Project management 401.

MIB

UNIT ONE: PROJECT MGT:

1. Project MGT:
Concept & categories of projects:
Why----
Who----
Where—
When--------
How---
Categories:
1, Based on type of activity—other than production/ mfg , healthcare, pollution control,
roads, irrigation, water supply etc. normally GOI/ state invests enjoyed by society ,
Difficult to quantify / value it in terms of return.

2. Based on location of project— could be national / international projects. May be jv/

subsidiary overseas/ by way of mergers/ acquisitions

3. Based on project completion time-------e.g. canal making must be done before

monsoon, food processing project must be done before season starts e.g. green peas
starts in oct.,

4. Based on ownerships—pvt/ govt sector or it sector. We have most pvt sec., China has
more Public sec, and India has both. We have PSU owned by State Govt/ Central Govt.
PSu is created during initial planned phase in a country. P sector do not invest in a poor/
developing economy, strategy sector can not be given to Pvt Sec—e.g.—defense/aviation
mfg/space/ atomic research)
Now natural resource sector is also being open to PVT sec—e.g.- coal, gas, oil, road,
townships, mining etc.

5. Based on Size----small (Rs 1 crs), medium (Rs2- 99 crs) & large( Rs 100 plus crs)------

6. Based on need---can be classified as below;

6 a) New project-----finding a gap in terms of needs for goods/ services & for filling the
gap (demand exceed supply of products)

6b) Balancing projects--------o/p of few units are ii/p of other grp of units( products)
Small no of units may produce steel frames, others may do welding, yet another painting,
yet another for making seats, finally a unit may make complete assay of chairs/ folding
cots.
One may think of a bigger co like cahndan stell works or Godrej – who have all activities
in one co. Yet the co may think of additional projects to balance the large cap unutilized
to balance same.
6c) Expansion projects-- a co making watches @ 50,000./M,decides to manufacture or
add capacity by either addition of project/ plant for say 20,000/pm or to acquire another
plant or buy from an Ancillary - will be known as expansion project9 not new one).
6d) Modernisation plant: When new technology comes into operation/ becomes known ,
the existing technology may become obsolete--- meaning it will less productive or less
cost efficient or profits/ productivity can be increased by new technology even if capital
cost is ammortised .
6e) Replacement project: Due to aging / wear & tear the existing machines/ process
plants—causing high cost of maintenance & lower productivity/ lesser profits,
6f) Diversification---can be related or unrelated. Samtel wanted to move from electron
gun to monitors for computer which they did in 1998-99—its related industry/ product.
Havells diversified into hospitals in 2007 from being a major in electrical industry—its
un related.
6g) backward integration—If a co decide to integrate its RM also its own production
process – SAMTEL example
6h) Forward integration --- If a co decided to add its DFg also its own RM , e.g. FLEX
decided to add making polythene bag also including printing packing from existing
polythene tubes & machine making business.

Project formulation/ Preparation:

Its four stages:
1. Prefeasibility stages:

Feasibility Analysis—
Pre feasibility study reports_-it’s done to estimate followings:
• Selection of product—is it right?
• Details analysis for accepting project
• Investors friendly
• Any speciall aspects
Pre feasibility study will bring about:
• Market / demand potentials
• Plant cap
• Resources
• Location
• Technology avl/ to be imported?
• Organization structure
• Fin analysis project engg/ scheduling
• Any special issue

Project feasibility study report (PFSR)

Data required for this study---

• Macro eco scene govt policy/tax/ for the industry
• Govt policy / initiatives
 • Industry scene of production/ marketing/ competition
• Marketing scenario
• Study of capital mkt
• Social variables

Guidelines for PFSR:

The aspects are:
1. gen info – must deal with eco scenes, industry stats, priority
2. Analysis of alternatives data to have no of similar industry in mkt, tech
level, location adv, profitability.
3. Description of project—details of projects – size/ i/p, o/p, resources,
personnel, organization & structure.
4. marketing aspects – data on demand projections/ identifications/
selection of market segments
5. fin analysis--- the analysis to include various costs, ratios, ror ,
projection on P & L a/c etc.
6. Socio economic analysis- on envrt.,, Fin earnings to govt/ public/
society

