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Name of the student :Yash Krishnakumar Agarwal

Name of the institution : NRIBM, Ahmedabad

Name of the reporting officer: Mr. Rajesh Tulsiani

Name of the organization: Adani Ports Ltd.


Purpose of the Project : Study of Indian Port sector and Options

for its Debt restructuring

Objectives :  To study the Indian port sector with

emphasis on Gujarat Adani Ports ltd
 To study the different aspects of the
infrastructure financing in India
To study and analyze different
instruments for debt restructuring.
 To study the procedure for Credit
Rating in India
 Steps to be taken which are in best
interest of the company.

Methodology : The project is a blend of the

primary as well as the secondary
data. The data were collected from the
company’s past record ,.various
websites, publications and other

Conclusion : The project has been completed

successfully and the objectives were

 To study the Indian Infrastructure financing market.

 To study the Indian port sector .

 Understand the working and operations of GAPL

 To analyze different ways of substituting costly loans for other cheap debt

 To study the process of credit rating.



The availability of adequate infrastructure facilities is imperative for the overall

economic development of the country. Infrastructure adequacy helps determine
success in diversifying production, expanding trade, coping with population
growth, reducing poverty and improving environmental conditions. Today, it is
necessary to broaden one's concern from increasing the quantity of infrastructure
stocks to improving the quality of infrastructure services. In recent years, there
has been a revolution in thinking about that should be responsible for providing
infrastructure stocks and services, and how these services should be delivered to
the users.

One of the bottlenecks in infrastructure development in India is the conflict arising

out of the confusion over the government's role in being licensers for
infrastructure development, an infrastructure developer and operator, and finally
a regulator. A clear separation of these roles would be essential. To further aid
this process, the financial, insurance and legal sectors would have to play a
significant role.

Provision of quality infrastructure services at reasonable cost, is a necessary

condition for achieving sustained economic growth. In fact, one of the major
challenges being faced by the Indian economy, as we enter the new millennium
is to enhance infrastructure investment and to improve the delivery system and
quality of services. There is a huge critical importance of the infrastructure sector
and high priority for development of various infrastructure services such as
power, telecommunications, seaports, airports, railways, roads etc. is being given
these days. Investments in these sectors involve high risk, low return, and
lumpiness of huge investment, high incremental capital/output ratio, long
payback periods, and superior technology. These prerequisites pose a constraint
on the Government's efficient delivery of quality infrastructure services. While
liberalizing the rules and procedures, the Government has created an
environment conducive for private participation including foreign investment in
infrastructure sector. A series of tax incentives and concessions have been
announced, regulations and procedures have been simplified for enhancing
competition in this sector.

What is Infrastructure?
As per India Infrastructure Report:

"Infrastructure is generally defined as the physical framework of facilities through

which goods and services are provided to public. Its linkages to the economy are
multiple and complex, because it affects production and consumption directly,
creates negative and positive spillover effects (externalities) and involves large
flow of expenditure.

Infrastructure contributes to economic development, both by increasing

productivity and by providing amenities which enhance the quality of life. The
services provided lead to growth in production in several ways:

Infrastructure services are intermediate inputs to production and any reduction

in these input costs raises the profitability of production, thus pertaining
higher levels of output, income and or employment.

These raise the productivity of other factors including labour and other capital.
Infrastructure is thus often described as an "Unpaid Factor of Production",
since its availability leads to higher obtainable from other capital and labour.
Why is Infrastructure Important?
As per India Infrastructure Report:

"The availability of adequate infrastructure facilities is imperative for the overall

economic development of the country. Infrastructure adequacy helps determine
reducing poverty and improving environmental conditions."

"Research indicates that total infrastructure stocks increase by 1% with each 1%

increment in per capita GDP."

Key Issues in Infrastructure Development and Financing

The Key issues in infrastructure development are: -

The importance of privatization is because it brings along with it a) Additional
resources and b) improved managerial efficiency in asset creation, asset
utilization and customer service leading to better financial health, due to stake

Unbundling and Project Structuring

Unbundling is a necessary condition before attracting private participation is

unbundling the infrastructure into logical sub activities which can be privatized
separately to enable private parties not to have to bite more than what they can

To enable unbundling necessary acts shall have to be overhauled. Regulatory

reform would also be essential to provide increased autonomy, especially for
capital investment, even as a precursor to unbundling. Another reason for
regulatory reform is to exercise controls over implicit monopoly situations.

Project Structuring is also a key issue as since projects have to be structured

small enough to make them investment friendly, and at the same time
"Commercial" viable.
Project Appraisal and Financing

The key issue here is one of appraising the project against future cash flows
rather than an asset base or collaterals. Various forms of revenue, control over
revenue and risk guarantees would also be related concerns. A vital banking
infrastructure to complement all this would be essential.

Project Implementation

Speed of project implementation would be imperatives, in the context of

environmental and other regulatory issues.

Classification of Infrastructure Sector

Infrastructure is classified as: -
*Economic Infrastructure which includes transportation (Roadways, railways,
airways and other water transportation); Power Generation, transmission and
distribution; telecommunications; port handling facilities; water supply and
sewage disposal; urban mass transportation systems and other urban
infrastructure (housing, etc) and irrigation.

*Social Infrastructure which includes medical, educational and other primary


Features of Infrastructure Projects in India

Characteristics of Infrastructure Projects:

1. Multiple level project Risks:

Infrastructure Financing involves risk participation at multiple levels and is

complex to understand for individual investors. The nature of Project risk in
various stages is volatile, it is the highest in the pre-commissioning stage and is
sought to be mitigated through contractual framework which is concession driven
or provides guaranteed returns. These guarantees and concessions are typically
extended by Government and Quasi-government organization (Municipal
Corporations, PSU, etc) and thus minimizing financial risk.

2. Unconventional Asset Cover:

Infrastructure Projects are typified by unconventional asset structure. As an
illustration, the assets of an infrastructure project could comprise.
a. Roads or a bridge or Flyovers
b. Jetties, Container Terminals, Loading-Unloading Bay, Storage Tanks in the
Port Infrastructure Projects
c. Oil well or a coal mine-drills, rigs, etc
d. Water Treatment Plant (ETP)

These assets are not amenable to resale or reapplication and hence are
unacceptable as security cover to conventional lenders. Furthermore, the step-in
rights to lenders are non-existent since such projects are awarded on basis of
concession and are on a Build Operate and Transfer basis (BOT) with the
"Ownership" of such assets rests with the State of Central Government or Quasi
Government Organization.

Challenges in Infrastructure Financing

Infrastructure projects are typically:
1. Long tenure projects and involving
2. High capital outlay and back-ended returns. Therefore such projects require
long tenure funds i.e. in excess of 10 years. In the Indian context the availability
of such funds is restrictive since Indian Financial Institutions/Banks are often
constrained by:
a. Preferred investment horizon of 7-10 years to avoid major asset/liability
b. Exposure norms and risk weightage on exposures for projects
Fiscal Incentives for Investment in Infrastructure Projects

The Government of India has sought to alleviate some of these concerns/issues

by providing certain fiscal incentives, concessions and policy reforms. Some of
these reforms have been:
a. Income Tax exemptions under Section 10 (23)(g) for interest and capital gains
income earned for infrastructure projects
b. Income Tax exemptions under Section 54 (EA/EB) for capital gains which can
be reinvested in infrastructure project companies
c. Deduction under Section 88 for investment in infrastructure projects -
Deduction available for individual investors.
d. Exemption from Minimum Alternative Tax
e. Concessional import duties and port charges for project-related imports.
f. Increased limits for External Commercial Borrowings.
g. Five year tax holiday to be claimed within 12 years of operation. For the
balance years, a 30% exemption is available.

Characteristics of Infrastructure Projects

Infrastructure Projects are typified by unconventional asset structure
- Roads, Bridges, Jetties, Container Terminals, oil/mine drills, water treatment
plant - investment not amenable to resale or reapplication - Unacceptable
security cover
- Step- in rights to lenders inadequate - Lack of implementation expertise

Project risk in various stages of the project life cycle:

- Highest pre-commissioning stage - would involve higher cost of funds, partly
offset by benefits of Section 10 (23)(g)
- Risk upon commissioning - diminished
From the Financiers' Perspective:
- Long tenure borrowing in the form of loan - lack of exit options
- Sponsor to carry risk till the end - Lender's risk partly mitigated
The use of Credit Derivative Structures can also be given a thought while
structuring the transaction structure for financing the Infrastructure Projects.

Risk Assessment of Private Infrastructure Projects

Project Sponsor/Infrastructure Company bears considerable risks. The following
are the major risks beared by the these companies:
1. Implementation Risk:
This is the risk in the pre-commissioning stage which covers Project Design,
Project Configurations, Equipment Procurements and timely completion of the

2. Operational Risk:
This is also one of the major risk beared by the Infrastructure Company / Project
Sponsors. This covers Operation and Maintenance requiring Engineering /
Logistics Expertise.

3. Financial Risk:
Financial risk takes place when Implementation Risk and Operational Risk are
partly mitigated. The result of this risk makes the problems of Financial Closure
of the Project Impossible. This risk is mitigated by achieving necessary financial
closure of the Project in the Implementation Stage.
4. Revenue Risk:
Revenue Risk takes place when the project cash flows does not achieves the
standards of worst possible case revenues. This is partly mitigated through
Concession Agreement, Take or Pay, Guarantees.

India has 13 major ports and 139 intermediate and minor ports (at present,
however, only 40 are active), and 30 cater to the Andaman and Nicobar and
Lakshadeep and Minicoy Archipelagos along its 5560 km coastline. The Indian
ports handled traffic of 368.96 million tones in fiscal 2000-01 and the total traffic
handled at Indian ports has grown at a compounded annual growth rate of 9.03%
p.a during the period 1991-92 to 2000-01. in fiscal 2001, the major 13 ports
accounted for 280.96 million tones (76.15%) of the cargo, while the minor ports
(primarily from Gujarat), accounted for the balance. The minor ports during the
same period have shown a faster growth of around 24.95% p.a, primarily due to
increased congestion at major ports, an increased development in shore-based
industries and initiatives by state governments in developing the ports within their
Indian ports suffer from low labour productivity and low equipment efficiency
levels adversely affecting their operating performance. The main factors
contributing to the low productivity of Indian ports are:

Operations constraints such as frequent breakdown of cargo handling

Inadequate dredging and container handling facility
Inadequate and non-optimal deployment of port equipment
Lack of proper co-ordination in the entire logistics chain
The major operating parameters related to the port operations are

Turnaround Time: Time between a ship arriving at a port and sailing back.
Pre-berthing Time: Time between a ship arriving at a port and getting
Idle Time: Time during which the loading/unloading operations are not being
performed on the ship when the ship is berthed.
Idle Time to Total Time at berth: The ratio of the total idle time of the ship
and the total time for which it was on the berth.
Idle Time to Total Time at Port: The ratio of the total idle time of the ship and
the total time for which it was on port.
Average Output per ship berth day: The ratio between total output from the
ship and the total number of days of occupation of a berth by the ship.

