Professional Documents
Culture Documents
A
PROJECT REPORT ON
“FINANCING OF STEEL PROJECTS
IN PRIVATE SECTOR”
IN PARTIAL FULFILLMENT OF
MASTER OF MANANGEMENT STUDIES (MMS)
FINANCE SPECIALISATION
SUBMITTED BY
MILIND ANAND APTE
NCRD’S
STERLING INSTITUTE OF MANAGEMENT STUDIES
Sector - 19, Near Seawoods Darave Petr ol Pump, Nerul (E), Navi Mumbai -
400 706
ACKNOWLEDGMENT
I would also like to thank my friends who have helped me in my project work and the library
staff of my college for all their patience and helping me find the required materials and books.
All this would not have been possible without the active support of my family members whose
constant encouragement motivated me to complete the ‘Master of Management Studies course.
Milind A. Apte
Roll No. 03
MMS 4th Semester
Batch: 2008-10
This report covers Indian steel scenario & it talks about the background of the steel industry, the
demand scenario, the supply scenario, the price scenario & the market potential of the Indian
steel industry. It presents a broad overview of the government reforms affecting the Indian steel
industry, the import duty structure, the policy on raw materials & the excise duty structure.
The report will also give an overview of processes for making steel, the various means of finance
available, the norms & policies of financial institutions, term loan procedure, kinds of financial
assistance & the risks prevalent in the steel industry. And a brief idea of the appraisal
methodology adopted by the financial institutions to appraise steel projects.
Table of Contents
1 INTRODUCTION 5
7 BIBLIOGRAPHY 56
• To understand the financial norms & Appraisal methodology adopted by the Financial
institutions with respect to steel projects in private sector.
• To analyze the Indian Steel scenario & the Government policies towards private sector steel
producers.
• This study focuses on the Financing & Appraisal of steel projects in private sector & the
issues emerging therefrom.
• The study may help the policy makers in the central & state government in formulating new
policies towards new technologies that are more environments friendly & can provide an
impetus to the Indian iron & steel industry.
• Secondary data has been collected from various publications & brochures.
• Research of secondary information available on Steel sector for current & future scenario,
growth, price & market potential.
• Research of secondary information available on financial institutions for their norms, policies
& risks they perceive in steel plants.
At the dawn of India’s Independence 60 years back, Indian Steel Industry was practically
insignificant compared to other industries of the country as well as the world steel industry. In
1947, TISCO and IISCO in the Eastern Region of the country were the only steel producers
through Blast Furnace route and their production together was not even one million ton.
Today, Indian Steel Industry is producing about 36 million tones of finished steel and there are
about 200 big, medium and small steel plants, based on blast furnace and electric arc furnace
routes (scattered almost in every State of India), for production of mild, alloy and special steels.
Not only the steel production in India has gone up significantly, the Indian Steel Industry has also
turned into a large and important industrial sector of the country. It has also become a major
player amongst the steel producing countries of the world. India has already started exporting a
large volume of steel products all over the world.
Indian Steel Industry is playing a very vital role in the growth and advancement of Indian
economy. A large number of other industrial units like mining, refractories, ferro-alloys etc.
have come up in India as offshoots of the steel industry. It has also helped to mitigate our
unemployment problem significantly by generating large-scale employment opportunities,
particularly for skilled and technical manpower.
The growth of steel industry in a number of other countries, like Japan, China, Brazil, South
Korea and former Soviet Union has been considerably faster than what happened in India. Our
steel industry is yet to achieve much higher targets to be comparable with China and others.
However, inspite of the significant growth of production in the recent years, steel market in India
has not grown sufficiently to absorb its whole production.
The growth of steel industry in any country is primarily dependent on the infrastructural activities
of the country. The construction industry is the largest consuming sector of steel, even in the
case of industrially developed countries. For the countries like India, which are still on the path
of development, very fast growth of infrastructural facilities is extremely essential. But inspite of
official announcements, plans and programmes, the infrastructural development in India even
In the urgent interest of the growth of economy, it should be the immediate concern of our
Government as well as the entrepreneurs to invest and accelerate the growth of infrastructure in
the country. The economic future of the Indian Republic depends on the steps which we are going
to take to accelerate the infrastructural development of this vast country. The growth of Indian
steel industry in the coming years also depends largely on the growth tempo of infrastructural
activities and vice-versa.
2.2 BACKGROUND
India’s first steel company TISCO was set up in 1907 & began commercial production in 1912.
IISCO was established in 1919. The installed capacity was 2.5 million tons at the time of India’s
independence.
