370.08

34.56
9.36

414.00



49.68
99.36

16.56
42.75

0.00
27.82

1.50


237.67



176.33

0.00

176.33

0.00


176.33


205.65


205.65




114.25

117.75
248.40

2.11

370.08

34.56
9.36

414.00



49.68
99.36

16.56
29.25

0.00
27.82

1.50


224.17



189.83

0.00

189.83

0.00


189.83


219.15


219.15




121.75

104.25
248.40

2.38


370.08

34.56
9.36

414.00



49.68
99.36

16.56
13.50

0.00
27.82

1.50


208.42



205.58

0.00

205.58

0.00


205.58


234.90


234.90




130.50

113.50
248.40

2.19

370.08

34.56
9.36

414.00



49.68
99.36

16.56
2.25

0.00
27.82

1.50


197.17



216.83

0.00

216.83

0.00


216.83


246.15


246.15




136.75

27.25
248.40

9.12

370.08

34.56
9.36

414.00



49.68
99.36

16.56
0.00

0.00
27.82

1.50


194.92



219.08

0.00

219.08

0.00


219.08


248.40


248.40




138.00

0.00
248.40



370.08

34.56
9.36

414.00



49.68
99.36

16.56
0.00

0.00
27.82

1.50


194.92



219.08

0.00

219.08

0.00


219.08


248.40


248.40




138.00

0.00
248.40

Debt service/year
Fund Ior Debt
Service
DSCR
Average DSCR



The average DSCR works out to 2.82.

II. Sensitivity Analysis when there is decrease in income

In the same proiect. now it is assumed that total income is decrease by 10°. By this assumption. the average DSCR
works out to 2.35 as below: (Rs. in
Lacs)
S.No. Particular I II III IV V VI VII VIII IX X
10º DECREASE IN TOTAL INCOME
1. Institution Running
Expenses
2. Other Costs
3. Depreciation
4. Prelim. Expenses
5. Total Cost
6. Total Income
7. Income beIore tax
8. Taxation
9. Income aIter tax
10.Gross Cash accruals

Debt service/Year
Fund Ior Debt
Service
DSCR
Average DSCR
42.40

43.20
12.93
1.50
100.03
95.40
-4.63
0.00
-4.63
9.80

43.20

53.00
1.23
2.35

84.80

72.00
18.72
1.50
177.0
2
190.8
0
13.78
0.00
13.78
34.00

72.00

106.0
0
1.47
125.2
0

67.50
22.65
1.50
216.8
5
281.7
0
64.85
0.00
64.85
89.00

117.5
0

156.5
0
1.33
165.6
0

56.25
27.82
1.50
251.1
7
372.6
0
121.4
3
0.00
121.4
3
150.7
5

131.2
5

207.0
0
1.58
165.6
0

42.75
27.82
1.50
237.6
7
372.6
0
134.9
3
0.00
134.9
3
164.2
5

117.7
5

207.0
0
1.76
165.6
0

29.25
27.82
1.50
224.1
7
372.6
0
148.4
3
0.00
148.4
3
177.7
5

104.2
5

207.0
0
1.99
165.6
0

13.50
27.82
1.50
208.4
2
372.6
0
164.1
8
0.00
164.1
8
193.5
0

113.5
0

207.0
0
1.82
165.6
0

2.25
27.82
1.50
197.1
7
372.6
0
175.4
3
0.00
175.4
3
204.7
5

27.25

207.0
0
7.60
165.6
0

0.00
27.82
1.50
194.9
2
372.6
0
177.6
8
0.00
177.6
8
207.0
0

165.60

0.00
27.82
1.50
194.92
372.60
177.68
0.00
177.68
207.00

III Sensitivity Analysis where is increase in Running Cost

In the second instance. institutional running costs are increased by 10° whereas total income is decreased
by 10°. The average DSCR. is thus works out to 2.16 as below:
(Rs. In
Lacs)
S.No. Particular I II III IV V VI VII VIII IX X
A. 10º INCREASE IN INSTITUTION RUNNING COST & 10º DECREASE IN INCOME:
1.Institution
Running
Expenses
2. Other Costs
3. Depreciation
4. Prelim. Expenses
5. Total Cost
6. Total Income
7. Income beIore
tax
46.64

43.20
12.93
1.50
104.2
7
95.40
-8.87
0.00
93.28

72.00
18.72
1.50
185.5
0
190.8
0
5.30
167.7
2

67.50
22.65
1.50
229.3
7
281.7
0
182.16

56.25
27.82
1.50
267.73
372.60
104.87
0.00
104.87
182.1
6

42.75
27.82
1.50
254.2
3
372.6
0
182.1
6

29.25
27.82
1.50
240.7
3
372.6
0
182.1
6

13.50
27.82
1.50
224.9
8
372.6
0
182.16

2.25
27.82
1.50
213.73
372.60
158.87
0.00
158.87
182.16

0.00
27.82
1.50
211.48
372.60
161.12
0.00
161.12
182.16

0.00
27.82
1.50
211.48
372.60
161.12
0.00
161.12
8. Taxation
9. Income aIter tax
10.Gross Cash
accruals

Debt service/Year
Fund Ior Debt
Service
DSCR
Average DSCR
-8.87
5.56

43.20

48.76
1.13
2.16
0.00
5.30
25.52

72.00

97.52
1.35
52.33
0.00
52.33
76.48

117.5
0

143.9
8
1.23
134.19

131.25

190.44
1.45
118.3
7
0.00
118.3
7
147.6
9

117.7
5

190.4
4
1.62
131.6
0
0.00
131.8
7
161.1
9

104.2
5

190.4
4
1.83
147.6
2
0.00
147.6
2
176.9
4

113.5
0

190.4
4
1.68
188.19

27.25

190.44
6.99
190.44

190.44

In both the situations i.e. aIter applying sensitivity analysis. the lowest DSCR is 2.16 which is well above 1.5 and as
such proiect can be taken as viable. And thereIore is acceptable Ior Iunding.

Projected Balance Sheet

On the basis oI proIitability and cash Ilow statements already drawn. the proiected balance sheet Ior a period oI 10
years is also prepared to know the Iinancial position oI the proiect at any given point oI time.

ENVIRONMENTAL & ECONOMIC VIABILITY

The perIormance oI a proiect may not only be inIluenced by the Iinancial Iactors as stated above. Other external
environmental Iactors. which may be economic. social or cultural may have a positive impact as well. The larger
proiects may be critically evaluated by the lending institutions by taking into consideration the Iollowing Iactors:

Employment potential.
Utilisation oI domestically available raw materials and other Iacilities.
Development oI industrially backward area as per Government policy.
EIIect oI the proiect on the environment with particular emphasis on the pollution oI water and air to be
caused by it.
The arrangements Ior eIIective disposal oI eIIluent as per the Government policy.
Energy conservation devices etc. employed Ior the proiect.

Other economic Iactors which inIluence the Iinal approval oI a particular proiect are. Net Present Value based on
DCF. Internal Rate oI Return (IRR) and Domestic Resources Cost (DRC).

Net Present Value

The Discounted Cash Flow (DCF) Technique which is more commonly known as Net Present Value method (NPV)
takes into account the time value oI money Ior evaluating the costs and beneIits oI a proiect.. It recognises that
streams oI cash inIlows at diIIerent points oI time diIIer in value. A sound comparison among such inIlows and
outIlows can be made only when they are expressed in terms oI a common denominator i.e. present values. For
determining present values. an appropriate rate oI discount is selected and the cash Ilow streams then are converted
into present values with the help oI rate oI discount so selected. II NPV is positive (i.e. diIIerence between present
values oI inIlows and outIlows) the proiect is taken to be viable and as such proceeded with otherwise not. The
concept oI NPV shall be clear with the help oI Iollowing example:

Let us assume that on an initial outlay oI Rs.50.000. a proiect's cash inIlows Ior next seven years are as below.
present value being calculated at a Discount rate oI 14°.

Year Cash inIlows P. V. Iactor at 14° Present values
1 12000 o.877 10524

2 10000 0.769 7690

3 15000 0.675 10125

4 13000 0.592 7696

5 14000 0.519 7266

6 12000 0.456 5472

7 11000 0.400 4400

Total present value oI cash inIlows
Less: Cash outIlow
NPV

Since NPV is positive the proiect may be considered.

Internal Rate of Return

Internal Rate oI Return ORR) is deIined as the discount rate which equate the present value oI investment in the
proiect to the present value oI Iuture returns over the liIe oI the proiect. This is an indicator oI earning capacity oI
the proiect and a higher internal rate oI return indicates better prospects Ior the proiect. The present investment is
cash outIlow which is assumed to be negative cash Ilow and the returns (cash inIlow) are assumed to be positive
cash Ilows The sum total oI the discounted cash Ilows shall be zero or as near to zero a. possible. The rate oI
discount applied to bring the sum total to zero as above is the internal rate oI return.

Domestic Resources Cost

Domestic Resources Cost (DRC) helps to establish a relationship between the total domestic resources in rupees
spent Ior manuIacturing a product a.. against the Ioreign exchange outlay that would be necessary to import that
particular product. It may be taken as a measure oI total rupees spent to save 1 unit oI Ioreign currency (Ior import
substitution) or to earn a unit oI Ioreign currency (Ior products to be exported). This may in turn be compared with
the exchange rate (parity rate) oI the unit oI Ioreign currency in rupees to determine iI it is worthwhile to
manuIacture the product in the country. II DRC is equal to or less than the parity rate oI the unit oI Ioreign
currency. it means manuIacturing the product in India is possible at a cost which is equal to or lower than the cost oI
Ioreign exchange and it is worthwhile to implement the proiect. However. as Ioreign exchange is scarce. proiects
with slightly higher DRC (than parity rate) may also be approved keeping in view oI other important Iactors such as
employment potential or Government policy to create manuIacturing capacity at home due to strategic importance
oI the product or to gain a position in the international market etc.

LENDING BY ALL INDIA FINANCIAL INSTITUTIONS - COMMON FEATURES AND
COORDINATION WITH BANKS



Industrial Development Bank oI India (IDBI) is an apex body Ior development Iinancing in the country. Industrial
Finance Corporation oI India (IFCI) is also actively involved in proiect appraisal and have developed some
common strategies in this regard. Other all India Iinancial institutions namely LiIe Insurance Corporation. Unit
Trust oI India and General Insurance Corporation and its Iour subsidiaries who also participate in proiect Iinancing
are generally lending through all India Iinancial institutions and are not that actively associated with the appraisal oI
the proiect as such. All India Institutions generally invest in large proiects while proiects in small-scale or medium
scale are leIt to be Iinanced by state level institutions. Commercial banks are also involved in term lending in
consortium with Iinancial institutions. Financing oI a proiect almost involves a deIinite pattern depending upon the
proiect cost as under.

Proiects costing upto Rs. 5 crores

Proiects costing upto Rs. 5000 crores should normally be Iinanced by state level term lending institutions in
consortium with commercial banks. Indirect assistance by way oI reIinance Irom all India institutions to lending
institutions is. however. available in such proiects.

Details are given in Chapter 5

SFCs and SIDCs look Iorward to reIinance Iacilities Irom all India institutions to augment their resources and as
such conIine their commitments to the above level. There is. however. no bar on SFCs and SIDCs granting term
loan Iacilities in excess oI the ceilings as stated above but in that case reIinance Irom all India institutions will not
be available.

However. Ior existing companies all India institutions can provide Iinancial assistance even when the proiect cost is
below Rs. 500 lacs.

Proiects with Term Loan Component exceeding Rs. 5 crores

As a part oI Proiect Finance. the Financial Institutions provide term loans in rupees and in Ioreign currency
repayable over 5- 10 years depending upon debt servicing capacity oI the borrower unit. and secured by a charge
over the immovable/movable assets. Credit evaluation constitutes the basis Ior sanction oI assistance. The Iinancing
can be done by institutions individually or iointly.

Commercial Bank vis-a-vis Granting oI Terms Loans

1. Commercial banks may participate in granting term loans in proiects where total proiect cost does not
exceed Rs. 500 lacs. The banks in such cases would be eligible Ior reIinance Irom all India institutions.
2. In other cases criterion is not linked to the cost oI the proiect but to the quantum oI loan and the exact
position is as under:
(a) A bank may provide term Iinance not exceeding its prudential exposure norm as prescribed by
Reserve Bank oI India Irom time to time Ior individual borrower/group oI borrowers.
(b) Bank and Iinancial institutions may provide term Iinance to all proiects including inIrastructure
proiects without any ceiling.

For lending to public sector units. banks are to ensure that such public sector units are registered under the
Companies Act. 1956. or are established as corporation under relevant Acts. Such units should be made out oI
income to be generated Irom the proiect and not out oI subsidies. made available to them by the Government.

Prudential Exposure Norms Ior Banks
1

As per guidelines oI Reserve Bank oI India the maximum exposure oI a bank Ior all its Iund based and non Iund
based credit Iacilities. investments. underwriting. investment in bonds and commercial paper and any other
commitment should not exceed 15 per cent oI its capital Iunds to an individual borrower including public sector
undertakings and 40 per cent oI its capital Iunds to group oI borrowers. The prudential exposure limit oI banks to
the borrowers oI a group can exceed by 10° iI the additional credit is on account oI inIrastructure proiects (i.e.
power. telecommunication. roads and transports). Further. w.e.I. April 1. 2003. the exposure limit oI banks to single
borrowers can exceed by 5° iI the additional credit is on account oI inIrastructure proiects. These limits are
reIerred to as prudential exposure norms. For arriving at exposure limit. the sanctioned limits or outstanding.
whichever is higher. shall be reckoned. It may. however. be noted that while calculating exposure. the non Iund
based Iacilities are to be taken at 100° oI the sanctioned limit or outstanding whichever is higher. The concept oI
capital Iun& has been broadened to represent total capital i.e.. Tier I and Tier 11 capital (same as total capital
deIined under capital adequacy standards) Ior the determination oI exposure ceiling by banks. To illustrate this
point let us consider the Iollowing example:

Capital Iunds oI the bank Rs.250 crores
Exposure to a borrower Limits sanctioned Outstandings
(Rs. In crores) (Rs. In crores)

Term loan 15.00 10.00
CC Hp. (incl. WCTL) 05.00 03.00
L/C 16.00 10.00

Total 36.00 23.00


Maximum exposure as per prudential norms Ior an individual borrower
including public sector undertakings ( 15° oI Capital Iunds Rs. 37.50 crores

Exposure on the basis oI limits sanctioned/ outstanding whichever is higher:

(i) Fund Based TL 15.00
CC hyp. 5.00 Rs. 20.00 crores
(ii) Non Fund Based 100° oI L/C Limit Rs. 16.00 crores
i.e. oI Rs 16.00 crores or
crores whichever is higher

Total Rs. 36.00 crores

Maximum exposure Ior this bank Ior borrowers under the same group should not exceed Rs. 100 crores (Rs. 125
crores Ior inIrastructure proiects relating to power. telecommunications. roads and ports).

Notes : The exposure limits are applicable to lending under consortium arrangements. wherever Iormalised.

