UNIT 1

What is the Nature and Scope of Project

Management?
Project Management, in a simple term, it means managing a project from end to end. It
is how a person of authority sets up and supervises the resources that are available in
order to finish a project they have taken. The person of authority who supervises the
whole project is called the Project Manager. The Project Managers uses different
techniques, methodologies, skills, and they have the required knowledge which will help
the Project achieve the objective as per the criterion which has been agreed upon by all
the parties.

The scope of the essential Project Management is covered in five different phases. They
are namely Initialization, planning and development, project execution, project planning,
project monitoring and lastly project closing. To successfully complete the given project,
a project manager has to have a good understanding of these basic five phases of the
Project.

1. Initializing the Project

The first phase of the project as the name suggests is initializing the Project. A business
case, i.e. the benefits or the reasons to do the project is presented, and then the Project
is defined at the macro level. The project manager first does the feasibility study in order
to know whether the objective of the project is achievable and thus can be launched.
The people concerned with the Project is required to do the due diligence and give the
go-ahead to the Project. The project manager then prepares a comprehensive document
stating the objective of the Project along with it the project manager should mention the
different requirement, the business case that was presented and the need of this Project
in the business.

 Planning and Development of the Project

After the Project gets a go-ahead, and it is initiated, the project manager moves to the
second phase known as the project planning phase of the project management. In this
phase, the project manager prepares a roadmap which focusses on achieving the
objective of the project in a systematic way. The project planning helps in streamline the
process of the Project. Planning helps in the smooth running of the Project as every
aspect of the project is taken into consideration, and the required solution is also
provided in the project planning phase.

 Project Execution
The actual work on the project happens in this phase. There are many responsibilities
which get done in this phase. In this phase, a team is developed for the Project;
resources are assigned, the execution of the second phase is done now. The project
manager manages the execution, tracking system for the progress of the project is set
up, the status meetings are done regularly, the project schedule is updated as and when
the planned task is finished as well as the project planning is modified as per the
requirement of the situation during the execution.

 Project Monitoring
The third and the fourth phase of the project management go hand in hand in the
process of project management. During this phase the Project is monitored proactively in
order to know whether the project is going as per the planning, it will also help to know
whether the Project is not going over budget and whether the quality of the Project
executed till now is up to the mark. These are some of the things that the project
manager would be aware of if the Project is continuously monitored and will help the
Project manager decide the further course of action.

 Project Closing
This is the phase bring about the completion of the project, and the objective of the
project is achieved. The team members are acknowledged for their efforts they have put
in for the Project. The learning while completing the Project is shared with everyone for
future reference. The final documents, any reports or any other relevant documents are
handed over to the team who would be operating the Project regularly.
Meaning and Definition of Project
Management
Project management is the discipline of planning, organizing and managing
resources to bring about the successful completion of specific project goals and
objectives.

The primary challenge of project management is to achieve all of the project goals
and objectives while honoring the project constraints. Typical constraints are
scope, time and budget. The secondary- and more ambitions- challenge is to
optimize the allocation and integration of inputs necessary to meet pre-defined
objectives. A project is a carefully defined set of activities that use resources
(money, people, materials, energy, space, provisions, communication, motivation,
etc.) to achieve the project goals and objectives.

According to Project management institute, “Project management is the

application of knowledge, skills, tools and techniques to project activities in order
to meet or exceed stakeholder needs and expectations.”

The PMBOK (A Guide to the Project Management body of Knowledge) definition

of Project Management is “application of knowledge, skills, tools and techniques
to project activities to achieve project requirements. Project management is
accomplished through the application and integration of the project management
processes of initiating, planning, executing, monitoring and controlling and
closing.”

Project management is a carefully planned and organized effort to accomplish a

specific (and usually) one-time effort, e.g., constructing a residential complex or
implementing a new computerized banking system. Project management includes
developing a project plan that includes defining project goals, specifying how the
goals will be accomplished, what resources are needed and relating budgets and
time for completion. It also includes implementing the project plan, along with
careful controls to ensure that the project is being managed according to the
plan.
Functions of Project Management
Setting realistic expectations, fostering agreement among all parties and then
delivering the product is frequently challenging and always requires a wide array
of techniques, from a high level, these techniques can be grouped into three
project management functions:

1) Project Definition: Project definition lays out the foundation for a project.

