Standard Operating Procedure

Project Finance

1 BUSINESS PROCESS OVERVIEW.........................................................................................................3

1.1 TYPES OF FUNDING SOURCES.......................................................................................................................3
1.2 DECISION..................................................................................................................................................3
2 FUNDING THROUGH TERM LOAN.....................................................................................................3
2.1 CREATION OF DISBURSEMENT LETTER..........................................................................................................4
2.1.1 Name of the Vendor.......................................................................................................................4
2.1.2 Payment Particulars......................................................................................................................4
2.1.3 Gross amount.................................................................................................................................4
2.1.4 TDS Payable.................................................................................................................................4
2.1.5 Payment to be made by Bank to Supplier (Net amount) ...............................................................4
2.1.6 Cheque Payable At........................................................................................................................4
2.2 APPROVAL OF THE DISBURSEMENT LETTER....................................................................................................5
2.3 SENDING DISBURSEMENT LETTER TO THE BANK ALONG WITH THE MARGIN MONEY............................................5
2.4 ISSUE OF DD BY THE BANK & PAYMENT TO VENDORS...................................................................................5
2.5 LOAN REPAYMENT.....................................................................................................................................5
3 INTERNAL FUNDING...............................................................................................................................5
4 FUNDING THROUGH LEASE.................................................................................................................6
4.1 CREATION OF PO IN THE NAME OF LEASING COMPANY...................................................................................6
4.2 CREATION OF THE LETTER TO BE ISSUED TO THE LEASING COMPANY.................................................................6
4.3 APPROVAL OF THE LETTER & ISSUING IT TO THE LEASING COMPANY................................................................7
4.4 CREATION OF RENTAL SCHEDULE BY THE LEASING COMPANY..........................................................................7
4.5 PAYMENT TO VENDOR/SUPPLIER .................................................................................................................7
4.6 PAYMENT OF LEASE RENTALS......................................................................................................................7
5 FUNDING THROUGH RIGHTS ISSUE..................................................................................................7
6 FUNDING PROCESS FOR IMPORTS....................................................................................................8
6.1 LETTER OF CREDIT.....................................................................................................................................8
6.1.1 The Sales Contract.........................................................................................................................9
6.1.2 Application to the Bank for issuing L/C........................................................................................9
6.1.3 Issuance of the L/C......................................................................................................................11
6.1.4 Advising.......................................................................................................................................11
6.1.5 Shipment of Goods.......................................................................................................................11
6.1.6 Presentation of Documents by Beneficiary..................................................................................12
6.1.7 Sending Documents to the Issuing Bank......................................................................................13

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 6.1.8 Delivering Documents to the Applicant.......................................................................................13
6.1.9 Payment Procedure.....................................................................................................................13
6.1.10 Exchange Rate Difference.........................................................................................................14
6.2 TELEGRAPHIC TRANSFER...........................................................................................................................14
6.2.1 Filling up the A1 Form................................................................................................................14
6.2.2 Approval......................................................................................................................................14
6.2.3 Enclosures to be attached............................................................................................................14
6.2.4 Submitting the A1 form to the Bank.............................................................................................15
6.2.5 Payment Procedure.....................................................................................................................15

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1 Business Process Overview
Whenever a company undertakes a new project, the most important task is to
arrange the required funds for the project. Generally, each project is not
funded separately, instead, the total numbers of upcoming projects are
estimated and for the overall amount, a single funding source is decided.

Whenever a new project is coming up, the Project Finance is required to

negotiate and decide the funding plan for the project. On that basis, the
funding plan is put during the Capex for the same is created.

1.1 Types of Funding Sources

In PRIL, the following types of funding sources are generally used,
• Term Loan
• Internal Funding
• Leasing

One more funding type through Rights Issue is also there but it has not been
used in PRIL so far.

1.2 Decision
The decision regarding which source of fund should be used for a particular
project is taken by the Head of Project Finance (Ravi Kejriwal).

2 Funding through Term Loan

In case the projects are to be funded by T/L, the ownership of the assets to be
procured will be with the company. According to the terms of the negotiation,
the company will have to pay a contribution of 20-25% of the amount to be paid
to the vendor/supplier and the bank will pay the rest of the amount.