Exemptions Irom Exposure Norms

1. 1. Rehabilitation of Sick/Weak Industrial Units The above ceilings on single/group exposure limits
are not applicable to existing/additional credit Iacilities (including Iunding oI interest and irregularities)
granted to weak/sick industrial units under rehabilitation packages.
2. 2. Food credit: Borrowers to whom limits are allocated directly by the Reserve Bank. Ior Iood credit. are
exempt Irom the ceiling.
3. 3. Loans against bank's own term depositsLoans and advances granted against the security oI bank's
own term deposits are excluded Irom the purview oI the exposure ceiling.

Meaning oI Exposure

Exposure includes credit exposure (Iunded and non Iunded credit limits) and investment exposure (underwriting
and similar commitments) as well as certain types oI investments in companies.

(i) Credit exposure- It comprises oI the Iollowing elements
• • all types oI Iunded and non-Iunded credit limits.
• • Iacilities extended by way oI equipment leasing. hire purchase Iinance and Iactoring services.
• • advances against shares. debentures. bonds. units oI mutual Iunds. etc. to stock brokers. market
makers.
• • bank loan Ior Iinancing promoters' contributions bridge loans against equity Ilows/issues.
• • Iinancing oI Initial Public OIIerings (IPOs).
(ii) Investments exposure It comprises oI the Iollowing elements
• • investments in shares and debentures oI companies and bonds issued by PSUs acquired through
direct subscription. devolvement arising out oI underwriting obligations or purchases Irom secondary
markets or on conversion oI debt into equity.
• • investments in Commercial Papers (CPs) issued by Corporate Bodies/PSUs.
• • investment made by the banks in bonds and debentures oI corporate which are guaranteed by a PFI
will be treated as an exposure by the bank on the PFI and not on the corporate.

Meaning oI Group

(i) The concept oI 'Group' and the task oI.' identiIication oI the borrowers belonging to speciIic industrial.
groups is leIt to the perception oI the banks/Iinancial institutions. Banks/Iinancial institutions are generally
aware oI' the basic constitution oI their clientele Ior the purpose oI regulating their exposure to risk assets.
The group to which a particular borrowing unit belongs. may. thereIore. be decided by them on the basis oI
the relevant inIormation available with them. the guiding principle being commonality oI management and
eIIective control.
(ii) For identiIying the group to which a company registered under section 26(2) oI MRTP Act. 1969 belongs. a
reIerence may be made to the Industrial House-wise list oI companies registered under the Act.
(iii) In respect oI borrowers not covered by the MRTP Act. the group aIIiliation may be decided by banks on the
basis oI the principle explained above.
(iv) In the case oI a split in the group. iI the split is Iormalised. the splinter groups will be regarded as separate
groups. II banks and Iinancial institutions have doubts about the bona IidesoI the split. a reIerence may be
made to RBI Ior its Iinal view in the matter to preclude the possibility oI a split being engineered in order to
prevent coverage under the Group Approach.

Credit Exposure to Industry or Certain Sectors

Specific Sectors - Apart Irom limiting the exposures to individual or Group oI borrowers. as indicated above. the
banks may also consider Iixing internal limits Ior aggregate commitments to speciIic sectors e.g.. textiles. iute. tea.
etc. so that the exposures are evenly spread over various sectors. These limits could he Iixed by the banks having
regard to tile perIormance oI diIIerent sectors and the risks perceived. The limits so Iixed may be reviewed
periodically and revised. as necessary.

Exposure to Real Estate:
(i) (i) Banks should Irame comprehensive prudential norms relating to the ceiling on the total
amount oI' real estate loans. single/ group exposure limits Ior such loans. margins. security. repayment
schedule and availability oI supplementary Iinance and the policy should be approved by the bank's
Board.
(ii) (ii) While Iraming the bank's policy the guidelines issued by the Reserve Bank should he taken
into account. Banks should ensure that the bank credit is used Ior productive construction activity and
riot Ior activity connected with speculation in real estate.

Exposure to Unsecured Guarantees and Unsecured Advances

1. 1. Banks have to limit their commitment by way oI unsecured guarantees in such a manner that 20 per cent oI
the bank's outstanding unsecured guarantees plus the total oI outstanding unsecured advances do not exceed 15
per cent oI total outstanding advances. Guarantees counter guaranteed by another bank need not be taken into
account Ior the purpose oI the norm.
2. 2. For the purpose oI conIirming to the above norm. guarantees covered by counter-guarantees oI the Central
Government and the State Governments. public sector Iinancial institutions and insurance companies will be
regarded as secured guarantees.
3. 3. However. deIerred payment guarantees should be backed by adequate tangible security or by counter
guarantees oI the Central Government or the State Governments or public sector Iinancial institutions. or by
counter-guarantees oI insurance companies or other banks. provided the counter-guarantees oI insurance
companies or other banks. are themselves backed by adequate tangible security. Where the counter guarantees
by commercial banks are backed by adequate tangible securities. then all guarantees. including deIerred
payment guarantees. will be treated as secured guarantees.
4. 4. In exceptional cases. the banks may give deIerred payment guarantees on an unsecured basis Ior modest
amounts to Iirst class customers who have entered into deIerred payment arrangements in consonance with
Government policy. But such unsecured guarantees should be accommodated within the maximum ceiling
limits.

Prudential Exposure Norms Ior Financial Institutions

Similar credit exposure norms as are applicable to banks shall also apply to term lending institutions i.e. exposure
ceiling Ior a single borrower will he limited to 15° oI capital Iunds and Ior a group oI borrowers it shall be 40°. In
the case oI Iinancing Ior inIrastructure proiects. the limit Ior a single borrower shall be extendable to 20° and Ior a
group shall be extendable to 50° oI capital Iunds.

PROPOSAL FOR ASSISTANCE

All India Iinancial institutions keep a very close liaison among themselves on proiect appraisal and have evolved a
common procedure to a large extent. Assistance under normal proiect Iinance scheme is extended by these
institutions generally on the same terms and conditions. Procedure in respect oI Proiect Report. the appraisal and
disbursement procedure and documentation remain almost same under the normal scheme. The Ieatures that are
common to all the lending institutions are discussed hereunder Iollowed by discussion on special schemes oI
individual institutions in the subsequent chapters.

The borrower has to submit the proposal along with proiect report to the term lending institutions. The salient
Ieatures oI the proposal and proiect report have been discussed in Chapter 4. The papers/documents. to be sent
along with the proposal have also been listed therein.

The proposal shall be considered complete only iI Iull inIormation is provided and necessary letter oI
intent/industrial licence. Ioreign collaboration approval etc. have already been obtained and processing shall he
taken up only when the proposal is complete.

DEBT EQUITY RATIO

Debt equity ratio is a measure oI resources that can he mobilised by the promoter (this also helps to reduce
dependence on borrowed Iunds which ma have an adverse eIIect on proIitability due to heavy interest cost in the
initial stages) with his own eIIorts and Iinancial institutions lay a great emphasis an try to keep it to the minimum
level Ior the proiects being Iinanced by then Broad norms Ior the minimum acceptable level oI debt equity ratio
have also been speciIied and the proiect may be approved within these norms.

There is. however. a diIIerence oI opinion as to what constitutes a debt an equity Ior the purpose oI calculation oI
this important ratio. The mo acceptable principles applied Ior calculation oI debt and equity are speciIied below:

Equity is sum total oI the Iollowing terms:

Share capital
• • Ordinary paid-up share capital.
• • Irredeemable preIerence share capital.
• • Redeemable preIerence capital provided redemption is due aIter the years.
• • Premium on issue oI shares.

Reserves And Surplus
• • Free reserves including any surplus in proIit and loss account
• • However. any accumulated losses. preliminary expenses not written oII. arrears oI unabsorbed
depreciation and any intangible assets are to be deducted Irom Iree reserves. Unrealisable investments are
also to be deducted Irom Iree reserves.
• • Development rebate reserve.
• • Investment allowance reserve.
• • Debenture redemption reserve.
• • Dividend equalisation reserve.

Any such other reserve shall also be taken as Iree reserve.

Quasi Equity
• • Amount oI Central/State subsidy.
• • Long term unsecured interest Iree loans Irom Government or Government agencies such as sales-tax
loan etc.
• • Long term unsecured interest Iree loans Irom promoters provided such loans are subordinated to the
loans Irom Iinancial institutions.
• • Non reIundable deposits in the case oI co-operatives.

Note: Assistance provided by Risk Capital and Technology Finance Corporation Limited (RCTC) under Risk
Capital Assistance Scheme and other seed capital provided by other institutions under similar schemes would
be treated as equity Ior the purpose oI determining oI debt equity ratio.

Debt is the sum total oI the Iollowing items:

Redeemable preIerence shares where redemption is due between one to three years.
Convertible and non convertible debentures except that part oI convertible debentures which is
compulsorily to be converted to equity.
Long- term (repayable aIter 12 months) interest bearing loans. deposits Irom Government/ Government
Agencies / Promoter
DeIerred payments not Ialling due within a period oI 12 months.
Long term loans (repayable aIter 12 months). (The loan which has been applied Ior is also to be
included to determine. debt aIter the Iinancial assistance has been extended).

Note: Redeemable preIerence shares where the period oI their redemption remains only 12 months or less are
treated neither as debt nor equity but a current liability.

Norms oI debt equity ratio

The normally acceptable debt equity ratio norm is 1:5:1 except Ior large proiects where the debt equity ratio could
go upto 2:1

Notes:
(i) (i) The above norms are to be taken only as broad guideline or a genera indicator and the exact ratio
in a particular proiect is to be decide depending upon (a) tile nature oI the industry. (b) the size oI the
proiect (c) the gestation period. (d) the proIitability potential. (e) the debt service capacity oI the proiect. (I)
the risk attendant on the proiect ill view oI Iactor such as background oI the promoters. nature oI
technology employed likely demand Ior the product. (g) current capital market conditions an economic
situation etc.
(ii) (ii) The norms are not applicable to shipping industry (including trawlers).
(iii) (iii) The norms oI debt-equity ratio Ior ioint sector proiects are to be the same as Iollowed in. the case
oI proiects promoted in private sector. However ioint sector proiects. iI promoted in association with Large
Houses. the norms oI debt equity ratio in relation to such proiects are to be the same as applicable to
proiects promoted by Large Houses as indicated above.

PROMOTER'S CONTRIBUTION

The promoter must have his own Iinancial stake in a proiect to ensure his sincerity in implementation oI the proiect
and his continued interest thereaIter. The share. the promoter shall bring as percentage oI total cost oI proiect inter
alia depends upon the resources oI the promoter. the type oI the proiect and its size.

The promoters are expected to bring in maximum possible contribution. Contribution can be in the Iorm oI share
capital. internal generation during the period oI implementation oI the proiect. additional capital or unsecured
deposits/ loans to be brought or arranged by promoters.

The norms Ior minimum promoters' contribution are as under:

I. I. The minimum level oI promoters' contribution shall be 20° oI the proiect cost (varies Irom
scheme to scheme).
II. II. Core promoters Ior the above purpose consist oI main promoters. their Iamily members. relatives.
group companies under their management Iriends and associates. equity contribution by Industrial Development
Corporations (IDCs) etc.
III. III. The equity contributed by core promoters shall be covered by non disposable undertakings to the
Iinancial institutions.
IV. IV. Non core promoters' contribution could include contribution to equity by IDCs. Mutual Funds
etc. (without non-disposal undertakings) with buy back arrangement with promoters.
V. V. Where venture capital companies are called upon to make contributions t the equity to help
promoters make Lip their stipulated contribution proiect cost. the Iinancial institutions do not insist on
Iurnishing non disposable. shortIall undertakings. However. where venture capita companies themselves are
promoters oI ventures. their contribution to equity will be covered by non-disposable undertakings and they will
also be required to Iurnish the shortIall Undertakings.
VI. VI. For large sized proiects (i.e.. proiect costing more than Rs. 200 crores). a minimum promoters'
contribution oI not less than 10° oI the proiect cost is accepted.


SCHEDULE OF RATES OF INTERE'ST. FEES AND OTHER CHARGES IN RELATION TO PROJECT FINANCE

I. Rate of Interest on Rupee Loan:

Based on Minimum Term Lending Rate Iixed Irom time to time. Actual rate within the prevailing rate band depends
upon creditworthiness oI borrower and risk perception. Interest is payable quarterly.

II. Rate oI interest on Foreign Currency Loan

Floating rate based on LIBOR depending upon the source oI the currency plus a Iixed spread according to the risk
perception and maturity oI the loan. The exact rate can he Iound out only at the time oI execution oI Ioreign
Currency loan agreement. The exchange Iluctuation risk in these loans is borne by the borrower.

III. Rehabilitation Finance

The rates oI interest Ior Iunded interest term loan. existing term loan and Iresh rehabilitation term loan. are subiect
to change Irom time to time and latest position may be ascertained Irom concerned Financial institution.

IV. Underwriting Commission

2.5° oI the under written amount.

V. Up-Front Fee

(In substitution oI the practice oI 1.0° oI the loan amount commitment charge)

In respect oI Loans under Proiect Finance.

VI. Commitment Charges

0.25° on the undrawn portion oI loan payable Irom the date oI signing oI die loan agreement.


GENERAL CONDITIONS APPLICABLE FOR ASSISTANCE

There are certain general conditions which are applicable Ior assistance under tile Scheme. These relate to
composition oI Board oI Directors. Management set-up. Government approvals and sanctions. payment oI dividend.
sale or purchase oI assets. selling arrangement etc. SpeciIic condition as may be applicable to individual cases are
conveyed separately.

CONVERTIBILITY CLAUSE

The mandatory convertibility clause which enabled Iinancial institutions to convert a part oI term loans into equity
Ior new proiects has been dispensed with in August. 1991.

The 'convertibility clause' is not applicable. except in overrun or deIault or rehabilitation cases.

NOMINATION 0F DIRECTOR

All India Iinancial institutions normally reserve the right to appoint their nominee directors on the Boards oI
assisted concerns. The actual appointments are. however. made generally aIter mutual consultation among the
institutions depending upon the extent oI their combined shareholdings. the size oI aggregate assistance etc.
Detailed guidelines are issued to the nominee directors appointed by institutions. They are not to interIere in the
day-to-day aIIairs oI the assisted concern. but are expected to keep themselves Iully acquainted with the aIIairs oI
the assisted concern and extend Iull co-operation to the management. They have also to ensure that. among other
things. the Iollowing issues are reviewed at periodical Board meetings:

• • Financial perIormance;
• • Payment oI dues to institutions;
• • Payment oI statutory and other dues to Government;
• • Inter-corporation investments including deposits. loans and advances;
• • Transactions in shares;
• • Contracts. purchase and sale oI raw materials. Iinished goods. Machinery. ect.; and
• • Maior items oI expenditure particularly those relating to management.
In the interest oI healthy growth oI the corporate sector. the institution expands that management oI every assisted
concern develops proper organisational set-up with a suitably board-based Board oI Directors to serve the
operations oI the concern as a whole. The Board oI Directors may constitute suitable committees to look into
speciIic Iunctional area. At least one oI the on the Board oI an assisted concern is expected to be included in the
more important oI these committees.