In 1951, the Government imposed licensing restrictions on the creation of new capacities. This
restricted the growth of private players & resulted in Government owning a major portion of the
steel capacity. The second five year plan (1956-61) outlined large capacities to be set up in public
sector. Accordingly, the Rourkela, Bhilai & Durgapur Steel plants were setup in the late 50’s
with German, Russian & British aides respectively. SAIL, operating as Hindustan steel Ltd, was
setup in 1973 as a holding company for the earlier established plants. Steel production grew from
1.6 million tons in 1955 to 6 million tons in 1965 at a CAGR of 14%. Per capita consumption
increased from 5 kgs to 12 kgs during this period.
The Government encouraged investments in steel through EAF route on account of lower capital
costs. Further these plants could have smaller capacities and were located close to end user
markets. As a result 1970s saw mushrooming of small EAFs units throughout the country. During
the same period the plan to set up the Rashtriya Ispat Nigam Ltd (RINL), mainly as a shore based
plant, was formalized. Construction of this 3 million tones plant commenced in 1982 in
collaboration with the erstwhile Soviet Union. However due to resource crunch the plant was
fully commissioned only in 1992-93.
The Government setup a Joint Plant Committee (JPC) to control the distribution and price of steel
produced by Integrated Steel Plants (ISPs). The intention was to ensure the availability of steel to
priority sectors at uniform prices across the country. Under the freight equalization scheme of the
50
45
40
35
30
M 25
T 20
P 15
A 10
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78- 84- 93- 95- 97- 99- 20 20 20 20
79 85 94 96 98 00 01- 03- 05- 08-
02 04 06 09
Year
In 1991, the Government introduced the process of liberalization & the industrial policy was
delicensed. In line with this policy, the steel industry was delicensed in July 1991 & in Jan 1992,
the price & distribution of steel were decontrolled & the freight equalization levy was
discontinued. Production immediately started picking up & increased to 18 million tons in 1994-
95.Then the industry went into a bit of depression till in the beginning of 2002 it again picked up
on account of pick up in economy and demand from china. Today it stands at over 36 million
tones.
Following liberalization of the economy in 1991-92, the steel industry faced two years of
stagnant demand. Finished products demand was stuck at about 15 million tones from 1990-91
through 1993-94. Then, the economy entered a higher growth period. Apparent consumption of
finished steel products grew nearly 19% during fiscal 1994-95 to about 18 million tones and
about 16% in 1995-96 to about 21.3 million tones. However, there was a slowdown in the 1996-
97 fiscal year with preliminary demand figures as reported by the Steel Ministry increasing just
4.6% to 22.3 million tones.
The potential for the growth of steel demand is substantial, especially if one considers the
possibilities on a per capita basis. If the per capita consumption level were to rise to about 60 kg
from about 30 kg currently, this implies a steel demand of about 60 million tones per year. In
comparison, per capital steel consumption is about 200 kg in China, an average of 80 kg for all of
There is strong correlation between the GDP & the apparent steel consumption. GDP is estimated
to grow at an average rate of 6- 8% till the end of the decade. World Steel Dynamics Projects
finished steel product demand in India to grow at a 6.75% per annum rate to 2010, from an
estimated 19.5 million tones in fiscal 1995-96 to about 28 million tones in 2000/01, to 38 million
tones in 2005/06 and to 52 million tones in 2010/11. The Government estimates the domestic
demand to be about 31 to 34 million tones in the fiscal year 2001-02 & at 67 million tones in
2011. These figures are somewhat more optimistic than the World Steel Dynamics estimates.
600
500
400
300
200
100
The share of industry in India’s GDP has increased from 17.5% in the 1950’s to 27.8% in the
1980’s, whereas that of agriculture has decreased from 50.6% to 33.8% over the same period.
The delicensing of industries is expected to result in higher levels of fixed capital formation. This
in turn would imply intensification of general construction activities & additions to the stock of
general machinery. As the economy develops, the contribution of industry and the service sector
to the GDP is expected to increase. Hence the demand for steel is expected to grow in tandem.
6. Infrastructure growth
Import / export
Demand summarized: Steel demand was 21.3 million tons in the year 1996/97 & the growth
rate 4.6%. The average growth is 6.75% per annum till the year 2010. But with increase in per
capita consumption of steel the demand in 2011 can touch up to 67 million tons.
In the fiscal year ended March 1996, the Indian steel industry produced about 21.8 million tons of
crude steel and 21.0 million tons of finished steel products. Preliminary figures reported in Steel
scenario for fiscal 2008-09 indicate that finished steel production increased to about 36.19 million
tons, a rise of about 10.74% from the previous year. On the basis of steel production, India ranks
as the 8th highest in the world.
