Wondering how to move ahead with 'Project Financing'? Here are the basics you need to know to get started.

1. Project Financing
January, 2016
SUMEDHA FISCAL SERVICES LTD.

2. Contents

3. Contents
• Definition of Project Finance
• What is Project Appraisal
• Present Indian Economy
- Overview
- Reform Measures by GOI
• Stages in Project Financing
• Basic Parameters in Project Financing

4. Definition of Project Financing
International Project Finance Association (IPFA) defined project financing as:
“The financing of long-term infrastructure, industrial projects and public services
based upon a non-recourse or limited recourse financial structure where project
debt and equity used to finance the project are paid back from the cash flows
generated by the project.”
A project finance transaction involves the mobilization of debt, equity, contingent
equity, hedges & a variety of limited guarantees through a newly organized
company, partnership or contractual joint venture for the purpose of building a
capital intensive facility and operating a discrete business activity.

5. What is Project Appraisal
Project Finance requires project appraisal
Project appraisal is the due diligence conducted on sponsors, technical,
market, environmental, financial, legal and risk aspects, among others, of the
proposed project
It is the assessment of the viability of proposed long-term investments in terms
of shareholder wealth
•From a commercial bank’s perspective, the focus is on whether the project can
generate sufficient cash flow to repay its debt and provide an acceptable rate of
return to sponsors.

6. Indian Economy – Overview

7. Current Position of Indian Economy
.
• The Indian economy grew by 7.3% in FY15 as compared to 6.9% in FY14
• The growth in GDP in FY15 was driven by higher contribution from manufacturing,
electricity and financial, real estate and professional services. Sectors like agriculture,
forestry & fishing and mining & quarrying were the weak performers in FY15
• The International Monetary Fund (IMF) and the Moody’s Investors Service have
forecasted that India will witness a GDP growth rate of 7.5 per cent in 2016, due to
improved investor confidence, lower food prices and better policy reforms
Source :IMF

8. Indian Economy
India & World inflation differential (%) has
been coming down…
Among currencies, INR exhibiting low
volatility relatively…..
.
Source: Bloomberg, IMF

9. Stressed Assets in the Banking system
PSB’s reported higher NPAs as compared to Private sector banks.
The major sectors that added to asset quality stress were mining, iron & steel, textiles,
infrastructure and aviation.

10. Credit growth percentage for Banks
Credit growth of Scheduled Commercial Banks (SCB) on a y-o-y basis as on March
2015 stood at 9.34% which was lower than 14.73% witnessed a year ago.
From a sector point of view ,y-o-y credit growth was-
Agriculture -15 %( PY :13.5%) , Industries-5.6%(PY:13.1%), Services -5.6% (PY:16.1%)
and Personal Loans -15.4%(PY:15.5%) .
There has been a clear decline in growth rates in industries and services

11. Corporate Debt Restructuring
CDR is the reorganisation of a company's outstanding obligations, often achieved by
reducing the burden of the debts on the company by decreasing the rates paid and
increasing the time the company has to pay the obligation back. This allows a company
to increase its ability to meet the obligations.
Position as on September 2015 :

12. Corporate Debt Restructuring

13. Corporate Debt Restructuring

14. The 5:25 flexible structuring scheme
As per the 5:25 flexible structuring scheme, the lenders are allowed to fix longer
amortization period for loans to projects in the infrastructure and core industries sector,
for say 25 years, based on the economic life or concession period of the project, with
periodic refinancing, say every 5 years.
Conditions for 5:25 flexible structuring scheme
• Term loans to projects, in which the aggregate exposure of all institutional lenders
exceeds Rs.500 crore, in the infrastructure and core industries sector will qualify.
• Banks may fix a fresh amortization schedule for the existing projects loans, once
during the life time of the project, after the Commercial Operations Date (CoD)
without it being treated as restructuring subject to:
- The loan is standard as on date of change of loan amortization schedule
- The Net Present Value of the loan remains same before and after the change in
the amortization schedule
- The Fresh loan amortization schedule should be within 85% of the initial
concession period / life of the project
• In case of accounts which are already classified as NPA, banks are allowed to
extend the flexible structuring scheme. However, it shall be considered as
‘restructuring’ and such accounts would continue to remain classified as NPAs

15. Beneficiary sectors of the 5:25 scheme
Few examples-Jaypee Infratech, Adani Power, Uttam Galva Metallics, Hindalco,GMR,
Lanco ,Bhushan Steel, Neelachal Ispat Nigam