There are two activities involved in this groundwork:
i) The project manager must determine the purpose, goals and constraints of the
project. He or she must answer questions like, “Why are they doing this”? and
“What does it mean to be successful?” The answers become the foundation for
making all project decisions because they describe the cost-schedule – quality
equilibrium and connect the project to the mission of the organization.
ii) The manager must establish basic project management controls. He or she
must get agreement on which people and organizations are involved in the
project and what their roles will be. The manager also needs to clarify the chain of
command, communication strategy and change control process. The documented
acceptance of these decisions and strategies communicates expectations about
the way the project will be managed. It also becomes an agreement to which they
can refer to keep everyone accountable to their responsibilities in the project.

2) Project Planning: Project planning puts together the details of how to meet the
project’s goals, given the constraints. Common estimating and scheduling
techniques will lay out just how much work the project entails, which will do the
work, when it will be accomplished and how much it will cost. Along the way, risk
management activities will identify the areas of greatest uncertainty and create
strategies to manage them. The detailed strategy laid out in the plan becomes a
reality check for the cost- schedule- quality equilibrium developed during project
definition.

3) Project Control: Project control includes all the activities that keep the project
moving toward the goal. These activities include.
i) Progress Measurement: Measuring progress frequently identifies any problems
early, making them easier to solve Progress measurement is also a feedback
mechanism, validating the estimates in the plan and the cost- schedule- quality
equilibrium.
ii) Communication: Communication is critical in controlling a project, because it
keeps all the participants co-ordinated and aware of project progress and
changes.
iii) Corrective Action: This consists of the day-to-day responses to all the obstacles
and problems a project may encounter.

These functions sum up the responsibilities of the project manager. The functions
are sequential; a project must begin with definition, then proceed to planning and
finally to control. And the functions must be repeated time and again, because
planning will inevitably lead to modifications in the definition and controlling
actions will require constant changes to the plan and, occasionally, changes to the
definition. During an ongoing project, a manager may spend time everyday
defining, planning and controlling the project.

Importance of Project Management

Project management is no longer a special- need management. It is rapidly
becoming a standard way of doing business. An increasing percentage of the
typical firm’s effort is being devoted to projects. Thee future promises an increase
in the importance and the role of projects in contributing to the strategic
direction of organizations.

1) Compression of Product Life Cycle: One of the most significant driving forces

behind the demand for project management is the shortening of the product life
cycle. Time to market for new products with short life cycles has become
increasingly important. A common rule of thumb in the world of high-tech
product development is that a six-month project delay can result in a 33 per cent
loss in product revenue share. Speed, therefore, becomes a competitive
advantage; more and more organizations are relying on cross- functional project
teams to get new products and services to the market as quickly as possible.

2) Global Competition: Today’s open market demands not only cheaper products

and services but also better products and service. This has led to the emergence
of the quality movement across the world with ISO 9000 certification a
requirement for doing business. Quality management and improvement
invariably involve project management. For many, their first exposure to project
management techniques has been in quality workshops.
Project management, with its triple focus on time, cost and performance, is
proving to be an efficient, flexible way to get things done.

3) Knowledge Explosion: The growth in new knowledge has increased the

complexity of projects because projects encompass the latest advances. For
example, building a road 30 years ago was a somewhat simple process. Today,
each area has increased in complexity, including materials, specifications, codes,
aesthetics, equipment and required specialists. Similarly, in today’s digital,
electronic age it is becoming hard to find a new product that does not contain at
least one microchip. Product complexity has increased the need to integrate
divergent technologies. Project management has emerged as an important
discipline for achieving this task.

4) Corporate Downsizing: The last decade has seen a dramatic restructuring of

organizational life. Downsizing and sticking to core competencies have become
necessary for survival for many firms. Middle management is a skeleton of the
past. In today’s flatter and leaner organizations, where change is a constant,
project management is replacing middle management as a way of ensuring that
things get done. Corporate downsizing has also led to a change in the way
organizations approach projects. Companies outsource significant segments of
project work and project managers have to manage not only their own people but
also their counter- parts in different organizations.