Contents of PFSR:
1. General info.
2. Project description
3. Mkt studies/ potential
4. capital cost & source of fin
5. WC reqts
6. Fin analysis & other aspects
7. Eco & social variables
8. Project implementations
PFSR appraisal—helps---
• Select alternative
• Objective assessment
• Evaluation viability- investment/ credit worthy ness
• Finalise tech & fin parameters
• Modify scope of projects- improve ratios
•
2. Functional study/ Support studies:
May be done in one/ more of followings:
2a)Mkt Study—
2b) RM/ input study—
2c) Project location study---
2d) plant size study--------
2e) Eqpt selection study----

3. Functional/.. Functional studies (Support fns):

We have to do following for feasibility study of project in hand:

Economic analysis--- must focus on improving followings

• o/p
• services
• earnings
• std of living
• national income
• income distribution
• employment
• govt revenues

Marketing— focus on improving

• potential
• customer seg
• demand forecast
• market strategies
• cost /price

Financials: to improve/ focus

• capital reqt/ time- various Ms
• WC- period/ time
• Capacity utilizations
• Fin analysis, ratios, BEA, fin parameters

& Technical: should focus on/ improve:

• Land/ location
• Avalbility of all Ms, power/ water..
• Facilities Mgt
• Compliance of stuatory/ govt / legal/local

4. D P R( detail project report):

1. Location, products, RM, promoters’ details, cost of project

2. Grp COs , products, financial perf . of 4 yrs,

3. List of directors, address, age, qualifications, exp., and other activities

4. Fin arrangements, share issues, div records
5. tech assistance, nature of arrangements, agreements of technology transfer
6. Land, bld, plant/ m/c,all Ms
 7. evrt/ social factors
8. Marketing plans/ dealerships, competitor
9. P & L, cash flow projections- 3 cyrs
10. Growth opportunity

Social Cost Benefit Analysis (SCBA):

National cost benefit analysis differs from commercial cost benefit analysis.
a) Its benefit will always be at current prices which will be lower/
higher than that would have been if commercial benefits are
reckoned.
b) As cost take consideration of direct cost & direct benefits for
commercial profitability analysis, the SCBA takes into
considerations indirect cost & indirect benefits to nation. ---
Though difficult to assess. A pharma drug co making life
saving medicine for hear patient, will give accrual to financial
benefit out margin of profit but indirect social benefit to society
many times by saving life of millions.
E.g. a bridge on river will have direct cost, indirect benefits: roads,
transportation, less time for commuting, while indirect cost could
be for acquiring land, , removal of agri/ industrial/ commercial
activities – disturbance of eco balance.

Objectives of SCBA:
• Contribution to GDP
• To poorer secretion to reduce social imbalance
• Justification of scarce resources
• Justification in improving/ retaining envrntal conditions
SCBA has two approaches:

1. UNIDO approach ---

• Arriving at profitability based on mkt price
• Using shadow price for resources for net profit at
economic price
• Adjustment of net profit for impact on savings/
investment
• Adjustment of net profit on project’s impact on
income distribution
• Adjustment of net benefit for goods produced
whose social values differ from their economic
values
The PSU’s/ GOVT project’s impact is seen same as pvt
sector in terms of profitability but also adjusted to
reflect social implications.
 Shadow Price: for SCBA the mkt price i/p & o/p of
projects are required to be corrected suitably if they do
not represent correct price of i/p & o/p. Such corrected
price of i/p & o/p is known as shadow price.

2. Little Mirrlees approach----developed in 1968 for OECD—

present uncommited social income measured in terms of
convertible FE of constant of constant purchasing power.

UNIT 2:
Project Financing/ Devtt Banks -Institutions:Objectives/
Functions/ roles:
Fixed capital; long term loans for shares/ deb/pub
deposits/machines/ building/ fixed assets-------- banks are:
ICICI,SFC, NSIC, SSIC, SIDC, COMMERCIAL BANKS
Working capital: --- production plans, for trade credit from vendors
—banks are:------ commercial banks, cooperative banks, private
banks, State fin & State Industrial & Investment corporations

1. IFCI(industrial fin corp of India)- assist in Rs, Subscribe to

Shares/ Deb,underwriting shares, pur of m/c, equipments, fin to
lease/ hire pur co,above Rs 3cr fin less than this by IDBI/SFC, as
gauranteer for loans taken from commercial banks, gauranteer
for deffered payments due from Industry/ firm for capital
expenses, Gauranteer for FE loans from abroad with approval
from GOI
2. IDBI—
3. ICICI--- infra/establishments/modernizations, deferred credit,
lease credit, venture capital ,Gauranteer of loans, underwriting of
shares/deb/ bonds