Gujarat Port Sector

Gujarat, situated on the west coast of India, is a principal maritime state endowed
with several strategic port locations. The state has a 1600 km long coastline
(which is a third of the total Indian coastline) and has a large potential cargo
market comprising the northern, western and central Indian states. Of the 41
ports in Gujarat, Kandla is the only major port. The 11 intermediate and 29 minor
ports fall within the jurisdiction of GMB(Gujarat Maritime Board). GMB has been
proactive in terms of encouraging private sector participation in port
developments. Out of the 10 identified probable site locations by GMB, port with
private sector participation have commenced operations at Mundra and Pipavav.
BOOT Guidelines
Under the port policy, GoG announced the Build-Own-Operate-Transfer (BOOT)
Guidelines in July 1997 to serve as framework for involvement of private sector in
the construction and operation of the 10 identified green field projects, including
the Mundra port. Under the BOOT principles, the ports are to be developed as
commercially viable entities capable of operating without government support
and the responsibility of financing the port will rest with the developer. The
government will grant license/concession to the private developer to Build-Own-
Operate and manage the port facilities for a specific period and permit the
developer to create mortgage/hypothecation of the real estate as security for
lenders to the project to be limited to the BOOT period. The ownership of the
land and waterfront will vest with the government. The acquisition of land for the
project will be the responsibility of the GoG/GMB. The land will be allotted on
lease to the developer for a term concurrent with the term of the concession
agreement. In order to facilitate the development of the port, the government
intends initiating concomitant development of road and rail corridors and
industrial parks. The road and rail linkages from the port to the nearest
highway/railhead will be structured as separate BOT packages and the port
developer will have the first preference of undertaking such development. The
ownership rights of developer would include the right to mortgage, hypothecate
or to execute such covenants as may be required for effectively vesting a charge
on the port assets in favor of a lender to the project and the right to sell, convey
or transfer to another party, the right title and interest and concession vested in
the developer, on the request of lender to the project, subject to contractual
agreements. The lender in consultation with GMB will select the new developer
and if necessary the terms and conditions of the concession agreement may be
re-negotiated. The developer may operate the port as a full service or as landlord
port. The GoG/GMB will permit subleasing of facilities or subcontracting of
services provided the developer continues to remain responsible to the GoG for
due performance under the contracted terms and conditions. The duration of the
BOOT package would be 30 years and can be considered for period greater than
30 years for projects will entail sizeable capital investment on account of site-
specific marine conditions and back-up infrastructure such as road/rail linkages.

Private sector can be involved in several ways including extending of resources,

providing state-of-the-art technology at project management and maintenance
levels. Besides, public-private partnership can be developed on models like
build-operate-transfer (BOT), build-operate-own-transfer (BOOT), build-operate-
lease-transfer (BOLT) and design-build-finance- operate-transfer (DBFOT)
models. The country is yet to adopt full-fledged private sector participation


Gujarat Adani Port Ltd (GAPL), a company promoted by Adani Port Ltd (APL) in
the joint sector with the Gujarat Port Infrastructure and Development Company
Limited (GPIDCL), is undertaking the development of Mundra Port located at
Navinal Island, Village Mundra, dist Kachch.

Gujarat Adani Port Ltd (GAPL) is a company incorporated on 26th May 1998 and
promoted by Ahmedabad based Adani Group and Government of Gujarat
through Gujarat Port Infrastructure Development Company Ltd (GPIDCL) for the
development of Mundra port as per the port policy and BOOT guidelines of the

Board of Directors:
1. Balwant singh Chairman
Secretary, Port and Fisheries Department, GoG
2. Gautam S. Adani Managing Director
3. P. N. Roy Chaudhury, IAS Director
Managing Director, GPIDCL
4. Rajesh S. Adani Director
5. K.N. Venkatasubramaniam Independent Director
6. K.N. Shelat Director
Industry Commissioner, GoG

Business Development
With a view to giving a focused thrust to the overall development of the port, an
exercises has been carried out by GAPL to identify bulk customers who would
like to have an alternative port. GAPL has developed and is in the process of
developing the services and facilities in tune with the requirements of bulk users
of the port facilities.

Product Customer
POL IOC,Caltex,IBP,Swiss Singapore(Jayshree),Ruchi
Petrochemicals Asian Paints, Nirma, C.J.Shah, Crescent, Hareshkumar
Edible Oil Andre, Cargill, Ruchi, Soya, Liberty, B.Arunkumar
Shadiram, Godrej, Wilmar.
Castrol Oil Hindustan lever, Minal, M.lakhamshi
DOC, rice Peter Cremer, A.C.Toefer, Gee Premji, Cargill, Nidera
Ruchi, Shivnath Rai, Priyanka, L&T, KB overseas
Satnam overseas.
Coal Emirates Trading Agency, Glencore, Binani Cement
Laxmi cement, Esteco, Gee Premji, Hindustan Zinc.
Minerals Ashapura Trimax, Gimpex, GMDC
Salt Friends, Bharat Salt & Chemical Industries
Timber Sentrans, Glory, Gupta Global
Steel Shah Alloys, Tisco
Sulphur Swiss Singapore, GSFC, Emmsons, Rama Phospate, Nirma
MFL, Indo gulf fertilizers, ICI, GNFC, Zuari, Chmbal Fertilisers


1.Mundra port has handled more than 700 vessels till 15 th September,2002,
carrying about 9.5 million tones of cargo. The connectivity of railway(in
November, 2001) further boosted the strategic importance of Mundra. The
deep draft and the connectivity of the port to the hinterland has culminated
in attracting HPCL and IOCL to establish crude oil handling facilities on
the port. In addition, the port has encouraged creation of other industrial
activities like largest single location edible oil refinery in the country viz.
Adani Wilmar Ltd at Mundra.

2.GAPL is contemplating enhancing the business flow in Mundra through

various strategic initiatives, which interalia, include re-positioning the
business of port-port related activities and container terminal business.
Revenue Realizations: -

The main heads of revenue in GAPL is as under

1. Marine Income
2. Royalty Income
3. Lease Rent Income
4. Development Charges
5. Railway Income
6. Sharing of Container Revenue

Marine Income

Port dues and pilot age charges (USD/GRT) 0.57(0.17+0.38)

Berth hire charges (USD/GRT/day) 0.15

Wharfage Charges

Sr. no Comodity Wharfage Rate (Rs./T)

1Dry Cargo
A Coal 30.00
B Fertiliser 35.00
C FRM 35.00
D DOC 20.00
E Salt 20.00
F Alumina 50.00
G Iron and Steel 55.00
H Timber 35.00
I Food grains (rice) 35.00
J Ores and Minerals 25.00
K Others 35.00
L Edible Oil 35.00
M Oils 35.00
N Chemicals 50.00
O POL-products 50.00
*Due to confidentiality clause of company other details were not shared.

Details of Loan Funds

GAPL has availed loan from various Banks and Institutions to the extent of
approximately Rs.500 crores and proposed to make the repayment of
approximately Rs.250 crores. In view of the said repayment, GAPL has reduced
its interest expenses on long-term loan, which is very important in Infrastructure
project due to their capital-intensive nature. This has resulted substantial saving
in interest cost in future and thereby increasing the profitability.

With this background GAPL is looking for various alternative option to reduce its
cost of loan funds.

Corporate Debt Restructuring aims to support continuing economic

recovery by enabling viable debtors to continue business operations and
promoting fair and equitable debt repayment to creditors.

The company is looking for new alternatives to raise cheaper fund to replace
their existing debt so what I have done is spotted four alternatives for
infrastructure financing and looked at their advantages, disadvantages and
suitability to company and suggested it to company and the four alternatives are

1. Issuing Corporate Bond

2. Securitisation of Future Cash Flow

3. Funding through Private Insurance Sector

4. Mezzanine Finance

I tried to cover all related aspect of each alternative and tried to see that it is
feasible for the company to explore this alternative but due to time constraint and
technicalities of port sector and confidentiality clause some information might not
be presented by me in this report.


The first option for Debt Restructuring is issuing Bond in this alternative I
have given details of different types of bond that company can issue in
future, recent market trend by example of recent bond issues by some
companies, credit rating process and in annexure SEBI guidelines for debt
issuance and credit rating symbols of different agencies.

According to Mr Pratip Kar of the Securities and Exchange Board of India (SEBI),
``Infrastructure financing is predominantly a structured debt finance and places a
higher burden on the capital market to raise debt resources. A vibrant bond
market thus becomes a necessary condition for infrastructure financing.''
Though infrastructure projects are capital-intensive with long gestation periods,
infrastructure bonds being low-risk guaranteed or secured debt, fetching a return
of 11-14 per cent, are an attractive investment proposition. Thanks to the various
tax exemptions, the FIs are able to earn a better spread by lending to
infrastructure companies, through such bonds. Clearly, a vibrant debt market
which allows full play to investors -- institutional and retail -- to lend and borrow
and employ a variety of trading strategies is just as necessary for speedy
development of infrastructure. Tax incentives are not enough.

Bond refers to a security issued by a company, financial institution or
government, which offers regular or fixed payment of interest in return for
borrowed money for a certain period.