Status of new projects as on Jan 1996:
Price regulation was abolished by the government in 1992, even in distribution of steel by
government is decided on priority basis only in five sectors namely defense, railways, northeast,
SSIs & exporters of engineering goods. Prices in general have been on the rise simultaneously
government has been reducing duties as well as taxes for last few years. Today the price is
basically being dictated by export demand
By the end of year 2010, the demand is expected to be 53 million tons, if calculated as per
expected growth rate in demand. The World Steel Dynamics (WSD) also makes a projection of
about 52 million tons in the fiscal year 2010-11. But if one keeps in consideration the per capita
steel consumption of 30 Kgs as in India currently & compare it with per capita consumption of
Asia, which is about 80 Kgs, there is a huge potential for steel industry in India. Using this
criteria, the Govt. estimates the demand to rise at a rate of 8.5% and at 67 million tons in the year
2010-11.
The supply is expected to be around 60 million tons, if calculated at the expected growth rate.
60.0
50.0
DEMAND (GOVT)
30.0 SUPPLY
20.0
10.0
0.0
1996 - 97
1997 - 98
1998 - 99
1999 - 00
2000 - 01
2001 - 02
2002 - 03
2003 - 04
2004 - 05
2005 - 06
2006 - 07
2007 - 08
2008 - 09
2009 - 10
2010 - 11
Fiscal year
The gap between demand & supply present a grim negative value of 7 million tons, if only
growth rates are considered. But if the Govt. estimates based on the factors affecting the steel
demand are considered then there exists a positive gap of 7 million tons. This gap can be even
more than the projected figure as the Indian economy grows and this represents the tremendous
potential of the Indian steel industry in terms of investment opportunities.
Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL
manufactures and sells a broad range of steel products, including hot and cold rolled
sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates,
bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at four
integrated plants and three special steel plants, located principally in the eastern and
SAIL's wide range of long and flat steel products are much in demand in the domestic
as well as the international market. This vital responsibility is carried out by SAIL's own
Central Marketing Organization (CMO) and the International Trade Division. CMO
encompasses a wide network of 38 branch offices and 47 stockyards located in major
cities and towns throughout India. With technical and managerial expertise and know-how
in steel making gained over four decades, SAIL's Consultancy Division (SAILCON) at
New Delhi offers services and consultancy to clients world-wide.
SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS)
at Ranchi which helps to produce quality steel and develop new technologies for the
steel industry. Besides, SAIL has its own in-house Centre for Engineering and
Technology (CET), Management Training Institute (MTI) and Safety Organization at
Ranchi. Our captive mines are under the control of the Raw Materials Division in
Calcutta. The Environment Management Division and Growth Division of SAIL operate
from their headquarters in Calcutta. Almost all our plants and major units are ISO Certified.
The Government of India owns about 86% of SAIL's equity and retains voting control
of the Company. However, SAIL, by virtue of its "Navratna" status, enjoys significant
operational and financial autonomy.
As part of the plan, SAIL will increase hot metal production from its plants to a level
of about 20 million tonnes per annum (MTPA) by 2012.
In view of emerging market requirements, SAIL has also planned to raise its output of
finished steel to 16.6 MTPA by 2011-12 from the current level of 8.6 MT, and reduce
generation of semi-finished steel from 20% of saleable steel to 4%. This will enable
inclusion of more value-added products in the company’s product basket.
Products:
Semis: Blooms, Billets & Slabs
Long product: Structurals Crane Rails Bars, Rods & Rebars Wire Rods
Flat product: Sheets & Skelp Plates, CR Coils & Sheets, GC Sheets\ GP Sheets and
Coils Tinplates Electrical Steel
Tata Steel's four-phase Modernization Programme in the steel works has enabled it to
acquire the most modern steel making facilities in the world. Recently, Tata Steel
commissioned its 1.2 million tonne capacity Cold Rolling Mill complex at 'Global Speed
and Cost'. Its fifth phase of the Modernization Programme leveraged the intellectual
capabilities of its employees to generate sustainable value for the stakeholders. Most
recently, it has embarked on a programme for expansion of its existing steelmaking
capacity by 1million tonne to reach a rated capacity of 5 million tonnes per annum.
Tata Steel has continuously been on the growth path and is constantly striving to improve
the EVA of the company by seizing the opportunities of tomorrow and by exploring
newer avenues of operations such as a ferro-chrome and titanium. Tata Steel, after
completion of their four phases of modernization has achieved a production of 3.54
million tonnes of finished steel and 4.22 million tones of crude steel in 2006 – 2007,
surpassing all previous records. The performance of TISCO was marked by higher
volumes, richer product – mix and considerable achievement in the areas of cost
reduction and improvement.