4. IRBI( Industr reconstruction bank)—pricipal agency for assisting

small industries for credit & reconstruction to revive sick
industries.In process of revival takes up consultancy, merchant
banking, equipment leasing.
5. LIC----housing, rural electrifications,water supply
6. UTI--- safeguard intt of small investors, retired personnels,most
of investments in UTI are meant for corporates expansion,
diversifications, rehabilitation ,modernizations.
7. State Fin corporations- more than 25 SFCs in states operating.—
term loans for land, bldg, m/cs, for SSIs/ entrepreneurs,
modernizations, mechnisations,rehabilitation of sick units, rural
industries, cottage industry, for transport , tourism,EDP/
 seminars, QIP

Development of Development banks in India:

Development banks and entrepreneurship promotion in India

By Pawan Kumar Sharma

Page vii

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Recent developments

To meet emerging challenges and to keep up with reforms in financial sector, IDBI has
taken steps to reshape its role from a development finance institution to a commercial
institution. With the Industrial Development Bank (Transfer of Undertaking and Repeal)
Act, 2003, IDBI attained the status of a limited company viz. "Industrial Development
Bank of India Limited" (IDBIL). Subsequently, the Reserve Bank of India (RBI) issued
the requisite notification on 30 September 2004 incorporating IDBI as a 'scheduled bank'
under the RBI Act, 1934. Consequently, IDBI, formally entered the portals of banking
business as IDBIL from 1 October 2004.

The commercial banking arm, IDBI BANK, was merged into IDBI. In March 2008, IDBI
Bank entered into a joint venture with Federal Bank and Fortis Insurance International to
form IDBI Fortis Life Insurance, of which IDBI Bank owns 48 percent. The company
ended the year with over 300 Cr in premiums as on 31 March 2009.

[edit] Overview of development banking in India

The concept of development banking rose only after Second World War, after the Great
Depression in 1930s. The demand for reconstruction funds for the affected nations
compelled in setting up a worldwide institution for reconstruction. As a result the IBRD
was set up in 1945 as a worldwide institution for development and reconstruction. This
concept has been widened all over the world and resulted in setting up of large number of
banks around the world which coordinating the developmental activities of different
nations with different objectives among the world. The Narashimam committee had
recommended to give up its direct financing functions and to perform only the
promotional and refinancing role. However, the S.H.Khan committee, appointed by the
RBI, recommended its transformation into a universal bank.[4]

The course of development of financial institutions and markets during the post-
Independence period was largely guided by the process of planned development pursued
in India with emphasis on mobilisation of savings and channeling investment to meet
Plan priorities. At the time of Independence in 1947, India had a fairly well-developed
banking system. The adoption of bank dominated financial development strategy was
aimed at meeting the sectoral credit needs, particularly of agriculture and industry.
Towards this end, the Reserve Bank concentrated on regulating and developing
mechanisms for institution building. The commercial banking network was expanded to
cater to the requirements of general banking and for meeting the short-term working
capital requirements of industry and agriculture. Specialised development financial
institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., with majority
ownership of the Reserve Bank were set up to meet the long-term financing requirements
of industry and agriculture. To facilitate the growth of these institutions, a mechanism to
provide concessional finance to these institutions was also put in place by the Reserve
Bank.

The first development bank In India incorporated immediately after independence in

1948 under the Industrial Finance Corporation Act as a statutory corporation to pioneer
institutional credit to medium and large-scale. Then after in regular intervals the
government started new and different development financial institutions to attain the
different objectives and helpful to five-year plans.

The early history of Indian banking and finance was marked by strong governmental
regulation and control. The roots of the national system were in the State Bank of India
Act of 1955, which nationalized the former Imperial Bank of India and its seven associate
banks. In the early days, this national system operated alongside of a large private
banking system. Banks were limited in their operational flexibility by the government’s
desire to maintain employment in the banking system and were often drawn into
troublesome loans in order to further the government’s social goals.

The financial institutions in India were set up under the strong control of both central and
state Governments, and the Government utilized these institutions for the achievements in
planning and development of the nation as a whole. Thus all India financial institutions
can be classified under five heads according to their economic importance that are:

• All-India Development Banks

• Specialized Financial Institutions
• Investment Institutions
• State-level institutions
• Other institutions..