Different types of bonds that are useful for infrastructure

1.Assumed bond

2.Callable bond

3.Combination bond

4.Consolidated bond

5.Convertible bond

6.Dual currency bond

7.Dollar bond

9.Guaranteed bond

10.Income bond

11.Junk bond

12.Mortgage bond

13.Secured bond

14.Surety bond

15.Zero-coupon bond

Recent Corporate Bond Issues

Name Of Issue
the Issuing Size(Rs Instrumen Rating Tenor(in Put/Call Open Close
Company cr) t Rating Agency Coupon yrs) Option Date Date
11.50% 5, 7 & 10
respectivel 7, 10 & respectivel Mar 4 May 2
GMIDC 349NCD y 12 y 2003 2003
Gujarat 11.50% May
Electricity respectivel 7, 10 & Mar 3 31
Board 350NCD y 12 5, 8 &10 2003 2003
11.50% Feb
respectivel 7, 10 & 27 Apr 30
MKVDC 300NCD BB(So) CARE y 12 5, 7 &10 2003 2003
Maharashtra 11.50% Feb
Patbandhar 350 + respectivel 7, 10 & 18 Apr 25
e Vittiya GS 150 NCD BBB(So) CARE y 12 5, 7 &10 2003 2003
Larsen & NSE Mibor Apr 1 Apr 1
Toubro Ltd 35FRB AA+ CRISIL + 110 bps 1.04 12003 2003
IndusInd Tier II Mar 31
Bank 35.5Bonds 8% 5.25 2003
Holdings Mar 31
Limited 30NCD AA+(SO) CRISIL 8% 5 2003
Holdings Mar 31
Limited 20NCD AA+(SO) CRISIL 7.85% 3 2003
Konkan 11.25,
Irrigation 11.50% Feb
Developmen 60 + GS respectivel 7, 10 & 26 Mar 31
t Corp 29.5 NCD BB(So) CARE y 12 5, 7 &10 2003 2003
Irrigation 11.00,
Developmen 11.25,
t 11.50%
Corporation 400 + respectivel 7, 10 & Mar 6 Mar 31
(VIDC) GS 105 NCD y 12 5, 7 &10 2003 2003
Tier II Mar 31
IDBI Bank 45Bonds 8.40% 7.25 2003
Corporation Tax-Free Mar 31
(IRFC) 77NCD AAA CRISIL 5.20% 5 2003
Corporation Taxable Mar 31
(IRFC) 255NCD AAA CRISIL 6.98% 10 2003
60 + GS Tier II 25 Mar 29
Dena Bank 40 Bonds Unrated 7% 5.25 2003 2003
Bank of 50 + GS Tier II 20 Mar 29
Maharashtra 50 Bonds Unrated 7% 5.25 2003 2003
Allahabad 50 + GS Tier II 7% 7.08 Mar Mar 28
Bank 50 Bonds 2003 2003
Textile Mar
Corporation 28 Mar 28
(NTC) 174NCD AAA(SO) CRISIL 7.75% 5 2003 2003
7.10, 7.30
and 7.50%
Taxable respectivel Mar 7 Mar 25
HUDCO 100NCD AAA(SO) Fitch y 105 & 7yrs 2003 2003
6.10, 6.30
and 6.50%,
for 5, 7 &
10 yr
respectivel Mar 7 Mar 25
HUDCO 50 AAA (So)Fitch y 105 & 7 yrs 2003 2003
6.10, 6.30
and 6.50%,
for 5, 7 and
10 yr
Tax-Free respectivel Mar 7 Mar 25
HUDCO 50NCD AAA (So)Fitch y 105 & 7 yrs 2003 2003
Federal Tier II 15 Mar 19
Bank 150Bonds A+ Fitch 8% 6.25 2003 2003
6.70 &
Canara 400 + Tier II respectivel 7.08 & Mar 5 Mar 15
Bank GS 100 Bonds LAAA ICRA y 10.08 2003 2003
Tax-Free Mar 5 Mar 11
NABARD 200NCD AAA CRISIL 5.25% 5 2003 2003
Sector Mar 5 Mar 11
NABARD 200NCD AAA CRISIL 5.10% 5 2003 2003

With many bond issues, the issuer is required to retain some portion of the
proceeds from sale of the bonds, sometimes as much as 10%, as a reserve fund.
This increases significantly the imputed interest cost of the bonds. A 5% face
value issue might actually cost the issuer 5.5% approximate due to the cost of
the reserve.

Issuance cost (one time) will be nearly 2-3% of bond issue that includes all legal
obligations and credit rating expenses.

So by looking at the above details Gujarat Adani Port Ltd can issue bond with
coupon rate 11%-14% and as per my view they should go for following types of
bonds to raise money

Assumed bond

Bond which is issued by one corporation but whose liability is taken on by

another corporation.

This bond they can issue because GAPL is new company they don’t have any
proven reputation in market so they can issue this bonds and liability can taken
over by Adani Exports Ltd. Which is flagship and very reputed company.

Callable bond

A bond, which the issuer has the right to redeem prior to its maturity date, under
certain conditions. When issued, the bond will explain when it can be redeemed
and what the price will be. In most cases, the price will be slightly above the par
value for the bond and will increase the earlier the bond is called. A company will
often call a bond if it is paying a higher coupon than the current market interest
rates. Basically, the company can reissue the same bonds at a lower interest
rate, saving them some amount on all the coupon payments; this process is
called "refunding." Unfortunately, these are also the same circumstances in
which the bonds have the highest price; interest rates have decreased since the
bonds were issued, increasing the price. In many cases, the company will have
the right to call the bonds at a lower price than the market price. If a bond is
called, the bondholder will be notified by mail and have no choice in the matter.
The bond will stop paying interest shortly after the bond is called, so there is no
reason to hold on to it. Companies also typically advertise in major financial
publications to notify bondholders. Generally, callable bonds will carry something
called call protection. This means that there is some period of time during which
the bond cannot be called. Also called redeemable bond. Opposite of
irredeemable bond or non-callable bond.

GAPL can go for this bond because as per the current market condition we can
not predict any thing about interest rate scenario so better to have bond with
callable option so in adverse condition we can not get into trouble by paying
higher interests.

Combination bond

A bond which is backed both by revenue from the project for which the borrowing
is being done as well as by the full faith and credit of the company issuing it.
Convertible bond
A corporate bond, usually a junior debenture, that can be exchanged, at the
option of the holder, for a specific number of shares of the company's preferred
stock or common stock. Convertibility affects the performance of the bond in
certain ways. First and foremost, convertible bonds tend to have lower
interest rates than non-convertibles because they also accrue value as the
price of the underlying stock rises. In this way, convertible bonds offer some of
the benefits of both stocks and bonds. Convertibles earn interest even when the
stock is trading down or sideways, but when the stock price rises, the value of
the convertible increases. Therefore, convertibles can offer protection against a
decline in stock price. Because they are sold at a premium over the price of the
stock, convertibles should be expected to earn that premium back in the first
three or four years after purchase. In some cases, convertibles may be callable,
at which point the yield will cease.

Securitisation is a Financial Instrument, which serves to the basic needs of the

Economy i.e. Long Tenure, Low Cost of Capital and Market acceptable. The
Objective of the "True Securitisation" is to create a multiple assets generation at
a lower Cost of Capital while protecting the Beneficial Interest of the Investors.
The Infrastructure Sector is the biggest Capital Deficit Sector of Indian Economy;
it requires Financial Engineering and Innovations to Fund the Infrastructure
Projects. One of best the solution to this problem is "Securitisation".

The objective of this study is to understand the concept of Securitisation and how
it can be helpful to GAPL in Debt Restructuring.

The scope of work of includes to understand the basic concept of Securitisation,

its applications and the technique that can be used on Infrastructure
Development and Financing. The scope of Work is Limited to Infrastructure
Projects Funding in GAPL.

Introduction to Securitisation

Securitisation is the buzzword in today's World of Finance. It's not a new subject
to the developed economies. It is certainly a new concept for the emerging
markets like India. The Technique of Securitisation definitely holds a great
promise for a Developing Country like India.

One of the Major Issue in the Development of Infrastructure Sector in India is the
availability of the long-term resources for the sector. One such financial
innovation to raise a long-term resource is "Securitisation". Securitisation is the
Financial Instrument of the new Millennium.

Securitisation is "Structured Project Finance". The financial instrument is

structured or tailored to the risk-return and maturity needs of the investors, rather
than a simple claim against an entity or asset. The popular use of the term
Structured Finance in today's financial world is to refer to such financing
instruments where the financier does not look at the entity as a risk: but tries to
align the financing to specific cash accruals of the borrower.

Traditionally there are many definitions of 'Securitisation'. Each definition aims at
defining this Financial Jargon. Some of the definitions are: -

"Securitisation is the process of pooling and re-packaging of homogenous illiquid

financial assets into marketable securities that can be sold to investors."

"Every such process which converts a financial relation into a transaction."

"The Creation of a Security based on a stream of Cash flows, such that the
security is liquidated by Cash Flows.

In simple words: -

"Selling the Cash flow generated from the assets (either existing or future)
against the charge of the assets, by converting them into homogenous market
negotiable instruments is known as Securitisation."

The meaning of Securitisation can also be expressed as: -

Securitisation is the process of commoditisation.
Every application of securitisation ends into the marketability of the Financial
Instrument into the Capital Market. Thus Securitisation aims at Commoditisation
of the illiquid financial claims.

Securitisation is the process of Integration and Differentiation.

The process of securitisation integrates all the illiquid financial claims or loans
(pooling) and then differentiates them into marketable lot securities

Need for Securitisation

The market size per investor comes down as the number of investor goes on
increasing. The small investor is not a professional investor. His basic
requirement is to invest in an instrument, which is easy to understand, and is
easily liquidable. This is need of the investor, innovated into a new financial
instrument i.e. "Securitisation".

The world of finance prefers Securitised Instruments due to the following


Borrowers requires high amount of capital.

This is clearly outside the range of the small investors. This difficultly was sorted
out by the financial intermediation of the Bank/FIs where the bank would pool the
resources of the investors' savings and in turn they lend the capital pooled to the

Small investor is not a professional investor.

The small investor understands homogenous, liquid, easy to understand and

market tradable instrument. The importance of liquidity is high for the small
investor. FIs cannot liquidate the investment directly to the investor in a small run
as this would definitely lead to asset-liability mismatch.

Thus, an easy to understand homogenous financial instrument with easy liquidity

features holds a great promise in the world of finance. Moreover a credit rating
label on such a Financial Instruments increases the investors' confidence in such
an investment.
Economic Significance of Securitisation
The economic impact of securitisation is as follows:

Securitisation Reduces Cost of Capital:

Securitisation tends to eliminate fund-based intermediation. The intermediary in

the process turns down to a specialized service oriented firm and thus charges
some reasonable fees, which is lower than the fund based intermediation costs.

Securitisation Encourages Savings:

Securitisation encourages savings, the investors gets best benefits by investing

in securitised paper.

Securitisation creates efficient Financial Markets

Securitisation changes the roles of the financial intermediary from a fund-based

activity to a service based activity. A service-oriented market is more efficient
than a fund based market.

Securitisation Diversifies Risk

Securitisation diversifies risk by creating different tranches in the t ransaction.

Securitisation Focuses on the use of the resources and not their ownership

The Investors does not look at the originator, but his interest lies in the
performance of the asset.

Features of Securitisation
The following are the features of the Securitisation:

1. Homogenous Product

The securitised instrument is a designed in a homogenous quantity and market

acceptable lot.

2. Marketability and Merchantable Quality

The Instrument is homogenous market acceptable lot and as it is generally

consist of the rating label, so it is of merchantable quality also. For Merchantable
Quality the instrument should also posses the feature of the wide distribution

3. Special Purpose Vehicle

The Instrument is issued by a SPV, the structure of the SPV is designed in such
a manner that the SPV remains "Bankruptcy Remote" from the Originator. Thus
the Investors Beneficial Interest is protected in this manner.

4. Recourse

Securitisation is an asset bases structured financing concept, the investors holds

the beneficial interest in the assets so it should be a non-resource featured.
Limited Recourse is done by the Originator to enhance the credit rating of the

5. Assets Features

The assets should have the following features:

1. It should represent cashflows
2. It should have high level of comfort i.e. quality of receivables should be good.
3. It should be isolated from the Originator.
4. It should be free from withholding taxes / pre paid taxes.
5. The pool of the assets should contain homogenous assets.
6. It should have periodic payments.

6. Issuer Features

The following types of companies are the originators of the securitisation


1. Real Estate Finance Companies

2. Auto Finance Companies
3. Credit Card Companies
4. Hoteliers
5. Power Generating and Telecom Companies
6. Banks
7. Infrastructure Project Companies like Toll Road Companies.

7. Investors

Most of the Investors in the securitised instruments are professionalised

investors which include FIs, Mutual Funds, High Net worth Investors, etc.