5) Increased Customer Focus: Increased competition has placed a premium on

customer satisfaction. Customers no longer simply settle for generic products and
services. They want customized products and services that cater to their specific
needs. This mandate requires a much closer working relationship between the
provider and the receiver. Account executives and sales representatives are
assuming more of a project manager’s role as thy work with their organization to
satisfy the unique needs and requests of clients.

Increased customer attention has also prompted the development of customized

products and services.

6) Rapid Development of Third World and Closed Economies: The collapse of the

Soviet Empire and the gradual opening of Asian Communist countries have
created an explosion of pent-up demand within these societies for all manner of
consumer goods and infrastructure development. Western firms are scrambling
to introduce their products and services to these new markets and many firms are
using project management techniques to establish distribution channels and
foreign bass of operations. These historical changes have created a tremendous
market for core project work in the areas of heavy construction and
telecommunications as Eastern European and Asian countries strive to revitalize
their inefficient industries and decrepit infrastructures.

Project Management Process

Project management processes can be split into five groups each consisting of one
or more processes. They are:

1) Initiation Process,
2) Planning Process,
3) Implementation Process,
4) Controlling Process,
5) Closing Process.

All these processes are interrelated as the output of one process becomes the
input for the others. In the central process groups (Planning, implementation and
control), all the links are looped. The planning process provides a documented
project plan to the implementation process which in turn provides documented
updates to the planning processes as the project progresses.

1) Initiation Process: Initiation is the process of formally identifying the presence

of a new project or the passing of the ongoing project to the next phase. This
phase relates the project to the ongoing work of the project organization.

2) Planning Process: Project planning is one of the most significant activities

management because it includes activities that were not included earlier, as a
result of which it contains more processes than others. The process of planning is
not specific- a single project can get different plans from different teams. There
ear two kinds of planning processes:
• Core Process: These are the processes that are interdependent and must be
performed in a sequence in almost all the projects.
• Facilitating Process: These are intermittent processes that are performed as and
when they are required in the project planning phase.
3) Implementation Process: Implementation process also involves core processes
and facilitating processes.

i) Core Process
Project Plan Implementation: It is the process of implementing the project plan. A
major portion of the project budget is spent on this process. This process requires
the project manager, the top management and the project team to support one
another and co-ordinate their activities.

ii) Facilitating Process

a) Scope verification: It is the process of getting the project scope formally
approved by the key stakeholders of the project. It ensures the satisfactory
accomplishment of all the project deliverables. When the project is terminated
before schedule, the scope verification should contain the extent and level of
completion.

b) Quality Assurance: It is the process of evaluating the total performance of the

project regularly, in order to ensure that the project confirms to thee quality
standards. Quality assurance goes on throughout the project life cycle. It is usually
conducted by the quality assurance department or any other department
responsible for quality. Quality assurance is generally done by the major
stakeholders of the project.

c) Team Development: It is the process of making the required information

available to project stakeholders’ ability to contribute as individuals and at the
same time increasing the efficiency of the tam to function as a group.

d) Information Distribution: It is the process of making the required information

available to project stakeholders. It involves executing the communications
management plan and also meeting unexpected requests for information.

e) Solicitation: It is the process of gathering information in the form of bids,

quotations and proposals from qualified vendors to satisfy the project needs.
Usually, it is the vendors who put in a majority of the effort in this process. The
process requires procurement documents and a list of qualified vendors.

f) Vendor selection: It is the process of accepting bids, quotations or proposals

and evaluating vendors.
g) Contract Administration: It is the process of ensuring that the vendors deliver
materials as per the requirements of the contract. When the projects is big and
involve more than one vendor, managing communications and interactions
among vendors becomes crucial.

4) Controlling Process: Controlling is important in project management because it

helps to measure project performance regularly so as to determine the deviations
from the plan and rectify the problems. This minimizes cost over-runs, time lapse,
schedule slippages and maintains the overall quality of products. Controlling
processes too involve core processes and facilitating processes.

5) Closing Process: Closing a project is also a major activity in the life cycle. Every
project has to come to an end after it has attained its objectives. Closing has
special significance in project management because it marks the formal
acceptance of the project by the client and the archiving of the project reports for
future reference. The closing process involves administrative closure and contract
closure, Administrative closure is the process of generating, collecting and
conveying all project related information to formally complete the project.
Contract closure of final settlement of contract along with the resolution of any
open issues.