REPAYMENT PERIOD OF LOANS

The Iinancial institutions have a Ilexible approach in respect oI Iixation oI repayment period is based on the debt
service coverage ratio oI 2:1 is generally ensured. The repayment period may be Iixed initial 1 to 3 years as
moratorium period. Proiects having the repayment period reduced to even 6 years including. The period oI
repayment may he accelerated by the warranted by proIitability and cash Ilow oI borrowing concern. The borrowing
concern can pre pay the outstanding loan or loan instalment with the prior approval oI Institutions.

DOCUMENTATION AND DISBURSEMENT OF RUPEE TERM LOAN

AIter the proiect has been approved by the Iinancial institutions. a Iormal Iinancial letter oI intent is issued in
Iavours oI the applicant.

The letter oI intent is issued to the applicant in the prescribed Iorm enclosing therein the Iollowing other papers:

• • Special terms and conditions as applicable to the Iinancial assistance.
• • General conditions as applicable to Iinancial assistance.
• • Specimen copy oI common loan agreement.
• • DraIt oI the resolution to be passed by the Board oI Director~ oI the borrower Im accepting the letter oI
intent.

On receipt oI letter oI intent the applicant must scrutinise the papers and may seek any additional clariIication
Irom the lending institution. iI necessary. II the terms oI suction are acceptable. the company may
simultaneously take the Iollowing steps:

To convene a board meeting Ior acceptance oI letter oI intent and passing the -board resolution. The
Iormal acceptance to the lending institution is to be conveyed within 30 days Irom the date oI issue oI intent
letter.
To Iinalise a Iinal drawal schedule depending upon the progress oI proiect implementation. The drawal
schedule is also to be intimated to the lending institution along with the acceptance.
To convene the General Body Meeting oI the company. iI necessary. to pass resolution Ior availing oI
the loan under section 293(1)(d) oI Companies Act. 1956.
To obtain draIt copies oI other loan document such as deed oI hypothecation and/or letter oI
guarantees. undertaking Ior disposal oI shareholding acquired Ior meeting shortIall in Proiect Cost.
declaration Ior creation oI ioint mortgage by deposit oI title deed etc. as required as per terms oI sanction.
To convene a board-meeting to approve all the loan documents and get necessary authority oI the
board Ior execution oI documents.
The disbursement oI loan is Iurther subiect to pre-disbursement conditions as stated in 'General
conditions applicable to Iinancial assistance being complied with Necessary undertakings. certiIicates Irom
legal advisors and/or statutory auditors wherever necessary must be got ready and submitted to the lending
institution.
All loans are subiect to creation oI a valid mortgage oI all immovable properties in Iavour oI the
lending institution. Creation oI mortgage generally involves a lengthy procedure and lending institution
may agree to release the loan against personal guarantee oI the promoters pending creation oI Iinal charge
over the security. The matter in this regard must be got cleared and draIt Ior personal guarantee be obtained
Irom the lending institution.
All the documents are then to be executed by authorised persons in the legal department oI the lending
institution.

DISBURSEMENTAND UTILISATION OF LOAN

• • The lending institution shall get all the document executed.
• • The disbursement oI the loan by the lending institution may be in stages depending upon the progress
in proiect implementation and will be subiect to compliance oI pre-disbursement and other special
conditions. Promoter has to Iirst bring in a substantial part oI his contribution (generally a minimum oI
50°) beIore any disbursement oI loan by the Iinancial institution. An auditor's certiIicate may also be
required Ior this purpose certiIying the paid up capital oI the company at the time oI disbursement.

A progress report on proiect implementation giving details oI expenditure already incurred under various heads
and a Iunds Ilow statement showing therein the phased requirement oI Iunds Ior timely execution oI the proiect
must also be submitted to the lending institution. The lending institution will evaluate these reports and Iinalise
a disbursement schedule which will Iurther be subiect to review Irom time to time on the basis oI progress in
proiect implementation.

• • All the disbursements are made by cheque drawn in Iavour oI the borrower and the date oI cheque is
taken as the date oI disbursement oI loan.
• • All these cheques are required to be deposited in a 'special bank account' to be maintained Ior this
purpose. The Iunds lying in this account are not subiect to the right oI set oII or lien by the bank. For this
purpose a letter Irom the bank Iorgoing his right oI set oII or lien must be obtained Irom the bank and
deposited with lending institution.
•• The borrower must keep proper record oI withdrawals Irom this special account and also authorise his
bank to reveal all the inIormation as required to the lending institution regarding operations in this
account. The borrower is also required to Iurnish a statement showing the manner in which the loan
already disbursed has been utilised. The statement is to be submitted to the lending institution at the end
oI each month Iollowing the month in which the loan monies are disbursed
• • Entire loan is not disbursed as long as Iinal security by way oI mortgage oI immovable propertyis not
created. Usually 10° oI the sanctioned loan is withheld and disbursed only when all theIormalities in this
regard are completed.

CHARGING OF SECURITIES

All loans by Iinancial institutions are secured by:
• • A Iirst mortgage and charge in Iavour oI the lending institutions oI all the borrower`s immovable
properties. both present and Iuture; and
• • A Iirst charge by way oI hypothecation in Iavour oI lending institution oI all borrower's movables
(except book debts). including movable (except book debts). including movable machinery spares. tools
and accessories. present and Iuture subiect to prior charges created and/or to be created;

In Iavour oI borrower's bankers on the borrower`s stocks oI raw materials. semi-Iinished and
Iinished goods. consumable stores and such other movables as may he agreed by the lending
institutions Ior securing the borrowings Ior working capital requirements in the ordinary course oI
business; and
On speciIic items oI machinery purchased/ to be purchased under deIerred payment Iacilities to
the borrower and as permitted by lending institutions.

The hypothecation agreement is got executed invariably beIore any disbursement. The borrowers should.
however. take immediate steps Ior creation oI mortgage to entitle himselI to avail the entire sanctioned
loan. Creation oI mortgage would involve the Iollowing steps:

Scrutiny oI title deeds oI all immovable properties and mutation certiIicates by the legal
department oI the tending institution to determine the ownership and clear marketable title oI borrower
over these properties. Copies oI all title deeds. mutation certiIicates and other relevant documents
should be promptly made available to the lending institution to enable it to carry out these veriIications.
Investigation oI records oI local land authorities/Registrar's oIIice is relevant to ensure that the
property under investigation is Iree Irom all encumbrances. This exercise will also be conducted by the
legal department oI the lending institution.
Obtention oI the authority oI the Board Ior creation oI mortgage and signing the declaration in
prescribed Iorm. The board's resolution in this regard shall also authorise the person/persons who have
to deposit the original title deeds with the lending institution Ior creation oI mortgage.
Obtaining oI income-tax clearance under section 281(1) oI Income-tax Act Ior the creation oI
mortgage. The income-tax clearance certiIicate is also to be submitted to the legal department oI the
lending institution.
Depositing oI all the original title deeds. mutation certiIicates etc. with the legal department oI
the lending institutions and Iurnishing the necessary declaration in the prescribed Iorm duly signed by
authorised person(s).

With the completion oI all Iormalities as above the mortgage charge is created. Nevertheless the legal
department oI the lending institution will communicate to the borrower regarding Iinal creation oI security
and the date Irom which the mortgage is deemed to be created.

It may once again be emphasised here that all the steps Ior creation oI mort ag charge must be completed as
early as possible. However. penal rate oI interest (1° higher than the normal rate shall be charged by the
lending institution on the entire outstanding loan till the date oI creation oI mortgage.

Registration oI Charge
Particulars oI all charges created over the assets oI the company are required to be registered with the
Registrar oI Companies under section 125 oI Companies Act.1956 within 30 days oI creation oI charge.
The company should thereIore. arrange to Iile particulars oI charge created by it in the prescribed Iorm 8`
and Iorm 13 with the Registrar oI Companies within the stipulated time. Particulars oI both the
hypothecation charge over the movable property as created by Deed oI Hypothecation` and mortgage charge over
immovable properties are required to be submitted and registered with t Registrar oI companies.

CO-ORDINATION BETWEEN BANKS AND ALL INDIA FINANCIAL INSTITUTION: SANCTIONING OF TERM LOANS AND
WORKING CAPTTAL LIMITS BY BANKS

Term loans Ior setting up oI any new proiect or Ior modernisation. diversiIication or expansion oI existing units are
sanctioned by all India Iinancial institutions with or without sharing such term loans with banks. Working capital Iinance
is now in mode available to the companies already assisted by the Iinancial institution. Companies have to depend upon
commercial banks Ior Iinance oI their working capital loan component. For this purpose co-ordination between banks
and all India Iinancial institution is important so that banks are able to sanction working capital limits to such units
expeditiously. Reserve Bank issued detailed guidelines in this regard in 1988 important aspects oI these guidelines to
banks which are oI interest to the borrower am discussed hereunder.

Association of Commercial Banks with the Project Appraisal Undertaken by All India Financial Institutions

The banks which is to take up the maximum share oI term loans among the bank and/or the working capital Iinance
should be identiIied and associated with the appraisal exercise initiated by lead Iinancial institution. The promoter is
Iree to choose such a bank who (the bank) will be involved in all aspects oI appraisal.

Where more than one bank is to share term loan an or working capital requirements due to the large proiect size. the
promoter has to identiIy other banks in consultation with lead bank. It should. however. be understood that the bank
who shares term loans must also give Iacilities Ior working capital. Other banks associated with the proiect must
accept the appraisal iointly Iinalized by lead Iinancial institution and the lead bank. This norm is. however. being
relaxed on case to case basis.

The association oI the bank having the maximum share oI term loan among the banks and/or working capital
Iinance with the proiect appraisal will ensure that assessment oI working capital requirements is in accordance with
the general approach adopted by banks aw is in conIormity with the guidelines issued by Reserve Bank oI India in
this behalI. It would also ensure that adequate margin money Ior working capital is provided in the proiect cost.

Financing of Cost Overrun of Projects

Term loan requirements due to cost overrun should be met by the Iinancial institutions and banks which had
participated in the original Iinancing oI the proiect by extending additional term loans on a pro rata basis and the
tending bank must be associated with the overrun appraisal carried out by lending Iinancial institution. Other banks
may also be brought in to share cost overrun Iinancing.

Sanction of Timely Working Capital Facilities and Release of Funds for Meeting Need-based Requirements

Depending upon the. quantum oI working capital Iinance required vis-a-vis other relevant Iactors. the bank
associated with the appraisal oI proiect may either meet the working capital requirement oI the entrepreneur himselI
or enter into consortium agreement with other banks. This consortium oI banks should be simultaneously Iinalised
while appraisal Ior term loan is being completed. The working capital limits are to be sanctioned by the lending
bank either as sole Iinancing bank or under consortium arrangements- immediately aIter sanction oI term loans.
Where. however. banks have not. Ior any reason. participated in the appraisal oI the proiect. the lead Iinancial
institution will keep the bank which is to provide maximum working capital Iinance inIormed about the appraisal
and sanction oI loan assistance to the proiect. An 'in-principle' sanction oI working capital limits should be
communicated by that bank to the borrower as well as to the lead Iinancial institution soon aIter the sanction oI term
loan assistance.

The assessment oI the lead bank oI the initial working capital limit should be accepted by other participating banks
in the consortium in order to avoid delay.

In order to obviate diIIiculties which inadequate working capital limits may create Ior the promoter. the lead bank
must review the limits already sanctioned about 6 months beIore the commencement oI commercial production.
While sanctioning such limits banks are required to take into account the requirements Ior working capital Ior
achieving the level oI production envisaged Ior the second year oI production. Banks must communicate the Iormal
sanction at least three months beIore the commencement oI commercial production. The release oI Iunds under the
sanction will. however. be dependent upon actual needs oI the borrower on one hand and build up oI chargeable
assets on the other hand.

Stipulation of Shorter Period for Repayment of Term Loans Extended by Banks

Repayment should continence simultaneously Ior all lenders. but the term loans given by banks may he liquidated
over a shorter period oI 5 to 6 year aIter commencement oI commercial production in normal proiects and over a
period oI 7 to 8 years in case oI capital intensive proiects. The stipulation oI shorter repayment period will not.
however. apply to deIerred payment guarantees issued by banks.

Provision oI Adequate Margin Money by Financial Institutions While Computing the Proiect Cost

In order that the build up oI production in stages (till the unit reaches normal level oI operation) does not suIIer on
account oI paucity oI short-term Iunds. banks adopt a realistic and Ilexible approach and release working capital
Iinance commensurate with the increasing tempo oI operations. Where. due to unIoreseen developments. the margin
money is Iound to be inadequate or has been eroded and where it comes in the way oI sanctioning oI need based
working capital. the lead bank should discuss with the borrower along with the lead institution. the iniection oI
additional long term Iunds to make up the deIiciency. Where. the borrower is unable to immediately mobilise long
term Iunds. the banks may take into account all relevant Iactors and allow him to make up the deIiciency in margin
within a time Irame oI 12 months or 24 months in extreme cases.

Issue oI DeIerred Payment Guarantees. (DPGs) by Banks Exclusively Ior Financing oI Proiect

Where all -India Iinancial institutions are not involved in providing Iinancial assistance. the banks may meet the
entire Iinancial requirement by way oI deIerred payment guarantees to proiects Ior modernisation/diversiIication/
expansion oI existing units. In such cases. however the concerned bank or the lead batik should make a detailed
appraisal oI the proiect and assess the risks involved beIore sanctioning the deIerred payment guarantees.

Stipulation of Bank Guarantees Against Term Loan Granted by Financial Institutions

Bank may issue guarantees Iavouring Iinancial institutions Ior the term loans extended by the latter. subiect to strict
compliance oI stipulated conditions in this regard.

Co-ordination between Financial Institutions and Banks in case of Modernisation/Expansion/Diversification
of Existing Units

In the case oI proiects involving modernisation/diversiIication/expansion oI existing units. the lead bank under the
consortium arrangement should invariably be inIormed by the lead Iinancial institution about the approach made by
the borrower and lead bank must invariably be associated with the detailed appraisal. Other aspects such as sharing
pattern between Iinancial institutions and banks etc. will be the same as in case oI setting up oI' new units.

Grant oI Term Loans Ior Import oI Second Hand Machinery

Import oI second hand machinery is subiect to compliance with the regulation Iramed by the government oI India
Irom time to time. Banks may grant tern loans Ior import oI second hand machinery provided the same is in
conIormity with such regulations. Such proposals will. however. be closely scrutinised and due precaution be taken
beIore granting the term loan Iacilities.

PROPOSAL FOR FINANCIAL ASSISTANCE


IDBI and IFCI had devised a common application Iorm Ior seeking proiect Iinance assistance and had also drawn
up detailed explanatory notes Ior guiding entrepreneurs to Iill up the application Iorm. Now-a-days. these
institutions do not insist Ior common loan application. The applicant is required to Iurnish complete details oI the
proiect including Iinancial assistance needed in the proiect report itselI which should be Iorwarded to the lending
institution along with request letter. For proiect screening and sanction. IDBI uses a Form known as Proiect Loan
Application Form (Appendix 4.1). Proiect report should be prepared in such a way so as to Iacilitate Iurnishing oI
inIormation in Proiect Loan Application Form.