Basic Process of Securitisation

The basis process of Securitisation is explained in the following steps: -

1. Estimation of the Cash Flows

The originator estimates the cash flows from the underlying assets. For this
purpose, the originator uses his historical data. Appropriate and accurate
calculations are done keeping in view of the pre payments rates, amortization,
etc for estimation of the cash flows.

2. Creation of SPV

The next step is to create a SPV. The basis logic behind the creation of SPV is:
a. To isolate the underlying assets from the originator. This is an important step
in the whole process as the ultimate result of this is "Bankruptcy Remoteness"
from the Originator.
b. Aggregation of the underlying assets into Pool.
Thus the assignment of the cash flow to the SPV is done in this manner.

3. SPV issues securities/notes to Investors

The SPV formed (Trust / MF / Corporate Form) now issues securities/notes to

the investors to invest in the securitised exercise done by the originator.
4. Investors - Proceeds of the issue of securities to SPV

The collection from the investors for there investment in the securitised
instrument is proceeds to the SPV. SPV in turn channelises this proceeds to the

5. Collection and Servicing from the Obligors

The Originator generally performs this function. In some cases, specialised

servicing agents are appointed to collect and service from the loan obligors.

6. Pass Over to the SPV

In this step the Servicing agent passes the collected payments from the obligors
to the SPV less his fees.

7. Reinvestment of Cash Flows

The SPV if permitted does reinvestments of the proceeds from the Servicing
agent (Generally in the Pay Through Structures) and in turn receives the
reinvestment proceeds also.
If the structure of the instrument is Pass through Structure then directly Step no.
8 is followed after Step no. 6.

8. Payment to the Investors

The Investors earns on his investments by receiving the proceeds from the SPV.
Depending upon the structure of the Instrument the payment of the investment is
done to the Investors.

9. Originators Residuary Profit

After the payments done to the Investors if any residuary is left that is passed on
the Originator as his residuary profit, which is generally maintained, by the
originator for the over-collaterisation and guarantee purpose.
Different Forms of Securitisation Structures

1) Pass Through Structure:

1.Investors get a proportional interest in pool of receivables.

2.Monthly Collections are divided proportionally among the Investors.

3.All the investors receive proportional payments - no slower or faster


4.Refinement can be done in the form of 'Senior' or 'Junior' investors to

enhance the credit rating of the transaction.

5. Pre-payments are passed on to the Investors.

6. No reinvestment of cash collected.

7. Thus, SPV is a passive conduit.

Pass Through Structure:

2) Pay through Structure:

1.Structure is almost similar to the Debt instrument, but with an off balance
sheet treatment to the originator

2.Investors get a proportional interest in pool of receivables.

3.SPV reinvests the amount collected generally in a AAA rated paper

(Guaranteed Investment)

4. Investors are serviced on the dates of the schedule payment; the payment
for this is released from the Receiving and the Paying Bank Account.

5. Pre-payments are reinvested in the Guaranteed Investment Paper.

6. Thus, SPV is an active conduit.

Pay Through Structure:

Benefits of Securitisation
The following are benefits of Securitisation to the Issuer: -
1. Lower Cost
2. Asset - Liability Mismatch solution
3. Dictation of the rating for the transaction
4. Retail Distribution of the asset
5. Multiple asset creation ability
6. Off balance sheet financing
7. Relief in Capital Adequacy requirements
8. Improvement in the Capital Structure
9. Not regulated as loan
10. Avoids Interest rate risks
11. Escapes taxes based on interest

The following are the benefits of Securitisation to the Investors:

1. Best Rating Investments.
2. Better Matching with investment objectives.
3. Perfect tool of Hedging.
4. Lesser Regulations.
5. Higher Yields on Investment.

Applications of Securitisation
Following are the mostly used applications of securitisation:
1. Residential Mortgage Backed Securitisation.
2. Commercial Mortgage Backed Securitisation.
3. Auto Loan Securitisation.
4. Equipment Lease Securitisation.
5. Credit Card Receivables Securitisation.
6. Bank Loan Securitisation.
7. Aircraft Lease Securitisation
8. Insurance Risk Securitisation
9. Intellectual Property Rights Securitisation
10. Future Flow Securitisation

For GAPL most important is Future Flow Securitisation because in this future
cash flow is securitised at security.

The Indian Experience

Securitisation began in India in the early nineties. CRISIL rate the first
securitisation programme in India in 1991 when Citibank securitised a pool from
its auto loan pool and placed the paper with GIC Mutual Fund. The volume
involved was about Rs. 16 crores. The Rating Agencies experience has so far in
the asset-backed securities has been good. Reportedly, there have been a few
unrated transactions in the market.

Type of Assets
In terms of the asset profile, car loan/hire-purchase receivables account for over
65% of the transaction with the rest being accounted for by truck receivables.
Higher yields and relatively low delinquencies in auto loans in general are the
main reasons for this asset category being preferred for securitisation. Because
of the inherent higher yields in auto loans, the originator could offer attractive
yields to the investor and still book profits.

There has been only one transaction of securitisation of housing loan till date.
While three are some legal hurdles like the absence of the foreclosure laws, the
main reason has been the low yield inherent in this asset category. While the
interest rates on auto loans are generally higher than the housing loans rates.
Auto loans are presently in the range of 14% to 18% while housing loans are in
the range of 11.75% to 15%. Since the interest rates were ruling high till recently,
it was not possible for the originator to offer competitive yield to the investors
without booking losses. The long tenure of housing loans was another problem,
as housing loans are typically for nearly 15 years of tenure and not many
investors have appetite for such long tenure securities.
The originators in the transactions rated in the past include Citibank, Ashok
Leyland Finance Ltd, 20th Century Finance Corporation Ltd, Tata Finance Ltd,
etc have securitised there loans. Alternate funding, asset/liability mismatch
correction and profit booking have been the main motivating factors for these

Investors in ABS in the past have been Institutional Investors, Multinational
Banks and Mutual Funds.

Cost of Securitisation
Different cost involved in a securitisation are the interest rate (discount rate)
given to the investors, cost of maintaining cash collateral, stamp duty, SPV
expenses, legal fee and the rating fee. The interest rate is the rate used to
discount the future cash flows of the pool to arrive at the consideration to be paid.
The cost of maintaining cash collateral is the interest income foregone due to
blocking of funds in the collateral. Stamp duty differs along the different states. In
5 states viz Maharashtra, Gujarat, Karnataka, Tamilnadu and West Bengal have
reduced reduced stamp duty on securitisation transaction to 0.1%. SPV
expenses would be the fee payable to the SPV. Often it may not be necessary to
from a company to act as the SPV, if one of the existing investment companies
could be used as SPV. The legal fees is normally a lump sum, not directly related
to the volume of the transaction. Rating fee has two components viz the rating
fee and the surveillance fees. Most of the Rating Agencies like CRISIL, CARE,
ICRA, Fitch India, etc charges initial fees as 0.1% of future receivables for the
first year and the surveillance fee is 0.05% of remaining receivables for every
year of surveillance.

For a Rs. 50 Crore transaction with a 10% cash collateral, cost other than the
coupon rate on the ABS could be about 0.75% p.a. if the rate of the discount or
the coupon rate on the ABS is 12% p.a., total cost could be around 14.75% p.a.
inclusive of the stamp duty, legal fee, rating fee and interest fee and interest loss
on the cash collateral. If other forms of credit enhancement like over-
collateralization is used, interest loss on the cash collateral could be reduced
thereby reducing the overall cost.

Extent of Credit Enhancement

The level of the credit enhancement has varied between 7% to 25% of the
receivables securitised for an AAA rating depending upon the quality of the
portfolio and the pool. The extent of credit enhancement has shown a decline
over the years. In the United States, the minimum credit enhancement goes
lower to 3% to 4% of the principal amount.

Many of the securitisation issue are listed at the Wholesale Debt Market of the
NSE and a mechanism of market making is also incorporated in some of the
issues. Liquidity in general for all debt instruments could be considered to be
better in India. Lack of awareness could further reduce the liquidity in case of

Major Constraint of Securitisation in India

Legal Issues
Transfer of a loan amount to conveyance and hence is subject to the stamp duty.
As stamp duty on conveyance comes under the purview of the State, the stamp
duty is different in different states. High level of stamp duties would make the
securitisation transaction uneconomical. Maharashtra, Gujarat, Tamilnadu,
Karnataka and West Bengal have reduced the stamp duty payable on
securitisation transactions involving some asset classes substantially in order to
encourage the development of this instrument. In some of the other states, the
incidence of stamp duty is as high as 13 - 14%.
Absence of foreclosure laws and slow legal process in India are areas of
concern. Ideally, a separate legislation recognizing the rights of the investors in
ABS or their trustees to effectively recover the dues from the underlying obligors
without the involvement of the originator and without having to approach the
Court would help develop the market for securitisation. This, however, would be
a time consuming process. There are some uncertainties with regard to some
legal issues like stamp duty on transfer of PTCs. It would help if the concerned
authorities issue clarification in this regard.

As securitisation is a relatively new concept, there have not been any legal cases
in this area. In the absence of the same, it is not know how Courts would view
these transactions and how the investors stand vis-à-vis the originator in the
event of bankruptcy of the originator. In the absence of the same, one would
have to go by professional advice.

Taxation Issues
These are uncertainties regarding taxability of SPVs, applicability of Tax
Deducted at Source (TDS) to PTCs, treatment of interest tax post securitisation,
etc. As regards to securitisation of housing loans, there was uncertainty as to
who would issue the certificate confirming the payment of principal and interest to
enable the borrowers to claim tax concessions. Some clarification from the Tax
Authorities in this regard would be beneficial.
à Accounting Issues

There is no accounting guidelines on the treatment of securitisation transaction in

the book s of the originator and the investors. The Institute of Chartered
Accountants of India would issue the guidelines in this regard in the coming
Lack of Third Party Servicers
In securitisation Transaction, normally, the originator acts as the servicer for the
securitised pool of assets. To that extent dependence of the originator continues
even after the sale of receivables. Though the agreement provides for the
investors to change the servicer in case they are not satisfied with the
performance of the servicer, in India, the efficacy of alternate servicer needs to
be fully tested.

Lack of data across economic cycles

Lack of long track record of performance of assets over economic cycles is not
available in India. This is because housing and consumer loans in the organized
sector is not as old in India as it is in the developed countries. In the US for
example, the historical performance of mortgages for decades including the great
depression of 1930 are available. The kind of database helps one to predict the
behavior of assets in adverse conditions better.

Lack of sophisticated Information Systems

A sophisticated information system is very important for securitisation. The
information requirement of rating agencies is fairly detailed both at the time of
initial rating and subsequent surveillance. Currently, not all originators systems
are fully geared to meet the information requirements.