6 Main Types of Need-Based

Projects | Project Management

This article throws light upon the six main types of need-based
projects. The types are: 1. Balancing Projects 2. Modernisation
Project 3. Replacement Project 4. Expansion Project 5.
Diversification Project 6. Rehabilitation/Reconstruction Project.

Type # 1. Balancing Projects:

There are situations when the production process in a plant passes
through different stages and/or through different machineries. The
maximum production at a particular stage (or by a particular
machine) is the ultimate optimum production of the plant as a
whole. This particular stage may be called the ‘Key Factor’ with
respect to the volume of production.

It may also be noted that installation of additional capacity and/or

additional machineries at that particular stage—within the entire
chain of production process—would increase the plant’s total
volume of production.

In reality, the capacities of the different stages in the production

centres are not harmonised and lesser production of some
components at some stage is limiting the volume production of
ultimate finished product.

Under this situation, when the organisation likes to optimise its

business by increasing the volume of production of the said finished
products, the organisation needs to increase the production capacity
of the particular stage/machineries which was the ‘key factor’ for
the limitation of the production volume. A project is drawn for the
installation of additional capacity in the key factor area.

Such a project for augmenting/strengthening the capacity of a

particular area or areas within the chain of entire production plant
—so that the production capacity of all the production centres
within the plant is harmonised—is called “Balancing Project”.
These projects are undertaken to remove the underutilization of
capacity of certain production centres as the volume of ‘input’ to
such centre is not to the level of its capacity.
Accordingly, the project, as such, optimises the production,
reducing inefficiency in the production plant and thus increases the
profitability.

An extension of the Balancing Project is ‘Integration’ of the

production; such integration can be ‘backward’ as well as ‘forward’
as illustrated hereinafter.

Balancing Project with Backward Integration:

An organisation procures materials and components to be
consumed in the process of manufacturing a finished product.

The organisation finds that:

i. The supply of some components is irregular in nature and not to
the level (volume- wise) of its plant’s capacity. At the same time, it is
uneconomic to increase the volume of procurement from different
sources. This situation is hampering the regular manufacture of the
ultimate finished product in its plant and/or

ii. The long lead time for supply of certain costly basic components
requires some components in the store at a very high inventory
level. Which means large inventory carrying cost, and/or

iii. The supplier of such components commands undue large profit

and thus erodes the profitability of the organisation itself.

Under this situation, the organisation looks for installation of

capacity in its own plant for the production of such components
primarily for its own captive consumption and, thus, brings in a
harmony of the plant capacity utilisation. No doubt this increases
the efficiency in production and profitability of the organisation.
A project for installation of capacity to manufacture components
etc., as mentioned above, for its own captive consumption is called
Balancing Project with Backward Integration.

The project shows the necessary investments for the installation of

the capacity within its chain of production process, to produce such
components, including the required machineries, space cost etc. as
against the monetary benefits derived from manufacturing the
components in its own plant instead of procurements from external
suppliers.

A project of this category is in the process of implementation by a

company which is importing “Seamless Tubes”, also called “Green
Pipes”. These pipes are passed through special processing in the
company’s plant. The finished products, after the processing, are
sold by the company as “casing pipes”, achieving a sales turnover of
Rs. 90 crores in 1995.

The import of seamless tubes needing longer lead time and, with the
weakening of rupee against hard currency was becoming costlier.
Considering the high inventory cost and gradual increase in the
material cost, the company finalised a balancing project with
backward integration for installation of in-house pipe
manufacturing.

The company also was manufacturing these pipes in its own plant
but with a low volume and the company’s ‘processing plant’ had a
larger capacity and, hence, such imports were necessary.

Balancing project with forward integration:

There may be a situation where a company would like to install
additional capacity for further processing of its currently produced
finished products. The new capacity to install should be in balance
with the volume of the finished products as output of the present
plant.

In such case, the company with the aim of further value additions
and growth (in sales turnover) as well as in profitability is to
prepare a balancing project with forward integration. Of course, the
project can be implemented with a thorough market research,
satisfying the possibility of selling the proposed ultimate product.