Jindal stainless limited: India's largest integrated manufacturer of Stainless Steel catering
to about 40% of Indian demand.
Plant Location - Hisar, Harayana
Capacity - 500,000 tpa
High Carbon Ferro Chrome plant at Vishakhapatnam, Andhra Pradesh
Jindal iron and steel company limited: India's largest integrated galvanising facilities in
private sector accounting for 25% of total galvanising production in the country. It is
engaged in Hot Rolling, Cold Rolling and Galvanising business. Export of 75% of production to
over 45 countries.
Plant Locations - Vasind and Tarapur, Maharashtra
Capacity - HR 280,000 tpa, CR 900,000 tpa, GP/GC 850,000 tpa
JSPL is one of the lowest-cost producers of sponge iron in India. Backward integration
has given JSPL the distinction of being the only sponge iron manufacturer with its own
captive raw material resources and power generation. This has enabled JSPL to monitor
both price and quality of its products. At Raigarh, JSPL has the world's largest coal-
based sponge iron manufacturing facility, with an installed capacity of 6,50,000 TPA,
using six rotary kilns. Growth and expansion plans include an additional 1.3 million TPA
capacity of sponge iron with the commissioning of 4 rotary kilns and a 250,000 MT
capacity for metallics charge using the state-of-the-art rotary hearth furnace.
JSPL has entered into a technical collaboration with NKK Corporation, Japan for
technology transfer to produce superior quality, world's longest rails of 120m-finished
length, along with Parallel Flange Beams, Columns and Sheet Piles for the first time in
the country. The agreement covers 'know-how' transfer encompassing steel-making,
secondary refining and continuous casting up to rolling and finishing of long rails and
universal beams; deputation of NKK multi-disciplinary specialists at the JSPL plant; and
training of JSPL personnel at NKK steelworks in Japan. This technical collaboration shall
enable production of long rails requiring far less joints in tracks, ushering a new era in
safer rail-travel and making introduction of fast trains in India a reality.
Product Range: Carbon & Alloy Steels confirming to National & International Standards
like SAE, AISI, DIN,IS and ASTM
Jindal united steel corporation: Manufactures steel plates for use in large diameter pipes,
construction and fabrication industries.
Plant Location - Bay Town, Texas, USA
Capacity - 1.2 million TPA
3.Essar Steel:
Essar is an integrated steel producer, with operations all along the value chain. Essar
Steel produces some of the world's best steel at its state-of-the-art steel complex in
Hazira, Gujarat. It is also India's largest exporter of flat products, sending half of its
Essar Steel's core manufacturing facilities are located at its steel complex in Hazira,
Gujarat. The Hazira complex includes a 2 MTPA hot briquetted iron (HBI) plant, a 2.4
MTPA hot rolled coils (HRC) plant and a downstream complex. These facilities are
complemented by its joint ventures: a 3.3 MTPA pellet plant in Vishakapatnam and a
200,000 TPA cold-rolled coils plant in Indonesia.
Essar Steel operates the world's largest gas-based hot briquetted iron (HBI) plant with a
production capacity of 3.4 MTPA. The plant uses state-of-the-art technology, which
ensures high quality raw material for the steel plant. Essar Steel is one of the world's
lowest cost producers of HBI on a per tonne basis. The plant is supported by a captive
power plant of 32MW, which operates at 100% capacity.
All Essar Steel's products are world-class, meeting the highest international standards,
supported by excellent marketing and service:
Iron Ore pellets, Hot briquetted (sponge) iron (HBI), Hot rolled coils (HRC), Cold rolled
coils (CRC), Plates, Sheet
Essar Steel defines value as value to customers because when its customers prosper, the
company prospers. Delighting its customers drives its unique approach to marketing. First, to
help its customers choose the best steel every time, it became the first Indian company
to brand flat products, under the name "24-carat steel". When customers ask for 24 carat
steel, they are assured of the world's best steel, backed by the strength and promise of
Essar Steel's technology, quality and distribution.
The steel plant is using the electric arc furnace route (CONARC process) for producing
steel. In this project, IIL have uniquely combined the usage of hot metal and DRI
(sponge iron) in the electric arc furnace for production of liquid steel. For casting and
rolling of liquid steel, IIL have the state-of-the art technology called compact strip
production (CSP) process, which is installed for the first time in India and produces high
quality and specifically very thin gauges of HRC. IIL’s products are well accepted in
international markets.
Steel making is a complex process and different types of products are obtained at each stage. The
coils coils
Hot Metal: Iron ore is mixed with coke, dolomite and limestone to form a homogenous mixture
called “charge”. This charge is fed into the blast furnace at a high temperature where iron ore is
reduced and molten iron or hot metal is formed. Hot metal, when otherwise not used for making
steel is cast by pig casting machines into moulds. The product from these moulds is called pig
iron and is sold to foundries for making cast iron.