Co-mingling of Cashflows
The risk that the cash flows from the securitised pool would get mixed with those
of the originator is referred to as co-mingling risk. If the originators rating is not
high this presents a problem. Internationally, a time limit is specified within which
the pool of cashflows should be transferred to the designated account. This could
pose a problem, if the contracts in the securitised pool are geographically
dispersed across many states and regions. There is a lack of quick fund transfer
systems in India. Hence, more time may have to be allowed for the transfer of
Future Prospects of Securitisation in India
Since late eighties, when securitisation made its beginning in India, the number
as well as the size of transactions has grown over the years. This trend is likely
to continue and the market would witness considerable growth in the coming
years. Currently the annual disbursement of truck loans is estimated to be
around Rs. 11,000 Crores and the same for the car loans has been estimated to
be around Rs. 8,000 Crores. The outstanding housing loans to individuals as of
now are estimated to be around Rs. 10,500 Crores. These figures are indicative
of the volume of securitisation that is possible.

It would help in the development of ABS market particularly the mortgage backed
securities (MBS) market, it some incentives are given to these instrument in the
form of fiscal incentives like tax concessions. For example, MBS could be
declared as eligible investments by provident funds and pension funds and could
be declared as Infrastructure Bonds.

So far, companies securitised assets to raise funds without adding to borrowings.

This helped companies which had high debt equity ratio. The motivating factor in
some securitisation transaction in the past was the ability to book profits upfront.
While these could continue to be demanded drivers for securitisation.
Securitisation is likely to be increasingly used for better asset liability
management. As securitisation replaces long to medium term assets by cash, the
weightage average maturity of assets of the company comes down. This is a big
comfort, as typically, NBFCs were funding three-year assets with one year fixed
deposits. Further, the NBFCs which are required to bring down the excess
deposit level could use the proceeds of securitisation to retire the fixed deposits.

Traditionally in the fund based business segment of the financial services sector
in India, a single entity was engaged in the entire gamut of activities viz raising
funds, locating borrowers, credit appraisal of the borrowers, servicing of the loans
and recovery. Owing to the rapidly changing environment, some kind of
realignment is likely to happen in this sector. One could see some specializations
emerging in the market. In developed economies, particularly in the mortgage
market, there is a lot of specialization. Typically in these markets a single entity
could not perform more than one or two of the activities mentioned earlier. This is
also in line with the increasing emphasis on "core competence". Instead of an
entity engaging in all the activities, it makes sense to focus on a few areas where
it has competitive advantage.

The trend is already visible in the auto loan sector. Owing to many regulatory
changes, many NBFCs are finding it difficult to raise funds at competitive rates.
These NBFCs, however, have a relatively low cost distribution network in place
to originate and service loans. On the other hand, large companies and Foreign
Banks find that it is not economical to create a large distribution network in terms
of extensive branch network across the country due to their high cost structure.
However, these companies, given their size, parent support, managerial talent
and a high credit rating have a much stronger funding capability.

Securitisation could be effectively used to combine these two complementary

pool of resources. NBFCs could originate loans and securities them and sell to
large companies. And they could use the proceeds of the sale to originate more
loans and the process could go on. The small NBFCs could continue to service
the loans which would ensure a steady flow of fee income.

While many transactions are under way in the auto loan sector, this trend has
also extended to housing sector also. In housing finance the funding required is
of a much longer tenure and thus far more difficult to raise.

Securitisation will benefit infrastructure financing because it: -

* Permits funding agencies whose sector exposures are choked, to continue
funding to those sectors.
* Permits the participation of a much large number of investors by issue of
marketable securities.
* Lowers the cost of funding infrastructure projects; long term funding ( a sine
quo non for most infrastructure projects) is more feasible in securitised structures
than conventional lending.
* facilities risk participation amongst intermediaries that specialise in handling
each of the components of risks associated with infrastructure funding (while
these may initially be borne by regular financial intermediaries and insurance
companies, it is expected that specialized institutions would develop over time)
* Shifts focus of funding agencies of to evaluation of credit risk of the transaction
structure rather than overall project risk. This is because the other components of
project risk would be borne by specialized intermediaries at a fee cost.

Thus, in a nut shell securitisation will change the project evaluation parameters to
an exposure driven by Credit Rating of a transaction structure rather than overall
project risk and also securitisation will facilitate participation of a large number of
investors by ensuring tradability of issued Negotiable Instrument (Participation

Thus these considerations would facilitate the process of financial intermediation

for resource raising of fund Infrastructure Projects. The outcome of which will
reduce the cost of funding for Infrastructure Projects in the long run.

Securitisation works on the principle of unbundling cash flows -

Customizing risk and Evolving Superior credit structure

* In the Conventional financing pattern is:

- Driven by credit extended in the form of non-tradable loans
- Project risk compensated by high cost of debt
- Sponsor comfort and "right" to project cash flows
- Key driver

* Securitisation in Infrastructure Financing will: -

- Disseminate risk by identifying risk parameters
. Allocate cash flows to lenders/investors
. Leverage on structure of infrastructure projects
- Quasi Government risk
- Lending driven by Credit Rating of Structure rather than overall project risk
- Participation of a large number of investors
. Tradability of loans
- Participation /Pass thru Certificates

•Thus the whole mechanism results in the reduction in cost of capital for the
Infrastructure Projects.

Policy Measures Requirements for Port sector


a. Sectoral Framework - Background and Issues:

India has a long coastal line dotted with over 11 major ports and 140 minor ports.
Major Port Trust of India manages the major ports and the minor ports are
managed by State Maritime Boards. The major ports handle over 87% of all India
sea-borne throughput of cargo aggregating million tons annually. The port
infrastructure can effectively handle millions tons of cargo annually and is
operating at optimal levels. It is estimated that India requires port handling
capacity of 540.51 millions tons (2005-06).

The port sector in India is governed under the Indian Port Act, 1908 and the
Major Port Trust Act, 1963. These acts have permitted private sector investment
in the following manner:

1. Setting up of major ports at several locations across the coastline. The states
of Maharashtra, Gujarat and Andhra Pradesh have embarked on development
initiatives in this segment.
2. Privatisation of support services at major ports. Government of Gujarat has
identified 10 Greenfield Port Projects and has seen substantive Investment from
the Private sector for the development of the Port Sector in the sate of Gujarat

b. Financial Outlay required in Port Sector :

The investment outlay required by the Port sector is estimated at Rs. 8000 crores
in the Ninth Plan and an annual outlay of Rs. 953 crores was provided for the
financial year 198-1999. It is proposed that 50% of capital requirement i.e. Rs.
4000 crore would be raised from the private sector.

Relevance of Securitisation of Port Sector of Infrastructure

Port Sector:

The revenues of typical port projects would be in the nature of stowage and
loading revenues levied on ships which stop at the port of call. In addition, ports
tend to provide storage facilities for chemicals, cargo, petroleum products, etc. to
several large companies. The port authority/operator contract such storage
facilities for a long tenure. The port revenues of this nature are amenable to

Criteria for structuring securitisation transaction

*Assets or Cash flows should be of an operative nature and it should likely to be
translated into a cash flow at a future date with minimal risk of performance
* Isolating Credit risk of the Originator (Owner of such assets or receipt of cash
flow) from that of the Obligor (Payor for the obligations/asset sought to be
*Evolving a "bankruptcy" remote structure for the transaction i.e. a transaction
structure which will not be impacted by the bankruptcy/default of the Originator of
the cash flows. This is conventionally achieved through: a. "True Sale" of cash
flow or the "right" to receive cash flow.
b. Setting up of an independent "Special Purpose Vehicle" which would provide
an appropriate framework for capital market participation.
*Credit enhancement based on the following principles:
a. Credit rating/standing of the Obligor
b. Providing adequate collateral for investors participating in the "securitised"
c. Evolving a suitable risk framework compromising of "Senior" investors who
have the first "right" on cash flows and "Sub-ordinate" investors who would bear
significant portion of the credit risk on the Obligor.
The advantage for Originators would be realising an upfront cash flows in
exchange of future receipts which would be "securitised" in favor of the SPV and
its investors.

The following diagram explains structuring of the securitisation transaction for the

Infrastructure Project: -

Diagram: Structuring Securitisation Transaction

Based on the structuring of the Transaction, securitisation can be applied in

the Pre-Implementation Stage and also in the Post Commissioning Stage.
Features of the transaction:

1.Under the BOT law, Concession agreement is signed between the

Infrastructure Project Company (SPV), the Project Sponsoring
Company executes the EPC contract on behalf of the SPV.

2. The Project Sponsoring Company provides credit enhancement in

terms of cash collateral or guarantees or stand by finance facility to
enhance the credit rating of the transaction.

3. The Project Lenders are paid back by the project cash flow.

4. Project Risk is mitigated partly by the concession agreement here.

5.The whole exercise will be an off balance sheet financing treatment

for the project sponsoring company.

Securitisation in the Post Commissioning Stage

* In the Post Commissioning Stage, there is Multiple Project Risk Participation
can be attracted to optimize the cost of fund.
* The Project Risk is almost diminished in the Post Commissioning Stage.
*Thus in this manner a large number of Investor base can be attracted in the
Financing of the Infrastructure Projects. The diagram of "relevance of the
securitisation on Road Sector" explains the process of securitisation in the post
commissioning stage.

Benefits of Securitisation in infrastructure financing

The Major Benefits of Securitisation in Infrastructure Financing: -
*Reduction in the Cost of Capital à Alternative Source of Fund.
* Technique of Risk Mitigation.

Regulatory and Legal Issues to be addressed

The following are the regulatory and the legal issues which are acting as
hindrances to the development of the market for securitisation: -

a. Legal Issues: -
* Partial Assignment of Debt under the Indian Law.
* Sale of future receivables which operates as an executory contract and
therefore is not covered under the definition of debt under law.
* Rights of "Securitised" asset owners or lenders vis a vis rights of conventional
lenders who take a charge on all book debts "present" and "future". These
covenants make it difficult to consummate "Securitisation" transactions.
* Incidence of Stamp duty on assignment of cash flow and receivables is
prohibitive and therefore renders securitisation transactions fiscally unviable.
b. Taxation Issues: -
*Section 60 transfer of income i.e. is transfer of Income without transfer of assets

*SPV structure is incidence to the Double Taxation.

* Transferability of Fiscal benefits to the SPV of the Infrastructure Projects and
Investors via: -
1. Section 80IA
2. Section 10(23)(g)
3. Section 88
c. Accounting Issues: -
* For Infrastructure Company Securitising the Assets the Income received in
Advance, there are no specific guidelines on Advance Income received. à For
SPV the income generated will be treated as Profit or interest income is also to
be issued.
d. Company Act and RBI: -
* The classification of an SPV - NBFC than it will require
1. Registration requirements
2. SLR requirements
3. Loan/Investment restrictions
* Fixed v/s Floating charge on the SPV is also to be addressed.
It is anticipated that a change in various regulations and an overall framework for
securitisation may provide impetus to infrastructure financing in the Indian

Major Securitisation Deals in India

Issue Amount
Sr. Rating
Deal Structured (Rs. Time Remarks
No. Agency
By Crs.)
Citibank Auto First Securitisation
1. NA CRISIL 16 1991
loan Exercise in India.
In the Fashion of
3. PFSL ICICI CRISIL 60 1997 First Listed Deal
Infrastructure Innovative Deal
4. ICICI CRISIL 409 1999
Developers from
Limited the house of L&T.
5. NHB-HDFC SBI CAPS CRISIL 88.8 2000 India's First RMBS

Funds Requirements for Ports

Total Cost of Internal Internal Additional Additional

Additional Resources Resources Resources Resources
Capacity Available Available Available Available
Creation (MOST) (Experts) (MOST) (Experts)
1996-01 1,00,729 68,166 59,991 32,562 40,738
2001-06 1,53,836 1,18,819 75,147 35,019 78,689
1.In case of GAPL right now they don’t have any fixed contracted revenue in
considerable amount but in future they have a great advantage in doing
this types of deals.