Proiect Loan Application Form oI IDBI

Proiect Loan Application Iorm oI IDBI starts with 'Background InIormation' required to be Iurnished on the
Iollowing matters

(i) Name oI the Industrial concern.
(ii) Constitution oI the applicant company and the sector to which it belongs.
(iii) Industrial ClassiIication.
(iv) Date oI Incorporation/Registration/Commencement oI Business.
(v) Addresses oI Regd. OIIice. Controlling OIIice and Proiect Location.
(vi) Proiect ProIile.

Background InIormation is Iollowed by Parts I to V which need to be Iilled up on the Iollowing lines.
Part-I requires inIormation in respect oI promoter/company as under:

(i) Promoter proIile.
(ii) Company background. in case oI existing company.
(iii) Management Structure.
(iv) Shareholding pattern oI the company on a particular date.

Part II requires Iurnishing oI technical inIormation in respect oI Proiect. It includes inIormation on technical
arrangements. location and site. inputs oI production and implementation schedule.

In Part III. inIormation regarding market i.e. demand outlook. supply outlook. market potential both in respect oI
domestic and global markets and selling arrangements is Iurnished.

In Part IV. Iinancial inIormation i.e. cost oI proiect means oI Iinancing. sources and uses oI Iunds and perIormance
indicators Ior the Iirst 5 year's oI operation is Iurnished.

In Part V. inIormation with regard to socio-economic impact oI the proiect i.e.. economic considerations. social
considerations. environmental considerations and status oI Governments consents.
PROJECT REPORT

Since the appraisal oI the proiect is carried on the basis oI inIormation given in the proiect report as well as
annexures attached thereto. it is pertinent that complete and precise inIormation is given in the Iirst instance itselI so
as to avoid any delay in processing. InIormation in the proiect report should be so structured that no diIIiculty is
Iaced while completing the proiect loan application Iorm. However. it must be clearly understood that the scope oI
inIormation to be Iurnished in proiect report is not limited to Iilling oI loan application Iorm but it must be as
detailed as possible covering each and every aspect oI the proiect. howsoever. minute it may be.

The proposal is treated as complete only aIter the entrepreneurs have obtained basic Government clearances. such
as Letter oI Intent. C.G. clearance and approval Ior Ioreign collaboration. etc.. wherever applicable. and have also
resolved. in some cases. certain basic issues such as Iinancing pattern Ior the proiect. capability oI promoters to
raise their contribution. selection oI size Ior the proiect. suitability oI process technology to be adopted. availability
oI requisite quality and quantity oI raw materials. availability oI adequate power particularly in the case oI power
intensive proiects and market aspects. wherever market may be a constraint or in case where bunching oI
applications is involved. Some oI these basic issues are oI such relevance in the case oI certain proiects that they
need to be resolved beIore taking up detailed appraisal so that it does not become inIructuous.

List oI various particulars to be given in proiect report is given below

1. General details about the industrial concerns. proiects and Iinancial assistance applied Ior.
2. Bio-data oI promoters with past history.
3. Particulars oI the industrial concern comprising
(i) A brieI history.
(ii) List oI subsidiaries.
(iii) List oI holding company.
(iv) List oI other group companies where subsidiary/holding relationship does not exist.
(v) Directors' bio-data.
(vi) Full details oI revaluation oI assets together with reasons thereIor.
(vii) Bio-data oI key technical and executive staII.
(viii) Existing long-term and short-term borrowings.
(ix) List oI shareholders owning or controlling 5° or more oI equity shares.
(x) Note on company's tax status.
(xi) ManuIacturing Iacilities.
(xii) Particulars oI production and sales.
(xiii) Locational advantages.
(xiv) Existing requirement oI various utilities and services.
(xv) Details oI exports and incentives
(xvi) Details oI insurance
(xvii) Details oI pending litigation.
(xviii) R & D activities.
4. Particulars oI the proiect comprising

(i) (i) Capacity.
(ii) (ii) Process.
(iii) (iii) Technical arrangements.
(iv) (iv) Management
(v) (v) Locations oI land
(vi) (vi) Building.
(vii) (vii) Plant Machinery.
(viii) (viii) Raw material
(ix) (ix) Utilities including power. water. steam compressed air Iuel etc.. transport.
(x) (x) EIIluents.
(xi) (xi) Labour.
(xii) (xii) Quarters Ior labour housing.
(xiii) (xiii) Schedule oI implementation.
(xiv) (xiv) Other proiects oI the concern.

5. 5. Cost oI the proiect.
6. 6. Means oI Iinancing.
7. Marketing and selling arrangements.
8. ProIitability and cash Ilow.
9. Economic consideration.
10. Government consents.
11. Letter addressed to the banker oI the applicant authorising the bank to divulge all inIormation about
the promoter to Iinancial institutions.
12. 12. Particular oI existing debentures and long-term secured loan.
13. 13. Particulars oI existing cash credit/overdraIt arrangements.
14. 14. Distribution oI shareholding.
15. 15. Particulars oI Iactory and non-Iactory building
16. 16. Particular oI machinery imported or to be imported Ior the proiect
17. 17. Particulars 'oI machinery already acquired/proposed to be acquired Irom indigenous
sources under the proiect
18. 18. Requirements oI raw materials. chemicals and components.
19. 19. Estimated cost oI the proiect.
20. 20. Estimate oI contingency provision.
21. 21. Margin money Ior working capital.
22. 22. Means oI Iinancing
23 Proposals Ior raising share capital. loans & debentures.
24 Source oI Iunds in respect oI expenditure already incurred.
25. Estimate oI cost oI production.
26. Estimates oI working results.
27. Estimate oI production and sales.
28. Calculation oI wage and salaries at maximum production.
29. Unit cost oI production.
30. 30. Cash Ilow statement.
31. 31. Proiected Balance Sheet

The Iollowing documents are normally required to be enclosed with the proposal Ior Iinancial assistance.

1. 1. Copy oI Memorandum and Articles oI Association/Bye Laws/ Partnership deed.
2. 2. CertiIied copies oI Memorandum and Articles oI Association oI the promoter company.
3. 3. Audited balance sheets and proIit & loss accounts Ior the last Iive years oI the promoter company.
4. 4. Copy oI agreements. iI any. entered into among the promoters.
5. 5. Copies oI the audited balance sheets and proIit and loss accounts Ior last Iive years oI the holding
company.
6. 6. CertiIied copies oI agreement with the Managing Director/Whole time Director/ChieI Executive.
7. CertiIied copies oI approval oI the Central Government Ior the appointment oI Managing Director/Whole
time Director/ChieI Executive.
8. CertiIied copies oI audited balance sheets and proIit and loss accounts Ior the last Iive years together with
proIorma oI balance sheet and proIit and loss account oI as recent a date as possible.
9. 9. Organisation chart showing lines oI authority.
10. 10. Copy oI the proiect report/Ieasibility. iI any. copy oI the process Ilow chart with material balance.
utilities and process parameters.
11. 11. Copies oI published brochures highlighting the activities oI the collaborator and balance sheets Ior
last three years.
12. 12. Copy oI collaboration agreement.
13. 13. Copy oI Government approval Ior the collaboration.
14. 14. Copy oI Government approval Ior availing oI the services oI Ioreign technicians.
15. 15. Copy oI published material on consultants.
16. 16. Copy oI agreement with consultants.
17. 17. Copy oI Government approval in case oI Ioreign consultants.
18. 18. Proposed organisation chart indicating the lines oI authority.
19. 19. Copy oI Sale/Lease case Deed oI land.
20. 20. Copy oI soil test report.
21. 21. Copy oI Government order converting the land into industrial land. iI applicable
22. 22. Location map.
23. 23. Site plan showing the contour lines. the internal roads. power receiving station. railway siding.
tube wells etc.
24. 24. Master plan showing location oI building roads. power receiving station. railway siding tube well
etc.
25. 25. Equipment layout plan oI building indicating the Ilow oI material.
26. 26. Copy oI agreement with architects.
27. 27. Copy oI published write up/brochure on architects.
28. 28. Layout oI the plant and machinery indicating the Ilow oI material.
29. 29. Copy oI agreement Ior mining lease.
30. 30. Experts' report regarding the quantity and value oI the reserves.
31. 31. Copy oI letter oI sanction Ior power.
32. 32. Copy oI agreement with electricity board.
33. 33. Copy oI electrical layout oI the plant.
34. 34. A note on power generation. demand and supply in the State present and proiected.
35. 35. Layout Ior the water system.
36. 36. Copy oI the letters oI sanction oI water by municipal/local authorities.
37. 37. Copy oI the water analysis report.
38. 38. Layout oI the steam system.
39. 39. Layout plan Ior compressed air. Iuel etc.
40. 40. Copies oI letter oI allotment oI coal/Iurnace oil Irom the concerned authorities.
41. 41. Copy oI approval Irom concerned authorities Ior the proposed arrangements Ior eIIluents.
42. 42. PERT Chart.
43. 43. Copies oI letter sanctioning Iinancial assistance.
44. 44. Copy oI market survey reports. iI any. conducted by the company or independent consultants.
45. 45. Copy oI the agreement with selling agents.
46. 46. Copies oI licences/consents etc. received Irom the Government.
47. 47. Copies oI letter Irom suppliers agreeing to supply the companies' requirements.
48. 48. Copies oI import licence Ior items to be imported.
49. 49. CertiIied copies oI audited balance sheets and proIit and loss accounts Ior the last three years in
respect group companies including subsidiary/holding companies.

EXPLANATORY NOTES ON CERTAIN CRUCIAL ASPECTS OF PRO1ECT REPORT

1. GENERAL IDEA ON PRO1ECT AND PRODUCT

• • Give a general idea oI the proiect. such as the product. capacity and any outstanding Ieatures.
whether the product is being produced Ior the Iirst time in the country and/or involves technological innovation or is
export-oriented/import-substitutive or deIence-oriented or it is promoted by technical entrepreneurs or based on locally
available raw materials. Indicate clearly the nature oI the proiect i.e. whether-it is a new proiect or an expansion scheme or a
modernisation and/or diversiIication scheme.
• • The capacity indicated in the letter oI intent or industrial licence should ordinarily tally with the
capacity proposed to be installed. II there is a diIIerence. explain the reasons there Ior in respect oI each oI the products
being manuIactured/proposed to be manuIactured by the company and steps taken/proposed to be taken to increase the
licensed capacity.

2. PROMOTERS

• • The institutions would like to have Iull inIormation on the promoters. such as age. education
qualiIications. Iields oI specialisation. iI any. and experience in industry or business etc. II the promoters are to be
considered as technician entrepreneurs. the reasons Ior doing so may be explained. Tile inIormation may be Iurnished
separately in respect oI each oI the main promoters. In the case oI ioint sector proiects. besides inIormation on the private
sector promoters. brieI write-ups on the activities oI the SIDC/SIIC associated with the proiect may be Iurnished together
with copies oI annual reports and accounts Ior last three years and other relevant published material.
• • Particulars oI all the directors oI the applicant concern (i.e. tile company Ior which assistance is
sought) may be given in the Iollowing PerIorma :

Name oI the Age Address Name oI companies/
Director Iirms in which interested
and nature oI interest

• • The institutions would like to have the bankers' report oil the applicant company on each oI the
promoters and in respect oI all the companies/ Iirms with which they are actively associated i.e. as Chairman. Managing
Director. Whole-time Director. Trustee. Managing Partner. Partner etc. For this purpose. the letter(s) may be completed in
all the above cases and addressed to the bankers beIore submitting the application. authorising them to disclose the relevant
inIormation to any or all oI' the Iinancial institutions. such as IDBI/IFCI/LIC/UTI/GIC. Copies oI the letters to banks are to
be enclosed with the proposal.

3. PARTICULARS OF THE INDUSTRIAL CONCERN

• • Give a brieI history oI.' the concern including any changes in names. business management etc.
Also indicate any mergers. reorganisation etc. which took place in the past.
• • II any oI the assets have been revalued or written oII at any time during the existence oI. the
company Iurnish Iull details oI such revaluation together with reasons thereIor.
• • Describe manuIacturing Iacilities separately at each plant and Iurnish Iigures oI licensed capacity.
installed capacity. production and sales oI each maior product/product group during the last Iive years.
• • Give details oI any pending litigation either by or against the company.
• • In case oI new companies which have approached the institutions Ior assistance at a later stage
when the proiect has already made substantial progress in the implementation oI the proiect. as Iar as possible same details
which are applicable to existing industrial concerns may he given.

4. PARTICULARS OF THE PRO1ECT

Furnish as detailed inIormation as is possible on the proiect as the basic inIormation will assist the institutions to
assess the viability oI the proiect. It is likely that some arrangements have already been made towards proiect
implementation. such as acquisition oI land. appointment oI consultants etc. In such cases. give Iull particulars oI
the arrangements made along with copies oI relevant documents. Wherever the arrangements are not Iinalised. give
details oI the arrangements proposed. It may be ensured that due consideration has been given to the various aspects
oI proiect implementation and operation and that satisIactory arrangements have been made thereIore.

A. Capacity

• • Give the capacity in respect oI each oI the proposed products.
• • Indicate 'Maximum Production Envisaged" based on the maximum production assumed in the
proIitability statements etc. Also indicate the number oI shiIts on the basis oI which this capacity is assumed. In case the
installed capacity is more than the licensed capacity. steps taken/proposed to be taken Ior regularising the position may be
indicated.
• • When a new unit is set up. the capacities oI various sections oI the plant should normally match
the overall capacity oI the unit. Indicate the capacities proposed to be installed in the maior sections and also Iurnish details
oI machine loading. process cycle time. assembly line balancing and other particulars. II the capacity in any section is in
excess oI the overall capacity. explain the reasons thereIore and iustiIy the need to install such excess capacity. SpeciIically
indicate that the industrial licence covers the excess capacity.
• • In the case oI engineering/automobile and other products give details oI proto-type development
and testing/approval. iI any. required to be obtained Irom Government or other bodies. Indicate ISI or other relevant
speciIications to which the product would conIorm.

B. Process

• • Name a new companies using the same process as proposed by the applicant and also elaborate on
the maior technical and/or other Ilired by the companies using the process.

C. Technical arrangements

• • Technical arrangements include the arrangements made Ior obtaining know-how. basic design
engineering. detailed engineering. selection oI equipment suppliers and contractors. construction/erection supervision. trial
runs and staII. The company itselI and part through collaborators and consultants might undertake part oI these iobs.
Explain in detail the arrangements made proposed to be made Ior each oI the services required Ior the proiect. Furnish
details oI the collaborators and consultants.

D. Management

• • Give separate write-ups on the organisational set-up during the construction stage and the
operational stage.
• • Give the bio-data oI senior personnel (especially oI departmental heads and above) already
appointed and the minimum qualiIications and experience expected oI other senior personnel proposed to he recruited. A
chart showing the organisational set-up envisaged when the company goes into production may be attached. The chart
should indicate the Iunctions oI each department. the names and designations oI oIIicials (iI appointed) heading the
departments etc. and the strength oI the supporting staII.

