VCE Summer Internship Program 2020

Smart Task Submission Format

Intern’s Details
Name Ravi Kumar

Email-ID ravi33kumar94@gmail.com

Smart Task No. 03

Project Topic

Smart Task (Solution)

Task Q1 : How a new venture is assessed to qualify as project finance? What are the factors
that needed to be considered?

Task Q1 Solution :

In the project finance business, deal origination happens through the direct relationship that
relationship managers across different sectors enjoy in the industry. Proposals are presented in the
form of appraisal notes put up to either the credit committee or a committee of senior management,
whichever is the appropriate sanctioning authority. Due diligence in project finance involves
thoroughly reviewing all proposals involved in a deal.
An appraisal note ideally contains a write up on the company background, its management and
shareholding pattern, its physical and financial performance, purpose of the project being funded,
details of costs involved and means of financing, the market for company’s products, future
prospects and profitability projections, risk analysis, and the terms and conditions of sanction.
An assessment of the promoters’ history is conducted to ensure the commitment of promoters to
the project. The main motive is to identify the background and track record of the promoters
sponsoring the project. The following terms are assessed:
 Assessment of group companies 

Involves in-depth study of various companies promoted by the sponsor. Assessment of group
companies is necessary even in cases where no direct support from companies to the project
company exist. In case the group is facing a severe financial crunch, the possibility of diversion of
funds from the project company cannot be ruled out. In such circumstances, the lenders need to
take adequate steps to ring-fence the project revenues.

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 Track record of sponsors – In case of any subsisting relationship with the sponsor, the track
record of the sponsors should be studied in light of its relationship. The lender should identify
any incidences of default and analyze the causes for the same.

 Management profile of sponsor companies – Helps in assessing the quality of management.

Lenders are typically more comfortable taking exposure with professionally managed
companies.

 Study of shareholders agreement – Study of the shareholders agreement should be done in

order to get clarity on issues such as voting rights of shareholders, representation on the board
of directors, veto rights (if any) of shareholders, clauses for protection of minority interest,
procedure for issuing shares of the company to the public and the method of resolution of
shareholders disputes.

 Management structure of project company – Study of shareholders agreement helps in

determining the management structure of a project.

 
Evaluation of the Company and Project Business Model
An extensive evaluation of the business model assists the lenders in assessing the financial
viability of the project. Typically, a business model is developed in consultation with financial and
technical consultants. The lenders need to undertake the following steps while accessing a
business model:
 Understanding the assumptions – Major assumptions are involved regarding revenues,
operating expenses, capital expenditures, and other general assumptions like working capital
and foreign exchange

 Assessment of assumptions – Involves evaluating the various assumptions and

benchmarking the same with respect to industry estimates and various studies. Sometimes the
lenders appoint an independent business advisor to validate the assumptions made in the
business model.

 Analysis of project cost – One of the most important stages in due diligence, as a substantial
amount of capital expenditure is to be incurred. The project cost is benchmarked to other similar

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projects implemented in the industry. Also, there needs to be the assurance that appropriate
contingency measures and foreign exchange fluctuation measures have been incorporated into
the estimated project cost.

 Sensitivity analysis – A business model involves many estimates and assumptions. Some of
these assumptions do not materialize in view of changing business scenarios. Hence, it is
important to sensitize the business model to certain key parameters. The lenders need to
assess the financial viability of the project in light of sensitivity analysis coupled with ratio
analysis.

 Benchmarking with the industry – An analysis of the key ratios in light of available industry
benchmarks is useful in an overall assessment of the business plan.

The following aspects need to be considered when assessing the financial structure and
statements:
 Debt to equity ratio – A good project would ideally have a low debt-equity ratio which helps
in reducing the cost of the debt, thereby increasing the net cash accruals. Higher net cash
accruals enable the company to build up sufficient cash reserves for principal repayment and
provide a cushion to the lenders.