A company producing acrylic fibre started facing problems with

Government of India’s liberalisation of imports—bringing in more
and more of acrylic fibres with lesser import duty. The profitability
of the company was further pressurised as the international price of
the Acrylic Nitrite, the required raw material for the production of
acrylic fibre, had gone up from $ 700 to $ 1,500 per tonne.

In order to fight the situation the company identified a project to

produce “yarn” from its current finished product of acrylic fibre
and, further, process the yarn in production of blankets.

The report on market study-revealed that, by further processing of

the acrylic fibre from the present plant, the company will have no
problem in selling the volume of ‘yarn’ produced as such, part of
which also will be consumed by the company in manufacture of
blankets.
The company made a balancing project with forward integration.
The project analysis showed the financial viability of investing for
such additional production facility.

In spite of the fact that the installation of the production facilities

for ‘yarn’ and ‘blanket’ are new projects, we still call it balancing,
because the projected new facilities are to balance with the volume
of the output from the existing plant

The projects described above are often called ‘Integration Projects’

instead of Balancing Projects.

Type # 2. Modernisation Project:

We find a situation when an organisation is carrying out its
activities with its plant setup long back. As a result, while the
company was running efficiently and profitably in the past, it
started facing problems in its plant leading to erosion of its
profitability.

This is mainly because:

i. The old age of the plant causing very high maintenance cost and
increasing breakdown;

ii. The modernisation elsewhere in the plants for the same industry
(and obsolescence of its own plant) is creating difficulties in
competition.

This scenario was faced by the steel manufacturing industry in USA

when steel industry was referred to as “sunset industry”. In recent
years, new, cost effective steel manufacturing units in the United
States have again become globally competitive. This situation was
apprehended years back by Tata Iron and Steel Company in India
(TISCO) and the company undertook a massive modernisation
project divided into 4 phases.

Phases I, II and III have already been completed and the company
undertook the Phase IV modernisation programme in 1996 which
should double the capacity of hot rolled coils and triple the output
of bars and rods, thus raising the overall capacity of the plant to 3.2
million tonnes of saleable steel per annum.

No doubt, with the lowest ore costs and own captive mines, together
with the modernisation, the company’s output should be extremely
competitive.

The modernisation projects are aimed at the improvement of the

plants and process (by new machineries, new techniques and
process) and are not meant for changes in the line of activities /
products.

The National Textile Corporation (NTC) has been suffering losses

due to various reasons including obsolescence of machineries. The
government has approved, in July 1996, a modernisation project of
Rs. 2,006 crores to modernise 79 mills and restructuring of 36
unviable units.

Type # 3. Replacement Project:

An organisation carrying out its manufacturing activities in its plant
may face some problems with some machinery installed in the
plant. The situation arises due to ageing, wear and tear leading to
break-down, and lower output. Mounting up of such problems even
lead to a situation where the maintenance costs become too high
and uneconomic and, at the same time, a reduction in the volume of
output.

In such a situation, the organisation must consider replacing the

particular machine/machines causing such problem.

By ‘replacement’ in such a situation we mean that the assets

currently in use is replaced by a new one with almost the same
capacity (as the old one being replaced) and does not include new
machine with much larger capacity as, otherwise, it would be a type
of ‘expansion project’ and not a ‘replacement project’.

The management implements the replacement project, as such,

with the expectation to reduce the cost of maintenance of the old
machine, get rid of the hindrances to smooth flow of production
and, thus, maintain the scheduled delivery to customers.

This type of project is generally cost based and does not have
enough scope to estimate additional revenues from the projected
investment. The appraisal of the project is made with the expected
benefits from such investment mainly in the area of saving the
maintenance cost and achieving the sales target by timely deliveries.

The managerial decision to go ahead with the project will

depend upon:
i. The cost of replacement; comparative costs when there are
options to select a new machine;

ii. The availability of resources for the new machines;

iii. The magnitude of the saving of maintenance costs and the losses
on account of breakdowns;

iv. The possibility of achieving the sales target;

v. Additional incidental facilities by replacement and 

vi. The scrap value of the old machine which is being replaced.

Type # 4. Expansion Project:

An organisation carrying out certain volume of activities may like to
increase its volume of activities with the same products or services
and grow. When such an organisation intends to install extra
capacities by adding, inter alia, new set of machineries etc. for
larger volumes, the project for such investments is called Expansion
Project.