E. Location

• • While selecting the site Ior the proiect. the advantages and disadvantages oI the site might have
been taken into consideration. Enumerate in detail the advantages and disadvantages which were weighed by the unit beIore
selecting the site and also highlight each oI the Iactors which were considered most advantageous Ior the proiect. such as
good transport Iacilities. nearness to market. availability oI raw materials. water. power. labour etc. For instance. in
explaining the transport Iacilities that might be available Ior the proiect. describe the national and state highways passing
nearby. speciIying the distances Irom the site oI important business centres. nearest railway station. whether the railway line
is on the broad gauge or on metre-gauge etc. Furnish data/inIormation collected by the company to establish the suitability
oI the site with reIerence to rainIall. Iloods. cyclones. earthquakes etc.
• • Describe in detail the topography oI the land elevation with reIerence to nearest highway etc.

The area oI land required Ior the proiect may be given separately Ior (a) Iactory building. (b) ancillary
buildings. (c) open storage space. (d) housing colony. (e) area required Ior Iuture expansion. and (I) any
other purpose to be speciIied. The Iollowing inIormation may be Iurnished in this respect :

(a) Total area and cost thereIore. including conveyance charges. II the cost is higher than the current market
price. explain the reason Ior such variation.
(b) When the land is acquired/proposed to be acquired Irom a number oI owners. indicate the area and the cost
oI each plot.
(c) It is likely that part oI the cost oI land is payable in deIerred instalments or in kind. such as by issue oI
shares. Indicate the amounts paid in diIIerent Iorms such as cash. other than cash deIerred payments etc. In
case the land is taken on lease basis. give separately the amount oI initial premium and the annual lease rent
(e) II the land is acquired/proposed to be acquired Irom any oI the promoters/directors oI the company or their
relatives. give Iull particulars. such as the relationship. area oI plot. cost etc. Also indicate the date oI
acquiring and price paid and expenses incurred by the promoter/director etc.
(I) II the land Ior the proiect has been earlier used Ior agricultural purposes. it may be necessary to obtain the
permission oI the State Government Ior converting it into non-agricultural land. Contact the Industrial
Department oI the State Government and obtain the approval oI the competent authority and enclose a copy
oI such approval.

F. Buildings

• • It may be explained how the buildings are proposed to be constructed i.e. whether through a
contractor. by the unit's own organisation etc. In case the buildings are to be constructed through contractors. describe the
process oI selection oI the contractor(s) and the reasons Ior selecting the contractor(s).
• • II no architect is proposed to be appointed. please give reasons why such an appointment is not
considered necessary. While giving the pas experience oI the architects also give details oI important work handled by them
and the Iees charged thereIore.

G. Plant and Machinery

• • Provide details as to how the (i) machinery/equipment. and (ii) machinery/ equipment suppliers
have been selected. The equipment might have been selected on the advice oI collaborators. turn-key contractors. technical
advisers/consultants. promoters etc. Similarly the machinery/equipment suppliers might have been suggested by the
collaborators. consultants etc. or selected through competitive bids Give Iull details including degree oI
sophistication/obsolescence oI the main equipment; and also explain the advantages oI selecting the supplier(s).

H. Raw Materials

• • Give detailed speciIication preIerably including any industrial standard oI raw materials required
by the unit. In the case oI raw materials/ chemicals. which are in short. supply. indicate the special arrangements. which the
company proposes to make Ior obtaining the indigenous. and imported raw materials.
• • In the case oI automobile and engineering industries give complete list oI parts indicating
seperately details oI manuIactured bought-out semi-Iinished (BOSF). bought-out Iinished (BOF) and proprietary
components. Give a write-up on ancillary development Ior supply oI components and alternate sources in view oI critical
components.

I. Utilities

Power
• • The power requirements oI the proiect could be met either Irom the State Electricity Board (i.e.
purchase power) or partly Irom the Electricity Board and partly through internal generation. Give separately the quantum oI
power requirements expected to be met by the Electricity Board and the quantum oI own generation proposed. The sum
total oI power available should at least be equal to the proiect requirements.
• • Furnish particulars oI the electrical sub-station Irom which power would be made available. its
distance Irom plant site. progress in extending the supply line. voltage at which power would be made available and other
terms such as how the cost oI extending the supply line would be borne etc.
• • Standby arrangements are generally meant only Ior meeting emergency situations. Such
arrangements may be explained in details. giving the capacity oI the generator and the equipment proposed to be operated
with the standby generator.
• • Give details oI electricity tariII payable to the Electricity Board.

Water
• • Explain in detail the proposed arrangements Ior obtaining the water requirements Ior the proiect.
In the case oI tube-wells. give the number oI tube-wells proposed to be sunk and their capacities. II water is to be drawn
Irom river etc.. give particulars regarding water Ilow in the river during monsoon and lean season. the length oI the pipe
line. number oI reservoirs and their capacities etc. Also explain whether the water has been analysed and Iound suitable Ior
use by the unit. II any water treatment is proposed. explain the arrangements envisaged and the capital cost thereoI

Steam
• • Indicate the areas where the steam will be used. II part oI the steam is required to the used Ior
generation oI power. give details.

Compressed Air. Fuel etc.
• • Give inIormation separately regarding the requirements and sources oI supply oI compressed air.
Iurnace oil. coal etc.

J. EIIluent

• • Some oI the units have run into diIIiculties Ior not having taken adequate and timely measures Ior
proper disposal oI solid. liquid and/ or gaseous eIIluents. It must be ensured that there exist adequate arrangements Ior
treating all the eIIluents. Provide complete details oI such arrangements.
• • Explain in detail the special characteristics. such as alkaline. acidic. toxic/poisonous etc. oI the
eIIluents which are harmIul to any living organism or vegetation and the arrangements proposed Ior their treatment and
disposal.

K. Labour

• • Explain in detail the plans Ior recruiting and training labour and supervisory personnel.

L. Quarters and Labour Housing

• • Give particulars oI the quarters proposed to be constructed Ior the various categories oI
employees.

In the case oI housing Ior labour. it is possible to meet part oI the expenditure through Government's
industrial housing schemes. This amount may be indicated. Besides the construction oI housing. indicate
the arrangements proposed to be made Ior housing oI essential staII and whether any accommodation is
available Ior others in the nearby village/town.

M. Schedule oI Implementation

• • The proposed schedule oI implementation may be given separately Ior each activity. Also. give a
brieI write-up on the physical Progress made as at the time oI making proposal Ior assistance.

It will be necessary to support the schedule oI implementation by a bar diagram indicating the maior
activities. In the case oI large proiects. it will be advantageous to prepare a PERT chart showing the
implementation schedule and the critical path.
N. Other Proiects oI the Concern

• • II the promoters and /or the applicant company is planning to take up any more schemes either
simultaneously with this proiect or in the near Iuture. give particulars oI such schemes. indicating. inter alia. the proiect
cost. proposed means oI Iinancing and the arrangements made Ior meeting the cost oI the schemes and personnel Ior
implementing and operating the proiect.

5. COST OF THE PRO1ECT

• • Utmost care needs to be taken while Iixing cost oI proiect because based on this aspect 'means oI
Iinancing' are decided. Each and every element oI cost. which is expected to Iorm part oI the proiect. should be included.
• • The amount oI expenditure already incurred and the expenditure proposed to be incurred under
various beads may be given in separate columns. Both rupee cost and rupee equivalent oI Ioreign exchange cost. iI Ioreign
exchange is involved and totals thereoI may be given under expenditure already incurred and expenditure proposed to be
incurred. The rates at which Ioreign currencies have been converted into Indian rupees may be indicated in a Iootnote.

6. MEANS OF FINANCING

• • In the case oI existing companies. cash generation Irom the existing activities may be
available Ior Iinancing part oI the proiect cost. This amount may be shown against 'internal cash accruals' in the
means oI Iinance. It should be clearly established that the availability oI internal accruals as envisaged is assured
by giving relevant Iacts and Iigures.
• • Indicate the amount oI Ioreign exchange proposed to be obtained Irom diIIerent sources. such as
Ioreign currency loans Irom IFCI/ICICI. Iree Ioreign exchange Irom Government oI India. import Irom Rupee payment
area. Government-to-Government credit. suppliers' credit etc.
• • The total contribution. which will be brought in by the promoter group including contribution
Irom SIDC/SIIC etc.. which Iorm part oI the promoters' contribution. should be indicated clearly.
• • Under their statutes IDBI and IFCI are prohibited Irom Iinancing concerns in which their directors
or their relatives are substantially interested. A complete list oI persons who would be contributing towards the promoters'
share oI the share capital and the contribution oI each one oI them may there against be Iurnished. In case any oI the
IDBI/IFCI directors or his relatives would be subscribing to the shares reserved Ior the promoters. this may be speciIically
indicated. The shareholders subscribing to the promoters' contribution will be called upon to give an undertaking Ior
non-disposal oI shares to the institutions.
• • Security Ior term loan assistance will normally be a Iirst pari passu charge on all the
movable and immovable assets oI the company. present and Iuture. subiect to charge in Iavour oI bankers (on
speciIied movables) Ior working capital requirements. However. iI Ior any particular reason any
additional/diIIerent security is proposed to be oIIered. it may be explained.

7. MARKET AND SELLING ARRANGEMENTS

The entrepreneur shall ensure that there is a reasonable market potential Ior the product beIore taking a decision to
set up Iacilities Ior its manuIacture. The Iact that the industrial licence etc. has been given by government does not
necessarily mean that the market aspect has been Iully examined. The unit would be well advised to undertake a
comprehensive market survey to establish the market potential to the satisIaction oI the institutions. Important
points are given as under:

• • Describe the product. its maior uses and present and Iuture market prospects. II the product is a
new one intended to substitute an existing product. explain the special qualities/Ieatures oI the product vis-a-vis the existing
product. which would be substituted. Bring out clearly the advantages oI the unit's product vis-a-vis the products oI its
competitors.
• • Give data on the present installed capacity likely to materialise in each oI the next Iew years and
current production and expected production Ior the next Iew years. Figures oI existing capacity and production would be
available Irom publications like the Monthly Statistics oI Production (published by the Central Statistical Organisation).
Guidelines to industries (by DGTD) etc. Some oI the sources Ior the estimates oI Iuture demand are publications oI the
Planning Commission. OGTI). Chambers oI Commerce and Industry. State Directorates oI Industries. State Industrial
Development Corporations etc. There are a number oI consultancy organisations in the country which would also be able to
undertake a detailed market study on behalI oI the applicant.
• • II it is proposed to export a part oI the production (either because oI a stipulation in the industrial
licence or Ior any other reason). give data regarding the export market. international prices during the last 2/3 years etc. The
inIormation may include Iigures oI the country's export oI the product to the various countries Ior the past Iew years and
proiected export demand made by the Export Promotion Councils. Development Councils. Trade Development Authority
etc.
• • II the bulk oI the production is expected to be sold to a Iew consumers. or the product is
sophisticated and has a limited market. please indicate the long-term arrangements. iI any. made with such consumers or
dealers in the products.
• • The price assumed Ior the product is important in deciding the viability oI the proiect. It is
advisable to assume a price somewhat lower than the net price realised by other existing manuIacturers.
• • OIten. a new entrant in the market would have to oIIer his products at a relatively lower price in
order to attract customers and to get established in the market. In the case oI products Ior which prices Iluctuate at short
intervals. it is preIerable to assume a reasonable price based inter alia on the average price Ior the previous Iew
quarters/months. depending on the periodicity oI Iluctuation's. It must be noted that it is diIIicult Ior a company to realise
the price prevailing during the periods oI temporary shortages.
• • II raw materials are to be obtained Irom the agricultural sector (such as sugarcane. raw cotton
etc.). or the Iinished products are to be used in agricultural Iarms (such as Iertilisers. pesticides etc.). it is generally
necessary to start an educational campaign oI a seeding programme Ior the beneIits oI the Iarmers much beIore the proiect
goes on stream. Explain the steps taken/proposed to be taken by the company in this regard.

8. PROFITABILITY AND CASH FLOW

• • The break-even point is the minimum level oI production at which a proiect would reach a no
proIit no loss position. For calculating the break-even point. Iigures may be taken Irom the proIitability statement Ior the
year in which the maximum capacity utilisation is expected to be achieved Ior the Iirst time. Enclose work-sheet and
indicate the basis oI computation.

9. ECONOMIC CONSIDERATIONS

• • It is all the more important Ior the institutions to assess the economic beneIits Irom the proiect
accruing to the country. particularly in terms oI Ioreign exchange earnings.
• • Furnish the international prices (I.o.b prices exports and c.i.I. Ior imports) oI the Iinished product
and oI the maior material inputs such as raw materials etc. It is not necessary that the company should be importing or
exporting the commodities. The Iigures oI international prices are required by the institutions Ior calculating the beneIits
accruing to the country by indigenously producing or by exporting the products abroad. The data Ior this purpose could be
obtained Irom. export promotion councils. industry associations. leading importers/ exporters. Ioreign trade iournals etc. and
the sources Irom which data have been obtained may be indicated.
• • Also explain the company's assessment in detail oI the scope Ior ancillary industries to come up in
the area as a result oI the setting up oI the proposed proiect.


10. GOVERNMENT CONSENTS

• • II any special conditions have been imposed in any oI the approvals indicate how Iar these
conditions have been complied with and steps taken to comply with the same. II the company has made any representation
Ior deletion/waiver oI the stipulations. copies oI correspondence exchanged may be enclosed.

11. DECLARATIONS

All the declarations must be signed by the Managing Director or a Director authorised to do so

FOREIGN CURRENCY LOANS FROM FINANCIAL INSTITUTIONS
AND BANKS

I. FOREIGN CURRENCY LOANS FROM FINANCIAL INSTITUTIONS

In the case oI large proiects involving heavy capital equipments. Ioreign currency loans are emerging as an
important source oI proiect Iinance. The Department oI Economic AIIairs. Government oI India. speciIically
permits borrowings in Ioreign currencies in respect oI speciIic proiects. While submitting the application to the
committee approving capital goods imports. the entrepreneur is required to speciIically mention Ioreign currency
loans a. source oI Iinance. It is thereIore. important that the Ioreign currency loans source oI proiect Iinance are
identiIied well in time.

While identiIying the Ioreign currency loans as a possible source oI proiect Iinance. the entrepreneur should take
into account : (a) the options available the international market; and (b) the cost eIIective Iinancing alternatives a
Ioreign currency exposure management.

There are two types oI external sources available Ior raising Ioreign currency borrowings:

(i) Iunds that can be raised on Iixed rates oI interest (i.e. Iixed borrowings); and.
(ii) Iunds that can be raised on Iloating rates oI interest (i.e. Iloating-rate borrowings).

Fixed-rate borrowings insulate the borrower against movements in the interest rates. Floating-rate borrowings. on
the other hand. enable the borrow to take advantage oI downward movements in the interest rates.

Fixed-rate Borrowings

The most commonly used methods oI raising Iixed-rate Iunds Ior Iinancing capital goods imports are : (a) Buyer's
credit; (b) Supplier's credit and (c) Fixed-rate loans.