 Principal repayment schedule – The lender endeavors to match the principal repayment
schedule with the cash flow projections while leaving sufficient cushion in the cash flow
projections. One way of safeguarding lenders’ interests is to negotiate the creation of a sinking
fund for this purpose

 Sinking fund build-up – Build-up of a sinking fund or Debt Service Reserve Account is
usually established in order to safeguard the lenders’ interests. Such a fund entails deposit of a
certain amount in a designated reserve account which is used towards debt servicing in the
event of a shortfall in any year/quarter of the debt repayment period.

 Trust and retention mechanism – In projects, a trust and retention mechanism is often
incorporated in order to safeguard the lenders’ interest. The mechanism entails all revenues
from the company to be routed to a designated account. The proceeds thus credited to the
account are utilized towards payment of various dues in a predefined order of priority.

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Generally, the following waterfall of payments is established: statutory payments including tax
payments, operating expenditure payments, capital expenditure payments, debt servicing,
dividends, and other restricted payments.

500 Words (Max.)

Task Q2 : Explain in detail the revenue model for Solar PV project, residential Building,
manufacturing unit and other PPP projects.

Task Q2 Solution :
BUSINESS MODEL OF SOLAR ENERGY PROJECT
Solar energy power plants (both utility and rooftop scale) have seen tremendous amount of growth
in last few years. With such growth in conjunction with the country’s ambitious target of 100 GW,
the market is to achieve new heights. However, acting as a hitch to such target (from consumer’s
perspective) may be selecting the correct investment plan (or more commonly business model) by
which a consumer can get desired return. Additionally the prices of solar power plant have seen a
huge downshift (Figure 1) due to various (positive and negative) reasons. Such downshift of prices
has led to a round of curiosity among the investors on the profit margins from the system. With the
advancement of technology it is now possible to have various alterations (both technical and
commercial) in a solar power plant. A business model in simple terms may be defined as a plan
which would deliver a particular product or service and earn profits in return. With reference to solar
power plant a business model is the method by which either revenue is generated by selling the
generated energy or savings are made by consuming the generated electricity. From a consumers
and/or investors prospective it is important that he chooses the right business model to minimize
his risks and maximizes his returns. This article aims to educate its reader on the various types of
business models he could possibly choose from.

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Figure 1: Recent trends of Utility scale solar energy price (Source: Mercom Capital Group)

Customer owned business model

As the name suggest, self owned business model are the ones which require the consumer to
invest themselves in the solar rooftop system. They can be further sub categorized as follows:

Gross metering: Metering is an important aspect for financial settlement in the solar power
plant. The number of units exported to and imported from the grid is recorded in the meter. Gross
metering (from the two types of known metering arrangement models) uses two separate meters for
recording the export and import of energy (Figure 2). While connected to the grid, the energy is fed into
the grid at a tariff known as Feed in Tariff (FiT) and the consumer buys the energy at his normal
applicable tariff. Prevalent in the areas with good grid reliability, this model would ensure a minimum
(guaranteed) amount of return to the consumer.

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Figure 2: A typical gross metering arrangement (Source: Google images)

Net metering: The second type of metering arrangement is known as net metering. Indirectly
promoting captive consumption of energy, "net metering uses the net difference between the export and
import of energy measured by a bi-directional net meter (Figure 3). This type of arrangement does away
with the need of storage as the energy (when needed say at night) is imported from the grid. Such model
is suitable for few categories of consumer whose tariffs are higher then cost of generation from solar
plant. Most utility/regulators tend to limit the size of the power plant such that the annual energy
generation is less that the customer’s demand. Prevalent in the areas with good grid reliability, this
model would generate revenue through potential savings for consumer and sale of excess energy to the
utility (in few cases). An additional advantage to the utility is that the financial settlement is done at a
tariff much lower than the FiT. From a customers view point, he would always consume more than his
generation capacity. This means that if he has his FiT lower than the utility tariff.