The expansion project is undertaken primarily for the growth of the

organisation with confidence that the organisation is likely to
maintain its market share in the estimated increase in the market
size, or, that the organisation is driving for an increase in the
market share.

The expansion plan, as such, can be achieved by one or

more of the following steps:
i. By establishing additional capacity in its plant and thus increase
its volume of output;

ii. By acquisition of another organisation relating to the same

industry and 
iii. By modernisation of its plant, which may also include
installation of capacity within the plant to boost the volume of
production.

Examples of such expansion:
(a) A leading industry for batteries with Rs. 360 crore
turnovers is in the process of its expansion projects:
(i) For batteries in the two-wheeler segment with an expansion
project of Rs. 35 crore to raise the capacity from 8, 00,000 batteries
a year to 20, 00,000 at the end of 1996; and

(ii) In the automotive segment, with a project cost of Rs. 65 crore to

expand the capacity from 2.2 million to 3.8 million in 1997-98 and
then to 5 million by 1998- 99.

(b) A leading company in Tea with sales turnover of Rs. 519

crore is in the process of investment for its expansion
projects by:
(i) Acquiring two plantation estates in Assam and one in Dooars;
and

(ii) Acquiring a group of 20 estates in Sri Lanka in partnership with

a Sri Lankan organisation.

(c) A large paper and boards manufacturing company, with a sales

turnover of Rs. 156 crore in 1995-96 has embarked upon a major
Expansion/Modernisation Project to double its production capacity
from 60,000 tonnes per annum to 1,20,000 tonnes per annum.

The project is bifurcated into two parts—one relating to direct paper

manufacturing activity and the other relating to generation and
distribution of steam and power (with up to Rs. 40 crore for
investment) which will modernise the plant.

Sometime such modernisation may include a change in the input

and process as well.

This may be seen from the following illustrations:

The company presently running ”tapioca” based plant with capacity
of 50,000 tonnes p.a. to manufacture Starch Powder, Liquid
Glucose, Dextrose etc. embarked in 1995 upon an expansion-cum-
modernisation project with the programme.

(i) To increase the total-capacity from existing 50,000 T.P.A. to

1,00,000 T.P.A.;

(ii) Modernise the plant with the latest technology using Maize in
addition to Tapioca.

This involved modification of the existing plant to use maize as an

alternative input, setting an additional capacity of 150 MT per day
with a project cost of Rs. 50 crore in addition to the technical know-
how cost. Considering the overall analysis of the project and the
profitability against such investment, the company duly launched
on the project.

Type # 5. Diversification Project:

The project initiated by an organisation with the idea of carrying out
new activity, a new business dealing with new products/services in
addition to its existing activities, is known as Diversification Project.

It must be ensured that the new products/services are fully

marketable by the organisation.
Such diversification project can be illustrated by the
following illustration:
A large company in the business of fertilizers and chemicals with a
sales turnover of Rs. 850 crores in 1994-95 made plans to diversify
into core sector projects of power and steel.

The new activity planned, as such, is so diversified from the

company’s existing product that the company had to obtain its
shareholder’s approval to change the ‘object clause’ of its
Memorandum of Association, to enable it to carry on the business in
the planned area of diversification and, subsequently, also had the
approval from the relevant statutory authorities.

The diversification project was with an estimated project cost of Rs.

7,700 crore with the projected production of 2.2. million tonnes of
steel plant and a 1,000 MW Power Plant. The feasibility study
contained in the relevant project report helped the management to
decide in favour of such large investment.

It may be noted that the diversification project is almost a ‘new

project’ of the organisation except that, in case of a diversification
project, the organisation derives some cost benefit from the already
existing infrastructure of the organisation dealing with certain
current products.

We repeat here that there may be overlapping of the projected

activities, so that one project may be complex in nature to include
activities belonging to different types of projects narrated earlier.
Again, an illustration of a project undertaken by a
company in Alkali and chemical industry revealed such
complex activities as the project included:
i. Modernisation of existing mercury cell plant of 200 T.P.D. to
membrane cell plant;

ii. Installation of two D.G. Sets of 18 MW each;

iii. Balancing of Membrane Cell Plant capacity from 60 T.P.D. to

100 T.P.D.

Type # 6. Rehabilitation/Reconstruction Project:

There may be a situation when a large organisation has for some
years incurred loss and the accumulated loss have exceeded the
company’s Shareholders’ Fund, which leads to a negative Net
Tangible Asset (NTA). The company, in such case, is declared sick.