[edit] Industrial Development Bank of India (IDBI)

The Industrial Development Bank of India (IDBI) was established on 1 July 1964 under
an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16
February 1976, the ownership of IDBI was transferred to the Government of India and it
was made the principal financial institution for coordinating the activities of institutions
engaged in financing, promoting and developing industry in the country. Although
Government shareholding in the Bank came down below 100% following IDBI’s public
issue in July 1995, the former continues to be the major shareholder (current
shareholding: 52.3%). During the four decades of its existence, IDBI has been
instrumental not only in establishing a well-developed, diversified and efficient industrial
and institutional structure but also adding a qualitative dimension to the process of
industrial development in the country. IDBI has played a pioneering role in fulfilling its
mission of promoting industrial growth through financing of medium and long-term
projects, in consonance with national plans and priorities. Over the years, IDBI has
enlarged its basket of products and services, covering almost the entire spectrum of
industrial activities, including manufacturing and services. IDBI provides financial
assistance, both in rupee and foreign currencies, for green-field projects as also for
expansion, modernisation and diversification purposes. In the wake of financial sector
reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-
based services with a view to providing an integrated solution to meet the entire demand
of financial and corporate advisory requirements of its clients. IDBI also provides
indirect financial assistance by way of refinancing of loans extended by State-level
financial institutions and banks and by way of rediscounting of bills of exchange arising
out of sale of indigenous machinery on deferred payment terms.

IDBI has played a pioneering role, particularly in the pre-reform era (1964–91),in
catalyzing broad based industrial development in the country in keeping with its
Government-ordained ‘development banking’ charter. In pursuance of this mandate,
IDBI’s activities transcended the confines of pure long-term lending to industry and
encompassed, among others, balanced industrial growth through development of
backward areas, modernisation of specific industries, employment generation,
entrepreneurship development along with support services for creating a deep and vibrant
domestic capital market, including development of apposite institutional framework.

Narasimam committee[5] recommends that IDBI should give up its direct financing
functions and concentrate only in promotional and refinancing role. But this
recommendation was rejected by the government. Later RBI constituted a committee
under the chairmanship of S.H.Khan to examine the concept of development financing in
the changed global challenges. This committee is the first to recommend the concept of
universal banking. The committee wanted the development financial institution to
diversify its activity. It recommended to harmonise the role of development financing and
banking activities by getting away from the conventional distinction between commercial
banking and developmental banking.

In September 2003, IDBI diversified its business domain further by acquiring the entire
shareholding of Tata Finance Limited in Tata Home finance Ltd., signaling IDBI’s foray
into the retail finance sector. The fully-owned housing finance subsidiary has since been
renamed ‘IDBI Home finance Limited’. In view of the signal changes in the operating
environment, following initiation of reforms since the early nineties, Government of
India has decided to transform IDBI into a commercial bank without eschewing its
secular development finance obligations. The migration to the new business model of
commercial banking, with its gateway to low-cost current, savings bank deposits, would
help overcome most of the limitations of the current business model of development
finance while simultaneously enabling it to diversify its client/ asset base. Towards this
end, the IDB (Transfer of Undertaking and Repeal) Act 2003 was passed by Parliament in
December 2003. The Act provides for repeal of IDBI Act, corporatisation of IDBI (with
majority Government holding; current share: 58.47%) and transformation into a
commercial bank. The provisions of the Act have come into force from 2 July 2004 in
terms of a Government Notification to this effect. The Notification facilitated formation,
incorporation and registration of Industrial Development Bank of India Ltd. as a
company under the Companies Act, 1956 and a deemed Banking Company under the
Banking Regulation Act 1949 [6] and helped in obtaining requisite regulatory and statutory
clearances, including those from RBI. IDBI would commence banking business in
accordance with the provisions of the new Act in addition to the business being
transacted under IDBI Act, 1964 from 1 October 2004, the ‘Appointed Date’ notified by
the Central Government. IDBI has firmed up the infrastructure, technology platform and
reorientation of its human capital to achieve a smooth transition.

IDBI Bank, with which the parent IDBI was merged, was a vibrant new generation Bank.
The Pvt Bank was the fastest growing banking company in India. The bank was pioneer
in adapting to policy of first mover in tier 2 cities. The Bank also had the least NPA and
the highest productivity per employee in the banking industry.