Figure 3: A typical net metering arrangement (Source: Google images)

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Let’s say a consumer’s consumption is 150 units (tariff of 10 Rs/kWh) and the generation is 100 units
(with FiT of 6 Rs/kWh). By using gross metering one would pay the utility 900 Rs while by using net
metering he would pay only 500 Rs. This means that a customer who is (almost always) consuming
more than his generation, he would always tend to pay more in gross metering if his FiT is less than his
tariff while compared to net metering where he would be paying for the net import of energy.

Figure 4: Cost benefit analysis of gross and net metering

Captive consumption (off grid route):  Off grid captive consumption (Figure 5) kind of power
plants are set up where the consumer has almost poor or no access to the grid. Such plants are set up
with an intention to either consume or store all the energy generated by the plant. This plant can replace
the old age Diesel Generator (DG) which could reduce both the cost and pollution however it would
require a storage source (battery) to be integrated with it for continuous supply of energy. The only
limitation of such system is that they (and the storage) are designed to supply energy only for particular
number of days. Hence if there is no sun for a stretch, it may result in intermittent supply of energy.

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Figure 5: Flow of energy in captive consumption (Source: Google images)

Third party owned business model

Solar leasing: Leasing has been one of the most important tools for offsetting risk. In solar
leasing (primarily followed in USA) the rooftop owner leases a rooftop system from a company. The
rooftop owner pays a pre agreed rent for such system while using the energy generated from the rooftop
system. This would reduce his dependence on grid and reduce his overall energy usage cost. An added
advantage is that both the company and the end customer are free to choose different party once the
lease period is over. Both the parties here get a fixed amount of savings over the same asset.
Solar Power Purchase Agreement (PPA) or Renewable Energy Service Company (RESCO)
model: The most commonly known model in solar industry is the Solar PPA or RESCO model. In this
model, the developer constructs the power plant and sells the generated energy to the end consumer.
The end consumer simply pays for the energy usage without worrying about the technical and financial
aspects of the plant as per the PPA. Such model is prevalent in government bodies where their rooftop
can be utilized to generate solar energy. The developer on the other hand, does not have to land
acquisition based problems but directly install the solar system.

Community shared business model

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While the first two types of business model have dominated the market, community shared
business model have been emerging in small urban centers and rural areas. Here the generated
energy (from various sources) is utilized by the entire community as per their energy needs. They
can be connected to the grid or completely disconnected from the grid based on grid availability.
The customer themselves or third party investor coupled with subsidy from the state and/or central
government is generally used to set up such communities. The energy mix from various power
plants can be used by all the consumers. Such community may be connected to the grid and hence
could utilize the grid power when power deficit. Such plant may also be off grid mandating the
usage of storage technology. A variation to such model is also possible when instead of centralized
generation each house has a distributed generation. In such cases few houses, if have increased
power requirement can obtain excess energy from other houses which has low power demand. The
house supplying power can be paid for this extra energy while maintaining the balance in the grid.
Such innovative and disruptive business models are in place and more variations of such models
may be added in near future. Additionally they would enable rural electrification along with
improved quality of power at a cheaper cost (when compared to the primitive methods of
generation).

Figure 6: Micro-gird (on left) and a Mini-grid (on

right)
500 Words (Max.)

Task Q3 : What should be the additional points that needed to be included in a financial

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m.odel, if the financing bank is from abroad and the debt is in US$ but revenue is in INR

Task Q4 Solution :

ROLE OF FORIEGN INVESTMENT IN FINANCING A PROJECT IN INDIA

The government has fully liberalised investments in the infrastructure sector and allows FDI via the
automatic route (that is, 100%, with the exception of the telecommunications sector where
government approval is required for FDI beyond 49%).
Further, to encourage private participation in the development of infrastructural facilities, the
Government of India has implemented the viability gap funding (VGF) scheme, which reduces the
capital costs and makes the project more viable and attractive for all stakeholders.
Additionally, other tax incentives available to all infrastructure related projects, whether domestic or
through FDIs, include profit-linked incentives, such as a ten-year tax holiday on infrastructure
undertakings (though the ten-year tax holiday incentive is not available for enterprises which start
the development or operation and maintenance of the infrastructure facility on or after the 1 April
2017). However, government has introduced deduction in respect of any capital expenditure for
projects that commence on or after 1 April 2017. Further, certain state governments have provided
tax incentives including:
 Electricity duty exemptions.
 Rebates in tariffs for electricity, water or gas.
 Subsidies on clean manufacturing technology, pollution control and so on.
Further, the Securities and Exchange Board of India has allowed foreign portfolio investors (FPIs)
to invest in units of real estate investment trusts, infrastructure investment trusts, category III
alternative investment funds. FPIs can also invest in unlisted debt securities of companies engaged
in the infrastructure sector.