2.Securitisation is a very fast and a complex subject in the financial

engineering. It is certainly a very new concept in the emerging market like

3. Securitisation will definitely solve some problems of the Infrastructure

Financing in India.

4.Already 5 states in India have taken crucial steps in reducing the stamp
duty for the transaction structured on the basis of Securitisation.

5.While certain legal, taxation, accounting and other regulatory issues are in
the limelight and are needed to be addressed soon.

6. With the new instrument becoming familiar to the market and further as the
retail investor takes interests in securitised products, the cost of the capital
will come down over a period of time.

7.In any country, more complex the Capital market is and greater the depth it
has in its Debt Market, the economy of that country is considered to be
Highly Matured.

1)Life Business:
In terms of explanation in Section 27 A of the Act, the Authority has determined
that assets relating to Pension business, Annuity business and Linked Life
Insurance business shall not form part of the Controlled Fund for the purpose of
that section.

Without prejudice to Section 27 or Section 27A of the Act, - Every insurer

carrying on the business of life-insurance shall invest and at all times keep
invested his controlled fund (other than funds relating to pension and general
annuity business and unit linked life insurance business) in the following manner:

Infrastructure and Social Sector

For the purpose of this requirement, Infrastructure and Social Sector shall have
the meaning as given in regulation 2(h) of Insurance Regulatory and
Development Authority (Registration of Indian Insurance Companies)
Regulations, 2000 and as defined in the Insurance Regulatory and Development
Authority (Obligations of Insurers to Rural and Social Sector) Regulations, 2000

They can invest 15% or more in companies which fall under the definition.
2) General Business:
Without prejudice to Section 27 or Section 27B of the Act, - Every insurer
carrying on the business of general insurance shall invest and at all times keep
invested his total assets in the manner not less than 10% in infrastructure and
social sector companies as per section 2(h):

As per regulation 2(h) of Insurance Regulatory and Development Authority

(Registration of Indian Insurance Companies) Regulations, 2000
"infrastructure facility" means ---

i.A road, highway, bridge, airport, port, Railways including

BOLT, road transport system, a water supply project,
irrigation project, industrial parks, water treatment
system, solid waste management system, sanitation
and sewerage system;

ii.Generation or distribution or transmission of power;


iv.Project for housing;

v.Any other public facility of a similar nature as may be

notified by the Authority in this behalf in the Official

Other Conditions That Insurance Company Has To Follow.

1.Every insurer shall endeavor to maintain a proper balance between the
investments made in infrastructure sector and those in the social sector.
Bonds issued for development of these sectors, duly guaranteed by
Government or otherwise rated not less than ‘‘AA’’ by independent,
reputed and recognized rating agencies, issued by others would qualify for
compliance of this regulation.
2.All investment in assets/ instruments, which are capable of being rated as
per market practice, is based on rating of such assets/ instruments.
3.The rating should be by an independent, reputed and recognized Indian or
foreign rating agency.
4.The assets/ instruments under consideration for investment shall be of a
grade not less than “AA” of investment grade as per their current rating. In
case Investments of this grade are not available to meet the investment
requirements of the investing insurance company and investment
committee of the investing insurance company is fully satisfied about the
same, then, for the reasons to be recorded in the investment committee’s
minutes, the investment committee may approve investment in
instruments carrying current rating of not less than +A. Investments in the
+A to be kept to the minimum.

5.The rating of Debt Instruments issued by all India financial institutions

recognized as such by RBI may be of ‘AAA’ or equivalent rating. In case
investment of this grade are not available to meet the requirements of the
investing insurance company and investment committee of the investing
insurance company is fully satisfied about the same, then, for the reasons
to be recorded in the investment committee’s minutes, the investment
committee may approve investments in instruments carrying current rating
of not less than ‘AA’ or equivalent as rated by an independent, reputed
and recognized Indian or foreign rating agency.

6.No investment shall be made in an asset/ instrument, which is capable of

being rated as per market practice but has not been rated.

7.Investments in equity shares listed on a recognized stock exchange should

be made in actively traded and liquid instruments viz., its trading volume
does not fall below ten thousand units in any trading session during the
last 12 months or trading value of which exceeds Rs. 10 lacs in any
trading session during last 12 months.”

As per the section 2(h) GAPL is falling under the required category but as indicated in
other condition that company will require credit rating of ‘AA’ or guarantee from the
government and GAPL has not acquire credit rating yet so after they get rating they can
exercises this option.


What is Mezzanine Finance?

Mezzanine Finance has two fundamental perspectives. First is in terms of capital
structure wherein mezzanine financing is used to fill the gap between equity and
senior debt. It is generally structured as subordinated debt with warrants or some
other equity feature or as preferred stock.

The second definition is in the venture capital parlance, mezzanine financing is a

an instrument that bridges gap between the initial rounds of venture financing
and a liquidity event like an IPO, acquisition or refinancing. This financing is
generally structured as subordinate debt with warrants having a term of not more
than 3 years.

Simply put, mezzanine finance is a cross between a loan and equity in the form
of a call option or convertible that allows the investor to convert the loan into an
equity investment at a previously agreed price. It is usually subordinated to
senior debt but ranks higher than common equity. Some mezzanine finance
investors may not incorporate an equity component. Instead, they may
accept a higher stepped-up interest rate towards the end of the loan or
incorporate some type of formula tied to the performance of the company
(e.g. a percentage of the sales or profit). The borrower will have to pay a
higher interest rate or coupon rate than senior debt, usually at 10-12% p.a., but
suffers less dilutive effect in shareholding compared to pure equity investments.
Moreover, as mezzanine finance is usually a subordinated loan, its loan
covenants are usually less stringent than senior debt. Mezzanine finance has
traditionally been perceived as a bridging loan, but it is increasingly used as a
stand-alone investment in buyouts or as a substantial investment to further
expands a business.

The Indian Perspective

Traditionally, the Indian banking practice has focused on asset covers. The
emphasis on cash flows has been less as bankers over the years have followed
Chore and Tandon Committee norms. As per the current norms, more borrowing
means more asset cover from the borrowers, when the borrower is unable to
support further borrowing through assets they are left gasping for funds. This is
especially true in case of buyouts and turnarounds where conventional financers
refuse to participate due to restrictive policy framework. Also, lackluster IPO
market and lack of private finance in Indian markets has resulted in a funding
void, it is here that mezzanine finance options can be exercised to bridge this
gap. Realizing the need for corporate funding prior to IPO and non-asset based
borrowings many overseas funds have setup dedicated mezzanine funds in India
based on attractive returns.

It is expected that this paradigm will soon catch up in a big way. Private equity
players and multilateral agencies are gradually occupying the areas avoided by
Banks & FIs. The focus of evaluation would now be more on cash flows and
earnings. Corporate aspiring for ambitious buy-outs, turnarounds, expansion and
non-asset based borrowings will have a an alternative available.

Although the concept of Mezzanine finance is in the introduction stage, industry

dynamics indicate that the road ahead for mezzanine finance is promising.
Characteristics of Mezzanine Finance

Salient Features Key benefits Drawbacks

· Useful for startups, · Leads to over leveraging,
· Adds additional tier of
infrastructure projects, which may not be suitable
financing between equity
buyouts, acquisitions and for some projects
and debt.
turnaround cases · Senior lenders can block
· Cost is higher than
· Does not require payments to mezzanine
traditional debt, but lesser
additional asset cover lenders, if the senior debt
than equity
· Exit route for lenders is is not serviced
· Claim over the financial
pre-defined · Invites provisions on
assets is senior to equity
payment stream that can’t
and trade creditors while · Lender can avail option of
capital appreciation be changed even by
junior to secured lender
thorough equity senior lenders
· Generally in the form of
conversion · In case of default,
preference shares,
· Seniors lenders can use mezzanine lenders can
convertible loans,
mezzanine as buffer stop senior lenders from
participating loan or
against risk accelerating their
combination of it.
installments. while, Senior
· Can avail credit · Lenders/VCs can avail
lender can compel
enhancement with higher returns based on
mezzanine lenders to
exclusive use of debt their evaluation skills and
grant waivers.
service reserve account. relationship
· Document intensive
Key comparisons among different classes of investment

Mezzanine Private Equity

Senior Debt High Yield Bond Finance Venture Capital
Nature Loan, ranks Loan, subordinated Loan, subordinated Usually common
highest in times of to senior debt but to senior loan and equity, however
liquidation ranks higher than usually bonds but may be in the form
common equity ranks higher than of convertible bond
common equity with a low coupon
Convents/ Stringent Less stringent than Less stringent than Least stringent
undertakings senior debt senior debt
Equity Absent Absent Call Common equity.
component option/convertible Option to convert
bond to convertto common equity if
into common it is a convertible
equity bond
Shareholding Absent Absent Less dilutive than More dilutive than
dilutive effect private mezzanine finance
Return expected Market lending rate 12-14% p.a. 18-20% p.a., 30%-35% p.a.
from investors inclusive of 10-
12% p.a. coupon
rate, with the
remaining return
from the equity
portion or higher
stepped up interest
rate/other formula
tied to the
performance of the

Mezzanine finance is at a introduction stage in India with very few publicized
deals. I want to suggest mezzanine finance deal which is based on GAPL’s
future performance we take loan at lower rate but if we earn good profit we’ll give
share of that profit to lender but as it is less popular and all legal aspect are still
not clear GAPL can consider it after looking at all the legal aspects only. The
benefits offered by this novel method of financing promises alternative options to
the CFOs . M&As, huge expansion (big ticket projects) and turnarounds are
domains where funds are some time required more than what an enterprise can
borrow. Let’s see how mezzanine finance has been useful in such cases where
firms have failed to obtain conventional finances.