For a single T/L, the bank will maintain two accounts of the company, a term
loan a/c and a current a/c. The 20-25% contribution made by the company will
be deposited to the current a/c and the rest 75-80% will be paid by the bank
and it will be transferred from the T/L a/c to the current a/c. This total
amount contained in the current a/c will be paid to the vendor/supplier by
issuing demand drafts or bank overdrafts in the name of the vendor/supplier to
the company or directly to the vendors.

When any type of payment, either advance payment or final payment, has to
be made to the vendor/supplier, the Projects dept will create payment request
F-47 against the PO created which will be cleared by Project Finance through
F-48. The process can be explained as follows-

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2.1 Creation of Disbursement Letter
After the projects dept issues payment request F-47, Project Finance will
create a disbursement letter for making payments to the respective
vendors/suppliers for the estimated numbers of projects that are funded
through a single T/L. In the disbursement letter the relevant payment details
for all the projects will be detailed briefly under the following heads-

2.1.1 Name of the Vendor

Here, name of the vendor has to be specified, to whom the payments for the
respective projects are to be made. The cheque will be issued in the name of
the particular vendor.

2.1.2 Payment Particulars

This field will contain all the payment details regarding, the type of payment
i.e., payment made to vendor is for advance payment, installment or final
payment; payment to vendor is made for what kind of charges like packing and
forwarding charges, supply and octroi charges, furniture, interior etc. This field
will also contain information on the payment being made against the type of
document, e.g. PO, running invoice or final bill; and for which store the
payment is made, e.g. BB Nagpur.

2.1.3 Gross amount

The total amount to be paid to the vendor/supplier has to be specified in this
field. The amount will be calculated as per the conditions specified in the PO
i.e. percentage of the total amount to be paid at a particular time. For
example, 50% as advance payment, 30% after GR and 20% after IR.

2.1.4 TDS Payable

In case of WO, the TDS amount will be calculated on the basis of the applicable
rate and will be specified in this field. The applicable TDS rates for different
WO are provided in the hyperlink below.
..\TDS Rates w[1].e.f.01.06.2007.xls

2.1.5 Payment to be made by Bank to Supplier (Net amount)

The net amount, i.e. the actual amount to be paid to the vendor will be
calculated after deducting TDS amount from the gross amount. In case TDS is
not applicable, the gross and the net amount will be the same.

2.1.6 Cheque Payable At

This field will define the place at which the cheque will be payable. This will
be defined as per the convenience of the vendor.

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2.2 Approval of the Disbursement Letter
After Project Finance creates the disbursement letter, it will be sent for
approval to Head (C P Toshniwal) or to the Director.

2.3 Sending Disbursement Letter to the Bank along with the

Margin Money
After the letter gets approved from the respective authority, it will be sent to
the negotiating bank along with the cheque containing 20-25% margin money
the total amount to be paid, as the contribution of the company.

2.4 Issue of DD by the Bank & Payment to Vendors

Within four days of receiving the documents, the bank will issue DD separately
as per the names of the vendors and the respective amount payable to them,
as specified in the disbursement letter. The bank may send the DD directly to
the vendor or to the company that in turn will send the DD to the respective
vendors after Project Finance clears the payment through F-48.

Financial Entry:

i) Vendor A/C Dr.

To Bank C/A Cr.
To T/L A/C Cr.

ii) Bank C/A Dr.

To T/L A/C Cr.

2.5 Loan Repayment

After the bank pays the entire loan amount of a T/L within the specified time
period, the company will repay the amount by quarterly installments as
decided during negotiation.

3 Internal Funding
The company may fund its project internally from the treasury. In this case, all
payments for a particular project such as advance, installments and final
payments to be made to the vendor will be paid from company’s own funds.

Payments will be made from the company’s C/A and the bank will issue DD of
the specified amount in the name of the vendor. Subsequently, the vendor A/C
will be debited and the company’s C/A will be credited.

Financial Entry:

Vendor A/C Dr.

To Bank C/A Cr.

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4 Funding through Lease
In case the projects are to be funded by leasing company, the ownership of the
assets to be procured will be with the leasing company. In such cases of
funding through leasing, the assets to be procured are mainly fixed assets (e.g.
Furniture, computer etc.) that have a limited useful life of about five years
after which the assets carry only a negligible scrap value. The leasing
companies with which PRIL generally negotiates are Rent Works and General
Electrics.