16. Strategic Debt Restructuring scheme
(SDR)
The SDR scheme has been enacted with a view to revive stressed companies and provide lending
institutions with a way to initiate change of management in companies which fail to achieve the
milestones under Corporate Debt Restructuring ("CDR")
Eligibility
 The JLF (Joint Lenders Forum) conversion of outstanding debts can be done by a consortium of
lending institutions.
 The Scheme will not be applicable to a single lender.
CONDITIONS
 At the time of initial restructuring, the JLF must incorporate an option in the loan agreement for
SDR if the company fails to achieve the milestones and critical conditions stipulated in the
restructuring package.
 This option must be corroborated with a special resolution since the debt-equity swap will result
in dilution of existing shareholders.
 Such a mandate will result in the lenders acquiring a majority (51%) ownership.
 If the company fails to achieve the milestones stipulated in the restructuring package, the
decision of invoking the SDR must be taken by the JLF within thirty (30) days of the review of the
account during the restructuring.
 The JLF must approve the debt to equity conversion under the Scheme within ninety (90) days of
deciding to invoke the SDR.
 The JLF will get a further ninety (90) days to actually convert the loan into shares.

17. List of companies under SDR scheme
Name of the company Debt Amount
(Rs.in Crs)
Electrosteel Steels 10,240
Lanco Teesta 2,400
Jyoti Structures 2,360
Monnet Ispat 11,710
Coastal Projects 3,250
Visa Steel 3,090
IVRCL 9,390
Other companies which have joined the list are :
• Shiv-Vani Oil & Gas
• Rohit Ferro-Tech
• Ankit Metal & Power
• Educom Software
• Gammon India

18. Strategic Debt Recast may hit bank’s credit growth
• Success of SDR not clear, given that of the 530
cases received under CDR, only 190 cases –totaling
Rs.70,000 crores have exited CDR, as loans could
not be repaid.
• For CDR to be successful , banks need to find new
promoters for the companies within the 18 –month
window and this would require restoring viability and
generating investor interest in such companies
• SDR has been exercised on loans worth Rs.81,300
crore (mostly in infrastructure and metals
sectors).With RBI directing banks to clean up their
books by March 2017, and banks continuing to fund
interest and working capital costs during the 18
months period, NPA levels are bound to shoot up.
• Shares acquired by banks through SDR are exempt
from RBI’s restrictions on capital market exposures.
Experts feel this would dilute business of banks and
they consider it a departure from core banking
opportunities, as banks are not in the business of
running companies.
Likely impact on Banks if SDR fails
Company Provision/
MTM Losses
Rs.in Crs
% of
Debt
Gammon India 13,848 93.5
Electrosteel Steels 9,826 89.5
IVRCL 9,195 88.9
Coastal Projects 5,519 95.0
Monnet Ispat 4,388 35.1
Shiv-Vani Oil & Gas 3,635 90.8
Visa Steel 2,838 91.7
Rohit Ferro-Tech 2,462 93.6
Ankit Metal & Power 1,190 92.9
Jyoti Structures 986 37.4

19. The Insolvency & Bankruptcy Code 2015
• Applicability: All kinds of corporate
enterprises, limited liability partnerships,
partnership firms and individuals
• Scope: Insolvency, liquidation, voluntary
liquidation (solvent insolvency) and
bankruptcy
• Key Objectives:
- Preserve value by providing linear, time-bound
and collective process
- Improve time taken to resolve failure and
provide clear exit options to investors
- Increase recovery value
- Develop other avenues of financing businesses
(such as bond markets, venture capitals )
other than banks
• Tribunal :National Company Law Tribunal
(NCLT) is the proposed forum for corporate
bankruptcy and DRT is for individual
bankruptcy
Resolution process
Default
Appointment of an Insolvency
professional
Calm period/moratorium period
(180/270 days)
75% of creditors to approve
Yes No
Implement
the plan
Goes into
liquidation