(a) Buyer's credit

Under a buyer's credit arrangement. a speciIic long-term loan is granted by a designated lending agency in the
exporter's country to the buyer in the import. country against a guarantee by an acceptable bank or Iinancial
institution. The supplier receives payment Ior the exports on his delivering to the lending agency the requisite
documents speciIied in the loan agreement and the relative commercial contract. The lending agency realises the
payment Irom the buy (importer) in instalments as and when they Iall due. Ordinarily. the supplier oI his obligation
reckons the period credit as the duration Irom the date oI completion
.
(b) Supplier's credit

Suppliers credit. on the other hand. is extended to the supplier (exporter) by the Iinancial institutions (in the
exporter-country) to Iinance his deIerred receivables. The buyer is required to provide the requisite guarantee Irom
an acceptable bank or Iinancial institution in the importer country.

Credit may also be extended by the supplier (exporter) directly to his buyer (importer) on the deIerred payment
terms against his providing a guarantee as above. In this case. the supplier will realise the proceeds oI his exports by
discounting the bills oI exchange (drawn on and accepted by the buyer) with his banker or the designated
Government agency in his country. Such credits however. are not really supplier's credit in the technical sense.
These are in the nature oI trade credit.

Technically both supplier's credit and buyer's credit are extended by the lending agency in the exporter's country;
when it is granted to the supplier (exporter). it is a supplier's credit; and when it is granted to the buyer (importer) it
is a buyer's credit.

(c) Fixed-rate loans

In addition to the above two methods. Iixed-rate loans can also be raise through commercial banks. Such loans are
normally arranged Ior a period upto 8 years and are priced at a speciIic spread above the going rate in the concerned
country oI the chosen currency.

Comparative Cost Advantage

OI the above three types oI credit. supplier's credit may. in many cases. prove to be more expensive as the supplier
is likely to add a premium in the price quoted Ior the goods or in the rate oI interest so as to compensate him Ior the
additional cost incurred by him in the process. As against this buyer's credit may be relatively cheaper as the
supplier under this arrangement is paid oII immediately and the lender realises die payment Irom the buyer as per
agreed terms. The interest rate quoted on the Iixed-rate loans by the commercial banks will depend upon the
competitive edge oI the concerned bank in the particular Euro-currency market

Methods oI Raising Foreign Currency Loans

There are two methods oI raising Ioreign currency loans; (i) through Financial Institutions under Lines oI credit &
(ii) directly Irom abroad. In this Chapter we shall discuss Ioreign currency loans through Iinancial institution only.
Raising Ioreign currency loans abroad directly i.e. external commercial borrowings will be discussed in the next
Chapter.

Lines oI Credit

The all India Iinancial institutions have arranged various lines oI credit in diIIerent Ioreign currencies Irom various
international development agencies and banks including World Bank and Ioreign currency loans are sanctioned as
apart oI proiect Iinance out oI these lines oI credit. The salient Ieatures oI Ioreign currency loans sanctioned by all
India Iinancial institution are as under:

The rates oI interest on Ioreign currency loans are either Iixed or Iloating depending upon the terms
and conditions applicable on the line oI credit out oI which a particular Ioreign currency loan is sanctioned.
Other terms and conditions including repayment period are also dependent on the original line oI credit
and entire repayment has to be within the terminal date oI original credit to the Iinancial institution.
All Ioreign currency loan attract a uniIorm up Iront Iee oI 1 °p.a. Irom the date oI issuance oI letter oI
intent by the Iinancial institution.
Convertibility clause is not applicable in case oI Ioreign currency loans.

The various steps involved Ior availing oI Ioreign currency loan are as Iollows:

The lending institution will issue letter oI intent Ior Ioreign currency loans.
Take steps to get capital goods clearance Irom Secretariat oI Industrial Assistance and Ior obtaining
import licence Irom the Director General oI Foreign Trade. where applicable.
Convene Board meeting to accept the letters oI intent issued by the lending institution and convey
acceptance to the institution by sending copy oI Board Resolution passed in this regard.
Obtain copy oI Ioreign loan agreement and guarantee agreement etc. as required in terms oI sanction
Irom the lending institution and arrange proper execution oI same by authorised persons to the satisIaction
oI the institution.
Obtain necessary application Iorms Ior issuance oI import letters oI credit.
Payment in respect oI imported machinery will be directly made by the institutions to the overseas
suppliers against letters oI credit opened by them by disbursing the loan.

EIIorts are. however. being made to rationalise the procedure and bring uniIormity by adopting a common approach
to Ioreign currency loans and a beginning in this regard has already been made. Full details oI the procedure are
given in the later part oI this chapter.
SELECTION OF FOREIGN CURRENCY

Foreign currency loans availed Irom Iinancial institutions are repayable in Foreign currency itselI and the borrower
in such cases is exposed to exchange Iluctuation risks. Selection oI Ioreign currency thus gains importance. Long-
term prospects as regard to stability in the value oI Ioreign currency vis-a-vis the interest rates applicable on the
loan must be analysed beIore selecting the Ioreign currency.

Another important Iactor in this regard which needs careIul examination the currency oI loan and currency oI
payment at the time oI import oI machinery etc. i.e. against a loan in US $. the payment oI the Ioreign supplier oI
machinery can be made in Japanese Yen. This is a very diIIicult situation Ior the importer as total rupee outlay will
not only be eIIected by a change in exchange rates oI dollar vis-a-vis Indian rupees but will also be eIIected by a
change in Japanese Yen-US $ rate. For example. iI Japanese Yen appreciates by about 30° a US $. the liability in
US $ will increase by 30° without any corresponding increase in Japanese Yen liability.

Import oI capital goods may generally involve a long time and letters credit are opened with relatively longer
commitment period and change in rate between the currency oI invoicing and currency oI loan may play a with the
Iinancial planning oI a proiect. In situations as quoted in the example. the very successIul completion oI the proiect
may be endangered to extra load oI 30° required to meet the import commitment. It is. thereIore absolutely
necessary to Ioresee such situations. The ideal solution to the above problem is to ensure that the currency oI
invoice and currency oI loan are or the same.
EXCHANGE RISK

From the discussions in the preceding paragraphs we can identiIy Iollowing risks Ior the promoter while availing
Ioreign currency loans.

Fluctuation in the parity rate between the currency oI invoicing currency oI loan.
(The risk is carried Irom the date oI purchase contract oI machine the date oI settlement oI payment.)
Exchange rate Iluctuation in the currency oI loan in term oI Indian rupees.
(The risk is carried Irom the date oI availing oI loan till the instalment is repaid on reducing scale.)

How to Cover the Foreign Exchange Risk?

Covering the Ioreign exchange risk is termed as hedging the risk. company does not want to hedge. it means it is
taking a view that the Iuture movements oI exchange rates will move in its Iavour. II the company adopts policy oI
hedging everything. and the spot rates move in Iavour oI the company. the company will lose out or incur the
opportunity cost by hedging the exposure iI the rates move against.

There may be partial hedging where a view is taken that only those exposures where it is anticipated that risk oI
losses could exceed the opportunity to gain need to be hedged. However. it is prudent going by the past experience
to Iix a limit which could be leIt unhedged. While the cost oI hedging is quite relevant in the context. the risk Iactor
might take a heavy toll and hence basically it is undeniable that exchange risks have to be hedged in the current
scenario.

There are many techniques provided by banks and Iinancial institutions which oIIer hedges in many Iorms as under

(i) Forward Contracts
This is a usual hedge extended to customers. Banks oIIer Iorward exchange contracts both Ior sale and purchase
transactions to customers with a maturity date Ior a Iixed amount at a determined rate oI exchange at the outset.
Normally contracts are entered in India Ior a period where the maturity period oI the hedge does not exceed the
maturity oI the underlying transaction. The customer has the option to choose the currency oI the tenor.

Roll Over Forward Exchange Contracts

Roll over Iorward contract is one where Iorward exchange contract is initially booked Ior the total amount oI loan
etc. to be re-paid. As and when instalment Ialls due. the same is paid by the customer in Ioreign currency at the
exchange rate Iixed in Iorward exchange contract. The balance amount oI the contract is rolled over (extended) till
the due date Ior the next instalment. The process oI extension continues till loan amount has been re-paid. But the
extension is available subiect to the cost being paid by the customer. thus under the mechanism oI roll over contract
the exchange rate protection is provided Ior the entire period oI the contract and the customer has to bear the roll
overcharges. iI any. The cost oI extension (roll over) is dependent upon the Iorward diIIerentials prevailing on the
date oI extension. Thus. the customer eIIectively protects himselI against the adverse spot exchange rates but he
takes a risk on the Iorward diIIerentials (i.e. premium/discount). Although spot exchange rates and Iorward
diIIerentials are prone to Iluctuations. yet the spot exchange rates being more volatile. the customer gets protection
against the adverse movement oI exchange rates.

We can appreciate that there is not much diIIerence between rolling over oI the Iorward exchange contract and
extension oI Iorward exchange contract. except that in the case oI Iormer the exchange contract is extended Ior the
balance amount leIt aIter the instalment has been remitted while in the case oI latter the exchange contract Ior the
entire amount is extended. The cash inIlows and outIlows are quite large and so also interest on the same.
ThereIore. sometimes iI the Ioreign currency appreciates continuously the extension oI Iorward sale contract turns
out to be a costly aIIair.

As per exchange control regulations. the Iorward contracts can be rolled over Ior periods less than six months also.
The interest. as in the case oI extension. on inIlows has to be paid to the customer. Similarly. on cash outIlows bank
is entitled to recover. interest.

(ii) Currency Futures
A Iuture contract is an agreement to buy or sell a standard quantity oI speciIic Iinancial instrument at a Iuture date
and at an agreed price. A corporate can take up a Iuture contract which is opposite to his Ioreign currency
transaction exposure. However. the Iutures are reviewed on a daily basis based on spot rate ThereIore. the values oI
the Iutures contract varies depending on the agreed price. Hence. the resultant spot rate will determine the loss or
gain on the transaction exposure and can be counteracted by the resultant loss or gain. on Iutures contract.

(iii) Currency Option
Currency option gives the right but no obligation to the buyer oI the option to sell (put option) or buy (call option) a
speciIic amount oI Ioreign currency a pre-determined price called strike price. There are tailor-made options which
can be picked up over the counters oI the banks. The buyer oI an option has pay a price-premium Ior conIerring the
above right by the option writer i.e. banks.

Foreign Currency-Rupee Swaps

A swap is a Iinancial transaction in which two counterparts agree exchange streams oI payments or cash Ilows over
a period oI time with a view to achieving overall cost reduction Ior both parties.

Authorised dealers may arrange Ioreign currency-rupee swaps between corporates who run exposures arising out oI
their long-term Ioreign currency commitments.

Hedging oI Loan Exposures

Authorised dealers can oIIer hedging products to Indian corporates without the Government's or the Reserve Bank's
prior approval. Such approval is a not required to unwind hedge transactions. the authorised dealers having be
allowed to remit upIront premia as well as other charges incidental to the hedge transaction without prior approval
oI the Reserve Bank.

According to FEM (Foreign Exchange Derivative Contracts) Regulation 2000. authorised dealers can oIIer interest
rate swaps. currency swaps. coup swaps. Ioreign currency option. purchase oI interest rate caps/collars a Iorward
rate agreements (FRA) to corporates. The products will have to oIIered by way oI booking the transaction overseas
or in a back-to-back basis Authorised dealers should ensure. beIore entertaining the corporate's request that :

(i) (i) the contract does not involve rupee.
(ii) the Reserve Bank has accorded the Iinal approval Ior borrowing in Ioreign currency;
(iii) the notional principal amount oI the hedge does not exceed the outstanding amount oI the Ioreign currency
loan;
(iv) the maturity oI the hedge does not exceed the remaining liIe to maturity oI the underlying loan; and
(v) (v) the Board oI Directors oI the corporate has approved the Iinancial limits and authorised designated
oIIicials to conclude the hedge transactions.

Interest rate swaps allow companies to move Irom a Iixed interest rate to a Iloating rate. or vice versa. in the same
currency. In a currency swap. when corporates Iind the ruling interest rate oI a particular currency lower than the
interest rate oI a currency in which they require a loan. they can take a loan in the Iavourable currency and protect
themselves against adverse movements.

Coupon Swaps allow moving Irom Iixed interest rate in a particular currency to a Iloating rate in another currency.

With a Iorward rate agreement. a company can protect itselI against adverse interest rate movements. Interest rate
swaps do the same but they have to be bought Irom a bank at a price. For protection on the asset side. the interest
rate Iloor is available to banks.

Foreign Currency Option Contract is an agreement wherein the holder has the right to acquire or sell. speciIied
amount oI Ioreign currency; at a speciIied price (also known as exercise price or strike rate) at which the option can
be bought or sold and within the speciIied time Irame (also reIerred to as expiration date or maturity date).

Procedure Ior Forward Exchange Contracts and Derivative Contracts have been laid down under RBI directions.
issued vide AP (DIR Series) Circular No. 19. dt. 24.1.2002 and No. 32. dt. 21.10.2002. consolidated under Master
Circular No. 1/2003-04. dt. 1.7.2003. relevant extracts given later.

Determinants oI Options Value

(i) Spot rate: The eIIect oI this variable on the option price is quite evident. In case oI call option. higher the
spot rate higher will be the option price (premia) and vice versa. A put option becomes less valuable with
the rise in spot price and vice versa.

(ii) Strike price: A call option tends to vary immensely with the strike rate. With the rise in strike rate. the call
option tends to lose value. This is because the holder stands to lose when he exercises the call option. A put
option moves in direct relation with the strike rate and with the rise in strike rate. the holder tends to gain on
exercising the option.

(iii) (iii) Time of expiration : With the increase in the time oI expiration. both call and put option gain
value. This is because the option with larger time to expiration other things being held constant will have
higher

Caps and Collars

Maior international banks agree to reimburse to the borrower the cost oI LIBOR exceeding a particular level during
the currency oI the loan. This le is reIerred to as the 'Cap'.

The Iee (or insurance premium) to be paid by the borrower would depend upon the diIIerence between the cap and
the current rate. the period Ior which the contract is to run. the anticipated interest volatility. etc. The higher the cap
the lower the Iee; on the contrary. the longer the period oI the contract. the higher will be the Iee payable.

The cost can be reduced iI the borrower simultaneously agrees to a Iloor the LIBOR. In that case. iI the actual
LIBOR is less. the diIIerence will have be paid to the insurer. When a contract speciIies both the cap and the Iloor
reIerred to as a 'collar' or a 'band'. This could be considered as the simultaneous purchase oI a series oI call options
and sale oI a series oI put options on LIBOR. The two strike prices -namely. the cap and the Iloor . - can be so
chosen that the cost oI the collar is zero.