Advantage of Leasing:

i) C-Form: In case of intra-state transactions, company has to pay VAT

and in case of inter-state transactions, CST becomes applicable. In
case of inter-state transactions, the leasing companies have the
privilege to issue C-Forms to the lessee company, which gives the
lessee company the advantage to pay a reduced Sales Tax of 4%
instead of the applicable CST rate. If C-form is not issued, the lessee
company has to pay tax at the applicable CST rate or at 10%
whichever is higher.

ii) Utilisation of Working Capital: With the help of leasing, the lessee
company can procure the required assets by paying the periodic lease
rentals over a period of time and can better utilise their working
capital somewhere else. We do not have to pay the entire amount
together.

The process of leasing consists of the following steps-

4.1 Creation of PO in the name of Leasing Company

In case of leasing, the PO, GR and invoice booking will be made in the name of
the leasing company and not in the name of the vendor/supplier. This is
because, since in case of leasing, the ownership of assets is with the leasing
company, it is assumed that the vendors, from whom we procure goods, are
the vendors of the leasing company. For the same reason, no entry to the
vendor account is shown in our books of accounts.

4.2 Creation of the Letter to be issued to the Leasing Company

Whenever any payment is to be made to the vendor/supplier, Project Finance
will create a letter that will include all the details relating to the payments
that is to be made to the vendors/suppliers. This letter to be created in case of
leasing will be same as that of the disbursement letter used in case of T/L. It
will contain project wise, the name of the vendors, payment particulars, gross
amount, TDS if deductible and net amount payable to the vendor as discussed
earlier in case of T/L. For details, please refer to point no. 2.1.

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4.3 Approval of the Letter & issuing it to the Leasing Company
Once Project Finance creates the letter, it will be sent for approval to the
Chief (C P Toshniwal) or to the Director and after the letter gets approved, it
will be sent to the leasing company.

4.4 Creation of Rental Schedule by the Leasing Company

The leasing company, after receiving the letter, will prepare state wise rental
schedules depending on the location where the assets are to be delivered or
works are performed. For example, the letter to be issued to the leasing
company will contain projects of various locations like Gujrat, Kolkata, Nagpur
etc. On that basis, the leasing company will prepare three rental schedules one
each for the three concerned states for the specified period. According to
these rental schedules the company will make payments of the periodic lease
rentals.

4.5 Payment to Vendor/Supplier

On the basis of the letter, the leasing company will make payments to the
vendors/suppliers by issuing cheques in the name of the vendors/suppliers.
They can send the cheques directly to the vendors or to the company, which
will further clear the cheques to the vendors. All these transactions are made
as per the terms of negotiation.

4.6 Payment of Lease Rentals

The lessee company will pay the LR according to the rental schedule prepared
by the leasing company on the agreed upon IRR on monthly or quarterly basis
depending on the terms of negotiation. The lessee company will start paying
the LR immediately after entering into the contract with the leasing company.
The entire period for paying LR usually varies from 3-5 years.

Financial Entry: e.g.

i) LR A/C Dr.
VAT receivable A/C Dr.
To Rent Works A/C Cr.

ii) Rent Works A/C Dr.

To Bank A/C Cr.

5 Funding through Rights Issue

When doing a Secondary Market Offering of shares to raise money, a company
can opt to do a rights issue to raise equity. With the issued rights, existing
shareholders have the privilege to buy a specified number of new shares from
the firm at a specified attractive price within a specified time. A rights issue is

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offered to all existing shareholders individually and may be rejected, accepted
in full or (in a typical rights issue) accepted in part by each shareholder. The
money that is raised through issuing shares are used to fund the projects of the
company.

Rights can be renounceable (can be sold separately from the share to other
investors during the life of the right) or non-renounceable (shareholders must
either take up the rights or let them lapse. Once the rights have lapsed, they
no longer exist).

To issue rights the financial manager has to consider:

• Subscription price per new share
• number of new shares to be sold
• the value of rights
• the effect of rights on the value of the current share
• the effect of rights to existing and new shareholders

A right to a share, generally issued on ratio basis (e.g. one-for-three rights

issue). Because the company is getting the shareholders' money in exchange for
issuing rights, a rights issue is a source of funds for the company issuing it.
Presently, PRIL does not use rights issue to fund its projects.