On 29 July 2004, the Board of Directors of IDBI and IDBI Bank accorded in principle
approval to the merger of IDBI Bank with the Industrial Development Bank of India Ltd.
to be formed incorporated under the Companies Act, 1956 pursuant to the IDB (Transfer
of Undertaking and Repeal) Act, 2003 (53 of 2003), subject to the approval of
shareholders and other regulatory and statutory approvals. A mutually gainful proposition
with positive implications for all stakeholders and clients, the merger process is expected
to be completed during the current financial year ending 31 March 2005.

The immediate fall out of the merger of IDBI and idbi bank was the exit of employees of
idbi bank. The cultures in the two organizations have taken its toll. The IDBI BANK now
is in a growing fold. With its retail banking arm expanding further after the merger of
United western Bank.

IDBI would continue to provide the extant products and services as part of its
development finance role even after its conversion into a banking company. In addition,
the new entity would also provide an array of wholesale and retail banking products,
designed to suit the specific needs cash flow requirements of corporates and individuals.
In particular, IDBI would leverage the strong corporate relationships built up over the
years to offer customised and total financial solutions for all corporate business needs,
single-window appraisal for term loans and working capital finance, strategic advisory
and “hand-holding” support at the implementation phase of projects, among others.

IDBI’s transformation into a commercial bank would provide a gateway to low-cost

deposits like Current and Savings Bank Deposits. This would have a positive impact on
the Bank’s overall cost of funds and facilitate lending at more competitive rates to its
clients. The new entity would offer various retail products, leveraging upon its existing
relationship with retail investors under its existing Suvidha Flexi-bond schemes. In the
emerging scenario, the new IDBI hopes to realize its mission of positioning itself as a one
stop super-shop and most preferred brand for providing total financial and banking
solutions to corporates and individuals, capitalising on its intimate knowledge of the
Indian industry and client requirements and large retail base on the liability side.

IDBI upholds the highest standards of corporate governance in its operations. The
responsibility for maintaining these high standards of governance lies with its Board of
Directors. Two Committees of the Board viz. the Executive Committee and the Audit
Committee are adequately empowered to monitor implementation of good corporate
governance practices and making necessary disclosures within the framework of legal
provisions and banking conventions.

[edit] Industrial Investment Bank of India Ltd.

The industrial investment bank of India is one of oldest banks in India.[7] The Industrial
Reconstruction Corporation of India Ltd., set up in 1971 for rehabilitation of sick
industrial companies, was reconstituted as Industrial Reconstruction Bank of India in
1985 under the IRBI Act, 1984. With a view to converting the institution into a full-
fledged development financial institution, IRBI was incorporated under the Companies
Act, 1956, as Industrial Investment Bank of India Ltd. (IIBI) in March 1997. IIBI offers a
wide range of products and services, including term loan assistance for project finance,
short duration non-project asset-backed financing, working capital/ other short-term loans
to companies, equity subscription, asset credit, equipment finance as also investments in
capital market and money market instruments.

In view of certain structural and financial problems adversely impacting its long-term
viability, IIBI submitted a financial restructuring proposal to the Government of India on
25 July 2003. IIBI has since received certain directives from the Government of India,
which, inter alias, include restricting fresh lending to existing clients approved cases rated
corporates, restrictions on fresh borrowings, an action plan to reduce the overhead
expenditure, disposal of fixed assets and a time-bound plan for asset
recovery/reconstruction. The Government of India had also given its approval for the
merger of IIBI with IDBI and the latter had already started the due diligence process.[8]

But on 17 December 2005 the IDBI rejected any such merger.[9]

[edit] Acquisition of United Western Bank

In 2006, IDBI Bank acquired United Western Bank in a rescue.[10] Annasaheb Chirmule,
who worked for the cause of Swadeshi movement, founded Satara Swadeshi
Commercial Bank in 1907, and some three decades later founded United Western Bank.
The bank was incorporated in 1936, and commenced operations the next year, with its
head office in Satara, in Maharashtra State. It became a Scheduled Bank in 1951. In 1956
it merged with Union Bank of Kolhapur, and in 1961 with Satara Swadeshi
Commercial Bank.[11] At the time of the merger with IDBI, United Western had some
230 branches spread over 47 districts in 9 states, controlled by five Zonal Offices at
Mumbai, Pune, Kolhapur, Jalgaon and Nagpur.