VCE Summer Internship Program 2021

Smart Task Submission Format

[ Download This Format in .DOCX format and then Edit it and SUBMIT ]
Intern’s Details
Name NIHARIKA MATHUR

Email-ID Mathurnihu99@gmail.com

Smart Task No. 3

Project Topic Financial modelling

Smart Task (Solution)

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

Task Q1 Solution : FACTORS TO BE ASSESSED TO QUALIFY AS PROJECT

FINANCE
A new venture can be assessed to qualify as a project finance through the process of
“Due Diligence”.
In the project finance business, deal origination happens by the direct relationship
that relationship managers across different sectors enjoy in the industry. Proposals
are presented in the form of appraisal notes put up to either the credit committee or a
committee of senior management, whichever is the appropriate sanctioning authority.
Due diligence in project finance involves thoroughly reviewing all proposals involved
in a deal.
Due diligence in project finance is a process that consists of multiple steps to ensure
the most comprehensive analysis:

1. Assessment of promoter history and background

2. Evaluation of the company and project business model
3. Legal due diligence
4. Analysis of financial statements and structure
5. Determine major risks associated with the project
6. Analysis of tax effects
7. Credit analysis and evaluation of loan terms
8. Project valuation

While there are multiple steps when conducting due diligence in project finance,
there are four key processes that require significant evaluation.

ST Solution Page 1 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

Assessment of Promoter History and Background

An assessment of the promoters’ history is conducted to ensure the commitment of

promoters to the project. The main motive is to identify the background and track
record of the promoters sponsoring the project. The following terms are assessed:

 Assessment of group companies – Involves in-depth study of various

companies promoted by the sponsor. Assessment of group companies is
necessary even in cases where no direct support from companies to the project
company exist. In case the group is facing a severe financial crunch, the
possibility of diversion of funds from the project company cannot be ruled out.
In such circumstances, the lenders need to take adequate steps to ring-fence
the project revenues.
 Track record of sponsors – In case of any subsisting relationship with the
sponsor, the track record of the sponsors should be studied in light of its
relationship. The lender should identify the incidences of default and analyze
the causes for the same.
 Management profile of sponsor companies – Helps in assessing the quality
of management. Lenders are typically more comfortable taking exposure in
professionally managed companies.
 Study of shareholders agreement – Study of the shareholders agreement
should be done in order to get clarity on issues such as voting rights of
shareholders, representation on the board of directors, veto rights (if any) of
shareholders, clauses for protection of minority interest, procedure for issuing
shares of the company to the public and the method of resolution of
shareholders disputes.
 Management structure of project company – Study of shareholders
agreement helps in determining the management structure of a project.

Evaluation of the Company and Project Business Model

An extensive evaluation of the business model assists the lenders in assessing the
financial viability of the project. Typically, a business model is developed in
consultation with financial and technical consultants. The lenders need to undertake
the following steps while accessing a business model:

 Understanding the assumptions – major assumptions are involved regarding

revenues, operating expenses, capital expenditures and other general

ST Solution Page 2 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

assumptions like working capital and foreign exchange

 Assessment of assumptions – involves evaluating the various assumptions
and benchmarking the same with respect to the industry estimates and various
studies. Sometimes the lenders appoint an independent business advisor to
validate the assumptions made in the business model.
 Analysis of project cost – One of the most important stages in due diligence,
as a substantial amount of capital expenditure is to be incurred. The project
cost is benchmarked to other similar projects implemented in the industry. Also,
there needs to be assurance that appropriate contingency measures and
foreign exchange fluctuation measures have been incorporated into the
estimated project cost.
 Sensitivity analysis – A business model involves many estimates and
assumptions. Some of these assumptions do not materialize in view of
changing business scenarios. Hence, it is important to sensitize the business
model to certain key parameters. The lenders need to access financial viability
of the project in light of sensitivity analysis coupled with ratio analysis.
 Benchmarking with the industry – An analysis of the key ratios in light of
available industry benchmarks is useful in an overall assessment of the
business plan.

Legal Due Diligence

Legal due diligence is usually conducted using an independent legal counsel

appointed by the lenders. Legal due diligence consists of a few steps:

 Determining the rights and liabilities of the different participants within the
project scope
 Analyzing the schedule and implementation plan of the project
 Evaluating the appropriateness of liquidated damages if the project fails to
deliver as promised

Analysis of Financial Statements and Structure

The following aspects need to be considered when assessing the financial structure

ST Solution Page 3 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

and statements:

 Debt equity ratio – A good project would ideally have a low debt-equity ratio
which helps in reducing the cost of the debt, thereby increasing the net cash
accruals. Higher net cash accruals enable the company to build up sufficient
cash reserves for principal repayment and provide a cushion to the lenders.
 Principal repayment schedule – The lender endeavors to match the principal
repayment schedule with the cash flow projections while leaving sufficient
cushion in the cash flow projections. One way of safeguarding lenders’
interests is to negotiate the creation of a sinking fund for this purpose
 Sinking fund build-up – Build-up of a sinking fund or Debt Service Reserve
Account is usually established in order to safeguard the lenders’ interests. Such
a fund entails deposit of a certain amount in a designated reserve account
which is used towards debt servicing in the event of a shortfall in any
year/quarter of the debt repayment period.
 Trust and retention mechanism – In projects, a trust and retention
mechanism is often incorporated in order to safeguard the lenders’ interest.
The mechanism entails all revenues from the company to be routed to a
designated account. The proceeds thus credited to the account are utilized
towards payment of various dues in a predefined order of priority. Generally,
the following waterfall of payments is established: statutory payments including
tax payments, operating expenditure payments, capital expenditure payments,
debt servicing, dividends and other restricted payments.

500 Words (Max.)

Task Q2 : Explain in detail the revenue model ( process of generating revenue) for Solar PV Project, Residential
Building, Manufacturing Unit and other PPP projects.

ST Solution Page 4 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

Task Q3 Solution : BUSINESS MODEL OF SOLAR ENERGY PROJECT

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

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

ST Solution Page 5 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

Customer owned business model

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

Gross metering: Metering is an important aspect for financial settlement in the solar

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

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

Net metering: The second type of metering arrangement is known as net metering.

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

ST Solution Page 6 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

if he has his FiT lower than the utility tariff.

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

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

ST Solution Page 7 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

Figure 4: Cost benefit analysis of gross and net metering

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

ST Solution Page 8 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

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

Third party owned business model

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

Community shared business model

While the first two types of business model have dominated the market, community
shared business model have been emerging in small urban centers and rural areas.
Here the generated energy (from various sources) is utilized by the entire community
as per their energy needs. They can be connected to the grid or completely
disconnected from the grid based on grid availability. The customer themselves or

ST Solution Page 9 https://techvardhan.com

 VCE Summer Internship Program 2021
Smart Task Submission Format

third party investor coupled with subsidy from the state and/or central government is
generally used to set up such communities. The energy mix from various power
plants can be used by all the consumers. Such community may be connected to the
grid and hence could utilize the grid power when power deficit. Such plant may also
be off grid mandating the usage of storage technology. A variation to such model is
also possible when instead of centralized generation each house has a distributed
generation. In such cases few houses, if have increased power requirement can
obtain excess energy from other houses which has low power demand. The house
supplying power can be paid for this extra energy while maintaining the balance in
the grid. Such innovative and disruptive business models are in place and more
variations of such models may be added in near future. Additionally they would
enable rural electrification along with improved quality of power at a cheaper cost
(when compared to the primitive methods of generation).

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

(on right)

500 Words (Max.)

ST Solution Page 10
https://techvardhan.com
 VCE Summer Internship Program 2021
Smart Task Submission Format

Task Q3 : What should be the additional points that needed to be included in a financial model, if the financing bank
is from abroad and the debt is in US$ but revenue is in INR.

Task Q3 Solution : ROLE OF FORIEGN INVESTMENT IN FINANCING A PROJECT

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

India is a signatory to bilateral investment promotion and protection agreements

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

ST Solution Page 11
https://techvardhan.com
 VCE Summer Internship Program 2021
Smart Task Submission Format

 Preferential trade agreements (which aim to protect foreign investments in projects

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

Returns on foreign investments in India are repatriable (net of applicable taxes)

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

Under the current Reserve Bank of India (RBI) regulations, a person resident in India
is permitted, subject to a prior approval from RBI, to open, hold and maintain a
foreign currency account with an authorised dealer bank for certain specified
purposes as recognised by the RBI.
Additionally, an Indian company or a body corporate registered or incorporated in
India is also permitted to open, hold and maintain a foreign currency account with a
bank outside India for the purpose of normal business operations in the name of its
office (trading or non-trading) or its branch set up outside India or its representative
stationed outside India. The opening of such accounts is also subject to the terms
and conditions of the current RBI regulations.

ST Solution Page 12
https://techvardhan.com
 VCE Summer Internship Program 2021
Smart Task Submission Format

Dividends payable to the foreign parent, who is the beneficial owner, is not restricted
by the Reserve Bank of India. The remittance of these dividends must be undertaken
through an authorised dealer bank (AD Bank). The domestic company is liable to pay
dividend distribution tax on the dividend payable.
Shareholders' loans are permitted to be remitted to the foreign shareholder through
an AD Bank, subject to compliance with the minimum maturity period provided by the
external commercial borrowings guidelines and may be subject to certain taxes as
under law (such as withholding tax, among others).

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

500 Words (Max.)

Task Q5 :

Task Q5 Solution :

ST Solution Page 13
https://techvardhan.com
 VCE Summer Internship Program 2021
Smart Task Submission Format

500 Words (Max.)

Task Q6 :

Task Q6 Solution :

500 Words (Max.)

Please add / delete blocks if needed.

ST Solution Page 14
https://techvardhan.com