6 Funding Process for Imports

Generally, import is done through bulk buy in which articles that are required
in large quantities such as items that are critical for store opening are
procured. The articles imported are stored in the warehouse from where these
are sent to the sites as per the requirements through STO and STN.

The import transactions are funded mainly in two ways-

• By issuing Letter of Credit (L/C)
• By Telegraphic Transfer (TT)

6.1 Letter of Credit

Letter of credit is a bank undertaking of payment on behalf of the applicant
company. It is a written undertaking by a bank (issuing bank) given to the
vendor/supplier (beneficiary) at the request, and in accordance with the
buyer’s (applicant) instructions to effect payment — that is by making a
payment, or by accepting or negotiating bills of exchange (drafts) — up to a
stated amount, against stipulated documents and within a prescribed time
limit. It is a way of reducing the payment risks associated with the movement
of goods.

Types of L/C:
There are three basic features of L/C, each of which has two options. Each L/C
has a combination of each of the three features.

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 • SIGHT OR TERM/USANCE
L/C can permit the beneficiary to be paid immediately upon presentation of
specified documents (sight letter of credit), or at a future date as
established in the sales contract (term/usance letter of credit).

• REVOCABLE OR IRREVOCABLE
L/C can be revocable, which means that they can be cancelled or amended
at any time by the issuing bank without notice to the beneficiary. However,
the issuing bank must honour the drawings negotiated before notice of
cancellation or amendment. An irrevocable L/C cannot be cancelled
without the consent of the beneficiary.

• UNCONFIRMED OR CONFIRMED
An unconfirmed L/C carries the obligation of the issuing bank to honour all
drawings, provided that the terms and conditions of the L/C have been
complied with. A confirmed L/C also carries the obligation of another bank,
which is normally located in the beneficiary’s country, thereby giving the
beneficiary the comfort of dealing with a bank known to him.

Funding through L/C involves the following steps-

6.1.1 The Sales Contract

The sales contract is the formal agreement between the buyer and seller
specifying the terms of sale that both parties have agreed upon. The contract
should include: a description of the goods, the amount, the unit price, the
terms of delivery, the time allowed for shipment and presentation of
documents, the currency, and the method of payment.

6.1.2 Application to the Bank for issuing L/C

For funding the contract through L/C, the applicant company has to apply the
bank to issue L/C for which it has to fill up the application form for opening
documentary letter of credit. In this form the lessee company has to provide
the bank with all the details relating to the contract, which includes the
following heads-

i) Form of Documentary Credit: In this field, the user has to specify

the type of the L/C, whether revocable or irrevocable and confirmed
or unconfirmed.

ii) Date of Issue: This will define the date on which the L/C is to be
issued.

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 iii) Date of Expiry & Place: This will define the expiry date of the L/C
and the place where the payment will be made. The L/C will expire
after 21 days from the latest date of shipment.

iv) Applicant Bank:

v) Applicant: Here, the name and address of correspondence of the
company applying for the L/C will be mentioned.

vi) Beneficiary: Here, the name and address of correspondence of the

vendor/supplier will be mentioned.

vii) Currency Code & Amount: User has to specify the amount to be paid
and also the foreign currency in which the payment will be made to
the vendor.

viii) Percentage Credit Amount Tolerance: User has to specify the

percentage of tolerance level i.e. the percentage by which the
payable amount may increase or decrease from the amount
specified.

ix) Maximum Credit Amount: This will define how much credit can be
given to the vendor/supplier. This amount is usually equal to the
specified amount that is to be paid.

x) Drafts: A draft is a bill of exchange and a legally enforceable

instrument which may be regarded as the formal evidence of debt
under a letter of credit. This field defines the time when the vendor
can receive the payment. Drafts drawn at sight are payable by the
drawee on presentation. Term (usance) drafts, after acceptance by
the drawee, are payable on their indicated due date.

xi) Partial Shipment: Through partial shipment, the vendor/supplier can

supply the goods in parts within the specified period of the contract.
User has to define whether partial shipment is permitted or
prohibited.

xii) Transhipment: The user also has to define whether transfer of goods
from one ship or conveyance to another is permitted or not.

xiii) On Board / DISP / Taking charges at / from: This will define the port
of the vendor’s country from where the goods will be sent.

xiv) For transportation to: This will define the Indian port to which the
goods have to be delivered.

xv) Latest date of Shipment: This will define the last date of shipment.