In case of large-scale projects, fund requirement often exceed the estimated

cost and procuring fresh loans may not be easy. On the other hand, equity route
may not be preferred since it dilutes promoters’ holding. In such cases,
mezzanine finance rescues the project. Recently, a power utility in Kerala is
reportedly arranging for mezzanine finance, which would result in an additional
tier of finance in the company. The structure of the instrument would provide
advantages to all the participants viz. sponsors (equity providers), senior lenders
and subordinate debt providers. It is reportedly considered by a domestic
infrastructure financing company .Mezzanine financing is crucial in financing
acquisition as it its flexible nature allows tailor made funding solution that
contributes significantly in improving equity returns. When companies lack free
reserves to make a buyout that has tremendous value creation potential in the
form of synergy. In such case, mezzanine financing could be seen as suitable
alternative. Classic example for mezzanine financing in India is Tata tea’s
acquisition of Tetley group. Here, Tata tea could acquire a global giant Tetley
with limited “risk and cash flow pressure” on its balance sheet. This leverage
buyout deal was funded through senior debt as well as mezzanine finance. Here,
an acquirer could target large size acquisition with a limited risk and cash flow
AEL Adani Export Limited
AFF A.F.Ferguson & Company
AMPR Adaipur Mundra Port Railway
APL Adani Port Limited
BOOT Build, Own, Operare and Transfer
BOT Build, Own and Transfer
CCOE Chief Control of Explosive
CD Chart Datum
CFS Container Freight Station
CMIE Center for Monitoring Indian Economy
COT Crude Oil Terminal
CT Container Terminal
DBT Dry Bulk Terminal
DOC De-Oiled Cake
DPR Detailed Project Report
DWT Dead Weight Tonnage
FRM Fertiliser Raw Material
GEB Gujarat Electricity Board
GGSRL Guru Gobind Singh Refineries Limited
GIIC Gujarat Industrial Ivestment corporation Limited
GMB Gujarat Meritime Board
GoG Government of Gujarat
GPCB Gujarat Pollution Control Board
GPIDCL Gujarat Port Infrastructure Development Company Limited
GPPL Gujarat Pipvav Port Limited
GSPL Gujarat State Petronet Limited
HPCL Hindustan Petroleum Corporation Limited
ICD Inland Container Depo
JNPT Jawaharlal Nehru Port Trust
KL Killo Liters
LSHS Low Sulphar Heavy Stock
MbPT Mumbai Port Trust
Mn.Cum Million Cubic Meters
McR Ministry of Railways
MPT Multi Purpose Terminal
MTP Monthly Traffic Plans
NH National High Way
NIO National Institute of Oceangraphy, Goa
POL Petrolium, Oik & Lubricants
R&D Receipt & Dispatch
SBM Single Buoy Mooring
SH State High Way
TAMP Traffic Authority for Major Ports
TEU Twenty Feet Equivalent Unit
TPH Tons Per Hour
TRIMS Tata AIG Risk Management Services
VLCC Verry Large crude Carriers
List of Abbreviations



What is a credit rating?

A credit rating is an independent assessment of the creditworthiness of a bond
(note or any security of indebtedness) by a credit rating agency. It measures the
probability of the timely repayment of principal and interest of a bond. Generally,
a higher credit rating would lead to a more favorable effect on the marketability of
a bond. The credit rating symbols (long-term) are generally assigned with "triple
A" as the highest and "triple B" (or Baa) as the lowest in investment grade (See
below for definition of rating grades). Anything below triple B is commonly known
as a "junk bond."

Credit rating is essentially, the symbolic indicator of the current opinion of the
rating agency on the relative ability and the willingness of the issuer of a financial
(debt) instrument to met the (debt) service obligations as and when they arise. It
other words, credit rating provides a simple system of gradation by which the
relative capacities of companies (borrowers) to make timely repayment of interest
and principal on a particular type of debt/financial instrument can be noted.

Credit rating however is neither a general-purpose evaluation of a corporate

entity nor an overall assessment of the credit risk likely to be involved in al the
debt/financial instrument and do such issues contract intended to grade. A rating
is specific to a debt clash financial instrument and is intended to grade different
and specific instruments in terms of credit risks associated with particular
instruments. Although it is an opinion expressed by an independent professional
organization, on the basis of a detailed study of all the relevant factors, the rating
does not amount to any recommendation to by, hold or sale an instruments as it
does not take into considerations, which may influence an investment decision.

As a fee-based financial advisory service, credit rating is obviously, extremely

useful to investors, corporate (borrowers), banks, and financial institutions. For
the investors, it is an indicator expressing the underlying credit quality of a (debt)
issue program. The investor is fully informed about the company as any effect of
change in business/economic condition of the company is evaluated and
published regularly by the rating agencies.

The corporate borrowers can raise fund at a cheaper rate with a good rating. It
minimizes the role of ‘name recognition’ and lesser-known companies can also
approach the market on the basis of their rating. The fund ratings are useful to
the bank and other financial institutions when they decide on lending and
investment strategies.

Although credit rating has been a long established part of the financial
mechanism abroad, it is of relatively recent origin in the country. The first rating
agency, Credit Rating Information Services of India Ltd. (CRISIL), was started in
1988. Initially it played a rather subdued role presumably because the
institutional investors did not require the wisdom of the rating agency. In a
change scenario where corporate are increasingly dependent on the public, the
removal of restriction on interest rate and stipulation of a mandatory credit rating
of a number of instruments since 1991 by the government/ SEBI, credit rating
has emerged as a critical element in the functioning of the India debt/financial
markets. In response to the ever increasing role of credit rating, two more
agencies were set up in 1990 [Information and Credit Rating Services (ICRA)
Ltd. And 1993 Credit Analysis and Research (CARE) Ltd. Respectively.

The first private sector credit rating institution was set up as a joint venture
between the JM Financial, Alliance Group and the International rating agency
Duffs and Phelps in 1995, known as Phelps Credit Rating India Ltd. (DCR). In
addition to the mandated ratings, these agencies are also diversifying into other
instruments/sectors. Unlike abroad, unsolicited rating is still not done in India.
Nevertheless, the increasing recognition to credit rating in the emerging financial
services industry in the country marks a major transition from a corporate culture
where names mattered to one where abstract grading count.

This chapter examines the present status of the credit ratings industry/system in
India. Section 1 of the chapter briefly profiles the credit ratings agencies,
followed by the rating process in Section 2. The rated instruments and the rating
symbols are discovered in the following section. The main points are summarized
in the last section of the chapter.


The process/procedure followed and the methodologies used generally by CRAs

in respect of mandated and other instruments are briefly outlined in this section.

Rating Process/Procedure
All the four rating agencies in the country adopt a similar rating process. The
steps followed by them in the rating process are illustrated with reference to 1)
new issues/instruments 2) review of rating and 30flow chart of rating.

Rating Process of New Issues

The following steps are involved in rating the issuers’ instruments for the first time
before going public.
Rating Agreement and Assignment of Analytical Team
The process of rating starts with the issue of the rating request by the issuer of the
instrument and the signing of the rating agreement. On receipt of the request, the
credit rating (CRA) assigns an analytical team, comprising two/more analysts, one
of whom would be the relevant business area are responsible for carrying out the
rating assignments.

Meeting with Management

Prior to meeting with issuer, the analytical team obtains and analyses information
relating to its financial statements, cash flow projections and other relevant
information detailed below:
1) Annual reports for the past five years and interim reports for the past three
- if annual reports do not include cash flow statements, then cash flow
statements should be provided for the above periods.
- if the interim reports do not contain balance sheets, these should also be
2) Two copies of the latest prospectus offering statements and applications for
listing on any major stock exchanges.
3) Consolidated financial statements for the past three fiscal ears by principal,
subsidiary or division.
4) Two copies of the statements of projected sources and application of funds,
balance-sheets and operating statements for at least next three years along with
assumptions on which projections have been based.
5) Copies of existing loan agreements , along with recent compliance letters, if
any. In the case of outstanding public debt issues, copies of compliance letters
required by indenture of such debt should be furnished.
6) A certified copy of the resolution adopted by the board of the company
authorizing the issuance of commercial paper and or other short-term debt
instruments, including the name of authorized signatories.
7) List of the banks, showing lines of credit and contact officers for each, along
with duly completed short-term borrowings from them in the prescribed format.
8) If applicable, the name of commercial paper dealer of the company, the
planned use of proceeds from the sale of commercial paper, the amount of
commercial paper to be used, and a specimen copy of the commercial paper
9) Biographical information on the company’s principal officers and the names of
the board members

There is no prescribed format for supplying above information but any format
could be flexibly used to cover all the required information adequately.

A complete brief followed by a discussion on management philosophy and plans

should also be obtained. There are certain important aspects which should be
known since these impact the credit quality of the instrument being rated.
Discussions with the management might reveal more information as such
discussion should cover the following matters:
a) Discussion on the management philosophy and plan should camouflage
the financial and operating data for the past five years and three to five years for
future projections.
b) Discussion on projections should reveal management objectives and future
plans, that is future growth plan of the company should be crystallized. These
projections are supposed to reflect a “management’s” best estimates of future
financial posture of the company and incorporate underlying economic
assumptions for the future as well as growth objectives, marketing strategies,
spending plans and financing needs and alternatives. The financial projections
play a significant role in the rating process as they indicated a management plan
for the future. They illustrate the financial strategies of the company in terms of
anticipated reliance on internal cash flow or outside funds.
c) Discussion must help reveal the risks and opportunities which affect credit
quality over the period covered under projections.

Other key factors that the issuer believes will have an impact on the rating,
including business segments analysis, portfolio analysis and so forth, should also
be discussed.
The analytical team then proceeds to have detailed meetings with the company’s’
management. To best serve the interests of the investors, a direct dialogue is
maintained with the issuer as this enables the CRAs to incorporate non-public
information in a rating decision and also enables the rating to be forward looking.
The topics discussed during the management meeting are wide ranging, including
competitive position, strategies, financial policies, historical performance and near
and long-term financial and business outlook. Equal importance is placed on
discussing the issues, business risk profile and strategies, in addition to reviewing
financial data.

The rating process ensures complete confidentiality of the information provided by

the company. All information is kept strictly confidential by the rating group and is
not used for any other purpose or by any third party other than the CRAs.

Rating Committee
After meeting with the management, the analysts present their report to a rating
committee which then decides on the rating. The rating committee meeting is only
aspect of the process in which the issuer does not participate directly. The rating
is arrived at after a composite assessment of all the factors concerning the issuer,
with the key issues getting greater attention from the rating committee.

Communication to the Issuer

After the committee has assigned the rating, the rating decision is communicated
to the issuer, along with the reasons or rationale supporting the rating.

For a rating to have to an issuer or to an investor, the CRA must have credibility.
The thoroughness and transparency of its rating methodology and the integrity
and fairness of its approach are important factors in establishing and maintaining
credibility. The CRAs are, therefore always willing to discuss with the
management, the critical analytical factors that the committee focused on while
determining the rating and also any factors that the company feels may not have
been considered while assigning the rating.
In the event that the issuer disagrees with the rating outcome, he may appeal the
decision for which new/ additional information, which is material to the appeal and
specifically addresses the concerns expressed in the rating rationale, need to be
submitted to the analysts. Subsequently, a note is put up once again before the
rating committee where the rating may or may not undergo a change. The client
has the right to reject the rating and the whole exercise is kept confidential.

The rating process, from the initial management meeting to the assignment of the
rating normally takes three to four weeks. However, when required, the CRAs
deliver the rating decision in shorter time frames.

Dissemination to the Public

Once the issuer accepts the rating, the CRAs disseminate it, alone with the
rationale, through print media.

Rating Review for Possible Change

In case of rated instruments, the rated company is on the surveillance system of
the credit rating agency and from time to time, the earlier rating is received. The
CRA constantly monitors all ratings with reference to new political, economic and
financial developments and industry trends. The CRA prepares annual review
proposals for rating review committee. The following steps are necessary in the
rating process for review cases.