Crude steel: The output obtained from the LD furnace or Open hearth furnace or the EAF
furnace is called crude steel. Crude steel is further cast into ingots, billets or slabs.
Semis or Semi finished steel: Molten steel is required to be cast into solids before it is usable.
Molten steel is either cast into ingots or directly into billets/ blooms or slabs by the continuous
Ingots: Crude steel is poured into a mould where it solidifies into a rectangular block of
dimension (4 mtr, 2 mtr, 1 mtr). Ingots are produced when the manufacturer does not have
continuous casting facilities. Ingots are further rolled into semi finished products.
Blooms: Ingots can be rolled into smaller rectangular blocks of 6” - 12” square cross section and
8 feet to 18 feet in length. Blooms are further rolled into billets or slabs.
Billets: Blooms can be further rolled into smaller rectangular blocks with square cross section of
6-12 cms square and length 6-10 mts called billets. Most rerollers buying semis prefer billets due
to their smaller size. Billets are further converted into long products like rounds, bars and wire
rods.
Slabs: A bloom can be rolled into slabs which have a rectangular cross section (15-50 cms * 10-
15 cms) and 6-10 meters in length. Slabs are used to further manufacture flat products like
plates, holt rolled (HR) and cold rolled (CR) products.
Finished steel: Finished steel is obtained through further processing of semis. They can be
either flat product (e.g. hot rolled coils, cold rolled coils, CR strips etc.) or long products (bars,
structural, wires etc.). Finished steel is further classified as follows
Longs: includes bars, structurals, wire rods, wires, wire ropes, steel pipes and tubes.
These find application mainly in the construction and engineering industries.
Flats: includes Hot Rolled (HR) plates/ coils/ sheets, Cold Rolled (CR) coils/ strips/
sheets, galvanized plain (GP) sheets, coils, galvanized corrugated (GC) sheets. These
products find application in the automobile, consumer durables and engineering
industries.
3.2 PROCESSES
The main raw materials in this process are iron ore, coke, limestone, dolomite and manganese
ore. Coke is used as a reducing agent, to remove oxygen from the iron ore. Coking coal is
converted into coke in the coking ovens, wherein impurities like sulphur and phosphorous, which
are detrimental to the quality of steel, are removed. The concentrated iron ore along with
limestone, coke, etc. Is fed into the blast furnace and hot metal is obtained. This hot metal is an
impure form of steel and is called pig iron when cooled and solidified.
Open Hearth Furnace (OHF) / Basic Oxygen Furnace (BOF) or (LD) process
The hot metal obtained from the blast furnace route is further refined or purified in an open
hearth furnace (OHF) or LD furnace to obtain crude steel. The OHF is increasingly being
replaced by the LD process in the manufacture of steel worldwide. The LD process is
economical both in terms of capital and operational costs. The “heat time” or tap-to-tap time of
steelmaking in a LD process is very low at approximately 1 hour as against 8-10 hours in the
OHF process. Further heat consumption in the LD process is low at 0.1 gcal compared to 1.2
gcal of heat consumption by the OHF (Under Indian conditions).
2. ELECTRIC ARC FURNACE ROUTE
The mini steel plants employ the Electric Arc Furnaces (EAF) to manufacture steel. In this
process a mixture of scrap and sponge iron is melted in an electric furnace and then refined to
produce molten steel.
3. INDUCTION FURNACE
The induction furnace is based on the principle of heating by induced currents. The primary coil
fo the furnace is constructed of water cooled copper tubing, positioned towards the inside of the
furnace shell, covered with a layer of refractory material. It normally operates on alternating
current at a frequency of approximately 1000 cycles produced by a motor generator set of special
design. The power is transmitted over the co-axial cables to the primary coil of the furnace. The
high frequency power applied to the primary coil creates a magnetic flux which passes through
the charge which in turn acts as the secondary winding of a transformer having a single turn.
This induced current melts the charge by the heat developed due to the electrical resistance.
5. COREX R ROUTE
The COREX R process uses low grade non coking coal which is abundantly available all over the
world as a reductant and energy source. On an average the price of non coking coal is lower by
about $ 20 per ton than that of coking coal. The Corex process eliminates the need for coke oven
battery and sinter plant required by the blast furnace.
The COREX process was developed by Voest Alpine Industrieanlagenbau (VAI) GmbH, Austria,
around 1975. It was subsequently, extensively tested and modified from 1981-87 in Germany.