RBI Regulations on Exchange Risk Management

The Reserve Bank has issued Foreign Exchange Management (Foreign Exchange Derivative Contracts)
Regulations. 2000. text given in Appendix 10.1

RBI Guidelines on Exchange Risk Management
`

Forward Contracts

A.1 A person resident in India may enter into a Iorward contract with authorised dealer in India to hedge an
exposure to exchange risk in respect transaction Ior which sale and/or purchase oI Ioreign exchange is permitted
under the Act. or rules or regulations or directions or orders made or issued thereunder subiect to Iollowing terms
and conditions

(a) (a) the authorised dealer through veriIication oI documentary evidence satisIied about the genuineness oI
the underlying exposure. irrespective oI the transaction being a current or a capital account transaction Full
particulars oI contract should be marked on such documents u proper authentication and copies thereoI
retained Ior veriIication. However. authorised dealers may allow importers and exporters book Iorward
contracts on the basis oI a declaration oI exposure subiect to the conditions mentioned in paragraph A.2 oI
this circular.
(b) (b) the maturity oI the hedge does not exceed the maturity oI the underlying transaction.
(c) (c) the currency oI hedge and tenor are leIt to the choice oI the customer.
(d) (d) where the exact amount oI the underlying transaction is not ascertainable the contract is booked on the
basis oI a reasonable estimate.
(e) (e) Ioreign currency loans/bonds will be eligible Ior hedge only aIter 1 approval is accorded by the
Reserve Bank where such approved. necessary or loan identiIication number is given by the Regional
OIIice oI the Reserve Bank.
(I) (I) Global Depository Receipts (GDRs) will be eligible Ior hedge aIter issue price has been Iinalised.
(g) (g) balances in the Exchange Earner's Foreign Currency(EEFC) accounts sold Iorward by the account
holders shall remain earmarked delivery and such contracts shall not be cancelled. They may. however be
rolled-over.
(h) (h) Iorward contracts booked in respect oI Ioreign currency exposures residents Iailing due
within one year may be cancelled and rebooked. This Iacility may be made available only to
customers who submit details exposure to authorised dealers in the prescribed Iormat. Forward
cont booked to cover exposures Ialling due beyond one year once cancelled cannot be rebooked.
Authorised dealers may continue to oIIer this Iacility without any restrictions in respect oI export
transactions. All Ior contracts may be rolled over at on-going market rates.
(i) (i) Substitution oI contracts Ior hedging trade transactions may be permitted by an authorised
dealer on being satisIied with the circumstance. under which such substitution has become
necessary.

A.2 Authorised dealers may also allow importers and exporters to book Ior contracts on the basis oI a
declaration oI an exposure and based on perIormance subiect to the Iollowing conditions: '

(a) The Iorward contracts booked in the aggregate should not exceed limits worked out on the basis oI the
average oI the previous Iinancial years' (April to March) actual import/export turnover. This is subiect to
the condition that at any point oI time Iorward contracts so booked shall not exceed 50°
1
oI the limit within
a cap oI US 100 million.
2
These eligible limits are to be computed separately Ior export and import
transactions.
(b) Any Iorward contract booked without producing documentary evidence will be marked oII against this
limit.
(c) Importers and exporters should Iurnish a declaration to the authorised dealer regarding amounts booked
with other banks under this Iacility.
(d) An undertaking may be taken Irom the customer to produce supporting documentary evidence beIore the
maturity oI the Iorward contract.
(e) Importers/exporters desirous oI availing limits higher than US $ 100 million may Iorward their applications
to the ChieI General Manager Reserve Bank oI India. Exchange Control Department. Forex Markets

Division. Central OIIice. Mumbai-400 001 (Fax No. 22611427. e-mail ecdcoImd(rbi.org.in) iustiIying the need Ior
higher limits. Forward contracts booked under the enhanced limits will be on a deliverable basis. Details oI the
import/export turnover oI the past three years delayed realisations/ payments during these years and existing limits
duly authenticated by the authorised dealer. may also be Iurnished the prescribed Iormat.

A.3 A Iorward contract cancelled with one authorised dealer can be rebooked with another authorised dealer subiect
to the Iollowing conditions:

(a) the switch is warranted by competitive rates on oIIer. termination banking relationship with the authorised
dealer with whom the contract was originally booked. etc.
(b) the cancellation and rebooking are done simultaneously on the rity date oI the contract .
(c) the responsibility oI ensuring that the original contract has been cancelled rests with the authorised dealer
who undertakes rebooking the contract.

A.4 Authorised Dealers may also enter into Iorward contracts with residents respect oI transactions denominated in
Ioreign currency but settled in Indian Rupees. These contracts shall be held till maturity and cash settlement would
made on the maturity date by cancellation oI the contracts. Forward co covering such transactions once cancelled.
are not eligible to be rebook

Contracts other than Forward Contracts

A.5Authorised dealers in India may enter into contracts. other than Iorward contracts with residents in India in
accordance with the Iollowing provision

(i) A person resident in India who. has borrowed Ioreign exchange accordance with the provisions oI Foreign
Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations. 2000. may enter into
an Interest rate swap or Currency swap or Coupon Swap or Foreign Currency option or Interest rate cap or
collar (purchases) or Forward Rate Agreement contract with an authorised dealer in India or with a branch
outside Indian authorised dealer Ior hedging his loan exposure and unwinding Irom such hedges:

Provided that
(a) the contract does not involve the rupee
(b) Iinal approval has been accorded or loan identiIication number by the Reserve Bank Ior borrowing
in Ioreign currency.
(c) the notional principal amount oI the hedge does not exceed outstanding amount oI the Ioreign
currency loan.
(d) The maturity oI the hedges does not exceed the unexpired maturity oI the underlying loan.

(ii) A person resident in India. who owes a Ioreign exchange or rupee liability. may enter into a contract Ior
Ioreign currency-rupee swap with an authorised dealer in India to hedge long term exposure under the Iollowing
and conditions:

1 . No swap transactions involving upIront payment oI rupees or its equivalent. in any Iorm shall be
undertaken.
2. Swap transactions may be undertaken by banks as intermediaries by matching the requirements oI corporate
counter-parties
3. While no limits arc placed on the authorised dealers Ior undertaking. to Iacilitate customers to hedge their
Ioreign exchange exposure limits have been put in place Ior swap transactions Iacilitating customers to assume a
Ioreign exchange liability. thereby resulting in supply in the market. While matched transactions may be
undertaken. a limit oI US $ 50 million is placed Ior net supply in the market on account oI these swaps. Positions
arising out oI cancellation oI swaps by customers need reckoned within the cap.
4. With reIerence to the speciIied limits Ior swap transactions Iacilitating customers to assume a Ioreign
exchange liability. the limit will be reinstated on account oI cancellation/ maturity oI the swap and on
amortization the amounts amortized.
5. In the case oI swap structures where the premium is inbuilt into the cost. authorised dealers should ensure
that such structures do not result increase in risk in any manner. Further. such structures should not result in net
receipt oI premium by the customer.
6. The above transactions iI cancelled. shall not be rebooked or re-entered. by whatever name called.

NOTE :
(i) Authorised dealers should not oIIer leveraged swap structures clients.
(ii) Authorised dealers should not allow the swap route to be surrogate Ior Iorward contracts Ior those
who do not qualiIy Ior Iorward cover.
(iii) A person resident in India may enter into a Ioreign currency contract with an authorised dealer in
India to hedge Ioreign exchange exposure arising out oI his trade :

Provided that in respect oI cost eIIective risk reduction strategies like range Iorwards. ratio-range Iorwards or any
other variable by whatever name called there shall not be any net inIlow oI premium. These transactions may be
Ireely booked and/or cancelled.

Explanation : The contingent Ioreign exchange exposure arising out oI submission oI a tender bid in Ioreign
exchange is also eligible Ior hedging un sub-paragraph.

A.6 (i) Authorised dealers should ensure that the Board oI Directors oI the corporate has drawn up a risk
management policy. laid down clear guidelines Ior concluding the transactions and institutionalised the
arrangements Ior a period cal review oI operations and annual audit oI transactions to veriIy compliance with the
regulations. The periodical review reports and annual audit report should be obtained Irom the concerned Corporate
by the authorised dealers.

(ii) Cross currency options should be written on a Iully covered back-to back basis. The cover transaction may be
undertaken with a bank outside India. an oII-shore banking unit situated in a Special Economic Zone or an
internationally recognized option exchange or another authorised dealer in India.

(ii) (ii) Authorised dealers desirous oI writing options. should obtain one time approval. beIore
undertaking the business. Irom the ChieI General Manager Exchange Control Department. (Forex Markets
Division). Reserve Bank oI India. Central OIIice. Mumbai 400 001
1

Hedging oI commodity price risk in the International Commodity Markets

A.7 (i) Residents in India. engaged in import and export trade. may hedge the price risk oI all commodities in the
international commodity exchanges/market. Applications Ior commodity hedging may be Iorwarded to Reserve
Bank Ior consideration through the International Banking Division oI an authorise dealer along with its
recommendation giving the Iollowing details:
1. A brieI description oI the hedging strategy proposed; namely:
(a) Description oI business activity and nature oI risk
(b) instruments proposed to be used Ior hedging
(c) names oI commodity exchanges and brokers through whom risk is proposed to be hedged and
credit lines proposed to be availed. The name and address oI the regulatory authority in the country
concern may also be given
(d) size/average tenure oI exposure and/or total turnover in a year. together with expected peak
positions thereoI and the basis oI calculation.

2. copy oI the Risk Management Policy approved by the Management covering;
(a) risk identiIication
(b) risk measurements
(c) guidelines and procedures to be Iollowed with respect to revaluation and/or monitoring oI positions
(d) names and designations oI oIIicials authorised to undertake transactions and limits

3. any other relevant inIormation.
A one-time approval will be given by Reserve Bank along with the guidelines Ior undertaking this activity.

Commodity Hedging by entities in Special Economic Zones

(ii) General permission has been granted to entities in 'Special Economic Zones' to undertake hedging transactions
in the overseas commodity exchanges/markets to hedge their commodity prices on export/import. subiect condition
that such contract is entered into on a stand-alone basis.
1

NOTE: The term "stand alone" means the unit in SEZ is completely isolated Irom Iinancial contacts with its parent
or subsidiary in the mainland within the SEZs as Iar as its import/export transactions are concerned.

Currency Options and FEDAI Guidelines

The salient Ieatures oI FEDAI Guidelines are as under:
1. The International Currency Option Market (ICOM) Agreement 28th August. 1992 oI British Bankers'
Association London with modiIications in wording in regard to the applicability oI law and iurisdiction
should be used in preparing documentation Ior currency option contract between the bankers and customers
in India.
2. The banks should obtain request letter Irom the customer as per specimen provided by FEDAI which inter-
alia contains a declaration that there is already no Iorward exchange cover or Ioreign option in place against
the exposure.
3. The customers should be required to conIirm all transaction banks as per standard ICOM conIirmation
Iormat. ConIirmation be exchanged between the originating bank and the counterpart bank.
4. The customers should communicate notice oI exercise contract two working days in advance beIore the
delivery provided in the ICOM document and such exercise and options should be upto 4 p.m. IST on the date oI
exercise. Notice oI exercise given by Iacsimile transmission.
5. Foreign Currency Options can be concluded as per the present regulation only over the counter (OTC).
6. The bank may write European or American Options (put and call Options only) in respect oI customers
transactions and cover themselves with the overseas branches/correspondent banks accordingly.
7. Option premium may be paid and received in Ioreign exchange. In the case oI premiums on options bought
by Authorised Dealers charge the premium to the customer by keeping a spread.
8. The Iactors that should be reckoned Ior determining the amount are strike price. maturity period oI the
contract. currency volatility. interest rate diIIerentials and market condition.
9. The premium amount once collected is not reIundable. not withstanding the Iact that the option contract
between customer and the bank and/or between the bank and the counterpart bank abroad becomes
impossible oI perIormance Ior what ever reason. including Government prohibitory order.
10. 10. Option premium may be remitted without the prior approval oI Reserve Bank.
11. Appropriate accounting entries should be passed Ior options bough and sold and premium amounts received
and paid. Option exposure should appear in the accounts as a contingent item.
12. The accounting procedure should deal with the entire processing cycle. It should necessarily involve the
maintenance oI the Iollowing accounts:
(a) Contingents (Options purchased/sold);
(b) (b) Premium (Receivable/payable accounts);
(c) (c) Revaluation Accounts; and
(d) ProIit/Loss Accounts.
13. Limits should be set Ior customer exposures; counterpart limits Ior options purchased should also be laid
down.
14. Options may be bought Irom overseas and sold to other authorised dealers in India.
15. Member banks should obtain the revaluation rates Irom the counterparty banks abroad i.e. the Ioreign
branch oI the bank oI the overseas correspondent bank with whom authorised dealer has arrangement.
16. Options written and options purchased should be mailed at suitable periods so as to coincide with the dates
on which evaluation oI Ioreign exchange position is done.

OBTAINING FOREIGN CURRENCY LOAN FROM IDBI

IDBI grants direct Ioreign currency loans to industrial concerns under its Proiect Finance Scheme as also under its
Equipment Finance Scheme. While the loans under the Iormer Scheme Iorm part oI assistance related to proiects.
loans under the latter scheme are intended Ior Iinancing import oI capital goods and equipment (not related to any
speciIic proiect/scheme as such) through a simpliIied procedure. IDBI also considers Ioreign currency loans under
its Corporate Loan Scheme. Ior meeting capital expenditure and long-term working capital. In respect oI
units/companies already assisted by IDBI. Ioreign currency loan may be provided Ior meeting loan component oI
working capital Iinance under assisted by IDBI's Working Capital Loan Scheme. The salient. Ieatures oI the scheme
are spelt out here in aIter.

DIRECT FINANCE SCHEME
Eligibility

Any industrial concern which qualiIies Ior IDBI's assistance under statute and envisages import oI capital goods Ior
a proiect is eligible Ior availing oI Ioreign currency loan Irom IDBI provided the proposed import is approved by
the Import Licensing Authority and allocated to Will or covered under Open General Licence. The proiect should
also satisIy the usual appraisal norms oI IDBI. The Ioreign currency loans are sanctioned on the basis oI the
requirements oI assisted proiects and there is no ceiling on the quantum oI loans. Foreign currency loans are exempt
Irom the preview oI convertibility clause.

Sources oI Foreign Currency Finance

IDBI raises Ioreign currency borrowings Irom various sources. such as Euro market. international institutions.
domestic bond markets oI Ioreign countries and export credit agencies. The source to be allocated to a particular
Ioreign currency loan sanctioned by IDBI depends on the country Irom where the goods are to be imported and the
availability oI Ioreign currency Iunds Irom a particular source at the time when the borrower desires to open letters
oI credit

Terms and Conditions

The terms and conditions oI a Ioreign currency loan depend upon source oI Ioreign currency Iunds to be allocated to
it. Normally. at the time oI sanction only a tentative indication is given by IDBI regarding the speciIic source that
may be allocated. Nevertheless. as IDBI would like to utilise its resources. on a Iirst-come-Iirst-served basis. the
allocation is normally Iirmed up to speciIic line oI credit at the time oI execution oI loan agreement. The term and
conditions are Iinalised at that stage. It is. however. possible that even aIter the loan agreement is signed and letter
oI credit is issued. the source oI the Iunds may change. Such situation could arise when there is a large time lag
between the time oI opening oI letter oI credit and the payment against shipping documents during which period the
particular source oI Iunds could have been exhausted. In case oI proiects where the amounts oI Ioreign currency
loans large. IDBI may like to oIIer a mix oI currencies depending on availability oI Iunds under its credit lines. For
this purpose. IDBI reserves the right to change the source oI Ioreign currency Iinancing and alter the terms and
condition accordance with such source.