20. The Insolvency & Bankruptcy Code 2015-
New opportunities/scope
• The Bill proposed a new class of Insolvency
Professionals to assist companies.
• The Investment Professionals will be drawn from
different fields like investment bankers, lawyers,
cost accountants, chartered accountants,
engineers, bureaucrats who are presently heading
sick PSUs.
• They will take over the management of the
company and restore the health of a company-will
be given 180 days to decide if a company can be
revived. The time can be extended for a further
period of 90 days.
-if yes, then a resolution has to be planned. The
management committee will come under
suspension and creditors committee will take over.
-If no, then then the Creditors committee will
decide to dissolve the company and the decision
would go to the tribunal for ratification.
• The Insolvency professionals will act as a
liquidator.
• Distribution of proceeds on liquidation, in
order of priority:
- Insolvency resolution process including the
fees of insolvency professionals
- Debts of secured creditors
- Workmen’s dues for 12 months
- Unpaid dues to employees other than
workmen
- Financial dues owed to unsecured creditors
- Government taxes for two years
- Other debts, preference shareholders and
equity shareholders (last priority)

21. Reform Measures by GOI

22. Reform Measures by Central Government
Ease of doing business
• New de-licensing and de-regulation measures for reducing complexity, increasing speed and transparency-process
of Industrial License made online 24x7 basis through portal and validity extended to 3 years
• Process of obtaining environmental clearances made online
Banking, Finance & Insurance
• Indradhanush -To revamp public sector banks
• Mudra Bank to bring finance to 5.7 crore small entrepreneurs
• Create Infrastructure Debt Fund and National Investment and Infrastructure Fund to kick start investment cycle
• Notification of Investment Pattern for Non-Government Provident Funds, Superannuation Funds and
Gratuity Funds to create additional demand for equity funds
Industrial Corridor
• GOI is building a pentagon of corridors across the country to boost manufacturing as a Global manufacturing
destination of the world
• Delhi-Mumbai Industrial Corridor(DMIC) is being developed -24 manufacturing cities envisaged in the DMIC
project
• Other corridors conceptualized-Bengaluru –Mumbai Economic Corridor (BMEC),Amritsar-Kolkata Industrial
Development Corridor(AKIC),Chennai-Bengaluru Industrial Corridor (CBIC),East Coast Economic Corridor(ECEC)
with Chennai Vizag Industrial Corridor (CVIC)

23. Reform Measures by Government
Pahal Scheme
•LPG is being sold to consumers at the market rate while the subsidy is credited to their bank account directly as per
entitlement . However. GOI has announced the scrapping of the LPG subsidy for “well-off” people whose annual taxable
income is more than Rs 10 lakhs from January 2016
Tackle NPAs
• RBI has allowed banks to acquire 51% or more stake in companies defaulting after restructuring their loans
Strategic Debt Restructuring
• Allowing lenders to convert debt into equity within 30 days of review of companies’ accounts. In addition, lenders
acquiring shares of listed companies under restructuring would be exempted from making open offers.
Bankruptcy Bill
• Facilitate banks to restructure and recover non performing assets in a timely manner
100 Smart Cities
• With an aim to achieve ‘inclusive growth”,the Smart City Mission promotes integrated city planning
Coal block auction and allotement under the Coal Mines
• Law has been introduced to facilitate a transparent and non-discretionary method of allocation of coal
blocks,enabling commercial mining to enhance the potential of the sector.

24. Stages in Project Financing

25. Stages in Project Financing
 Project identification
 Risk identification & minimizing Pre Financing
Stage
 Technical and financial feasibility
 Equity arrangement
 Negotiation and syndication Financing
Stage
 Commitments and documentation
 Disbursement.
 Monitoring and review
 Financial Closure / Project Closure Post Financing
Stage
 Repayments & Subsequent monitoring.

26. Project Identification
 Identification of the Project
- Government announced
- Self conceived / initiated
 Identification of market
- Product of the project
- Users of the product
- Marketability of the product
- Marketing Plan

27. Risk Identification and Minimizing
Risk Solution
Completion Risk Contractual guarantees from contractors,
manufacturer, selecting vendors of repute.
Price Risk hedging
Resource Risk Keeping adequate cushion in assessment.
Operating Risk Making provisions, insurance.
Environmental Risk Insurance
Technology Risk Expert evaluation and retention accounts.
Interest Rate Risk Swaps and Hedging
Insolvency Risk Credit Strength of Sponsor, Competence of
management, good corporate governance

28. Risk Identification and Minimizing…contd.
Currency Risk Hedging
Political and
Sovereign Risk
• Externalizing the project company by forming it abroad or
using external law or jurisdiction
• External accounts for proceeds
• Political risk insurance (Expensive)
• Export Credit Guarantees
• Contractual sharing of political risk between lenders and
external project sponsors
• Government or regulatory undertaking to cover policies
on taxes, royalties, prices, monopolies, etc
• External guarantees or quasi guarantees

29. Technical and Financial Feasibility
 Technical feasibility
- Location
- Design
- Equipment
- Operations / Processes.
 Financial feasibility
- Business plan / model
- Projected financial statements with assumptions
- Financing structure
- Pay-back, IRR, NPV etc.