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 xvi) Description of the goods & services: Here, the user has to define
the goods and services that are to be procured from that
vendor/supplier.

xvii) Delivery Terms: This field will define the delivery terms of the
contract that are decided during negotiation i.e. whether CIF, FOB,
C&F or EXW will be applicable. If CIF is applicable, all the charges of
insurance, freight etc. will be born by the supplier. If FOB is
applicable, all the charges will be born by PRIL. In case C&F is
applicable, PRIL will pay the insurance charges and supplier will pay
the freight charges. If EXW is applicable, everything from loading the
shipment to taking the delivery will be PRIL’s responsibility.

The letter of credit application and agreement forms, when executed,

constitute a payment and reimbursement contract between the issuing bank
and its customer. It is also the customer’s instruction to the issuing bank. The
letter of credit must be issued exactly in accordance with the customer’s
instructions; therefore, it is important that the application be completed fully
and accurately, so as to avoid the inconvenience of having to have the letter of
credit amended. The agreement constitutes an undertaking by the customer to
reimburse the issuing bank for drawings paid in accordance with the terms of
the L/C, and normally takes the form of an authorization to debit the
customer’s account.

6.1.3 Issuance of the L/C

The issuing bank prepares the L/C as specified in the application and forwards
it by tele-transmission or airmail to the advising bank, (a branch or
correspondent of the issuing bank). The issuing bank instructs the advising bank
as to whether or not to add its confirmation, as per their customer’s
instructions.

6.1.4 Advising
The advising bank forwards the L/C to the beneficiary (supplier/vendor) stating
that no commitment is conveyed on its part. However, if the advising bank has
been asked to confirm the letter of credit and agrees to do so, it will
incorporate a clause undertaking to honour the beneficiary’s drafts, provided
the documents evidence that all terms and conditions of the letter of credit
have been complied with.

6.1.5 Shipment of Goods

Upon receiving the letter of credit, the beneficiary should examine it carefully
and be satisfied that all the terms and conditions can be complied with. If this
is not possible, the beneficiary should request the applicant to arrange an

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amendment to the letter of credit. Once completely satisfied, the beneficiary
will then be in a position to assemble and ship the goods.

In case of funding through L/C, it takes time to carry out the payment
procedure and make payment to the beneficiary. Hence, after receiving the
L/C, the beneficiary can, if required, discount the L/C in any bank of his choice
in his country and get the payment against it at the same time. After the
period specified in the L/C gets over and the advising bank makes the actual
payment against the L/C, the beneficiary will reimburse the bank from which it
had discounted the L/C.

6.1.6 Presentation of Documents by Beneficiary

The beneficiary prepares an invoice in the number of copies required, with the
description of goods shown exactly as stipulated in the letter of credit. The
beneficiary obtains the bill of lading and/or other transport documents from
the carrier and prepares and/or obtains all other documents required by the
letter of credit. These are attached to the draft, drawn on the bank indicated
and at the term stipulated in the letter of credit, and are presented to the
advising/confirming/negotiating bank.

6.1.6.1 Documents to be enclosed

• Draft: A draft is a bill of exchange and a legally enforceable instrument,
which may be regarded as the formal evidence of debt under a letter of
credit. Drafts drawn at sight are payable by the drawee on presentation.
Term (usance) drafts, after acceptance by the drawee, are payable on
their indicated due date.

• Commercial Invoice: The commercial invoice is an itemized account

issued by the beneficiary and addressed to the applicant, and must be
supplied in the number of copies specified in the letter of credit.

• Custom Invoice: A consular or customs invoice is prepared by the

beneficiary on forms either supplied by the buyer or local consulate
offices. Consular invoices must be officially stamped and signed by a
consular officer of the importing country and be supplied in the official
form and number of copies as stipulated in the letter of credit.