The Corex-BOF route has been commercially proven at ISCOR Limited, Pretoria (South Africa).
Jindal Vijaynagar Steel Limited having two C-2000 units is being set up in Karnataka, South
India. COREX-MIDREX combination comprising two C-2000 units of COREX & a module 800
of MIDREX is being set up in HANBO, South Korea & the same combination is also being set
up at Saldhana, South Africa. Voest Alpine has also received orders from Pohang Iron & Steel
Company Limited (POSCO), South Korea for a C-2000 unit.
The COREX process releases large amount of top gas with high calorific value which can be used
for power generation.
Compared to the blast furnace route the corex process has the following advantages:
- Use of non coking coal, the reserves of which are abundant in India
- Lower operating costs
- Lower emissions as compared to the blast furnace route
- Further, the top gas released is used for generation of power.
4.1 BACKGROUND
The Steel Development Fund (SDF) was created in 1978 to provide low cost funds to the ISPs, to
be used mainly for modernization and expansion programmes. The funds corpus was built by
Engineering goods export assistance fund (EGEAF) was created to make steel based engineering
exports from India internationally competitive. The government was utilising this fund to
reimburse engineering exporters the difference between the domestic and international steel
prices under the International Price Reimbursement Scheme (IPRS) introduced in 1981. ISPs
were required to pay an EGEAF levy of Rs. 300 per tones of steel sold. Although IPRS was
discontinued from 1995, the EGEAF levy was still being charged in order to meet the IPRS
arrears. However, the same has been discontinued in February 1996.
The New Economic Policy initiated in 1991-92 marked revolution in the Indian economy. The
Indian iron and steel industry, previously under numerous state controls, has been deregulated in
tune with the emerging economic philosophy. For this sector, some of the important changes are,
• Large-scale capacities have been removed from the list of industries reserved for the public
sector.
• Licensing requirement for additional capacity creation has been abolished.
• The system of price and distribution control dismantled.
• Inclusion in the high priority list for foreign investment which implied automatic approval for
foreign equity participation up to 74% on condition that the permissible equity covers the cost
of imported capital goods and foreign technology agreements up to specified limits.
• Replacement of freight equalization system by a system of freight ceiling.
• The peak import tariff rates have been lowered from a level exceeding 100% to15% in 2003-
04.
• Physical control on imports by way of licensing was relaxed.
Apart from the sector-specific reforms, the steel industry benefited from the general
economic reforms. These are:
• Convertibility of the rupee on trade account has helped in removing the bias against exports.
• Exporters are allowed to import capital goods at concessional rates linked to their export
earnings.
• Opening up of foreign trade meant easier access to input materials at competitive rates from
overseas sources.
Raw material in India is not of very good quality namely coke as it has high ash component plus
also large quantity of water; however government has reduced the duties on coal both on
domestic as well as imported coal progressively over the years
Excise duty on all steel products is at 12% ad valorem. No change is expected in the excise duty
structure.
4.5 OUTLOOK
In view of the large infrastructure and industrial growth potential in India, the Government is
encouraging steel capacities by the private sector in the country. Further the government is also
opening up mining activities, ports and roads to foreign and private sector participation.
The role of the government as a major buyer of long products is expected to reduce in the long
term with the participation of the private sector in infrastructural projects.
Although reducing tariff barriers may increase the threat from imported steel, the decrease in
import duties is expected to be offset by the likely depreciation of the rupee. However, products
like HR coils continue to face competition from imports. Hence manufacturers would have to
control costs, improve quality and establish a base in the export market.
To meet the cost of the project following are the means of finance available:
• Equity capital
• Preference capital
• Debenture capital
• Rupee term loan
• Foreign currency term loan
Equity capital
This represents the owner’s contribution towards business. The equity shareholders enjoy the
rewards & the risks equally. However their liability is limited to the capital contributed in limited
companies. This type of capital has two distinct advantages i.e. firstly it represents a permanent
capital to the business without the liability to payback & secondly it does not involve any fixed
obligation for payment of dividends. The disadvantages of this type of capital is that its cost is
high, being a non tax deductible expense & the flotation cost is also very high.
Preference capital
This represents a mix of equity & debt capital. It is similar to equity because preference dividend
being a non tax deductible expense and it is similar to debt since it carries a fixed rate of
dividend. This kind of financing is attractive only when the promoters without reducing their EPS
try to increase their net worth in order to meet the requirements of financial institutions.
Debenture capital
There are 3 kinds of debentures that are commonly used : non convertible debentures (NCD),
partially convertible debentures (PCD), fully convertible debentures (FCD). The debentures carry
a fixed rate of interest & the interest paid is a tax deductible expense. It is this property which
makes it’s cost less when compared to costs of equity and preference capitals.