New Data of Company

The analysts review the new information or data available on the company which
might be sent to it by the company or it might have been procured through routine
channels as strategic information under its surveillance approach. If the new
information is crucial for rating decisions then analysts take action to collect more
information as may be available from different sources and study the same from
the angle of relevance and authentically.

Rating Change
On preliminary analysis of the new data, oif the analysts feel that there is a
possibility for changing the rating, then the analysts request the issuer for a
meeting with its management and proceed with a comprehensive rating analysis.
The rest of the procedure of presenting the rating opinion to a rating committee
and so on is the same as is followed in the cases of new issues discussed above.

Credit Rating Watch

During the review monitoring or surveillance exercise, rating analysts might
become aware of imminent events like merger and so on, which affect the rating
and warrants rating change. In such a possibility, the issuer’s rating is put on
‘credit watch’ indicating the direction of a possible change and supporting reasons
for a review. Once a decision to either change or present the rating has been
made, the issue will be removed from ‘credit watch’. The duration of credit watch
is for 90 days. In case the rating is modified, the same procedure of presentation
to the rating committee, and so on are followed. ‘Credit watch’ indicates four
situations for changing the rating, namely (1) “Negative” change indicating the
possibility of downgrade, (2) “Positive” change indicating an upgrade (3) “Stable”
implying no change in rating and (4) “Developing” implies and unusual situation in
which the future events are so unclear that the rating may be changed either in
negative or positive directions.

Flow Chart of the Rating Process

The steps for the rating process discussed in the foregone paragraphs can be
summed up in the flow chart in Figure 16.1

Rating Methodology
The rating methodology involves an analysis of the industry risk, the issuers
business and financial risks. A rating is assigned after assessing all the factors
that could affect the credit worthiness of the entity. Typically, the industry risk sets
the stage for analyzing more specific company risk factors and establishing the
priority of these factors in the overall evaluation. For instance, if the industry is
highly competitive, careful assessment of the issuers’ market position is stressed.
If the company has large capital requirements, the examination of cash flow
adequacy assumes importance. The ratings are based on current information
provided by the issuer or facts obtained from reliable both qualitative and
quantitative criteria are employed in evaluating and monitoring the ratings.

For Manufacturing Companies:

The main elements of the rating methodology for manufacturing companies are
outlined below.

Business Risk Analysis: The rating analysis begins with an assessment of the
company’s environment focussing on the strength of the industry prospects,
pattern of business cycle as well as competitive factors affecting the industry. The
vulnerability of the industry to government controls/regulations is assessed.

The nature of competition is different for different industries based on price,

product quality, distribution capabilities, product differentiation, service and so on.
The industries characterized by a steady growth in demand, ability to maintain
without impairing future prospects, flexibility in the timing of capital outlays and
moderate capital intensity are in a stronger position.

When a company participates in more than one business, each segment is

analyzed separately. A truly diversified company does not have a single business
segment that is dominant and the company’s ability to manage diverse operation
is significant factor. As part of the industry analysis, key rating factors are
identified into keys to success and areas of vulnerability. The main industry and
business factors assessed include:

Industry Risk : Nature and basis of competition, key success factors, demand
and supply position, structure of industry, cyclical/seasonal factors, government
policies and so on.

Market Position of the Issuing Entity Within the Industry : Market share,
competitive advantage, selling and distribution arrangements, product and
customer diversity and so on.

Operating Efficiency of the Borrowing Entity : Locational advantages, labor

relationship, cost structure, technological advantages and manufacturing
efficiency as compared to competitors and so on.

Legal Position : Terms of the issue document/prospectus, trustees and their

responsibilities, system for timely payment and for protection against
fraud/forgery and so on.

While the CRAs do not have a minimum size criterion for any given rating level,
the size of the company is a critical factor in the rating decision as smaller
companies are more vulnerable to business cycle swings as compared to larger
companies. In general, small companies are more concentrated in terms of
product, number of customers and geography and, consequently, lack the
benefits of diversification that can benefit larger firms.

If the company being rated is a subsidiary or an affiliate, that is controlled by/has

strong links with a dominant parent, then the rating also includes an analysis of
the parent company’s credit quality. The parent company’s credit quality could
have an impact on the issuer’s own credit quality.

Financial Risk Analysis : After evaluation the issuer’s competitive position and
operating environment, the analysis proceed to analyze the financial strength of
the issuer. Financial risk is analyzed largely through quantitative means,
particularly by using financial ratios. While the past financial performance of the
issuer is important, emphasis is placed on the ability of the issuer to
maintain/improve its future financial performance.

As rating rely on audited data (the rating process does not entail auditing a
company’s financial records), the analysis of the audited financial results begin
with a review of accounting quality. The purpose is to determine whether ratios
and statistics derived from financial statements can be used to accurately
measure a company’s performance and its position, relative to both its peer
group and the larger universe of companies.

The profitability of a company is an important determinant of its ability to

withstand business adversity as well as generate capital internally. The main
measure of profitability studied include operating and net margins and return on
capital employed. The absolute levels of these ratios, trends in movement of the
ratios as well as comparison of the ratios with other competitors, is analysed. As
a rating exercise is a forward-looking exercise, greater emphasis is laid on the
future, rather than the past earning capability of the issuers.

Emphasis is also laid on an analysis of cash flow pattern, as it provides a better

indicator of the issuer’s debt servicing capability compared to reported earnings.
A cash flow analysis reveals the usage of cash for different purpose, and,
consequently, the extent of cash available for debt service.

The future debt claims on the issuer’s as well as issuer’s ability to raise capital is
also assessed in order to arrive at the level of the issuer’s financial flexibility. The
areas considered in financial analysis include :

Accounting Quality : Overstatement/understatement of profits, auditors

qualifications, method of income recognition, inventory valuation and
depreciation policies, off Balance sheet liabilities and so on.

Earnings Protection : Sources of future earnings growth, profitability ratios,

earnings in relation to fixed income charges and so on.

Adequacy of Cash Flows : In relation to debt and working capital needs,

stability of cash flows, capital spending flexibility, working capital management
and so on.

Financial Flexibility: Alternative financing plans in times of stress, ability to raise

funds, asset deployment potential and so on.

Interest and Tax Sensitivity: Exposure to interest rate changes, tax law
changes and hedging against interest rates and so on.

Management Risk : A proper assessment of debt protection levels requires an

evaluation of the management philosophies and its strategies. The analyst
compares the company’s business strategies and financial plans (over a period
of time) to provide insights into a management’s abilities with respect to
forecasting and implementing of plans. Specific areas reviewed include : (i) Track
record of the management : planning and control systems, depth of managerial
talent, succession plans ; (ii)Evaluation of capacity to overcome adverse
situations ; and (iii) Goals, philosophy and strategies.
Financial Services Sector : When rating debt instruments of financial
institutions, banks and non-banking finance companies, in addition to the
financial analysis and management evaluation outlined above, the assessment
also lays emphasis on the following factors:

Regulatory and Competitive Environment : (i) Structure and regulatory

framework of the financial system ; (ii) Trends in regulation/deregulation and their
impact on the company/institution.

Fundamental Analysis to include

Capital Adequacy : Assessment of the true networth of the issuer, its adequacy
in relation to the volume of business and the risk profile of the assets.

Resource : Overview of funding sources; funding profile; cost and tenor of

various sources of funds.

Asset Quality : Quality of the issuer’s credit risk management; systems for
monitoring credit; sector risk; exposure to individual borrowers; management of
problem credits and so on.

Profitability and Financial Position : Historic profits; spreads on funds

deployment; revenues on non-fund based services; accretion to reserves and so

Interest and Tax Sensitivity : Exposure to interest rate changes; tax law
changes and hedging against interest rate.

The summary of information to be submitted by manufacturing and financial

companies for rating assignment is given in Appendix 16-B and 16-C

Credit Rating Agencies

Credit Analysis & Research (CARE)
5th Floor, Mahindra Towers,
Dr G. M. Bhosale Marg,
Worli, Mumbai - 400 018,
Tel : 4925242/44, 4932588/5627, 4975574/75
Fax : 4973243

Credit Rating Information Services of India Limited (CRISIL)

Crisil House (Pinnacle Chambers),
121/122, Andheri Kurla Road
Andheri (East),
Mumbai - 400 093
Tel : 6913001-9
Fax: 6913000

Fitch Ratings India Pvt. Ltd.

2-B Lake Temple Road, 1st Floor
Kolkata 700029
Tel : 465 5326, 465 5327
Fax: 465 5327

Investment Information & Credit Rating Agency of India Limited (ICRA)

Kailash Building, 4th Floor
26, Kasturba Gandhi Marg
New Delhi - 110001
Tel : 335 7940-50
Fax : 335 7014, 335 5293


Proper infrastructural development is a prerequisite for steady and healthy

economic growth of the country. The availability of adequate infrastructure
facilities is imperative for the overall economic development of the country.
Infrastructure adequacy helps determine success in diversifying production,
expanding trade, coping with population growth, reducing poverty and improving
environmental conditions.

Indian port sector has come a long way since last decade or two but still there is
a long way to go as the country becomes more globalised and integrated with the
global economies. The authorities have understood the importance of ports as a
lifeline form an economy. Many steps have been taken to develop the sector but
still they are not enough for the port sector to groom properly.

The biggest problem with the port sector seems to be the availability of funds for
finance. After liberalization process the companies are offered with many type of
different instruments for funding the projects. Different benefits like tax holidays
and subsidies are given to encourage investments in the ports.

It has become easier for port companies to procure funds as interest rates have
come down considerably in last decade or so. The option of procuring funds from
foreign market is also made accessible for the companies.

There are many debt restructuring plans available for the company as mentioned
above. It is upon the higher authorities at the GAPL to decide the tool they will
use in future to substitute high interest loans. Every instrument has its own pros
and cons but we have to properly decide which will be the most beneficial for the
company in the long term by comparing the instrument with the objective, goals
and working of the organization. Borrowing should be made in long term
instrument as the break even period in ports is longer. Instruments should be
such that they give stability as well as flexibility to the organization’s decision

Credit rating as a source for easy procurement for funds is very important. Good
rating by a well recognized institution reduces amount of effort needed in order to
procure funds from the market. Thus it is very important for to have good repo
with credit rating agencies in order to have a smooth fund procuring process if
needed by the company.
GAPL is very dynamic organization which believes in constantly looking for
opportunities and chances to enhance their business. They constantly look for
options to improve their profitability and become more and more competitive. My
experience with GAPL as a trainee will be very useful for me in my future when I
join a company as dynamic and efficient as GAPL.


“Brochures of HDFC mutual fund, Kotak Mutual fund, Franklin Templeton India”

Mehta, Aman.(Kotak securities) “current bond issues and cost of bond issues”
interviewed by Prakash Notani, 25 February, 2003.

Chandra, Prassana. Financial Management. NEW DELHI: Tata McGraw-

Hill.2001. pp. 347-407.