Terms and Conditions Ior Grant oI Loans out oI Foreign Currency Resources

IDBI grants loans in various Ioreign currencies out oI its Euro-Dollar. Japanese Yen. Deutsche Mark. etc.
borrowings.

Amount of Loan : The loan amount will be normally available up extent oI Ioreign exchange cost (C.I.F. value) oI
the capital goods/equipment be imported.

Rate of Interest: Floating rate based on LIBOR depending upon the source oI the currency plus a Iixed spread
according to the risk perception and maturity oI loan.

Upfront Fee : UpIront Iee will be. levied at the rate oI 1° p.a. Irom the date oI Letter oI Intent issued by IDBI.

Repayment: The repayment period will normally be synchronised with the relative repayment commitments oI
IDBI in respect oI the Ioreign currency Iunds utilised Ior grant oI loan. The period oI repayment will range upto 10
years (including moratorium) as appropriate lo each case.

Security : The loans will be generally secured by a Iirst charge on the assets oI the borrowing company including
hypothecation oI capital goods to be imported.

Procedure Ior Sanctions and Disbursement oI Foreign Currency Loans IDBI

General: Applications Ior Ioreign currency loans should be submitted IDBI's Proiect Finance Department in
Mumbai (or to Regional OIIices at New Delhi/Calcutta/Chennai/Guwahati/Mumbai Ior proiects with a total cost up
Rs.7 crores) in the prescribed Iorm. The Ioreign currency loans will be considered on the basis oI the usual appraisal
norms. The company is thereaIter required to execute a Loan Agreement in the prescribed Iorm. Ior availing oI the
Ioreign currency loan.

Opening of Letters of Credit.. IDBI opens letters oI credit against its c sanctions oI Ioreign currency loans without
seeking margin or bank guarantee. AIter execution oI the Loan Agreement. applications Ior opening oI letters oI
credit in the prescribed Iorm should be submitted to the General Manager. Proiect Finance Department. Mumbai.
The applications should be signed by borrower's oIIicials authorised in this behalI and should be duly supported the
Iollowing documents:

(a) Resolution authorising the signatories Ior the purpose;
(b) Exchange control copy oI import licence;
(c) Purchase order;
(d) Supplier's conIirmation;
(e) Approval Irom IDBI on behalI oI RBI Ior Foreign Currency Borrowings Irom the Exchange Control angle.

Currency of Payment.. The risk arising out oI exchange Iluctuation is to borne by the borrower. All dues will.
thereIore. be calculated with reIerence the currency in question and converted into rupees at the exchange rate
prevailing on due dates and recovered in equivalent rupees. Thus. up Iront .will be calculated on the amount oI
relevant Ioreign currency agreed to be made available by IDBI Ior Iinancing import and the amount oI interest and
repayment oI instalments due will be calculated in terms oI currency in which the loan is made and converted into
rupees at the exchange rate prevailing on due dates

APPENDIX 10.1
Text oI Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations. 2000
`
In exercise oI the powers conIerred by clause (h) oI sub-section (2) oI section 47 oI the Foreign Exchange
Management Act. 1999 (42 oI 1999). the Reserve Bank makes the Iollowing regulations. to promote orderly
development maintenance oI Ioreign exchange market in India. namely.

1.Short title and commencement

(1) These Regulations may be called the Foreign Exchange Management reign Exchange Derivative Contracts)
Regulations. 2000.
(2) They shall come into Iorce on the 1st day oI June. 2000.

2.Definations.

In these Regulations. unless the context requires otherwise.

(i) (i) Act' means the Foreign Exchange Management Act. 1999 (42 oI 1999);
(ii) (ii) authorised dealer' means a person authorised as authorised dealer under sub-section (1) oI section
10 oI the Act;
(iii) 'Cash delivery' means delivery oI Ioreign exchange on the day oI transaction;
(iv) 'Forward contract' means a transaction involving delivery. other than Cash or Tom or Spot delivery. oI
Ioreign exchange;
(v) 'Foreign exchange derivative contract' means a Iinancial transaction or an arrangement in whatever Iorm
and by whatever name. called. whose value is derived Irom price movement in one or more underlying
assets. and includes.

(a) a transaction which involves at least one Ioreign currency other than currency oI Nepal or Bhutan.
or
(b) a transaction which involves at least one interest rate applicable to a Ioreign currency not being a
currency oI Nepal or Bhutan. or
(c) a Iorward contract.
but does not include Ioreign exchange transaction Ior Cash or Tom or Spot deliveries;
(vi) 'Registered Foreign Institutional Investor (FII)' means a Ioreign institutional investor registered with
Securities and Exchange Board oI India;
(vii) 'Schedule' means a schedule annexed to these Regulations;
(viii) 'Spot delivery' means delivery oI Ioreign exchange on the second working day aIter the day oI transaction;
(ix) 'Tom delivery' means delivery oI Ioreign exchange on a working day next to the day oI transaction;
(x) the words and expressions used but not deIined in these Regulations shall have the same meanings
respectively assigned to them in the Act.
3. Prohibition.

Save as otherwise provided in these Regulations. no person in India shall enter into a Ioreign exchange derivative
contract without the prior permission oI he Reserve Bank.

4. Permission to a person resident in India to enter into a Foreign Exchange Derivative contract.

A person resident in India may enter into a Ioreign exchange derivative contract in accordance with provisions
contained in Schedule I. to hedge an exposure to risk in respect oI a transaction permissible under the Act. or rules
or regulations or directions or orders made or issued thereunder.
1

5. Permission to a person resident outside India to enter into a Foreign Exchange Derivative contract.

A person resident outside India may enter into a Ioreign exchange derivative contract with a person resident in India
in accordance with provisions contained in Schedule II. to hedge an exposure to risk in respect oI a transaction
permissible under the Act. or rules or regulations or directions or orders made .or issued thereunder..

6. Commodity hedge.

Reserve Bank may. on an application made in accordance with the procedure speciIied in Schedule Ill. permit
subiect to such terms and conditions as it may consider necessary. a person resident in India to enter into a contract
in a commodity exchange or market outside India to hedge price risk in a commodity.
1

2
Provided that a unit in the Special Economic Zone (SEZ) may. without prior approval oI the Reserve Bank. enter
into a contract in a commodity exchange or market outside India to hedge the price risk in the commodity on
export/import. subiect to the condition that such contract is entered into on a 'stand above¨ basis.


Explanation : The term "stand-above" means that the unit in the SEZ is completely isolated Irom Iinancial contacts
with its parent or subsidiary in the mainland or within the SEZ(s) as Iar as its import/export transactions are
concerned.

7. Remittance related to a Foreign Exchange Derivative contract.

An authorised dealer in India may remit outside India Ioreign exchange in respect oI a transaction. undertaken in
accordance with these Regulations. in the Iollowing cases. namely

(a) option premium payable by a person resident in India to a person resident outside India;
(b) remittance by a person resident in India oI amount incidental Ioreign exchange derivative contract entered
into in accordance Regulation 4.
(c) remittance by a person resident outside India oI amount incident Ioreign exchange derivative contract
entered into in accordance Regulation 5;
(d) any other remittance related to a Ioreign exchange derivative cost approved by Reserve Bank.

SCHEDULE I
(See regulation 4)
Foreign exchange derivative contract permissible Ior a person resident in India
1

A. Forward Contract

A person resident in India may enter into a Iorward contract with an authorised dealer in India to hedge an exposure
to exchange risk in respect oI a transaction Ior which sale and/or purchase oI Ioreign exchange is permitted under
the Act. or rules or regulations or directions or orders made or issued thereunder. subiect to Iollowing terms and
conditions

(a)
2
|the authorised dealer through veriIication oI documentary em is satisIied about the genuineness oI the
underlying exposure otherwise permitted by the Reserve Bank Irom the time to time
(b) the maturity oI the hedge does not exceed the maturity underlying transaction.
(c) the currency oI hedge and tenor are leIt to the choice customer.
(d) where the exact amount oI the underlying transaction ascertainable. the contract is booked on the basis oI a
reasonable estimate.
(e) Ioreign currency loans/bonds will be eligible Ior hedge only aIter Iinal approval is accorded by the Reserve
Bank where such approval is necessary.
(I) in case oI Global Depository Receipts (GDRs) the issue price been Iinalised.
(g) balances in the Exchange Earner's Foreign Currency (EEFC) accounts sold Iorward by the account holders
shall remain marked Ior delivery and such contracts shall not be cancelled. They may. however. be rolled-
over.
1
|(h) contracts involving the rupee as one oI the currencies. cancelled shall not be re-booked except as otherwise
permitted the Reserve Bank Irom time to time although they can be rolled over at on-going rates on or
beIore maturity. Contracts covering export transactions may be cancelled. re-booked or rolled o on-going
rates without any restrictions.|
(i) substitution oI contracts Ior hedging trade transactions may be pen by an authorised dealer on being
satisIied with the circumstances which such substitution has become necessary.
2
|(i) a person resident in India may. subiect to the terms and conditions prescribed by Reserve Bank oI India.
enter into a Iorward contract with an authorised dealer in India to hedge an exposure exchange risk in
respect oI transactions denominated in Ioreign currency but settled in Indian rupees.|

B. Contract other than Forward Contract

2. (1) A person resident in India who has borrowed Ioreign exchange accordance with the provisions oI Foreign
Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations. 2000. may enter into
an Interest rate swap or Currency swap or Coupon Swap or Foreign Currency Option or Interest rate cap or
collar (Purchases) or Forward Rate Agreement (FRA) contract with an authorised dealer in India or with a
branch outside India oI an authorised dealer Ior hedging his loan exposure and unwinding Irom such hedges
Provided that -
(a) the contract does not involve rupee.
(b) the Reserve Bank has accorded Iinal approval Ior borrowing in Ioreign currency.
(c) the notional principal amount oI the hedge does not exceed outstanding amount oI the Ioreign
currency loan. and
(d) the maturity oI the hedge does not exceed the unexpired maturity oI the underlying loan.

(2) A person resident in India. who owes a Ioreign exchange or rupee liability. may enter into a contract Ior
Ioreign currency-rupee swap with an authorised dealer in India to hedge long-term exposure
(3) The contract entered into under sub-paragraph (2). iI cancelled shall not be rebooked or re-entered.
by whatever name called.

3. (1) A person resident in India may enter into a Ioreign currency option contract with an authorised dealer in
India to hedge Ioreign exchange exposure oI such person arising out oI his trade :

Provided that in respect oI cost eIIective risk reduction strategies like range Iorwards. ratio-range Iorwards
or any other variable by whatever name called there shall not be any net inIlow oI premium. Explanation -
The contingent Ioreign exchange exposure arising out oI submission oI a tender bid in Ioreign exchange is
also eligible Ior hedging under this sub-paragraph.

(2) A transaction undertaken under sub-paragraph (1) may be Ireely booked and/or cancelled.

SCHEDULE II
(See regulation 5)
Foreign exchange derivative contracts permissible for a person resident outside India
1

1 . A Registered Foreign Institutional Investor (FII) may enter into a Iorward contract with rupee as one oI the
currencies with an authorised dealer in India to hedge its exposure in India
Provided that
2
|(a) the value oI the hedge does not exceed the market value oI the underlying debt or equity
instruments. provided Iorward contracts once booked shall be allowed to continue to the original
maturity even iI the value oI the underlying portIolio shrinks. Ior reasons other than sale oI
securities.|
(b) Iorward contracts once cancelled shall not he rebooked but may be rolled-over on or beIore the
maturity.
(c) the cost oI hedge is met out oI repatriable Iunds and/or inward remittance through normal banking
channel.
(d) all outward remittances incidental to hedge are net oI applicable Indian taxes.

2. A non-resident Indian may enter into Iorward contract with rupee as one oI the currencies. with an
authorised dealer in India to hedge;
(a) the amount oI dividend due to him/it on shares held in an Indian company;
(b) the balances held in Foreign Currency Non-Resident (FCNR) account or non-resident External
Rupee (NRE) account;
(c) the amount oI investment made under portIolio scheme in accordance with the provisions oI the
Foreign Exchange Regulation Act. 1973 or under notiIications issued thereunder or is made
accordance with the provisions oI the Foreign Exchange Management (TransIer or Issue oI Security
by a Person Resident Outside India) Regulations.2000
1
and in both cases subiect to the terms a
conditions speciIied in the proviso to paragraph 1 oI this Schedule
2
|2.A A non-resident Indian may. subiect to conditions prescribed by The Reserve Bank oI India Irom
time to time. enter into cross currency (not involving the rupee) Iorward contracts to convert the
balances held in FCNR(B) accounts in one Ioreign currency to another Ioreign currency in which
FCNR(B) deposits are permitted to be maintained.

3
|3. Authorised dealers may oIIer Iorward contracts to persons resident outside India to hedge the
investments made in India since January. 1. 1993. subiect to veriIication oI the exposure in India.
These Iorward contracts once cancelled are not eligible to be rebooked.|

2
|3A. A person resident outside India may. subiect to conditions prescribed by the Reserve Bank oI India
Irom time to time. enter into a Iorward. sale contract with an authorised dealer in India to hedge the
currency risk arising out oI his proposed Ioreign direct investment in Indian.
3B. A person resident outside India having Foreign Direct Investment in India may. subiect to the condition that
Iorward cover shall be taken only aIter the rate has been approved by the Board. enter into Iorward
contracts with rupee as one oI the currencies to hedge the currency risk on dividend receivable by him Irom
the Indian company.|

SCHEDULE III
(See Regulation 6)
Procedure for application for approval for hedging of commodity price risk
4

1 . A person resident in India. engaged in export-import trade.
5
|or as permitted by the Reserve Bank| who
seeks to hedge price risk in respect oI any commodity including gold.
6
|but excluding oil and petroleum
products|. may submit an application to the International Banking Division oI an authorised dealer giving
the Iollowing details.

(i) A brieI description oI the hedging strategy proposed; namely:
(a) description oI business activity and nature oI risk;
(b) instruments proposed to be used Ior hedging;
(c) names oI commodity exchange and brokers through whom the risk is proposed to be
hedged and credit lines propose( be availed. The name and address oI the regulatory
authority in the country concerned may also be given;
(d) size/average tenure oI exposure and/or total turnover in a year together with expected peak
position thereoI and the basis oI calculation;
(ii) copy oI the Risk Management Policy approved by the Management covering:
(a) risk identiIication.
(b) risk measurements.
(c) guidelines and procedures to be Iollowed with respect revaluation and/ or monitoring oI
positions.
(d) names and designations oI the oIIicials authorised to undertake transactions and limits;
(e) any other relevant inIormation.
2. Authorised dealer aIter ensuring that the application is supported documents indicated in paragraph 1 may
Iorward the application its recommendations to Reserve Bank Ior consideration.

  
   

 
  

  
     
   


    



     
 


 
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