Euro issues
There are two types of securities under this scheme i.e. Global depository receipts (GDR) & Euro
convertible bonds (ECB). A GDR is a negotiable certificate that represents the equity shares of a
non-US company traded in local currency. GDRs are issued by a depository bank against the
local currency shares. ECB is an equity linked debt security. The holder of this security has the
option to convert it into equity shares at a pre-specified ratio during a specified period.
Deferred credit
This type of capital is basically a facility provided by supplier of machinery under which
payment for the purchase is made over a period of time. The interest rate & the period of
payment depend on the supplier. Normally, the supplier before giving a deferred credit facility
insists on a bank guarantee by the buyer.
Government subsidies
The state Govt. provides subsidies to the certain projects set up in that state. This subsidy varies
from 5 % to 25% of the fixed capital investment, subject to a ceiling depending on the location.
Eligibility
Till recently, long term loans were provided by financial institutions to concerns in certain
industries and denied to concerns in industries placed in the negative list. Now, however, a shift
is taking place in their policy. They are inclined to finance almost every kind of industry.
Further, till recently financial institutions followed a consortium approach as per the advice of the
Ministry of Finance. Now they are permitted to lend individually as well as participate in
consortium financing.
Debt-equity Ratio
Presently, the general debt-equity norm for medium and large scale projects is 1.5:1. This is a
broad guideline against which variations are permitted on a case to case basis, especially under
the following circumstances:
Promoters’ Contribution
Financial institutions require promoters to contribute 25 to 30 per cent of the project cost. This is
in certain cases like capital-intensive projects, high priority projects, and technocrat-promoted
projects. Contributions made by the following or of the following kinds represent promoters’
contribution :
(I) Equity investment by promoters, their friends, relatives and associates (including NRIs),
(ii) Equity investment by other companies controlled by promoters,
(iii) Equity participation by shareholders of other promoter companies,
(iv) Foreign collaborators,
(v) Investment from oil exporting developing countries,
(vi) State government, in the case of joint sector or assisted sector projects,
(vii) Seed capital assistance,
(viii) Unsecured loan from promoters,
(ix) Venture capital participation,
(x) Mutual fund participation,
(xi) Internal accruals in the case of an existing company,
(xii) Rights issue to existing shareholders, and
(xiii) Any other contribution approved as promoter’s contribution.
The Capital Issues Act, 1947 was the primary legislation regulating the issue of securities by the
corporate sector till recently. This Act was repealed in May 1992 and capital issues were brought
under the guidelines of the Securities Exchange Board of India (SEBI) which was empowered
with statutory powers by passing of the SEBI Act, 1992.
A comparison of SEBI guidelines with the guidelines that were followed under the Capital Issues
Control Act, 1947 suggests that the thrust of regulation is no longer on product and price control.
In the earlier regime, there were restrictions on the kinds of securities that could be issued, the
pricing of these securities, and the interest rates or dividend rates payable on them. Under the
new regime there is virtually no restriction on the types of securities that can be issued, there is
substantial freedom in pricing these securities, and there is no ceiling on interest / dividend rate
payable on these securities. While new regime more or less does away with product and price
controls, it lays stress on adequate disclosures & seeks to safeguard the interest of investors.
The key SEBI guidelines are:
Seed Capital
Financial institutions supplement the resources of the promoters of the small and medium scale
industrial units which are eligible for assistance from all-India financial institutions and / or state-
level financial institutions. Broadly, three schemes have been formulated:
• Special Seed Capital Assistance Scheme: The quantum of assistance under this scheme is
Rs 0.2 million or 20 per cent of the project cost, whichever is lower. This scheme is
administered by the State Financial Corporations
• Seed Capital Assistance Scheme: The assistance under this scheme is restricted to Rs 1.5
million. This scheme is applicable to project costing not more than Rs. 20 million. The
assistance per project is restricted to Rs. 1.5 million. The assistance is provided by IDBI
through state level financial institutions. In special cases, IDBI may provide the
assistance directly.
• Risk Capital Foundation Scheme: Under this scheme, the Risk Capital Foundation, an
autonomous foundation set up and funded by IFCI, offers assistance to promoters of
projects costing between Rs 20 million and Rs 150 million. The ceiling on the assistance
provided varies between Rs 1.5 million and Rs 4 million depending on the number of
applicant promoters.
Underwriting
As part of the overall financial package, financial institutions generally participate in
underwriting equity issues of assisted units. This helps the assisted units in raising funds from the
capital market.