• Bill of Lading: A bill of lading is a receipt issued by a carrier for goods to

be transported to a named destination, which details the terms and
conditions of transit. In the case of goods shipped by sea, it is the
document of title which controls the physical custody of the goods. It
will cover only goods described in the invoice and specified in the L/C.
Letters of credit should stipulate a period of time after date of issue of
the bill of lading or other shipping document for presentation of
drawings. If no such period is specified, banks will refuse documents and

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 consider them to be stale dated if presented later than 21 days after the
date of “on board” endorsement, or, in the case of a shipped bill of
lading or other shipping document, 21 days after the date of issue.

• Airway Bill: An air waybill is a receipt issued by an air carrier indicating

receipt of goods to be transported by air and showing goods consigned to
a named party. Being a non-negotiable receipt it is not a document of
title.

• Insurance Policy & Certificate: Under the terms of a CIF contract, the
beneficiary is obliged to arrange insurance and furnish the buyer with
the appropriate insurance policy or certificate. The extent of coverage
and risks should be agreed upon between the buyer and seller in their
initial negotiations and be set out in the sales contract.

• Certificate of Origin: As the name suggests, a certificate of origin

certifies as to the country of origin of the goods to be imported. The
certificate should be consistent with and identified with the other
shipping documents by shipping marks and numbers, and must be signed.

• Open General License: The company will issue the open general license
in the company’s letterhead and it will be signed by the authorized
signatory.

6.1.7 Sending Documents to the Issuing Bank

The advising/confirming/negotiating bank checks the documents presented by
the seller against the letter of credit. If the documents meet the requirements
of the letter of credit, that bank will send them to the issuing bank, claiming
reimbursement and paying the seller.

6.1.8 Delivering Documents to the Applicant

The issuing bank will also check the documents for compliance and then deliver
them to the applicant either against payment or as an undertaking to pay on
maturity of the drawing under the letter of credit.

6.1.9 Payment Procedure

6.1.9.1 Payment
On presentation of the documents called for under the letter of credit,
provided they are in compliance with its terms, the advising/negotiating bank,
in the case of an unconfirmed letter of credit, may pay/negotiate the draft. In
the case of a confirmed letter of credit, the confirming bank is obliged to
honour the drawing without recourse to the beneficiary.

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6.1.9.2 Reimbursement
The advising/confirming/negotiating bank will claim reimbursement from the
issuing bank.

6.1.9.3 Settlement
On receipt of conforming documents, the issuing bank will also be responsible
for checking documents and will charge the applicant’s account under the
terms of the letter of credit application and agreement forms, effecting
reimbursement to the negotiating bank.

6.1.10 Exchange Rate Difference

In case of imports, the transaction will be in foreign currency. The difference
in the invoice amount and the payment amount will be accounted to either the
exchange rate gain account or exchange rate loss account as the case may be.

6.2 Telegraphic Transfer

In case of funding through TT, we will pay the vendor/supplier from our
existing T/L or from company’s C/A with the bank. But we do not enter into a
new T/L for funding through TT. During making payments to the party, the
following steps need to be followed-

6.2.1 Filling up the A1 Form

The very first step for initiating payment process to the party is to fill up the
A1 form by the concerned company. In the form, the company has to give the
name of the party, particulars of payment (as described in point no.2.1.2), TDS
if payable, amount to be paid to the party and the source of fund (T/L or C/A).

6.2.2 Approval
The filled up A1 form needs to be sent to the authorized signatory for approval.
The authorized signatory will be decided as per the issuing banks.

6.2.3 Enclosures to be attached

Along with the approved A1 form, the user needs to attach the following
enclosures before submitting it to the bank.
• Opening Letter
• Open General License
• FEMA Certification
• Duplicate copy of Performa Invoice (in case of advance payment) or final
Invoice (in case of final payment)
• Copy of Bill of Entry (in case of final payment)

In the Opening letter as well as in the A1 form, the user needs to specify the
payment particulars. The Open General License and the FEMA certification will

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be issued by the company in the company’s letterhead and needs to be signed
by the authorized person.

6.2.4 Submitting the A1 form to the Bank

The A1 form along with the necessary enclosures will be submitted to the bank
for processing the payment procedure.

6.2.5 Payment Procedure

The issuing bank, after receiving the documents will initiate the payment
process to the party by informing the advising bank or the beneficiary’s bank.
The amount will be transferred to the advising bank and from there the
advising bank will make the payment to the party. As a result the amount will
be will be credited from bank C/A and debited to the vendor A/C.

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