Detailed scrutiny of the company’s operation may show that the

company has well-equipped plant, a good product and there is also
a good market for such a product but the company is suffering
losses due to continuous increased borrowings leading to
abnormally high finance cost. In such cases, the company also faces
acute cash crunch.

Under this situation, the company may find a project by completely

changing the existing financial structure. The company or the
project owner draws a project—Rehabilitation-cum-Reconstruction
project—which is discussed with the Board of Industrial and
Financial Reconstruction (BIFR).
When the BIFR agrees with the feasibility of such project it requests
the financial institution the Industrial Reconstruction Bank of India
(IRBI), now named as Industrial Investment Bank of India (IIBI) to
provide the necessary fund for the financial restructure.

Normally, there are ‘special concessions’, whereby liability for

interest are reduced, penal charges are waived, old liability to
Financial Institutions, are to a certain extent converted to the
company’s equity, thereby further reducing the interest burden.

Such restructuring is agreed upon when the BIFR and also the IRBI
agree about the possibilities of the company turning the corner by
implementing the project. In such case, along with infusion of fund
by IRBI, they also insist on the project owner to bring in further
amount of fund as interest-free loan or equity.

We would like to go through an illustration the company had a paid

up share capital of Rs. 50 crore, an accumulated loss of Rs. 125
crores and sales turnover for the year Rs. 190 crore. Due to large
interest cost (of Rs. 18 crore) and insufficient liquidity (lack of
working capital), the company was not in a position to increase the
volume of activity and, thereby, service its debts of Rs. 200 crore.

Considering the situation, the BIFR suggested for Rehabilitation

Project. The BIFR discussed along with related financial institutions
the details of the project and the possible revival of the company.

The highlights of the project included:

1i. Waiver of the compound interest and liquidated damages on
unpaid interest payable to the concerned Financial Institution (FI)
amounting to Rs. 20 crore;
ii. Simple interest due/accrued shall be funded by the FI and 50%
thereof remaining outstanding at the point of launching the
rehabilitation shall be converted to ‘term loan’ carrying interest and
the balance shall become zero interest liability;

iii. The dues payable to the FI/Banks shall be amortised over a

period of six years from the cut-off date;

iv. The relevant state government is to provide deferment of Trade

Tax collected for 5 years from the cut-off date on interest free basis,
each year’s trade tax is to be repaid after 5 years;

v. The promoters are required to bring in Rs. 14.5 crore as their

contribution and the said amount is to be converted into equity
capital at par (i.e. Rs. 10 to be paid into the company for share with
face value of Rs. 10);

vi. The company is to optimise its production by adding balancing

equipment and an additional expenditure of Rs. 9.5 crore on this
account will also be arranged by the promoters.

We would like to note the following points with regard to

the rehabilitation/reconstruction Project:
(a) It is not necessary that the project should deal only with the
financial restructuring as noted in every point of the case study. It
can also be with a technological restructuring.

(b) The BIFR/IRBI, before agreeing to such project, would like to

scrutinize the promoter’s or the management’s background and
capabilities (financial, managerial and technical) and then handover
the project to the promoter of the project or to the management.
(c) Normally the approval of such project is followed by infusion of
representatives from the concerned FIs and Banks in the company’s
management to ensure that the business is carried out in
accordance with the terms of such rehabilitation.

(d) The National Textile Corporation (NTC) has been suffering

losses due to various reasons—obsolete machineries, excess
manpower, high cost of raw materials, acute shortage of working
capital etc. The government has approved a project of Rs. 2,006
crore for modernisation of 79 mills and rehabilitation/restructuring
of 36 unviable mills into 18 viable unit.

Eight out of its nine subsidiaries have been referred to BIFR which
has declared them as sick industrial companies. The restructuring
project will be implemented on approval of the scheme by BIFR.

Project is a non-routine one-off undertaking for future activities

with specified performance goal.

It has a owner who implements the project to satisfy the need or to

avail the opportunities. Project has a start and ends with the
completion of the project.