30. Equity arrangement
 Sponsors
- Lead sponsors
- Co – sponsors
 Private equity participation
- Angel investors – Private equity funding
- Financial institutions
- Non-financial institutions.

31. Debt Arrangement-Negotiation and
syndication
 Lenders
- Banks
- Non- banking financial institutions
- International lending institutions
 Syndication
- Lead arranger
- Co-arrangers
 Negotiation
- Pricing
- Documentation
- Disbursement

32. Documentation
 Commitment letters / MOUs
- Commitment letters from sponsors and investors
- MOU signing with financiers.
 Documents
- Offer Letters
- Lending agreements
- Security documents
- Disbursement plan
 Contracts
- Management/shareholder agency relationship
- Inter corporate agency relationship
- Government/corporate agency relationship
- Bondholder stockholder relationship

33. Disbursement
 Equity Disbursement
⁻ Shares application
⁻ Shares proceeds
⁻ Share certificates
 Loan Disbursement
⁻ Sponsor loans
⁻ Advance payments
⁻ Progress Payment

34. Monitoring and Review
 Why?
- Project is running on schedule
- Project is running within planned costs.
- Project is receiving adequate costs.
 How?
- First hand information.
- Project completion status reports.
- Project schedule chart.
- Project financial status report.
- Project summary report.
- Informal reports.

35. Financial Closure / Project Closure
Financial closure is the process of completing all project-related financial
transactions, finalizing and closing the project financial accounts, disposing of project
assets and releasing the work site.
Financial closure is a prerequisite to project closure and the Post Implementation
Review (PIR). A project cannot be closed until all financial transactions are complete,
otherwise there may not be funds or authority to pay outstanding invoices and
charges. Financial closure establishes final project costs for comparison against
budgeted costs as part of the PIR. Financial closure also ensures that there is a
proper disposition of all project assets including the work site.
Project closure and commencement take place after financial closure

36. Project Financing Parameters
 Loan Limit: Determining maximum borrowing capacity of the project
 Currency: Maybe denominated in either local or foreign currency.
 Capital Structure: Maximum debt-to-equity ratio up to 75:25
 LoanTenure: Maximum tenure of the loan depends on project nature. Tenure will
typically include a grace period, which commemorates with length of construction
period and timing of revenue generation by the project. Earlier 7 years were
considered , now extended to 15-20 years depending on nature of project for
infrastructure projects.
 Facility Nature: Both funded and non-funded (L/C, BG etc.).Funded facilities may
include revolving credit for working capital facility
 Rate of Interest: Rate of interest is 13% pa or lower.
 Fees & charges: As applicable
 Securities: Primary(first charge on project assets) ,and collateral (PG, corporate
guarantee, R/M on other immovable properties, lien on financial assets FDR, shares
etc.)

37. Syndication of Loans-Role of an Arranger
 Point of Contact
 Monitoring the compliance of certain terms of the facility
 Assistance in drawing Financial Model capturing requirements of the Company
 Introducing the Company to the Lenders
 Liaison on behalf of the Company with the Lenders
 Negotiate on behalf of the Company for suitable terms and conditions i.e.
interest rate, processing fee, security, guarantee, repayment schedule, etc.

38. About Sumedha Fiscal – An Overview
 One stop destination for financial solutions. A SEBI registered Merchant Banker
& Stock Broker
 Incorporated in the year 1989 and listed on BSE
 Promoted by a group of Chartered Accountants
 PAN India presence across seven locations
 Has large pool of talents
 Provides professional services in Merchant Banking, Corporate Finance,
International Finance

39. Team Sumedha
Ms. Moumita Chowdhury is based out of Kolkata and takes care of execution of debt related
mandates such as techno economic feasibility studies, restructuring, due diligence and
valuation.
Ms. Sudeshna Agarwal is situated out of Kolkata and manages the Execution Desk for all
debt related proposals. Her domain area includes project appraisal, risk analysis, evaluation of
proposals, relationship management, compliance and due diligence for deal execution.
Reach Us

40. Contact us
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7272
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