India is a signatory to bilateral investment promotion and protection agreements (BIPA) and also
provides special incentives to specific projects, which include investment protection and tax
incentives. For example, the India-Singapore Comprehensive Economic Co-operation Agreement
(CECA) provides for exemption on import duties for investment in infrastructure sector.

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India is also a signatory to numerous:

 Free trade agreements.
 Comprehensive economic partnership agreements.
 Comprehensive economic co-operation agreements.
 Preferential trade agreements (which aim to protect foreign investments in projects in India).
These treaties and agreements protect foreign investors even in the event of foreclosure of the
project, subject to the guidelines of the Reserve Bank of India and other industry related authorities.
India has also entered into multiple double taxation avoidance treaties (DTAT) with various nations
that aim to provide tax relaxations to investors. However, this has recently seen a radical shift,
where the DTAT with certain countries were amended, subject to the grandfathering clause that
protects investments prior to a cut-off date, to shift to source based taxation of capital gains arising
from alienation of shares, instead of residence based taxation.

Returns on foreign investments in India are repatriable (net of applicable taxes) except in the
following cases where the:
 Foreign investment has been in certain specific sectors that have a minimum lock-in period,
such as defence.
 The investment made by non-resident Indians into specific non-repatriable schemes.
 Dividend payments are permitted through a designated authorised dealer bank (AD Bank),
subject to payment of the dividend distribution tax.
The payment of principal, interest or premiums on loans or debt securities held by parties in other
jurisdictions must be carried out through an AD Bank, and in accordance with the provisions of the
Reserve Bank of India's external commercial borrowings guidelines (such as compliance with
minimum average maturity period). No additional taxes or fees are applicable other than those
applicable to domestic investors. The AD Bank may impose agency fees, commitment charges and
structuring fees for remittance but such charges are not statutory.

Under the current Reserve Bank of India (RBI) regulations, a person resident in India is permitted,
subject to a prior approval from RBI, to open, hold and maintain a foreign currency account with an
authorised dealer bank for certain specified purposes as recognised by the RBI.

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Additionally, an Indian company or a body corporate registered or incorporated in India is also

permitted to open, hold and maintain a foreign currency account with a bank outside India for the
purpose of normal business operations in the name of its office (trading or non-trading) or its
branch set up outside India or its representative stationed outside India. The opening of such
accounts is also subject to the terms and conditions of the current RBI regulations.
Dividends payable to the foreign parent, who is the beneficial owner, is not restricted by the
Reserve Bank of India. The remittance of these dividends must be undertaken through an
authorised dealer bank (AD Bank). The domestic company is liable to pay dividend distribution tax
on the dividend payable.
Shareholders' loans are permitted to be remitted to the foreign shareholder through an AD Bank,
subject to compliance with the minimum maturity period provided by the external commercial
borrowings guidelines and may be subject to certain taxes as under law (such as withholding tax,
among others).

All imports into India must conform to India's current foreign trade policy.
Under current foreign trade policy, certain "special chemicals, organisms, materials, equipment and
technologies" (SCOMET) items have been either specifically prohibited (such as nuclear materials)
or have been permitted to be imported, provided the importer has obtained a specific licence from
the relevant authority.
For restricted items, banks must obtain the exchange control copy of the import licence issued by
the office of the Directorate General of Foreign Trade from the importer and supporting documents
showing all conditions of the licence have been satisfied.

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