The procedure associated with a term loan involves the following steps:
Submission of Loan Application
Disbursement of Loans
Periodically, the borrower is required to submit information on the physical progress of the
project, financial status of the project, arrangements made for financing the project, contribution
Creation of Security
The term loans (both rupee and foreign currency) and the deferred payment guarantee assistance
provided by the All-India financial institutions are secured through the first mortgage, by way of
deposit of title deeds of immovable properties and hypothecation of movable properties. As the
creation of mortgage, particularly in the case of land, tends to be a time consuming process, the
institutions permit interim disbursements against alternate security (in the form of guarantees by
the promoters). The mortgage, however, has to be created within a year from the date of the first
disbursement. Otherwise the borrower has to pay an additional charge of 1 per cent interest.
Monitoring
Monitoring of the project is done at the implementation stage as well as at the operational stage.
During the implementation stage, the project is monitored through:
(i) Regular reports, furnished by the promoters, which provide information about placement of
orders, construction of buildings, procurement of plant, installation of plant and machinery, trial
production, etc.,
(ii) Periodic site visits,
(iii) Discussion with promoters, bankers, suppliers, creditors, and others connected with the
project,
(iv) Progress reports submitted by the nominee directors, and
(v) Audited accounts fo the company.
During the operational stage, the project is monitored with the help of
(I) quarterly progress report on the project,
(ii) Site inspection,
(iii) Reports of nominee directors, and
(iv) Comparison of performance with promise.
The most important aspect of monitoring, of course, is the recovery of dues represented by
interest and principal repayment.
Further, the quality of the domestic HR manufacturers (with the exception of a few plants) is
lower than the international standards on account of the outdated technologies and process in
efficiencies in use. Hence, the Indian steel manufacturers also face a threat from imports on the
quality issue.
Further, over the past few years the budgetary support from the government for the
modernization and expansion programmes of the ISPs has been curtailed in a gradual manner on
account of the funds constraints.
In 1992, the continuous casting route accounted fro only about 16% of India’s steel production
(compared to almost 95% in Japan), adversely affecting the cost competitiveness of Indian
manufacturers. Today RINL is the only ISP in India which has a 100% continuous casting
facilities. As a result the Indian process efficiencies are much lower than the global average.
Large capital outlays are required by the ISPs to modernize and upgrade their production
facilities. However, the Indian steel manufacturers are modernizing their plants and therefore, in
the medium term, process efficiencies are expected to improve.
5. Location
As steel is freight sensitive item, the location of the plant assumes a significant importance in
determining its competitiveness. Most ISPs (SAIL and TISCO) are located in the eastern region
close to the raw material sources whereas most secondary producers are located close to the
major consuming centers (Western and Northern region). Hence, freight costs incurred by the
ISPs are comparatively higher than those of the secondary producers (located in the western
region) and are expected to remain high.
9. Labour
Financial institutions appraise a steel project from the marketing, technical, financial, economic,
and managerial angles. The principal issues considered and the criteria employed in such
appraisal are discussed below
The technical review done by the financial institutions focuses mainly on the following aspects:
• Product mix
• Capacity
• Process of manufacture
• Engineering know-how and technical collaboration
• Raw materials and consumables
• Location and site
• Building
• Plant and equipments
• Manpower requirements
In order to judge the managerial capabilities of the promoters, the following points are considered
Resourcefulness
This is judged in terms of prior experience of the promoters, the progress achieved in organizing
various aspects of the project & the skill with which the project is presented.
Understanding
This is assessed in terms of the credibility of the planning, including the organization structure,
the estimated costs, the financing pattern, the assessment of various inputs & the marketing
programme.
Commitment
This is guaged by the resources (financial, managerial & others) applied to the project and the
zeal with which objectives of the project are pursued. Managerial review also involves the
assessment of the key technical & managerial personnel working on the project, the schedule for
training them & the remuneration structure for rewarding & motivating them.
The key financial indicators used by the financial institutions are the Internal Rate of Return,
Debt Service Coverage Ratio & the Break even analysis. In addition to these primary indicators
some secondary indicators are also considered.
The break even analysis is done to know whether the project will be able to sustain the repayment
of the term loans as well as the interest burden. The break even point for the project is calculated
Contribution
Contribution
BEP (in terms of capacity utilization) = Fixed costs x Target capacity utilization
Contribution
Sales
Equity
Current liabilities
ROI (before tax) = Profit before tax + Depreciation + Interest on term loan
Cost of project
ROI (after tax) = Profit after tax + Depreciation + Interest on term loan (1-T)
Cost of project
Chandra.
4. “Steel Scenario” volume 7, July-Sept 1997, for all the data on the market prices &
6. “Alternatives Routes to Iron & Steel making”, a conference organized by Indian Institute
CONCLUSION