Project Financing

in India

Ajeeb J.
No. 2, 5th Sem., MBA (PT)
School of Management Studies, CUSAT

Project
Planning,
Analysis &
Management

Project Financing
Project financing refers to the means of
finance employed for meeting the cost of
- Prasanna Chandra
project.
Project finance is a method of financing very
large capital intensive projects, with long
gestation period, where the lenders rely on
the assets created for the project as security
and the cash flow generated by the project as
source of funds for repaying their dues.

Project Financing contd

Project finance is essentially financing on the security of
the project itself, with limited or no recourse against the
sponsors of the project or other parties involved in the
development and implementation of the project.
Due to such characteristics of project finance, the loans
sought by the borrowers are always approved by the
lenders on the basis of strong in-house appraisal of the
cost and viability of the ventures as well as the credit
standing of project promoters.

Special Purpose Vehicle

Private Participation Schemes

Build Own and Operate (BOO)

Build Operate and Transfer (BOT)
Build and Transfer (BT)
Build Lease and Transfer (BLT)
Build Transfer and Operate (BTO)
Develop Operate and Transfer (DOT)
Rehabilitate Operate and Transfer (ROT)
Rehabilitate Own and Operate (ROO)
Lease Renovate Operate and Transfer (LROT)

Means of Finance
The long term source of finance for meeting
the cost of project

Equity Capital
Preference Capital
Non convertible Debentures
Convertible Debentures
Rupee Term Loans
Foreign currency Term Loans
Euroissues

Means of Finance contd

Deferred credit
Billing rediscounting scheme
Suppliers line of credit
Seed capital assistance
Government Subsidies
Sales tax deferment and exemption
Unsecured loans & deposits
Lease and hire purchase finance

Equity Capital
Contribution made by the owners of business, equity share
holders
Enjoys the rewards & bears the risk of ownership
Liabilities limited to capital contribution
Permanent capital
Does not involve any fixed obligation for payment of dividend
Cost of equity capital is high (dividend are not tax deductible )
Cost of issuing equity capital is high

Preference Capital
Has characteristics of equity capital and some attributes of debt
Dividend is not a tax deductible payment
Rate of preference dividend in fixed
TYPES
Cumulative & non cumulative PS
Participating & non participating PS
Redeemable & non redeemable PS
Convertible & non convertible PS

Debentures
Emerged as an important source of project
financing

TYPES
Non convertible Debentures
Partially convertible Debentures
Fully convertible Debentures

Rupee Term Loans

Provided by financial institutions &

commercial banks
Secured borrowing for new projects,
expansion,
modernization
&
renovation scheme of existing units
Repayable over a period of 8-10 years
Rate of interest is fixed

Foreign currency Term Loans

Financial institutions provide foreign
currency term loans for meeting the
foreign expenditure import of plant,
machinery and equipment and also
towards payment of foreign technical
know-how fees.

Deferred credit
Suppliers of machinery provide
deferred credit facility under which the
payment of machinery is made over a
period of time.
Normally issued with a bank guarantee
furnished by buyer.

Government Subsidies

Subsidies provided by central and state

govt. to industrial units
located in
backward areas
State subsidies varies between 5% to 25%
of the fixed capital investment of project
Central subsidies has been discontinued

Unsecured loans

Provided by promoters to fill the gap

between the promoters contribution
required by FI and the equity capital
subscribed to by the promoters
Subsidiary to Institutional loans
Rate of interest is less than rate of
interest on the Institutional loans

Bank credit
Commercial banks in the country serve
as the single largest source to business
firms

Public Deposit
Companies have been receiving public
deposits for a long time to meet the
medium term & short term financial
requirements
Rate of interest offered is more than
that offered by banks
Cost of deposit to company is less that
cost of borrowing from the bank

SEBI
Capital issues control Act 1947 repealed in May 1992
Capital issues brought under the purview of the
Securities Exchange Board of India (SEBI)
SEBI Act passed in June 12,1992
SEBI does away with product & price control, lays
stress on adequate disclosure, seeks to safe guard the
interest of investors, and emphasises prudential
controls.

Keys Aspects

Key to any project finance is to use a right mix of debt

and equity
There should be a right mix of foreign currency and
rupee loans
There should be flexibility in respect of switching
from foreign currency to rupee loan and vice versa
It is important that due care is taken in drafting the
documents concerning the financing of the project

Thank You